<PAGE>
[GRAPHIC]
Excelsior Money Market Funds
Prospectus
August 1, 2000
Excelsior Funds, Inc.
Excelsior Tax-Exempt Funds, Inc.
Money Fund
Government Money Fund
Treasury Money Fund
Tax-Exempt Money Fund
New York Tax-Exempt Money Fund
Investment Adviser
United States Trust Company of New York
U.S. Trust Company
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
[LOGO OF EXCELSIOR FUNDS]
<PAGE>
-----------------------------------------------------------------
Table Of Contents
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. are mutual fund fam-
ilies that offer shares in separate investment portfolios which have individual
investment goals, strategies and risks. This prospectus gives you important in-
formation about the Money, Government Money and Treasury Money Funds of Excel-
sior Funds, Inc. and the Tax-Exempt Money and New York Tax-Exempt Money Funds
of Excelsior Tax-Exempt Funds, Inc. (each, a Fund) that you should know before
investing. The Money Fund and Government Money Fund offer two classes of
shares: Shares, which are offered in this prospectus, and Institutional Shares,
which are offered in a separate prospectus. Institutional Shares of the Govern-
ment Money Fund are not currently offered. Please read this prospectus and keep
it for future reference.
This prospectus has been arranged into different sections so that you can eas-
ily review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
<TABLE>
<CAPTION>
Page
<S> <C>
Money Fund........................................................... 4
Government Money Fund................................................ 6
Treasury Money Fund.................................................. 8
Tax-Exempt Money Fund................................................ 10
New York Tax-Exempt Money Fund....................................... 12
More Information About Risk.......................................... 14
More Information About Fund Investments.............................. 14
Investment Adviser................................................... 14
Purchasing, Selling and Exchanging Fund Shares....................... 15
Dividends and Distributions.......................................... 18
Taxes................................................................ 18
Financial Highlights................................................. 20
How to Obtain More Information About Excelsior Funds, Inc. .......... Back Cover
</TABLE>
<PAGE>
-------------------------------------------------------------
Introduction--Risk/Return Information Common to All Funds
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal, strategies and risks for reaching that
goal. The investment managers invest Fund assets in a way that they believe
will help a Fund achieve its goal. Still, investing in each Fund involves risk
and there is no guarantee that a Fund will achieve its goal. An investment man-
ager's judgments about the markets, the economy, or companies may not antici-
pate actual market movements, economic conditions or company performance, and
these judgments may affect the return on your investment. In fact, no matter
how good a job an investment manager does, you could lose money on your invest-
ment in the Fund, just as you could with other investments. A Fund share is not
a bank deposit and it is not insured or guaranteed by the Federal Deposit In-
surance Corporation (FDIC) or any government agency.
The Funds try to maintain a constant price per share of $1.00, but there is no
guarantee that a Fund will achieve this goal.
3
<PAGE>
Money Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Current income
consistent with preserving
capital and maintaining
liquidity
Investment Focus Money market
instruments
Share Price Volatility Very
low
Principal Investment
Strategy Investing in a
portfolio of high quality
short-term debt securities
designed to allow the Fund to
maintain a stable net asset
value per share
Investor Profile Conservative
investors seeking current
income from their investment
Investment Objective
The Money Fund seeks as high a level of current income as is consistent with
liquidity and stability of principal.
Investment Strategy of the Money Fund
The Money Fund invests substantially all of its assets in high quality U.S.
dollar-denominated money market instruments, such as bank certificates of de-
posit, bankers' acceptances, commercial paper, corporate debt, mortgage-backed
securities, obligations issued or guaranteed by the U.S. government, and its
agencies and instrumentalities and fully collateralized repurchase agreements.
In managing the Fund, the Adviser assesses current and projected market condi-
tions, particularly interest rates. Based on this assessment, the Adviser uses
gradual shifts in portfolio maturity to respond to expected changes and selects
securities that it believes offer the most attractive risk/return trade off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments as to maturities, issuers and providers of
credit support.
Principal Risks of Investing in the Money Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your invest-
ment is also subject to the risk that the investment return generated by the
Fund may be less than the rate of inflation. A Fund share is not a bank deposit
and is not insured or guaranteed by the FDIC or any government agency. Although
a money market fund seeks to keep a constant price per share of $1.00, you may
lose money by investing in the Fund.
The mortgages underlying mortgage-backed securities may be paid off early,
which makes it difficult to determine their actual maturity and therefore cal-
culate how they will respond to changing interest rates.
4
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
[GRAPH]
1990 8.14%
1991 6.01%
1992 3.96%
1993 2.83%
1994 3.91%
1995 5.60%
1996 5.02%
1997 5.21%
1998 5.16%
1999 4.83%
Best Quarter Worst Quarter
2.01% 0.68%
(6/30/90) (12/31/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.83%.
This table shows the average annual total returns of the Fund's shares for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund (Shares) 4.83% 5.16% 5.03%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.22%
Total Other Expenses 0.62%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.87%
Fee Waivers and Expense Reimbursements (0.37)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$51 $160 $280 $628
</TABLE>
5
<PAGE>
Government Money Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Current income
consistent with preserving
capital and maintaining
liquidity
Investment Focus Money market
instruments issued or
guaranteed by the U.S.
government, its agencies and
instrumentalities
Share Price Volatility Very
low
Principal Investment
Strategy Investing in a
portfolio of high quality
short-term debt securities
issued by the U.S. government,
its agencies and
instrumentalities designed to
allow the Fund to maintain a
stable net asset value per
share
Investor Profile Conservative
investors seeking current
income from their investment
Investment Objective
The Government Money Fund seeks as high a level of current income as is consis-
tent with liquidity and stability of principal.
Investment Strategy of the Government Money Fund
The Government Money Fund invests substantially all of its assets in high qual-
ity U.S. dollar-denominated money market instruments, including mortgage-backed
securities, issued or guaranteed by the U.S. government, its agencies and in-
strumentalities and fully collateralized repurchase agreements. In managing the
Fund, the Adviser assesses current and projected market conditions, particu-
larly interest rates. Based on this assessment, the Adviser uses gradual shifts
in portfolio maturity to respond to expected changes and selects securities
that it believes offer the most attractive risk/return trade off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments among securities with various maturities.
Principal Risks of Investing in the Government Money Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your invest-
ment is also subject to the risk that the investment return generated by the
Fund may be less than the rate of inflation. A Fund share is not a bank deposit
and is not insured or guaranteed by the FDIC or any government agency. Although
a money market fund seeks to keep a constant price per share of $1.00, you may
lose money by investing in the Fund.
The Fund's U.S. government securities are not guaranteed against price move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment agencies are backed by the U.S. Treasury, while others are backed solely
by the ability of the agency to borrow from the U.S. Treasury or by the
agency's own resources.
The mortgages underlying mortgage-backed securities may be paid off early,
which makes it difficult to determine their actual maturity and therefore cal-
culate how they will respond to changing interest rates.
6
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
[GRAPH]
1990 7.98%
1991 5.80%
1992 3.95%
1993 2.77%
1994 3.83%
1995 5.54%
1996 4.99%
1997 5.09%
1998 5.15%
1999 4.82%
Best Quarter Worst Quarter
2.58% 0.67%
(12/31/95) (6/30/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.85%.
This table shows the average annual total returns of the Fund's shares for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 5 10
Year Years Years
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Fund (Shares) 4.82% 5.11% 4.94%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.22%
Total Other Expenses 0.62%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.87%
Fee Waivers and Expense Reimbursements (0.37)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$51 $161 $280 $628
</TABLE>
7
<PAGE>
Treasury Money Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Current income
consistent with preserving
capital and maintaining
liquidity
Investment Focus U.S. Treasury
securities
Share Price Volatility Very
low
Principal Investment
Strategy Investing in a
portfolio of short-term
obligations of the U.S.
Treasury designed to allow the
Fund to maintain a stable net
asset value per share
Investor Profile Conservative
investors seeking current
income from their investment
that is generally exempt from
state and local taxes
Investment Objective
The Treasury Money Fund seeks current income with liquidity and stability of
principal.
Investment Strategy of the Treasury Money Fund
The Treasury Money Fund invests substantially all of its assets in U.S. Trea-
sury obligations. The Fund also may invest, to a lesser extent, in high quality
obligations issued or guaranteed by U.S. government agencies and instrumentali-
ties. Generally, interest payments on obligations held by the Fund will be ex-
empt from state and local taxes. In managing the Fund, the Adviser assesses
current and projected market conditions, particularly interest rates. Based on
this assessment, the Adviser uses gradual shifts in portfolio maturity to re-
spond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments among securities with various maturities.
Principal Risks of Investing in the Treasury Money Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if inter-
est rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your invest-
ment is also subject to the risk that the investment return generated by the
Fund may be less than the rate of inflation. A Fund share is not a bank deposit
and is not insured or guaranteed by the FDIC or any government agency. Although
a money market fund seeks to keep a constant price per share of $1.00, you may
lose money by investing in the Fund.
The Fund's U.S. government securities are not guaranteed against price move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment agencies are backed by the U.S. Treasury, while others are backed solely
by the ability of the agency to borrow from the U.S. Treasury or by the
agency's own resources.
8
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1992 3.68%
1993 2.66%
1994 3.61%
1995 5.27%
1996 4.81%
1997 4.89%
1998 4.82%
1999 4.41%
Best Quarter Worst Quarter
1.37% 0.63%
(6/30/91) (6/30/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.56%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1
Year 5 Years Since Inception
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Fund 4.41% 4.84% 4.37%*
</TABLE>
* Since February 13, 1991
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.30%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.21%
Total Other Expenses 0.61%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.91%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.55%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.55%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$56 $176 $307 $689
</TABLE>
9
<PAGE>
Tax-Exempt Money Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Current income
exempt from federal taxes
consistent with preserving
capital
Investment Focus Municipal
money market instruments
Share Price Volatility Very
low
Principal Investment
Strategy Investing in a
portfolio of high quality
short-term debt securities
which pay interest exempt from
federal taxes designed to
allow the Fund to maintain a
stable net asset value per
share
Investor Profile Conservative
taxable investors in higher
tax brackets seeking current
income exempt from federal
income taxes
Investment Objective
The Tax-Exempt Money Fund seeks a moderate level of current interest income ex-
empt from federal income taxes consistent with stability of principal.
Investment Strategy of the Tax-Exempt Money Fund
The Tax-Exempt Money Fund invests substantially all of its assets in high qual-
ity money market instruments issued by state and local governments and agen-
cies, and other U.S. territories and possessions, that pay interest exempt from
federal taxes ("municipal money market instruments"). Banks and other credit-
worthy entities may provide letters of credit and other credit enhancements as
to municipal money market instruments. Such institutions may also provide li-
quidity facilities that shorten the effective maturity of some of the Fund's
holdings. The Fund ordinarily will not invest in obligations that pay interest
treated as a preference item for purposes of the alternative minimum tax. The
Fund invests only in instruments with remaining maturities of 13 months or less
that the Adviser believes present minimal credit risk. The Fund maintains an
average weighted maturity of 90 days or less.
In managing the Fund, the Adviser assesses current and projected market condi-
tions, particularly interest rates. Based on this assessment and an extensive
credit analysis, the Adviser uses gradual shifts in portfolio maturity to re-
spond to expected changes in interest rates and selects securities that it be-
lieves offer the most attractive risk/return trade off.
Principal Risks of Investing in the Tax-Exempt Money Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your invest-
ment is also subject to the risk that the investment return generated by the
Fund may be less than the rate of inflation. A Fund share is not a bank deposit
and is not insured or guaranteed by the FDIC or any government agency. Although
a money market fund seeks to keep a constant price per share of $1.00, you may
lose money by investing in the Fund.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
10
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1990 5.56%
1991 4.34%
1992 3.02%
1993 1.98%
1994 2.46%
1995 3.53%
1996 3.11%
1997 3.25%
1998 3.09%
1999 2.78%
Best Quarter Worst Quarter
1.39% 0.47%
(12/31/90) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 1.73%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1 5 10
Year Years Years
----------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Fund 2.78% 3.15% 3.28%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.21%
Total Other Expenses 0.61%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.86%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$51 $160 $280 $628
</TABLE>
11
<PAGE>
New York Tax-Exempt Money Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Current income
exempt from federal, New York
State and New York City taxes
consistent with preserving
capital and maintaining
liquidity
Investment Focus New York tax-
exempt money market
instruments
Share Price Volatility Very
low
Principal Investment
Strategy Investing in a
portfolio of high quality
short-term debt securities
which pay interest exempt from
federal, New York State and
New York City taxes designed
to allow the Fund to maintain
a stable net asset value per
share
Investor Profile Conservative
investors in higher tax
brackets seeking current
income that is exempt from
federal, New York State and
New York City income taxes
Investment Objective
The New York Tax-Exempt Money Fund seeks a moderate level of current interest
income that is exempt from federal income tax and, to the extent possible, from
New York State and New York City personal income taxes, as is consistent with
liquidity and stability of principal. This objective may be changed without
shareholder approval.
Investment Strategy of the New York Tax-Exempt Money Fund
The New York Tax-Exempt Money Fund invests substantially all of its assets in
high quality money market instruments issued by the State of New York, local
governments and agencies in New York and other governmental issuers including
U.S. territories and possessions that pay interest exempt from federal, New
York State and New York City income taxes ("New York money market instru-
ments"). Banks and other creditworthy entities may provide letters of credit
and other credit enhancements for New York money market instruments. Such in-
stitutions may also provide liquidity facilities that shorten the effective ma-
turity of some of the Fund's holdings. The Fund invests only in instruments
with remaining maturities of 13 months or less that the Adviser believes pres-
ent minimal credit risk. The Fund maintains an average weighted maturity of 90
days or less.
In managing the Fund, the Adviser assesses current and projected market condi-
tions, particularly interest rates. Based on this assessment and an extensive
credit analysis, the Adviser uses gradual shifts in portfolio maturity to re-
spond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.
Principal Risks of Investing in the New York Tax-Exempt Money Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your invest-
ment is also subject to the risk that the investment return generated by the
Fund may be less than the rate of inflation. A Fund share is not a bank deposit
and is not insured or guaranteed by the FDIC or any government agency. Although
a money market fund seeks to keep a constant price per share of $1.00, you may
lose money by investing in the Fund.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund is non-diversified, which means that it may invest in the securities
of relatively few issuers. As a result, the Fund may be more susceptible to a
single ad-
12
<PAGE>
-------------------------------------------------------------
verse economic or political/regulatory occurrence affecting one or more of
these issuers, and may experience increased volatility due to its investments
in those securities.
The Fund's concentration of investments in securities of issuers located in a
single state subjects the Fund to economic and government policies of that
state. In particular, the Fund's performance depends upon the ability of the
issuers of New York money market instruments to meet their continuing obliga-
tions. New York State and New York City face long-term economic problems that
could seriously affect their ability, and that of other issuers of New York
money market instruments, to meet their financial obligations.
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1999 2.66%
Best Quarter Worst Quarter
0.75% 0.59%
(12/31/99) (3/31/99)
The Fund's performance for the six month period ending June 30, 2000 was 1.64%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1
Year Since Inception
-----------------------------------------------------
<S> <C> <C>
New York Tax-Exempt Money Fund 2.66% 2.68%*
</TABLE>
* Since August 3, 1998.
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.50%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.20%
Total Other Expenses 0.60%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.10%
Fee Waivers and Expense Reimbursements (0.50)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.60%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.60%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$61 $192 $335 $750
</TABLE>
13
<PAGE>
-------------------------------------------------------------
More Information About Risk
Fixed Income Risk
(All Funds)--The market value of fixed income investments change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise. During
periods of rising interest rates, the values of outstanding fixed income secu-
rities will generally fall. Moreover, while securities with longer maturities
tend to produce higher yields, the prices of longer maturity securities are
also subject to greater market fluctuations as a result of changes in interest
rates.
Call Risk
(All Funds)--During periods of falling interest rates, certain debt obliga-
tions with high interest rates may be prepaid (or "called") by the issuer
prior to maturity. This may cause a Fund's average weighted maturity to fluc-
tuate, and may require a Fund to invest the resulting proceeds at lower in-
terest rates.
Credit Risk
(All Funds)--The possibility that an issuer will be unable to make timely
payments of either principal or interest.
Event Risk
(All Funds)--Securities may suffer declines in credit quality and market
value due to issuer restructurings or other factors. This risk should be re-
duced because of the Fund's multiple holdings.
Municipal Issuer Risk
(Tax-Exempt Money Fund, New York Tax-Exempt Money Fund)--There may be economic
or political changes that impact the ability of municipal issuers to repay
principal and to make interest payments on municipal securities. Changes to the
financial condition or credit rating of municipal issuers may also adversely
affect the value of the Funds' municipal securities. Constitutional or legisla-
tive limits on borrowing by municipal issuers may result in reduced supplies of
municipal securities. Moreover, certain municipal securities are backed only by
a municipal issuer's ability to levy and collect taxes.
(New York Tax-Exempt Money Fund)--In addition, the Fund's concentration of in-
vestments in issuers located in a single state makes the Fund more susceptible
to adverse political or economic developments affecting that state. The Fund
also may be riskier than mutual funds that buy securities of issuers in numer-
ous states.
Mortgage-Backed Securities
(Money Fund, Government Money Fund)--Mortgage-backed securities are fixed in-
come securities representing an interest in a pool of underlying mortgage
loans. They are sensitive to changes in interest rates, but may respond to
these changes differently from other fixed income securities due to the possi-
bility of prepayment of the underlying mortgage loans. As a result, it may not
be possible to determine in advance the actual maturity date or average life of
a mortgage-backed security. Rising interest rates tend to discourage
refinancings, with the result that the average life and volatility of the secu-
rity will increase, exacerbating its decrease in market price. When interest
rates fall, however, mortgage-backed securities may not gain as much in market
value because of the expectation of additional mortgage prepayments that must
be reinvested at lower interest rates. Prepayment risk may make it difficult to
calculate the average maturity of a portfolio of mortgage-backed securities
and, therefore, to assess the volatility risk of that portfolio.
More Information About Fund Investments
In addition to the investments and strategies described in this prospectus,
each Fund also may invest in other securities, use other strategies and engage
in other investment practices. These investments and strategies, as well as
those described in this prospectus, are described in detail in our Statement of
Additional Information. Of course, a Fund cannot guarantee that it will achieve
its investment goal.
Investment Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its prin-
14
<PAGE>
-------------------------------------------------------------
cipal subsidiary Charles Schwab & Co., Inc., Schwab is one of the nation's
largest financial services firms and the nation's largest electronic brokerage
firm, in each case measured by customer assets. At December 31, 1999, Schwab
served 6.6 million active accounts with $725 billion in customer assets.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment manage-
ment, estate and trust administration, financial planning, corporate trust and
agency banking, and personal and corporate banking. On December 31, 1999, U.S.
Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W.
47th Street, New York, NY 10036. U.S. Trust Company has its principal offices
at 225 High Ridge Road, East Building, Stamford, CT 06905.
The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the security subject to research.
The Boards of Directors of Excelsior Funds, Inc. and Excelsior Tax-Exempt
Funds, Inc. supervise the Adviser and establish policies that the Adviser must
follow in its management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
<TABLE>
<S> <C>
Money Fund 0.14%
Government Money Fund 0.22%
Treasury Money Fund 0.28%
Tax-Exempt Money Fund 0.18%
New York Tax-Exempt Money Fund 0.32%
</TABLE>
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to buy, sell (sometimes called "redeem") and ex-
change shares of the Funds.
How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
.Telephone,
.Wire, or
.Automatic Investment Program
To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to Ex-
celsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic in-
vestment program, write your check, payable in U.S. dollars, to "Excelsior
Funds," and include the name of the appropriate Fund(s) on the check. A Fund
cannot accept third-party checks, credit cards, credit card checks or cash. To
purchase shares by wire, please call us for instructions. Federal funds and
registration instructions should be wired through the Federal Reserve System
to:
The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account Number 9102732915
For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration (including account number)
Investors making initial investments by wire must promptly complete the en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place
15
<PAGE>
-------------------------------------------------------------
trades in Fund shares for their customers. If you invest through an authorized
institution, you will have to follow its procedures, which may be different
from the procedures for investing directly. Your broker or institution may
charge a fee for its services, in addition to the fees charged by the Fund. You
will also generally have to address your correspondence or questions regarding
a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for deal-
ers, which will be paid for by the distributor out of its own assets and not
out of the assets of the Funds. Under any such program, the distributor may
provide incentives, in the form of cash or other compensation, including mer-
chandise, airline vouchers, trips and vacation packages, to dealers selling
shares of a Fund. If any such program is made available to any dealer, it will
be made available to all dealers on the same terms.
General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus Day. A Fund may reject any purchase request if it is determined
that accepting the request would not be in the best interests of the Fund or
its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good or-
der. We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV twice each Business Day at 1:00 p.m., Eastern time
(12:00 noon, Eastern time for the Tax-Exempt Money and New York Tax-Exempt
Money Funds) and at the regularly-scheduled close of normal trading on the NYSE
(normally, 4:00 p.m., Eastern time). For you to be eligible to receive divi-
dends declared on the day you submit your purchase request, a Fund must receive
your request in good order before 1:00 p.m., Eastern time (12:00 noon, Eastern
time for the Tax-Exempt Money and New York Tax-Exempt Money Funds) and federal
funds (readily available funds) before the regularly-scheduled close of normal
trading on the NYSE.
How We Calculate NAV
NAV for one Fund share of each class of a Fund is the value of that share's
portion of the net assets of such class of the Fund.
In calculating NAV for the Funds, a Fund generally values its investment port-
folio using the amortized cost valuation method, which is described in detail
in our Statement of Additional Information. If this method is determined to be
unreliable during certain market conditions or for other reasons, a Fund may
value its portfolio at market price or fair value prices may be determined in
good faith using methods approved by the Board of Directors.
Minimum Purchases
To purchase shares for the first time, you must invest at least $500 in any
Fund.
Your subsequent investments in any Fund must be made in amounts of at least
$50.
A Fund may accept investments of smaller amounts at its discretion.
Automatic Investment Program
If you have a checking, money market, or NOW account with a bank, you may pur-
chase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.
With a $50 minimum initial investment, you may begin regularly scheduled in-
vestments once per month, on either the first or fifteenth day, or twice per
month, on both days.
How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone,
. Systematic Withdrawal Plan, or
. By Writing a Check Directly From Your Account
Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).
16
<PAGE>
-------------------------------------------------------------
You may sell your shares by sending a written request for redemption to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or institu-
tion may charge a fee for its services, in addition to the fees charged by the
Fund.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares by writing a
check for at least $500 drawn on your account. Checks are available free of
charge, and may be obtained by calling (800) 446-1012 (from overseas, call
(617) 557-8280). You cannot use a check to close your account.
The sale price of each share will be the next NAV determined after the Fund re-
ceives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal plan. Under the plan you may arrange monthly, quarterly, semi-annual or
annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.
Receiving Your Money
Normally, we will send your sale proceeds within five Business Days after we
receive your redemption request in good order. Your proceeds can be wired to
your bank account (if more than $500) or sent to you by check. You can request
to have redemption proceeds wired to your bank account on the same day you call
us to sell your shares, as long as we hear from you by 1:00 p.m., Eastern time
(12:00 noon, Eastern time for the Tax-Exempt Money and New York Tax-Exempt
Money Funds) on that day. Otherwise, redemption proceeds will be wired the next
Business Day. Shares redeemed and wired on the same day will not receive the
dividend declared on that day. If you recently purchased your shares by check,
redemption proceeds may not be available until your check has cleared (which
may take up to 15 days from your date of purchase).
Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes
on any capital gains from the sale as with any redemption.
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be re-
quired to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.
How to Exchange Your Shares
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for Shares of
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that the
17
<PAGE>
-------------------------------------------------------------
exchange would not be in the best interests of a Fund or its shareholders.
Shares can be exchanged directly by mail, or by telephone if you previously se-
lected the telephone exchange option on the account application.
You may also exchange shares through your financial institution. Exchange re-
quests must be for an amount of at least $500.
If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your
date of purchase). This exchange privilege may be changed or canceled at any
time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of in-
structions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund
shares. These intermediaries may authorize other organizations to accept pur-
chase, redemption and exchange requests for Fund shares. These requests are
normally executed at the NAV next determined after the intermediary receives
the request in good order. Authorized intermediaries are responsible for trans-
mitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% of the average
daily net asset value of Fund shares held by clients of a shareholder organiza-
tion.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying accu-
mulated dividends monthly.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive
the distribution.
Dividends and distributions for shares held of record by U.S. Trust and its af-
filiates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.
Taxes
Each Fund contemplates declaring as dividends each year all or substantially
all of its taxable income, including its net capital gain (the excess of long-
term capital gain over short-term capital loss), if any. It is anticipated that
all, or substantially all, of the distributions by the Money Fund, Government
Money Fund and Treasury Money Fund will be taxable as ordinary income. You will
be subject to income tax on these Fund distributions regardless whether they
are paid in cash or reinvested in additional shares. The one major exception to
these tax principles is that distributions on shares held in an IRA (or other
tax-qualified plan) will generally not be currently taxable.
The distributions by the Tax-Exempt Money Fund and the New York Tax-Exempt
Money Fund will generally constitute tax-exempt income for shareholders for
federal income tax purposes. It is possible, depending upon the Funds' invest-
ments, that a portion of these Funds' distributions could be taxable to share-
holders as ordinary income or capital gains, but it is not expected that this
will be the case.
Interest on indebtedness incurred by you to purchase or carry shares of the
Tax- Exempt Money Fund or the New York Tax-Exempt Money Fund generally will not
be deductible for federal income tax purposes.
18
<PAGE>
-------------------------------------------------------------
You should note that a portion of the exempt-interest dividends paid by the
Tax-Exempt Money Fund or the New York Tax-Exempt Money Fund may constitute an
item of tax preference for purposes of determining federal alternative minimum
tax liability. Exempt-interest dividends will also be considered along with
other adjusted gross income in determining whether any Social Security or rail-
road retirement payments received by you are subject to federal income taxes.
If you receive an exempt-interest dividend with respect to any share and the
share is held by you for six months or less, any loss on the sale or exchange
of the share will be disallowed to the extent of such dividend amount.
Shareholders may also be subject to state and local taxes on distributions.
State income taxes may not apply however, to the portions of each Fund's dis-
tributions, if any, that are attributable to interest on federal securities or
interest on securities of the particular state or localities within the state.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, may be subject to different United States federal income tax treatment.
You should consult your tax adviser for further information regarding federal,
state, local and/or foreign tax consequences relevant to your specific situa-
tion.
More information about taxes is in the Statement of Additional Information.
19
<PAGE>
-----------------------------------------------------------------
Financial Highlights
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's financial
performance for the past five years, or, if shorter, the period of the Fund's
operations. Some of this information reflects financial information for a sin-
gle Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in a Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
Ernst & Young LLP, independent auditors. Their report, along with each Fund's
financial statements, are incorporated by reference into our Statement of Addi-
tional Information. You can obtain the annual report, which contains more per-
formance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8280).
Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.05005 0.04901 0.05139 0.04888 0.05336
Net Gains on Securities
(both realized and
unrealized)........... 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.05005 0.04901 0.05139 0.04888 0.05336
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.05005) (0.04901) (0.05139) (0.04888) (0.05336)
Dividends in Excess of
Net Investment
Income................ 0.00000 0.00000/2/ 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.05005) (0.04901) (0.05139) (0.04888) (0.05336)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 5.08% 5.01% 5.26% 5.00% 5.47%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $1,467.18 $ 973.67 $ 658.87 $ 498.07 $ 394.29
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.47% 0.48% 0.48% 0.47% 0.50%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.58% 0.52% 0.52% 0.53% 0.53%
Ratio of Net Investment
Income to Average Net
Assets................ 5.05% 4.85% 5.14% 4.89% 5.40%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
20
<PAGE>
-----------------------------------------------------------------
Government Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.05004 0.04838 0.05082 0.04862 0.05296
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.05004 0.04838 0.05082 0.04862 0.05296
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.05004) (0.04838) (0.05082) (0.04862) (0.05296)
Dividends in Excess of
Net Investment
Income................ 0.00000 0.00000/2/ 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.05004) (0.04838) (0.05082) (0.04862) (0.05296)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 5.08% 4.95% 5.20% 4.97% 5.43%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 772.69 $ 641.83 $ 600.12 $ 533.83 $ 461.47
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.47% 0.47% 0.47% 0.47% 0.50%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.50% 0.50% 0.50% 0.51% 0.53%
Ratio of Net Investment
Income to Average Net
Assets................ 5.01% 4.85% 5.09% 4.86% 5.36%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
21
<PAGE>
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Treasury Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.04560 0.04543 0.04853 0.04676 0.05043
Net Gains on Securities
(both realized and
unrealized)........... 0.00000 0.00002 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.04560 0.04545 0.04853 0.04676 0.05043
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.04560) (0.04545) (0.04853) (0.04676) (0.05043)
Dividends in Excess of
Net Investment
Income................ 0.00000 0.00000 0.00000/2/ 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.04560) (0.04545) (0.04853) (0.04676) (0.05043)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 4.62% 4.64% 4.96% 4.78% 5.16%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 525.39 $ 494.22 $ 469.64 $ 349.09 $ 258.17
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.51% 0.52% 0.52% 0.52% 0.55%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.53% 0.55% 0.54% 0.54% 0.57%
Ratio of Net Investment
Income to Average Net
Assets................ 4.58% 4.55% 4.86% 4.68% 5.03%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
22
<PAGE>
-----------------------------------------------------------------
Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.02946 0.02911 0.03216 0.03050 0.03362
Net Gains on Securities
(both realized and
unrealized)........... (0.00001) 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.02945 0.02911 0.03216 0.03050 0.03362
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.02945) (0.02910) (0.03216) (0.03050) (0.03362)
Dividends in Excess of
Net Investment
Income................ 0.00000 (0.00001) 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.02945) (0.02911) (0.03216) (0.03050) (0.03362)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 2.96% 2.95% 3.26% 3.09% 3.41%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $2,051.11 $1,503.07 $1,396.53 $1,069.69 $ 966.71
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.46% 0.46% 0.47% 0.47% 0.49%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.52% 0.52% 0.53% 0.52% 0.53%
Ratio of Net Investment
Income to Average Net
Assets................ 2.97% 2.91% 3.21% 3.05% 3.35%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
23
<PAGE>
-----------------------------------------------------------------
New York Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Year Ended March 31, 2000 Period Ended March 31, 1999/1/
------------------------- ------------------------------
<S> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00
--------- ---------
Income From Investment
Operations
Net Investment Income.. 0.02809 0.01711
--------- ---------
Total From Investment
Operations............ 0.02809 0.01711
--------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.02809) (0.01711)
--------- ---------
Total Distributions.... (0.02809) (0.01711)
--------- ---------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00
========= =========
Total Return............ 2.82% 1.72%/3/
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 421.39 $ 305.72
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.54% 0.47%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets/3/
...................... 0.71% 0.79%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 2.84% 2.24%/2/
</TABLE>
------
Notes:
1. Inception date of the Fund was August 3, 1998.
2. Annualized.
3. Not Annualized.
24
<PAGE>
Excelsior Funds, Inc.
Excelsior Tax-Exempt Funds, Inc.
Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905
Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the fol-
lowing:
Statement of Additional Information (SAI)
The SAIs dated August 1, 2000 include detailed information about Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. The SAIs are on file with the
SEC and are incorporated by reference into this prospectus. This means that the
SAIs, for legal purposes, are a part of this prospectus.
Annual and Semi-Annual Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, recent market conditions and trends.
To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 446-1012 (from overseas, call (617) 557-8280)
By Mail: Excelsior Funds, 73 Tremont Street, Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, as well as other information about Excelsior Funds, Inc. and Excelsior
Tax-Exempt Funds, Inc., from the EDGAR Database on the SEC's website
("http://www.sec.gov"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information on the operation of the Pub-
lic Reference Room, call 202-942-8090). You may request documents by mail from
the SEC, upon payment of a duplicating fee, by writing to: Securities and Ex-
change Commission, Public Reference Section, Washington, DC 20549-0102. You may
also obtain this information, upon payment of a duplicating fee, by e-mailing
the SEC at the following address: [email protected]. The Investment Company
Act registration numbers of Excelsior Funds, Inc. and Excelsior Tax-Exempt
Funds, Inc. are 811-4088 and 811-4101, respectively.
<PAGE>
Excelsior Tax-Exempt Fixed Income Funds
Prospectus
August 1, 2000
Excelsior Tax-Exempt Funds, Inc.
Long-Term Tax-Exempt Fund
Intermediate-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
New York Intermediate-Term Tax-Exempt Fund
California Tax-Exempt Income Fund
Investment Adviser
United States Trust Company of New York
U.S. Trust Company
Investment Sub-Adviser
U.S. Trust Company, N.A.
(California Tax-Exempt Income Fund)
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
[LOGO OF EXCELSIOR FUNDS]
<PAGE>
Table of Contents
Excelsior Tax-Exempt Funds, Inc. is a mutual fund family that offers shares in
separate investment portfolios which have individual investment goals, strate-
gies and risks. This prospectus gives you important information about the Long-
Term Tax-Exempt, Intermediate-Term Tax-Exempt, Short-Term Tax-Exempt Securi-
ties, New York Intermediate-Term Tax-Exempt and California Tax-Exempt Income
Funds (each, a Fund) that you should know before investing. Please read this
prospectus and keep it for future reference.
This prospectus has been arranged into different sections so that you can eas-
ily review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
<TABLE>
<CAPTION>
Page
<S> <C>
Long-Term Tax-Exempt Fund.......................................... 4
Intermediate-Term Tax-Exempt Fund.................................. 6
Short-Term Tax-Exempt Securities Fund.............................. 8
New York Intermediate-Term Tax-Exempt Fund......................... 10
California Tax-Exempt Income Fund.................................. 12
More Information About Risk........................................ 14
More Information About Fund Investments............................ 14
Investment Adviser And Sub-Adviser................................. 14
Portfolio Managers................................................. 15
Purchasing, Selling And Exchanging Fund Shares..................... 16
Dividends And Distributions........................................ 18
Taxes.............................................................. 18
Financial Highlights............................................... 20
How To Find Out More Information About Excelsior Tax-Exempt Funds,
Inc. ............................................................. Back Cover
</TABLE>
<PAGE>
-------------------------------------------------------------
Introduction--Risk/Return Information Common to All Funds
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal, strategies and risks for reaching that
goal. The investment managers invest Fund assets in a way that they believe
will help a Fund achieve its goal. Still, investing in each Fund involves risk
and there is no guarantee that a Fund will achieve its goal. An investment man-
ager's judgments about the markets, the economy, or companies may not antici-
pate actual market movements, economic conditions or company performance, and
these judgments may affect the return on your investment. In fact, no matter
how good a job an investment manager does, you could lose money on your invest-
ment in a Fund, just as you could with other investments. A Fund share is not a
bank deposit and it is not insured or guaranteed by the Federal Deposit Insur-
ance Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the se-
curities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price move-
ments, sometimes called volatility, may be greater or lesser depending on the
types of securities a Fund owns and the markets in which they trade. The effect
on a Fund of a change in the value of a single security will depend on how
widely the Fund diversifies its holdings.
3
<PAGE>
Long-Term Tax-Exempt Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal High current
income exempt from federal
income taxes
Investment Focus Tax-exempt
municipal securities
Share Price Volatility Medium
Principal Investment
Strategy Investing in a
diversified portfolio of
investment grade tax-exempt
municipal obligations
Investor Profile Investors in
higher tax brackets seeking to
maximize tax-exempt income,
and who are willing to accept
risk of share price volatility
Investment Objective
The Long-Term Tax-Exempt Fund seeks to maximize current interest income exempt
from federal income taxes.
Investment Strategy of the Long-Term Tax-Exempt Fund
The Long-Term Tax-Exempt Fund invests substantially all of its assets in tax-
exempt securities issued by U.S. states, territories and possessions and their
political subdivisions, the interest on which is exempt from federal income
taxes ("municipal securities"). In selecting municipal securities for the Fund,
the Adviser considers each security's yield and total return potential relative
to other available municipal securities and manages the Fund through gradual
shifts in the Fund's average maturity. The Fund generally will have a dollar-
weighted portfolio maturity between 10 and 25 years.
The Fund emphasizes investment in municipal securities rated in the two highest
rating categories at the time of purchase. However, the Fund may purchase with-
out limitation investment grade municipal securities rated at the time of pur-
chase in one of the four highest rating categories by a major rating agency, or
determined by the Adviser to be of equivalent quality. Some of the municipal
securities in which the Fund invests may be supported by credit enhancements
provided by third parties. The Fund ordinarily will not invest in municipal se-
curities that pay interest subject to the alternative minimum tax. The Fund's
average weighted portfolio maturity may be as high as 30 years and there is no
restriction on the maturity of any single security held by the Fund.
Principal Risks of Investing in the Long-Term Tax-Exempt Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise
and the volatility of lower rated securities is even greater than that of
higher rated securities. In addition, longer-term investments tend to be more
sensitive to interest rate changes.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund is also subject to the risk that long-term municipal securities may
underperform other segments of the fixed income market or the fixed income mar-
kets as a whole.
4
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1990 6.89%
1991 12.72%
1992 10.01%
1993 15.63%
1994 (5.78)%
1995 23.43%
1996 3.67%
1997 9.47%
1998 6.31%
1999 (9.01)%
Best Quarter Worst Quarter
9.35% (7.14)%
(3/31/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 7.27%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Lehman Brothers Current Municipal Bond
Index.
<TABLE>
<CAPTION>
5 10
1 Year Years Years
-----------------------------------------------------------------
<S> <C> <C> <C>
Long-Term Tax-Exempt Fund (9.01)% 6.26% 6.94%
Lehman Brothers Current Municipal Bond Index (1.53)% 6.37% 6.58%
</TABLE>
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular market or securities in a market sector. You cannot invest directly in
an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.50%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.25%
Total Other Expenses 0.65%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.15%
Fee Waivers and Expense Reimbursements (0.35)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.80%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.80%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser, Sub-Adviser and Port-
folio Managers."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$82 $255 $444 $990
</TABLE>
5
<PAGE>
Intermediate-Term Tax-Exempt Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Moderate
current income exempt from
federal income taxes,
consistent with relative
stability of principal
Investment Focus Tax-exempt
municipal securities
Share Price Volatility Medium
Principal Investment
Strategy Investing in a
diversified portfolio of
investment grade tax-exempt
municipal obligations
Investor Profile Investors in
higher tax brackets seeking
tax-exempt income, and who are
willing to accept moderate
share price volatility
Investment Objective
The Intermediate-Term Tax-Exempt Fund seeks as high a level of current interest
income exempt from federal income taxes as is consistent with relative stabil-
ity of principal.
Investment Strategy of the Intermediate-Term Tax-Exempt Fund
The Intermediate-Term Tax-Exempt Fund invests substantially all of its assets
in tax-exempt securities issued by U.S. states, territories and possessions and
their political subdivisions, the interest from which is exempt from federal
income taxes ("municipal securities"). In selecting municipal securities for
the Fund, the Adviser considers each security's yield and total return poten-
tial relative to other available municipal securities and manages the Fund
through gradual shifts in the Fund's average maturity. The Fund generally will
have a dollar-weighted average maturity of 3 to 10 years.
The Fund emphasizes investment in municipal securities rated in the two highest
rating categories at the time of purchase. However, the Fund may purchase with-
out limitation investment grade municipal securities rated at the time of pur-
chase in one of the four highest rating categories by a major rating agency or,
if unrated, determined by the Adviser to be of equivalent quality. Some of the
municipal securities in which the Fund invests may be supported by credit en-
hancements provided by third parties. The Fund ordinarily will not invest in
municipal securities that pay interest subject to the alternative minimum tax.
There is no restriction on the maturity of any single security held by the
Fund.
Principal Risks of Investing in the Intermediate-Term Tax-Exempt Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise
and the volatility of lower rated securities is even greater than that of
higher rated securities.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund is also subject to the risk that intermediate-term municipal securi-
ties may underperform other segments of the fixed income market or the fixed
income markets as a whole.
6
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1990 6.41%
1991 10.19%
1992 8.50%
1993 10.78%
1994 (4.18)%
1995 15.08%
1996 4.34%
1997 7.31%
1998 6.32%
1999 (1.75)%
Best Quarter Worst Quarter
5.89% (4.57)%
(3/31/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 3.00%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999, to those of the Lehman Brothers 5 Year Municipal G.O.
Bond Index.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Tax-Exempt Fund (1.75)% 6.12% 6.16%
Lehman Brothers 5 Year Municipal G.O. Bond Index 0.73% 5.80% 6.17%
</TABLE>
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular market or securities in a market sector. You cannot invest directly in
an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.35%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.22%
Total Other Expenses 0.62%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.97%
Fee Waivers and Expense Reimbursements (0.32)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.65%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.65%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser, Sub-Adviser and Port-
folio Managers."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$66 $208 $362 $810
</TABLE>
7
<PAGE>
Short-Term Tax-Exempt Securities Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Current income
exempt from federal income
taxes, consistent with
relative stability of
principal
Investment Focus Tax-exempt
municipal securities
Share Price Volatility Low
Principal Investment
Strategy Investing in a
diversified portfolio of
investment grade tax-exempt
municipal obligations
Investor Profile Investors
seeking tax-exempt income with
the risk of limited share
price volatility
Investment Objective
The Short-Term Tax-Exempt Securities Fund seeks as high a level of current in-
terest income exempt from federal income taxes as is consistent with relative
stability of principal.
Investment Strategy of the Short-Term Tax-Exempt Securities Fund
The Short-Term Tax-Exempt Securities Fund invests substantially all of its as-
sets in tax-exempt securities issued by U.S. states, territories and posses-
sions and their political subdivisions, the interest on which is exempt from
federal income taxes ("municipal securities"). In selecting municipal securi-
ties for the Fund, the Adviser emphasizes preservation of principal and consid-
ers each security's yield and total return potential relative to other avail-
able municipal securities. The Fund generally will have a dollar-weighted aver-
age portfolio maturity of 1 to 3 years.
The Fund emphasizes investment in municipal securities rated in the two highest
rating categories at the time of purchase. However, the Fund may purchase with-
out limitation investment grade municipal securities rated at the time of pur-
chase in one of the four highest rating categories by a major rating agency or,
if unrated, determined by the Adviser to be of equivalent quality. Some of the
municipal securities in which the Fund invests may be supported by credit en-
hancements provided by third parties. The Fund ordinarily will not invest in
municipal securities that pay interest subject to the alternative minimum tax.
There is no restriction on the maturity of any single security held by the
Fund.
Principal Risks of Investing in the Short-Term Tax-Exempt Securities Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise
and the volatility of lower rated securities is even greater than that of
higher rated securities.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund is also subject to the risk that short-term municipal securities may
underperform other segments of the fixed income market or the fixed income mar-
kets as a whole.
8
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1993 5.49%
1994 (0.30)%
1995 7.41%
1996 3.68%
1997 4.58%
1998 4.58%
1999 1.46%
Best Quarter Worst Quarter
2.53% (1.18)%
(3/31/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 1.77%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999, to those of the Lehman Brothers 3 Year Municipal Bond
Index.
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
---------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Tax-Exempt Securities Fund 1.46% 4.32% 3.82%*
Lehman Brothers 3 Year Municipal Bond Index 2.10% 5.20% 4.69%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular market or securities in a market sector. You cannot invest directly in
an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.30%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.26%
Total Other Expenses 0.66%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.96%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.60%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.60%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser, Sub-Adviser and Port-
folio Managers."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$61 $192 $335 $750
</TABLE>
9
<PAGE>
New York Intermediate-Term Tax-Exempt Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Maximize
current income exempt from
federal, New York State and
New York City income taxes
Investment Focus New York tax-
exempt municipal securities
Share Price Volatility Medium
Principal Investment
Strategy Investing in a
portfolio of investment grade
municipal obligations that pay
interest that is exempt from
federal, New York State and
New York City income taxes
Investor Profile High tax
bracket investors seeking tax-
exempt current income, and who
are willing to accept a
moderate degree of share price
volatility
Investment Objective
The New York Intermediate-Term Tax-Exempt Fund seeks to provide New York in-
vestors with as high a level of current interest income exempt from federal in-
come 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.
This objective may be changed without shareholder approval.
Investment Strategy of the New York Intermediate-Term Tax-Exempt Fund
The New York Intermediate-Term Tax-Exempt Fund invests substantially all of its
assets in tax-exempt securities issued by New York State local governments and
agencies in New York and other governmental issuers including U.S. territories
and possessions that pay interest exempt from federal, New York State and New
York City income taxes ("New York municipal securities"). In selecting securi-
ties for the Fund, the Adviser considers each security's yield and total return
potential relative to other available municipal securities and manages the Fund
through gradual shifts in the Fund's average maturity. The Fund generally will
have a dollar-weighted average portfolio maturity of 3 to 10 years.
The Fund emphasizes investment in New York municipal securities rated in the
two highest rating categories at the time of purchase. However, the Fund may
purchase without limitation investment grade municipal securities rated at the
time of purchase in one of the four highest rating categories by a major rating
agency or, if unrated, determined by the Adviser to be of equivalent quality.
Some of the municipal securities in which the Fund invests may be supported by
credit enhancements provided by third parties. The Fund ordinarily will not in-
vest in securities that pay interest subject to the alternative minimum tax.
There is no restriction on the maturity of any single security held by the
Fund.
Principal Risks of Investing in the New York Intermediate-Term Tax-Exempt Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise
and the volatility of lower rated securities is even greater than that of
higher rated securities.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund's concentration of investments in securities of issuers located in a
single state subjects the Fund to economic and government policies of that
state. In particular, the Fund's performance depends upon the ability of the
issuers of New York municipal securities to meet their continuing obligations
for the payment of principal and interest. New York State and New York City
face long-term economic problems that could seriously affect their ability, and
that of other issuers of New York municipal securities, to meet their financial
obligations.
The Fund is non-diversified, which means that it may invest in the securities
of relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or
more of these issuers, and may experience increased volatility due to its in-
vestments in those securities.
10
<PAGE>
-------------------------------------------------------------
The Fund is also subject to the risk that New York municipal securities may
underperform other segments of the fixed income market or the fixed income mar-
kets as a whole.
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1991 9.53%
1992 6.55%
1993 9.28%
1994 (4.23)%
1995 13.62%
1996 4.31%
1997 6.67%
1998 6.33%
1999 (2.13)%
Best Quarter Worst Quarter
6.12% (4.16)%
(3/31/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 3.36%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999, to those of the Lehman Brothers 5 Year Municipal Bond
Index.
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
----------------------------------------------------------------------------
<S> <C> <C> <C>
New York Intermediate-Term Tax-Exempt Fund (2.13)% 5.64% 5.63%*
Lehman Brothers 5 Year Municipal Bond Index 0.74% 5.71% 6.29%*
</TABLE>
* Since May 31, 1990
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular market or securities in a market sector. You cannot invest directly in
an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.50%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.23%
Total Other Expenses 0.63%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.13%
Fee Waivers and Expense Reimbursements (0.33)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.80%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.80%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser, Sub-Adviser and Port-
folio Managers."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$82 $255 $444 $990
</TABLE>
11
<PAGE>
California Tax-Exempt Income Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Moderate
current income exempt from
federal and California income
taxes
Investment Focus California
tax-exempt municipal
securities
Share Price Volatility Medium
Principal Investment
Strategy Investing in
municipal obligations that pay
interest that is exempt from
federal and California taxes
Investor Profile Investors
seeking tax-exempt current
income, and who are willing to
accept some degree of share
price volatility
Investment Objective
The California Tax-Exempt Income Fund seeks to provide California investors
with as high a level of current interest income exempt from federal income tax
and, to the extent possible, from California state personal income tax as is
consistent with the preservation of capital and relative stability of princi-
pal. This objective may be changed without shareholder approval.
Investment Strategy of the California Tax-Exempt Income Fund
The California Tax-Exempt Income Fund invests substantially all of its assets
in tax-exempt securities issued by the State of California and its cities,
counties and political subdivisions, the interest from which is exempt from
federal and California State income taxes ("California municipal securities").
In selecting securities for the Fund, the Sub-Adviser considers each security's
yield and total return potential relative to other available municipal securi-
ties and manages the Fund through gradual shifts in the Fund's average maturi-
ty. The Fund generally will have a dollar-weighted average remaining maturity
of 3 to 5 years.
The Fund emphasizes investment in California municipal securities rated in the
two highest rating categories at the time of investment. However, the Fund may
invest without limit in investment grade municipal securities, which are those
rated at the time of investment in one of the four highest rating categories by
a major rating agency or, if unrated, determined by the Sub-Adviser to be of
equivalent quality. Some of the municipal securities in which the Fund invests
may be supported by credit enhancements provided by third parties. The Fund or-
dinarily will not invest in securities that pay interest subject to the alter-
native minimum tax. There is no restriction on the maturity of any single secu-
rity held by the Fund.
Principal Risks of Investing in the California Tax-Exempt Income Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise,
and the volatility of lower rated securities is even greater than that of
higher rated securities.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal securi-
ties. Changes in the financial condition or credit rating of municipal issuers
also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund's concentration of investments in securities of issuers located in a
single state subjects the Fund to economic and government policies of that
state. In particular, the Fund's performance depends upon the ability of the
issuers of California municipal securities to meet their continuing obligations
for the payment of principal and interest. California and its cities face long-
term economic problems that could seriously affect their ability, and that of
other issuers of California municipal securities to meet their financial obli-
gations.
The Fund is non-diversified, which means that it may invest in the securities
of relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or
more of these issuers, and may experience increased volatility due to its in-
vestments in those securities.
12
<PAGE>
-------------------------------------------------------------
The Fund is also subject to the risk that California municipal securities may
underperform other segments of the fixed income market or the fixed income mar-
kets as a whole.
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
[GRAPH]
1997 5.72%
1998 5.25%
1999 0.08%
Best Quarter Worst Quarter
2.46% (0.91)%
(6/30/97) (6/30/99)
The Fund's performance for the six month period ending June 30, 2000 was 3.02%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999, to those of the Merrill Lynch 3-7 Year Municipal In-
dex.
<TABLE>
<CAPTION>
1 Year Since Inception
--------------------------------------------------------------
<S> <C> <C>
California Tax-Exempt Income Fund 0.08% 3.78%*
Merrill Lynch 3-7 Year Municipal Index 0.65% 4.62%**
</TABLE>
* Since October 1, 1996
** Since September 30, 1996
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular market or securities in a market sector. You cannot invest directly in
an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.50%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.28%
Total Other Expenses 0.68%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.18%
Fee Waivers and Expense Reimbursements (0.68)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser, Sub-Adviser and Port-
folio Manager."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$51 $160 $280 $628
</TABLE>
13
<PAGE>
-------------------------------------------------------------
More Information About Risk
Fixed Income Risk
(All Funds)--The market value of fixed income investments change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise. During
periods of rising interest rates, the values of outstanding fixed income secu-
rities generally fall. Moreover, while securities with longer maturities tend
to produce higher yields, the prices of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest
rates. As the average maturity or duration of a security lengthens, the risk
that the price of such security will become more volatile increases. Duration
approximates the price sensitivity of a security to changes in interest rates.
In contrast to maturity which measures only time until final payment, duration
combines consideration of yield, interest payments, final maturity and call
features.
Call Risk
(All Funds)--During periods of falling interest rates, certain debt obliga-
tions with high interest rates may be prepaid (or "called") by the issuer
prior to maturity. This may cause a Fund's average weighted maturity to fluc-
tuate, and may require a Fund to invest the resulting proceeds at lower in-
terest rates.
Credit Risk
(All Funds)--The possibility that an issuer will be unable to make timely
payments of either principal or interest.
Event Risk
(All Funds)--Securities may suffer declines in credit quality and market
value due to issuer restructurings or other factors. This risk should be re-
duced because of a Fund's multiple holdings.
Municipal Issuer Risk
(All Funds)--There may be economic or political changes that impact the ability
of municipal issuers to repay principal and to make interest payments on munic-
ipal securities. Changes to the financial condition or credit rating of munici-
pal issuers may also adversely affect the value of the Fund's municipal securi-
ties. Constitutional or legislative limits on borrowing by municipal issuers
may result in reduced supplies of municipal securities. Moreover, certain mu-
nicipal securities are backed only by a municipal issuer's ability to levy and
collect taxes.
(New York Intermediate-Term Tax-Exempt Fund and California Tax-Exempt Income
Fund)--These Funds' concentration of investments in issuers located in a single
state makes the Funds more susceptible to adverse political or economic devel-
opments affecting that state. These Funds also may be riskier than mutual funds
that buy securities of issuers in numerous states.
More Information About Fund Investments
In addition to the investments and strategies described in this prospectus,
each Fund also may invest in other securities, use other strategies and engage
in other investment practices. These investments and strategies, as well as
those described in this prospectus, are described in detail in our Statement of
Additional Information.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During adverse economic, market or other condi-
tions, each Fund may take temporary defensive positions such as investing up to
100% of its assets in investments that would not ordinarily be consistent with
a Fund's objective. The Fund may not achieve its objective when so invested. A
Fund will do so only if the Adviser or Sub- Adviser believes that the risk of
loss outweighs the opportunity for capital gains or higher income. Of course, a
Fund cannot guarantee that it will achieve its investment goal.
Investment Adviser and Sub-Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal sub-
sidiary Charles Schwab & Co., Inc., Schwab is one of the nation's largest fi-
nancial services firms and
14
<PAGE>
-------------------------------------------------------------
the nation's largest electronic brokerage firm, in each case measured by cus-
tomer assets. At December 31, 1999, Schwab served 6.6 million active accounts
with $725 billion in customer assets.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment manage-
ment, estate and trust administration, financial planning, corporate trust and
agency banking, and personal and corporate banking. On December 31, 1999, U.S.
Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W.
47th Street, New York, NY 10036. U.S. Trust Company has its principal offices
at 225 High Ridge Road, East Building, Stamford, CT 06905.
The Adviser makes investment decisions for the Short-Term Tax-Exempt Securi-
ties, Intermediate-Term Tax- Exempt, Long-Term Tax-Exempt and New York Interme-
diate-Term Tax-Exempt Funds and continuously reviews, supervises and adminis-
ters each Fund's investment program.
U.S. Trust Company, N.A. (the Sub-Adviser) serves as the investment sub-adviser
to the California Tax-Exempt Income Fund. The Sub-Adviser is a national bank
and a wholly-owned subsidiary of U.S. Trust Corporation, and has its principal
offices at 515 South Flower Street, Los Angeles, CA 90071. The Sub-Adviser
makes investment decisions for the Fund.
The Adviser oversees the Sub-Adviser to ensure compliance with the California
Tax-Exempt Income Fund's investment policies and guidelines, and monitors the
Sub-Adviser's adherence to its investment style. The Adviser pays the Sub- Ad-
viser out of the investment advisory fee it receives from the Fund (described
below).
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the securities subject to research.
The Board of Directors of Excelsior Tax-Exempt Funds, Inc. supervises the Ad-
viser and Sub-Adviser and establishes policies that the Adviser and Sub-Adviser
must follow in their management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
<TABLE>
<S> <C>
Short-Term Tax-Exempt Securities Fund 0.23%
Intermediate-Term Tax-Exempt Fund 0.28%
Long-Term Tax-Exempt Fund 0.43%
New York Intermediate-Term Tax-Exempt Fund 0.48%
California Tax-Exempt Income Fund 0.05%
</TABLE>
Portfolio Managers
Kenneth J. McAlley has served as the Short-Term Tax- Exempt Securities, Inter-
mediate-Term Tax-Exempt and New York Intermediate-Term Tax-Exempt Funds' port-
folio manager since 1995 and the Long-Term Tax-Exempt Fund's portfolio manager
since 1986. Mr. McAlley, Executive Vice President and Manager of the Fixed In-
come Investment Division of U.S. Trust, has been with U.S. Trust since 1980.
Mr. McAlley is primarily responsible for the day to day management of the
Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt, Long-Term Tax-
Exempt and New York Intermediate-Term Tax-Exempt Funds' portfolios. Research,
analyses, trade execution and other facilities provided by U.S. Trust and other
personnel also play a significant role in portfolio management and performance.
Lois G. Ingham, C.F.A. and Gary S. Larson have served as the California Tax-
Exempt Income Fund's portfolio managers since 1997 and 2000, respectively. Ms.
Ingham, a Senior Vice President and Director of Fixed Income Investments, has
been with the Sub-Adviser since 1990. Mr. Larson, a Senior Vice President and
Senior Fixed Income Portfolio Manager, has been with the Sub- Adviser since
1997. Prior to joining U.S. Trust, Mr. Larson held positions at City National
Bank and had served as Manager of Municipal Bond Trading at Security Pacific
Bank. Ms. Ingham and Mr. Larson are primarily responsible for the day to day
management of the California Tax-Exempt Income Fund's portfolio. Research,
analyses, trade execution and other facilities
15
<PAGE>
-------------------------------------------------------------
provided by the Sub-Adviser and other personnel also play a significant role in
portfolio management and performance.
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange shares of the Funds.
How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone
. Wire, or
. Automatic Investment Program
To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Bos-
ton, MA 02208-2798. Unless you arrange to pay by wire or through the automatic
investment program, write your check, payable in U.S. dollars, to "Excelsior
Tax-Exempt Funds." and include the name of the appropriate Fund(s) on the
check. A Fund cannot accept third-party checks, credit cards, credit card
checks or cash. To purchase shares by wire, please call us for instructions.
Federal funds and registration instructions should be wired through the Federal
Reserve System to:
The Chase Manhattan Bank
ABA # 021000021
Excelsior Funds, Account Number 9102732915
For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration
(including account number)
Investors making initial investments by wire must promptly complete the en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its proce-
dures, which may be different from the procedures for investing directly. Your
broker or institution may charge a fee for its services, in addition to the
fees charged by the Fund. You will also generally have to address your corre-
spondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for deal-
ers, which will be paid for by the distributor out of its own assets and not
out of the assets of the Funds. Under any such program, the distributor may
provide incentives, in the form of cash or other compensation, including mer-
chandise, airline vouchers, trips and vacation packages, to dealers selling
shares of a Fund. If any such program is made available to any dealer, it will
be made available to all dealers on the same terms.
General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus Day. A Fund may reject any purchase request if it is determined
that accepting the request would not be in the best interests of the Fund or
its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good or-
der. We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So,
for you to receive the current Business Day's NAV, a Fund must receive your
purchase request in good order before 4:00 p.m., Eastern time.
How We Calculate NAV
NAV for one Fund share is the value of that share's portion of the net assets
of the Fund.
In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser or Sub-Adviser thinks
that they are unreliable, fair value prices may be determined in good faith us-
ing methods approved by the
16
<PAGE>
-------------------------------------------------------------
Board of Directors. Fixed income investments with remaining maturities of 60
days or less generally are valued at their amortized cost, which approximates
their market value.
Minimum Purchases
To purchase shares for the first time, you must invest at least $500 in any
Fund.
Your subsequent investments in any Fund must be made in amounts of at least
$50.
A Fund may accept investments of smaller amounts at its discretion.
Automatic Investment Program
If you have a checking, money market or NOW account with a bank, you may pur-
chase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.
With a $50 minimum initial investment, you may begin regularly scheduled in-
vestments once per month, on either the first or fifteenth day, or twice per
month, on both days.
How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone, or
. Systematic Withdrawal Plan
Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).
You may sell your shares by sending a written request for redemption to:
Excelsior Tax-Exempt Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or institu-
tion may charge a fee for its services, in addition to the fees charged by the
Fund.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
The sale price of each share will be the next NAV determined after the Fund re-
ceives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal plan. Under the plan you may arrange monthly, quarterly, semi-annual or
annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.
Receiving Your Money
Normally, we will send your sale proceeds within five Business Days after we
receive your request in good order. Your proceeds can be wired to your bank ac-
count (if more than $500) or sent to you by check. If you recently purchased
your shares by check, redemption proceeds may not be available until your check
has cleared (which may take up to 15 days from your date of purchase).
Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes
on any capital gains from the sale as with any redemption.
17
<PAGE>
-------------------------------------------------------------
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be re-
quired to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.
How to Exchange Your Shares
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for Shares of
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that such exchange would not
be in the best interests of a Fund or its shareholders. Shares can be exchanged
directly by mail, or by telephone if you previously selected the telephone ex-
change option on the account application.
You may also exchange shares through your financial institution. Exchange re-
quests must be for an amount of at least $500.
If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your
date of purchase). This exchange privilege may be changed or canceled at any
time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of in-
structions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund
shares. These intermediaries may authorize other organizations to accept pur-
chase, redemption and exchange requests for Fund shares. These requests are
normally executed at the NAV next determined after the intermediary receives
the request in good order. Authorized intermediaries are responsible for trans-
mitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% of the average
daily net asset value of Fund shares held by clients of a shareholder organiza-
tion.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying accu-
mulated dividends monthly.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive
the distribution.
Dividends and distributions for shares held of record by U.S. Trust and its af-
filiates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.
Taxes
The Funds anticipate that substantially all of their income dividends will be
"exempt interest dividends," which are exempt from federal income taxes. Howev-
er,
18
<PAGE>
-------------------------------------------------------------
some dividends will be taxable, such as dividends that are attributable to
gains on bonds that are acquired at a "market discount," and distributions of
short and long-term capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of a Tax-Exempt Fund will generally not be deductible for federal income tax
purposes.
You should note that a portion of the exempt-interest dividends may constitute
an item of tax preference for purposes of determining federal alternative mini-
mum tax liability. Exempt-interest dividends will also be considered along with
other adjusted gross income in determining whether any Social Security or rail-
road retirement payments received by you are subject to federal income taxes.
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your ac-
count statements for the periods during which you held shares. Generally, this
gain or loss will be long-term or short-term depending on whether your holding
period for the shares exceeds 12 months, except that any loss realized on
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends that were received on the shares.
If you receive an exempt-interest dividend with respect to any shares and the
share is held by you for six months or less, any loss on the sale or exchange
of the share will be disallowed to the extent of such dividend amount.
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal se-
curities or interest on securities of the particular state or localities within
the state.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the California Tax-Exempt Income Fund consists of obli-
gations, which if held by an individual would pay interest that is exempt from
California personal income tax, then dividends paid by the Fund to its individ-
ual shareholders will be exempt from California personal income tax.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, may be subject to different United States federal income tax treatment.
You should consult your tax adviser for further information regarding federal,
state, local and/or foreign tax consequences relevant to your specific situa-
tion.
More information about taxes is in the Statement of Additional Information.
19
<PAGE>
-----------------------------------------------------------------
Financial Highlights
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's financial
performance for the past five years, or, if shorter, the period of the Fund's
operations. Some of this information reflects financial information for a sin-
gle Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in a Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
Ernst & Young LLP, independent public auditors. Their report, along with each
Fund's financial statements, are incorporated by reference into our Statement
of Additional Information. You can obtain the annual report, which contains
more performance information, at no charge by calling (800) 446-1012 (from
overseas, call (617) 557-8280).
LONG-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $ 9.87 $ 10.03 $ 9.43 $ 9.53 $ 9.27
------- ------- ------- ------- ------
Income From Investment
Operations
Net Investment Income......... 0.42 0.42 0.44 0.46 0.47
Net Gains on Securities (both
realized and unrealized)..... (0.82) 0.12 0.71 0.03 0.39
------- ------- ------- ------- ------
Total From Investment
Operations................... (0.40) 0.54 1.15 0.49 0.86
------- ------- ------- ------- ------
Less Distributions
Dividends From Net Investment
Income....................... (0.42) (0.42) (0.43) (0.46) (0.46)
Distributions From Net
Realized Gain on
Investments.................. (0.06) (0.28) (0.12) (0.13) (0.14)
Distributions in Excess of Net
Realized Gain on
Investments.................. 0.00 0.00 0.00/2/ 0.00/2/ 0.00
------- ------- ------- ------- ------
Total Distributions........... (0.48) (0.70) (0.55) (0.59) (0.60)
------- ------- ------- ------- ------
Net Asset Value, End of Year... $ 8.99 $ 9.87 $ 10.03 $ 9.43 $ 9.53
======= ======= ======= ======= ======
Total Return................... (4.01)% 5.42% 12.18% 5.47% 9.35%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).................... $121.99 $182.45 $149.54 $107.93 $91.06
Ratio of Net Operating
Expenses to Average Net
Assets....................... 0.75% 0.76% 0.74% 0.74% 0.77%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ ................... 0.83% 0.86% 0.81% 0.81% 0.82%
Ratio of Net Investment Income
to Average Net Assets........ 4.54% 4.17% 4.40% 4.80% 4.85%
Portfolio Turnover Rate....... 78.0% 88.0% 83.0% 125.0% 185.0%
</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.
20
<PAGE>
-----------------------------------------------------------------
INTERMEDIATE-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $ 9.49 $ 9.48 $ 9.11 $ 9.12 $ 8.80
------- ------- ------- ------- -------
Income From Investment
Operations
Net Investment Income.......... 0.37 0.38 0.42 0.40 0.40
Net Gains or (Losses) on
Securities (both realized and
unrealized)................... (0.43) 0.14 0.37 0.00 0.32
------- ------- ------- ------- -------
Total From Investment
Operations.................... (0.06) 0.52 0.79 0.40 0.72
------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment
Income........................ (0.37) (0.35) (0.41) (0.41) (0.40)
Dividends in Excess of Net
Investment Income............. 0.00 (0.03) 0.00 0.00/2/ 0.00
Distributions From Net Realized
Gain on Investments........... 0.00 (0.13) (0.01) 0.00 0.00
------- ------- ------- ------- -------
Total Distributions............ (0.37) (0.51) (0.42) (0.41) (0.40)
------- ------- ------- ------- -------
Net Asset Value, End of Year.... $ 9.06 $ 9.49 $ 9.48 $ 9.11 $ 9.12
======= ======= ======= ======= =======
Total Return.................... (0.58)% 5.53% 8.81% 4.58% 8.30%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)..................... $292.67 $323.99 $271.02 $244.05 $255.18
Ratio of Net Operating Expenses
to Average Net Assets......... 0.57% 0.58% 0.58% 0.58% 0.60%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ .................... 0.64% 0.64% 0.64% 0.64% 0.65%
Ratio of Net Investment Income
to Average Net Assets......... 4.06% 3.95% 4.47% 4.56% 4.44%
Portfolio Turnover Rate........ 91.0% 48.0% 30.0% 28.0% 50.0%
</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.
21
<PAGE>
-----------------------------------------------------------------
SHORT-TERM TAX-EXEMPT SECURITIES FUND
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 7.17 $ 7.11 $ 7.03 $ 7.05 $ 6.96
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income............. 0.25 0.26 0.27 0.26 0.28
Net Gains on Securities (both
realized and unrealized)......... (0.15) 0.06 0.08 (0.01) 0.09
------ ------ ------ ------ ------
Total From Investment Operations.. 0.10 0.32 0.35 0.25 0.37
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment
Income........................... (0.25) (0.26) (0.27) (0.27) (0.28)
Dividends in Excess of Net
Investment Income................ 0.00 0.00 0.00/2/ 0.00/2/ 0.00
Distributions From Net Realized
Gain on Investments.............. 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions............... (0.25) (0.26) (0.27) (0.27) (0.28)
------ ------ ------ ------ ------
Net Asset Value, End of Period..... $ 7.02 $ 7.17 $ 7.11 $ 7.03 $ 7.05
====== ====== ====== ====== ======
Total Return....................... 1.39% 4.51% 5.01% 3.55% 5.42%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)........................ $54.23 $45.16 $42.35 $41.08 $42.97
Ratio of Net Operating Expenses to
Average Net Assets............... 0.56% 0.58% 0.59% 0.58% 0.58%
Ratio of Gross Operating Expenses
to Average Net Assets/1/ ........ 0.63% 0.65% 0.65% 0.65% 0.64%
Ratio of Net Investment Income to
Average Net Assets............... 3.54% 3.58% 3.76% 3.73% 4.05%
Portfolio Turnover Rate........... 130.0% 47.0% 58.0% 87.0% 124.0%
</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.
22
<PAGE>
-----------------------------------------------------------------
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
2000 1999 1998 1997 1996 1995
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 8.80 $ 8.79 $ 8.45 $ 8.44 $ 8.24 $ 8.18
------- ------- ------- ------- ------ ------
Income From Investment
Operations
Net Investment Income... 0.32 0.33 0.35 0.36 0.35 0.33
Net Gains on Securities
(both realized and
unrealized)............ (0.37) 0.12 0.34 0.01 0.20 0.15
------- ------- ------- ------- ------ ------
Total From Investment
Operations............. (0.05) 0.45 0.69 0.37 0.55 0.48
------- ------- ------- ------- ------ ------
Less Distributions
Dividends From Net
Investment Income...... (0.32) (0.33) (0.35) (0.36) (0.35) (0.33)
Distributions in Excess
of Net Investment
Income................. 0.00 0.00 0.00/2/ 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments............ (0.09) (0.11) 0.00 0.00 0.00 (0.09)
------- ------- ------- ------- ------ ------
Total Distributions..... (0.41) (0.44) (0.35) (0.36) (0.35) (0.42)
------- ------- ------- ------- ------ ------
Net Asset Value, End of
Period.................. $ 8.34 $ 8.80 $ 8.79 $ 8.45 $ 8.44 $ 8.24
======= ======= ======= ======= ====== ======
Total Return............. (0.51)% 5.16% 8.35% 4.46% 6.77% 6.05%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions)... $126.38 $154.83 $131.29 $102.25 $96.41 $87.16
Ratio of Net Operating
Expenses to Average
Net Assets............. 0.73% 0.73% 0.71% 0.72% 0.75% 0.78%
Ratio of Gross Operating
Expenses to Average
Net Assets/1/ ......... 0.75% 0.75% 0.74% 0.75% 0.77% 0.80%
Ratio of Net Investment
Income to Average
Net Assets............. 3.82% 3.75% 4.08% 4.25% 4.15% 4.06%
Portfolio Turnover
Rate................... 64.0% 65.0% 47.0% 89.0% 154.0% 563.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.01 per share.
23
<PAGE>
-----------------------------------------------------------------
CALIFORNIA TAX-EXEMPT INCOME FUND
<TABLE>
<CAPTION>
Year ended March 31,
---------------------- Period ended
2000 1999 1998 March 31, 1997/1/
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 7.25 $ 7.18 $ 6.95 $ 7.00
------ ------ ------ ------
Income From Investment Operations
Net Investment Income............... 0.26 0.27 0.28 0.12
Net Gains on Securities (both
realized and unrealized)........... (0.18) 0.07 0.23 (0.05)
------ ------ ------ ------
Total From Investment Operations.... 0.08 0.34 0.51 0.07
------ ------ ------ ------
Less Distributions
Dividends From Net Investment
Income............................. (0.26) (0.27) (0.28) (0.12)
------ ------ ------ ------
Total Distribution.................. (0.26) (0.27) (0.28) (0.12)
------ ------ ------ ------
Net Asset Value, End of Period....... $ 7.07 $ 7.25 $ 7.18 $ 6.95
====== ====== ====== ======
Total Return......................... 1.13% 4.74% 7.42% 2.12%/4/
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $65.03 $64.91 $32.57 $13.23
Ratio of Net Operating Expenses to
Average Net Assets................. 0.50% 0.50% 0.50% 0.66%/2/
Ratio of Gross Operating Expenses to
Average Net Assets/3/ ............. 0.95% 1.08% 1.24% 1.53%/2/
Ratio of Net Income to Average Net
Assets............................. 3.67% 3.65% 3.90% 3.69%/2/
Portfolio Turnover Rate............. 16.0% 5.0% 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.
4. Not annualized.
24
<PAGE>
Excelsior Tax-Exempt Funds, Inc.
Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905
Sub-Adviser
U.S. Trust Company, N.A.
515 South Flower Street
Los Angeles, California 90071
Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the fol-
lowing:
Statement of Additional Information (SAI)
The SAI dated August 1, 2000 includes detailed information about Excelsior Tax-
Exempt Funds, Inc. The SAI is on file with the SEC and is incorporated by ref-
erence into this prospectus. This means that the SAI, for legal purposes, is a
part of this prospectus.
Annual and Semi-Annual Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, and recent market conditions and trends.
To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 446-1012 (from overseas, call (617) 557-8280)
By Mail: Excelsior Funds, 73 Tremont Street, Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, as well as other information about Excelsior Tax-Exempt Funds, Inc.,
from the EDGAR Database on the SEC's website ("http://www.sec.gov"). You may
review and copy documents at the SEC Public Reference Room in Washington, DC
(for information on the operation of the Public Reference Room, call 202-942-
8090). You may request documents by mail from the SEC, upon payment of a dupli-
cating fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-0102. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
[email protected]. Excelsior Tax-Exempt Funds, Inc.'s Investment Company Act
registration number is 811-4101.
<PAGE>
EXCELSIOR FUNDS, INC.
Money Fund
Government Money Fund
Treasury Money Fund
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Tax-Exempt Money Fund
New York Tax-Exempt Money Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Money, Government Money
and Treasury Money Funds of Excelsior Funds, Inc. and the Tax-Exempt Money and
New York Tax-Exempt Money Funds of Excelsior Tax-Exempt Funds, Inc.
(individually, a "Fund" and collectively, the "Funds") dated August 1, 2000 (the
"Prospectus"). A copy of the Prospectus may be obtained by writing Excelsior
Funds, Inc. or Excelsior Tax-Exempt Funds, Inc. c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 2000 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual
report are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY............................................................... 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.............................................. 1
Additional Investment Policies...................................................... 1
Treasury Money Fund................................................................. 2
Tax-Exempt Money and New York Tax-Exempt Money Funds................................ 2
Additional Information on Portfolio Instruments..................................... 4
Special Considerations Relating to New York Municipal Securities.................... 13
Investment Limitations.............................................................. 23
NET ASSET VALUE AND NET INCOME........................................................... 28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................................... 29
Distributor......................................................................... 29
Purchase of Shares.................................................................. 30
Redemption Procedures............................................................... 30
Other Redemption Information........................................................ 32
INVESTOR PROGRAMS........................................................................ 33
Systematic Withdrawal Plan.......................................................... 33
Exchange Privilege.................................................................. 33
Retirement Plans.................................................................... 34
Automatic Investment Program........................................................ 34
Additional Information.............................................................. 35
DESCRIPTION OF CAPITAL STOCK............................................................. 35
MANAGEMENT OF THE FUNDS.................................................................. 37
Directors and Officers.............................................................. 37
Investment Advisory and Administration Agreements................................... 40
Shareholder Organizations........................................................... 44
Expenses............................................................................ 46
Custodian and Transfer Agent........................................................ 47
PORTFOLIO TRANSACTIONS................................................................... 47
INDEPENDENT AUDITORS..................................................................... 49
COUNSEL.................................................................................. 49
ADDITIONAL INFORMATION CONCERNING TAXES.................................................. 49
YIELD INFORMATION........................................................................ 51
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CODE OF ETHICS........................................................................... 53
MISCELLANEOUS............................................................................ 53
FINANCIAL STATEMENTS..................................................................... 54
APPENDIX A............................................................................... A-1
</TABLE>
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. ("Excelsior Fund") and Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund" and collectively with Excelsior Fund,
the "Companies") are open-end, management investment companies. The Money,
Government Money and Treasury Money Funds are separate series of Excelsior Fund.
The Tax-Exempt Money and New York Tax-Exempt Money Funds are separate series of
Excelsior Tax-Exempt Fund. The Money, Government Money, Treasury Money and Tax-
Exempt Money Funds are classified as diversified under the Investment Company
Act of 1940, as amended (the "1940 Act"). The New York Tax-Exempt Money Fund is
classified as non-diversified under the 1940 Act. Excelsior Fund and Excelsior
Tax-Exempt Fund were organized as Maryland corporations on August 2, 1984 and
August 8, 1984, respectively. Prior to December 28, 1995, Excelsior Fund and
Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and "UST Master
Tax-Exempt Funds, Inc.," respectively. This Statement of Additional Information
pertains to the Shares ("Retail Shares") of all the Funds and the Institutional
Shares of the Money and Government Money Funds (collectively with the Retail
Shares, the "Shares").
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the Money, Government Money and
Treasury Money Funds (collectively, the "Taxable Funds") and the Tax-Exempt
Money Fund may not be changed without the vote of the holders of a majority of
its outstanding Shares (as defined below). The investment objective of the New
York Tax-Exempt Money Fund may be changed without shareholder approval. Except
as expressly noted below, each Fund's investment policies may be changed without
shareholder approval.
As discussed below under "Net Asset Value and Net Income," each Fund
uses the amortized cost method to value securities in its portfolio. As such,
each Fund is required to comply with Rule 2a-7 under the 1940 Act. Under Rule
2a-7, with respect to 100% of each of the Money, Government Money, Treasury
Money and Tax-Exempt Money Funds' total assets, and 75% of the New York Tax-
Exempt Money Fund's total assets, a Fund may not invest more than 5% of its
assets, measured at the time of purchase, in the securities of any one issuer
other than U.S. government securities, repurchase agreements collateralized by
such securities and securities subject to certain guarantees. The New York Tax-
Exempt Money Fund's compliance with the diversification provisions of Rule 2a-7
is deemed to be compliance with the diversification standards of the 1940 Act.
Additional Investment Policies
------------------------------
The Funds may only invest in: (i) securities in the two highest
short-term rating categories of a nationally recognized statistical rating
organization ("NRSRO"), provided that if a security is rated by more than one
NRSRO, at least two NRSROs must rate the security in one of the two highest
short-term rating categories; (ii) unrated securities determined to be of
-1-
<PAGE>
comparable quality at the time of purchase; (iii) certain money market fund
shares; and (iv) U.S. government securities (collectively, "Eligible
Securities"). The rating symbols of the NRSROs which the Funds may use are
described in the Appendix attached hereto.
Treasury Money Fund
-------------------
Under normal market conditions, the Treasury Money Fund will invest at
least 65% of its total assets in direct U.S. Treasury obligations, such as
Treasury bills and notes. The Fund may also from time to time invest in
obligations issued or guaranteed as to principal and interest by certain
agencies or instrumentalities of the U.S. government, such as the Farm Credit
System Financial Assistance Corporation, Federal Financing Bank, General
Services Administration, Federal Home Loan Banks, Farm Credit System and the
Tennessee Valley Authority. Income on direct investments in U.S. Treasury
securities and obligations of the aforementioned agencies and instrumentalities
is generally not subject to state and local income taxes by reason of federal
law. In addition, the Fund's dividends from income that is attributable to such
investments will also be exempt in most states from state and local income
taxes. Shareholders in a particular state should determine through consultation
with their own tax advisors whether and to what extent dividends payable by the
Treasury Money Fund from its investments will be considered by the state to have
retained exempt status, and whether the Fund's capital gain and other income, if
any, when distributed will be subject to the state's income tax.
Tax-Exempt Money and New York Tax-Exempt Money Funds (the "Tax-Exempt Funds")
-----------------------------------------------------------------------------
The Tax-Exempt Money Fund will invest substantially all of its assets
in high-quality debt obligations determined by the Adviser to present minimal
credit risks. Such obligations will be issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political
subdivisions, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax ("Municipal Securities"). As a matter of
fundamental policy, except during temporary defensive periods, the Fund will
maintain at least 80% of its assets in tax-exempt obligations. (This policy may
not be changed with respect to the Fund without the vote of the holders of a
majority of its outstanding Shares.) The Tax-Exempt Money Fund also may invest
in certain tax-exempt derivative instruments, such as floating rate trust
receipts.
Under normal market conditions, at least 80% of the New York Tax-
Exempt Money Fund's net assets will be invested in Municipal Securities which
are determined by the Adviser to present minimal credit risks. The Fund may also
invest in tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
Dividends paid by the Fund that are derived from interest on obligations that is
exempt from taxation under the Constitution or statutes of New York ("New York
Municipal Securities") are exempt from regular federal, New York State and New
York City personal income tax. New York Municipal Securities include municipal
securities issued by the State of New York and its political sub-divisions, as
well as certain other governmental issuers such as the Commonwealth of Puerto
Rico. Dividends derived from interest on Municipal Securities other than New
York Municipal Securities are exempt from federal income tax but may be
-2-
<PAGE>
subject to New York State and New York City personal income tax (see "Additional
Information Concerning Taxes" below). The Fund expects that under normal market
conditions, at least 65% of its total assets will be invested in New York
Municipal Securities.
The New York Tax-Exempt Money Fund is concentrated in securities
issued by New York State or entities within New York State and therefore
investment in the Fund may be riskier than an investment in other types of money
market funds. The Fund's ability to achieve its investment objective is
dependent upon the ability of the issuers of New York Municipal Securities to
meet their continuing obligations for the payment of principal and interest. New
York State and New York City face long-term economic problems that could
seriously affect their ability and that of other issuers of New York Municipal
Securities to meet their financial obligations.
Certain substantial issuers of New York Municipal Securities
(including issuers whose obligations may be acquired by the Fund) have
experienced serious financial difficulties in recent years. These difficulties
have at times jeopardized the credit standing and impaired the borrowing
abilities of all New York issuers and have generally contributed to higher
interest costs for their borrowings and fewer markets for their outstanding debt
obligations. Although several different issues of Municipal Securities of New
York State and its agencies and instrumentalities and of New York City have been
downgraded by Standard & Poor's Ratings Services ("S&P") and Moody's Investors
Service, Inc. ("Moody's") in recent years, S&P and Moody's have recently placed
the debt obligations of New York State and New York City on CreditWatch with
positive implications and upgraded the debt obligations of New York City.
Strong demand for New York Municipal Securities has also at times had the effect
of permitting New York Municipal Securities to be issued with yields relatively
lower, and after issuance, to trade in the market at prices relatively higher,
than comparably rated municipal obligations issued by other jurisdictions. A
recurrence of the financial difficulties previously experienced by certain
issuers of New York Municipal Securities could result in defaults or declines in
the market values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Securities. Although as of
the date of this Statement of Additional Information, no issuers of New York
Municipal Securities are in default with respect to the payment of their
municipal obligations, the occurrence of any such default could affect adversely
the market values and marketability of all New York Municipal Securities and,
consequently, the net asset value of the New York Tax-Exempt Money Fund's
portfolio. Other considerations affecting the Fund's investments in New York
Municipal Securities are summarized below under "Special Considerations Relating
to New York Municipal Securities."
From time to time on a temporary defensive basis due to market
conditions, the Tax-Exempt Funds may hold uninvested cash reserves or invest in
taxable obligations in such proportions as, in the opinion of the Adviser,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Taxable obligations in which the Tax-Exempt Funds may
invest include: (i) obligations of the U.S. Treasury; (ii) obligations of
agencies and instrumentalities of the U.S. government; (iii) money market
instruments such as certificates of deposit, commercial paper, and bankers'
acceptances; (iv) repurchase agreements collateralized by U.S. government
obligations or other money market instruments; and (v) securities issued by
other investment companies that invest in high-quality, short-term securities.
-3-
<PAGE>
The Tax-Exempt Funds may also invest from time to time in "private
activity bonds" (see "Municipal Securities" below), the interest on which is
treated as a specific tax preference item under the federal alternative minimum
tax. Investments in such securities, however, will not exceed under normal
market conditions 20% of a Fund's net assets when added together with any
taxable investments by the Fund.
Each Tax-Exempt Fund may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues on
similar projects if such investment is deemed necessary or appropriate by the
Adviser. To the extent that a Fund's assets are concentrated in Municipal
Securities payable from revenues on similar projects, the Fund will be subject
to the peculiar risks presented by such projects to a greater extent than it
would be if its assets were not so concentrated.
Additional Information on Portfolio Instruments
-----------------------------------------------
Variable and Floating Rate Instruments
--------------------------------------
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, the Fund may, from time to time as specified in
the instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods that the Fund is
not entitled to exercise its demand rights, and the Fund could, for this or
other reasons, suffer a loss with respect to such instrument. While the Funds
in general will invest only in securities that mature within 13 months of the
date of purchase, they may invest in variable and floating rate instruments
which have nominal maturities in excess of 13 months if such instruments have
demand features that comply with conditions established by the Securities and
Exchange Commission (the "SEC").
Some of the instruments purchased by the Government Money and Treasury
Money Funds may also be issued as variable and floating rate instruments.
However, since they are issued or guaranteed by the U.S. government or its
agencies or instrumentalities, they may have a more active secondary market.
The Adviser will consider the earning power, cash flows and other
liquidity ratios of the issuers of variable and floating rate instruments and
will continuously monitor their financial ability to meet payment on demand. In
determining dollar-weighted average portfolio maturity and whether a variable or
floating rate instrument has a remaining maturity of 13 months or less, the
maturity of each instrument will be computed in accordance with guidelines
established by the SEC.
-4-
<PAGE>
Repurchase Agreements
---------------------
The Money, Government Money, Tax-Exempt Money and New York Tax-Exempt
Money Funds may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds'
custodian (or sub-custodian) or in the Federal Reserve/Treasury book-entry
system. The seller under a repurchase agreement will be required to maintain the
value of the securities which are subject to the agreement and held by a Fund at
not less than the repurchase price. Default or bankruptcy of the seller would,
however, expose a Fund to possible delay in connection with the disposition of
the underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
Repurchase agreements are considered loans by a Fund under the 1940 Act. Income
on repurchase agreements will be taxable.
Securities Lending
------------------
To increase return on their portfolio securities, the Money and
Government Money Funds may lend their portfolio securities to broker/dealers
pursuant to agreements requiring the loans to be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. government, its agencies or instrumentalities, or an irrevocable letter of
credit issued by a bank which meets the investment standards of these Funds, or
any combination thereof. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of a Fund exceeds 30% of the value of its
total assets. When a Fund lends its securities, it continues to receive interest
or dividends on the securities lent and may simultaneously earn interest on the
investment of the cash loan collateral, which will be invested in readily
marketable, high-quality, short-term obligations. Although voting rights, or
rights to consent, attendant to lent securities pass to the borrower, such loans
may be called at any time and will be called so that the securities may be voted
by a Fund if a material event affecting the investment is to occur.
There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.
-5-
<PAGE>
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days.
The Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
-6-
<PAGE>
Stand-By Commitments
--------------------
Each Tax-Exempt Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a dealer or
bank agrees to purchase at the Fund's option, specified Municipal Securities at
a specified price. The amount payable to a Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. "Stand-by commitments" are exercisable by the Tax-Exempt
Funds at any time before the maturity of the underlying Municipal Securities,
and may be sold, transferred or assigned by a Fund only with the underlying
instruments.
The Tax-Exempt Funds expect that "stand-by commitments" will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Fund may pay for a "stand-by commitment"
either separately in cash or by paying a higher price for securities which are
acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). When a Tax-Exempt Fund has paid
any consideration directly or indirectly for a "stand-by commitment," its cost
will be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
The Tax-Exempt Funds intend to enter into "stand-by commitments" only
with banks and broker/dealers which, in the Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. The
Tax-Exempt Funds will acquire "stand-by commitments" solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. "Stand-by commitments" acquired by a Tax-Exempt Fund would be
valued at zero in determining the Fund's net asset value.
Municipal Securities
--------------------
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Securities" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.
The two principal classifications of Municipal Securities which may be
held by the Tax-Exempt Funds are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues
-7-
<PAGE>
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as user fees of the facility being financed.
Each Tax-Exempt Fund's portfolio may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund -- the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by a Tax-Exempt Fund.
The Tax-Exempt Funds may purchase custodial receipts evidencing the
right to receive either the principal amount or the periodic interest payments
or both with respect to specific underlying Municipal Securities. In general,
such "stripped" Municipal Securities are offered at a substantial discount in
relation to the principal and/or interest payments which the holders of the
receipt will receive. To the extent that such discount does not produce a yield
to maturity for the investor that exceeds the original tax-exempt yield on the
underlying Municipal Security, such yield will be exempt from federal income tax
for such investor to the same extent as interest on the underlying Municipal
Security. The Tax-Exempt Funds intend to purchase custodial receipts and
"stripped" Municipal Securities only when the yield thereon will be, as
described above, exempt from federal income tax to the same extent as interest
on the underlying Municipal Securities.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of NRSROs such as Moody's and S&P described in the Appendix
hereto represent their opinion as to the quality of Municipal Securities. It
should be emphasized that these ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate, and rating may have different yields while Municipal Securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease
to be rated, or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multi-state
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures
-8-
<PAGE>
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Fund are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.
Among other instruments, the Tax-Exempt Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Funds may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the applicable maturity restrictions.
The New York Tax-Exempt Money Fund may invest in tax-exempt derivative
securities such as tender option bonds, participations, beneficial interests in
trusts, partnership interests, floating rate trust receipts or other forms. A
typical tax-exempt derivative security involves the purchase of an interest in a
Municipal Security or a pool of Municipal Securities which interest includes a
tender option, demand or other feature. Together, these features entitle the
holder of the interest to tender (or put) the underlying Municipal Security to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, Municipal Securities are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying municipal securities held by the custodian.
Under such arrangements, the holder of the custodial receipt has the option to
tender the underlying municipal security at its face value to the sponsor
(usually a bank or broker dealer or other financial institution), which is paid
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate that would cause the bond, coupled with the tender option, to trade at
par on the date of a rate adjustment.
Before purchasing a tax-exempt derivative for the New York Tax-Exempt
Money Fund, the Adviser is required by the Fund's Amortized Cost Procedures to
conclude that the tax-exempt security and the supporting short-term obligation
involve minimal credit risks and are Eligible Securities under the Procedures.
In evaluating the creditworthiness of the entity
-9-
<PAGE>
obligated to purchase the tax-exempt security, the Adviser will review
periodically the entity's relevant financial information.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to New
York Municipal Securities, to the exemption of interest thereon from New York
State and New York City personal income taxes) are rendered by bond counsel to
the respective issuers at the time of issuance, and opinions relating to the
validity of and the tax-exempt status of payments received by the New York Tax-
Exempt Money Fund from tax-exempt derivatives are rendered by counsel to the
respective sponsors of such derivatives. The Funds and the Adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Securities, the creation of any tax-exempt
derivative securities, or the bases for such opinions.
Insured Municipal Securities
----------------------------
The New York Tax-Exempt Money Fund may purchase Municipal Securities
which are insured as to timely payment of principal and interest at the time of
purchase. The insurance policies will usually be obtained by the issuer of the
bond at the time of its original issuance. Bonds of this type will be acquired
only if at the time of purchase they satisfy quality requirements generally
applicable to Municipal Securities. Although insurance coverage for the
Municipal Securities held by the Fund reduces credit risk by insuring that the
Fund will receive timely payment of principal and interest, it does not protect
against market fluctuations caused by changes in interest rates and other
factors. The Fund may invest more than 25% of its net assets in Municipal
Securities covered by insurance policies.
Money Market Instruments
------------------------
"Money market instruments" that may be purchased by the Money,
Government Money, Tax-Exempt Money and New York Tax-Exempt Money Funds in
accordance with their investment objectives and policies include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations acquired
by the Money Fund may also include U.S. dollar-denominated obligations of
foreign branches of U.S. banks and obligations of domestic branches of foreign
banks. Investments in bank obligations are limited to the obligations of
financial institutions having more than $2 billion in total assets at the time
of purchase. Investments in bank obligations of foreign branches of domestic
financial institutions or of domestic branches of foreign banks are limited so
that no more than 5% of the value of the Fund's total assets may be invested in
any one branch, and that no more than 20% of the Fund's total assets at the time
of purchase may be invested in the aggregate in such obligations. Investments in
non-negotiable time deposits are
-10-
<PAGE>
limited to no more than 5% of the value of a Fund's total assets at time of
purchase, and are further subject to the overall 10% limit on illiquid
securities described below under "Illiquid Securities."
Investments in obligations of foreign branches of U.S. banks and of
U.S. branches of foreign banks may subject the Money Fund to additional
investment risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks. Investments in the obligations of U.S.
branches of foreign banks or foreign branches of U.S. banks will be made only
when the Adviser believes that the credit risk with respect to the instrument is
minimal.
Government Obligations
----------------------
The Funds may purchase government obligations which include
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Such investments may include obligations issued by the Farm
Credit System Financial Assistance Corporation, the Federal Financing Bank, the
General Services Administration, Federal Home Loan Banks and the Tennessee
Valley Authority. Obligations of certain agencies and instrumentalities of the
U.S. government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Obligations of such instrumentalities will be
purchased only when the Adviser believes that the credit risk with respect to
the instrumentality is minimal.
Securities issued or guaranteed by the U.S. government have
historically involved little risk of loss of principal if held to maturity.
However, due to fluctuations in interest rates, the market value of such
securities may vary during the period a shareholder owns Shares of a Fund.
The Treasury Money Fund primarily will purchase direct obligations of
the U.S. Treasury and obligations of those agencies or instrumentalities of the
U.S. government interest income from which is generally not subject to state and
local income taxes.
Investment Company Securities
-----------------------------
The Funds may invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. The Tax-Exempt Funds normally will
-11-
<PAGE>
invest in securities of investment companies only if such companies invest
primarily in high-quality, short-term Municipal Securities. The Government Money
and Treasury Money Funds intend to limit their acquisition of shares of other
investment companies to those companies which are themselves permitted to invest
only in securities which may be acquired by the respective Funds. Securities of
other investment companies will be acquired by a Fund within the limits
prescribed by the 1940 Act. Except as otherwise permitted under the 1940 Act,
each Fund currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund. In addition to the advisory fees and other
expenses a Fund bears directly in connection with its own operations, as a
shareholder of another investment company, a Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the Fund and
the other investment company, some or all of which would be duplicative. Any
change by the Funds in the future with respect to their policies concerning
investments in securities issued by other investment companies will be made only
in accordance with the requirements of the 1940 Act.
The Funds may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
-12-
<PAGE>
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form of
borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.
Illiquid Securities
-------------------
Each Fund will not knowingly invest more than 10% of the value of its
net assets in securities that are illiquid. A security will be considered
illiquid if it may not be disposed of within seven days at approximately the
value at which the particular Fund has valued the security. Each Fund may
purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.
Miscellaneous
-------------
The Money, Government Money, Treasury Money and Tax-Exempt Money Funds
may not invest in oil, gas, or mineral leases.
Special Considerations Relating to New York Municipal Securities
----------------------------------------------------------------
Some of the significant financial considerations relating to the New
York Tax Exempt Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Securities that were available prior to
the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.
State Economy. New York is one of the most populous states in the
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nation and has a relatively high level of personal wealth. The State's economy
is diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the
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economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a multi-
state region, State personal income measured on a residence basis understates
the relative importance of the State to the national economy and the size of the
base to which State taxation applies.
The economic forecast of the State has also been modified for 2000 and
2001 from the mid-year forecast to reflect a stronger-than-expected economy.
Continued growth is projected for 2000 and 2001 for employment, wages, and
personal income, although the growth in employment will moderate from the 1999
pace. Personal income is estimated to have grown by 4.7 percent in 1999, fueled
in part by a large increase in financial sector bonus payments at the year's
end. Personal income is projected to grow 5.5 percent in 2000 and 4.8 percent in
2001. Total bonus payments are projected to increase by 11 percent in 2000 and
10.5 percent in 2001. Overall employment growth is expected to continue at a
more modest pace than in 1999, reflecting the slower growth in the national
economy, continued spending restraint by government employers, and restructuring
in the manufacturing, health care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
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"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each
year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
The State revised the cash-basis 1999-2000 State Financial Plan on
January 11, 2000, with the release of the 2000-01 Executive Budget. The State
updated the Financial Plan on January 31, 2000 to reflect the Governor's
amendments to his Executive Budget. After these
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changes, the Division of the Budget ("DOB") now expects the State to close the
1999-2000 fiscal year with an available cash surplus of $758 million in the
General Fund, an increase of $733 million over the surplus estimate in the mid-
year update. The larger projected surplus derives from $499 million in net
higher projected receipts and $259 million in net lower estimated disbursements.
DOB revised both its projected receipts and disbursements based on a review of
actual operating results through December 1999, as well as an analysis of
underlying economic and programmatic trends it believes may affect the Financial
Plan for the balance of the year.
The State plans to use the entire $758 million surplus to make
additional deposits to reserve funds. At the close of the current fiscal year,
the State expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund ("TSRF") - the fifth consecutive annual deposit. In
the 2000-01 Executive Budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ("DRRF") ($250 million).
DOB projects total General Fund disbursements of $37.06 billion in
1999-2000, a decline of $282 million from the October estimate. Of this amount,
$33 million is related to the timing of spending and accounting adjustments and
therefore does not contribute to the surplus projected by DOB. The $33 million
consists of lower timing-related spending of $65 million from the Community
Projects Fund ("CPF") and $50 million from the Collective Bargaining Reserve,
offset by the Medicaid reclassification of $82 million described above.
Accordingly, lower disbursements since October contribute $249 million to the
1999-2000 surplus, which, when combined with the $10 million in lower
disbursements recognized in the mid-year update, produce a total reduction in
estimated disbursements of $259 million for the current year.
State Operations spending is now projected to total $6.63 billion in
1999-2000. In the revised Financial Plan, $50 million of an original $100
million for new collective bargaining costs is set aside in a reserve to cover
the cost of labor agreements in 1999-2000, and the balance is transferred to
General State Charges in the current year to pay for the recently approved labor
contract with State University employees and other labor costs. The remaining
revisions to the State Operations estimate are comprised of savings from agency
efficiencies and timing-related changes that do not affect the surplus.
The State projects a closing balance of $1.17 billion in the General
Fund, after the tax refund reserve transaction. The balance is comprised of $548
million in the Tax Stabilization Reserve Fund ("TSRF") after a $75 million
deposit in 1999-2000; $265 million in the CPF, which pays for Legislative
initiatives; $250 million in the DRRF; and $107 million in the Contingency
Reserve Fund ("CRF") (which guards against litigation risks).
In addition to the General Fund closing balance of $1.17 billion, the
State will have a projected $3.09 billion in the tax refund reserve account at
the end of 1999-2000. The refund reserve account is used to adjust personal
income tax collections across fiscal years to pay for tax refunds, as well as to
accomplish other Financial Plan objectives. The projected balance of $3.09
billion is comprised of $1.82 billion in tax reduction reserves from the 1998-99
surplus; $683 million from the 1999-2000 surplus; $521 million from LGAC that
may be used to pay tax
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refunds during 2000-01 but must be on deposit at the close of the fiscal year;
$50 million in collective bargaining reserves from 1999-2000; and $25 million in
reserves for tax credits.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions except those required to be
accounted for in another fund. It is the State's largest fund and received
almost all State taxes and other resources not dedicated to particular purposes.
General Fund moneys are also transferred to other funds, primarily to support
certain capital projects and debt service payments in other fund types.
The Governor presented his 2000-01 Executive Budget to the Legislature
on January 10, 2000. The Executive Budget contains financial projections for the
State's 1999-2000 through 2002-03 fiscal years, a detailed explanation of
receipts estimates and the economic forecast on which it is based, and proposed
Capital Program and Financing Plan for the 2000-01 through 2004-05 fiscal years.
On January 31, 2000, the Governor submitted amendments to his Executive Budget,
the most significant of which recommends eliminating all gross receipts taxes on
energy providers.
There can be no assurance that the Legislature will enact into law the
Governor's Executive Budget, as amended, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth therein.
The 2000-01 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1999-2000 to 2000-01. Under the Governor's
Executive Budget, as amended, total General Fund receipts, including transfers
from other funds, are projected at $38.62 billion, an increase of $1.28 billion
(3.4 percent) over the current fiscal year. General Fund disbursements,
including transfers to other funds, are recommended to grow by 2.3 percent to
$37.93 billion, an increase of $869 million over 1999-2000. State Funds spending
(the portion of the budget supported exclusively by State taxes, fees, and
revenues) is projected to total $52.46 billion, an increase of $2.57 billion or
5.1 percent. Spending from all government funds is expected to grow by 5.5
percent, increasing by $4.0 billion to $76.82 billion.
The State projects a closing balance of $1.61 billion in the General
Fund at the end of 2000-01. This balance is comprised of a $433 million reserve
set aside from the 1999-2000 surplus to finance the estimated costs of the
Governor's proposed tax reduction package in 2001-02 and 2002-03, $475 million
in cumulative reserves for collective bargaining ($425 million from 2000-01 plus
$50 million from 1999-2000), $548 million in the TSRF, and $150 million in the
CRF after a proposed $43 million deposit in 2000-01. The change in the closing
fund balance compared to 1999-2000 results from the planned use in 2000-01 of
$265 million for existing legislative initiatives financed from the CPF and the
reclassification of DRRF into the CPF, offset by increased reserves for
collective bargaining, tax reduction, and litigation discussed above.
In addition to the General Fund closing balance of $1.61 billion, the
State will have a projected $567 million in the tax refund reserve at the end of
2000-01. Also, $1.2 billion is proposed to be on deposit in the Star Special
Revenue Fund to be used in 2001-02 for State-
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funded local tax reductions and $250 million is proposed to be on deposit in the
DRRF. The balance in the DRRF is projected to be used in 2001-02 to retire
existing high-cost State-supported debt and increase pay-as-you-go financing of
capital projects.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by
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which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the
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payments. The State has also entered into a contractual-obligation financing
arrangement with the LGAC to restructure the way the State makes certain local
aid payments.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-than-
projected tax receipts and in lower-than-expected entitlement spending. The
State assumes that the 2000-01 Financial Plan will achieve $500 million in
savings from initiatives by State agencies to deliver services more efficiently,
workforce management efforts, maximization of federal and non-General Fund
spending offsets, and other actions necessary to help bring projected
disbursements and receipts into balance. The projections do not assume any gap-
closing benefit from the potential settlement of State claims against the
tobacco industry.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds. Subsequent
to that time, the State's general obligations have not been downgraded by S&P.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its
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officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action seeking enforcement
of certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; and (4) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193
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million in fiscal 1997-98, peaking at $241 million in fiscal 1998-99. Beginning
in fiscal 2001-02, State contributions required under the Comptroller's plan are
projected to be less than that required under the prior funding method. As a
result of the United States Supreme Court decision in the case of State of
Delaware v. State of New York, on January 21, 1994, the State entered into a
settlement agreement with various parties. Pursuant to all agreements executed
in connection with the action, the State was required to make aggregate payments
of $351.4 million. Annual payments to the various parties will continue through
the State's 2002-03 fiscal year in amounts which will not exceed $48.4 million
in any fiscal year subsequent to the State's 1994-95 fiscal year. Litigation
challenging the constitutionality of the treatment of certain moneys held in a
reserve fund was settled in June 1996 and certain amounts in a Supplemental
Reserve Fund previously credited by the State against prior State and local
pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the current fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
On November 23, 1998, the attorneys general for forty-six states
(including New York) entered into a master settlement agreement ("MSA") with the
nation's largest tobacco manufacturers. Under the terms of the MSA, the states
agreed to release the manufacturers from all smoking-related claims in exchange
for specified payments and the imposition of restrictions on tobacco advertising
and marketing. New York is projected to receive $25 billion over 25 years under
the MSA, with payments apportioned among the State (51 percent), counties (22
percent), and New York City (27 percent). The projected payments are an estimate
and subject to adjustments for, among other things, the annual change in the
volume of cigarette shipments and the rate of inflation.
From 1999-2000 through 2002-03, the State expects to receive $1.54
billion under the nationwide settlement with cigarette manufacturers. Counties,
including New York City, will receive settlement payments of $1.47 billion over
the same period.
Authorities. The fiscal stability of New York State is related, in
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part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and
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operating revenue-producing public benefit facilities. Authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. The State's access to
the public credit markets could be impaired, and the market price of its
outstanding debt may be materially and adversely affected, if any of the
Authorities were to default on their respective obligations, particularly with
respect to debt that is State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since 1995. As a
result of the structural imbalances in JDA's capital structure, and defaults in
its loan portfolio and loan guarantee program incurred between 1991 and 1996,
JDA would have experienced a debt service cash flow shortfall had it not
completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
New York City and Other Localities. The fiscal health of the State
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may also be impacted by the fiscal health of its localities, particularly the
City, which has required and continues to require significant financial
assistance from the State. The City depends on State aid both to enable the City
to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal budget
negotiation process could result in a reduction in or a delay in the receipt of
Federal grants which could have additional adverse effects on the City's cash
flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit
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markets. The City was not able to sell short-term notes to the public again
until 1979. In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Subsequent to that time, the City's general obligation bonds have not been
downgraded by S&P.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A. Subsequent to that time, the
City's general obligation bonds have not been downgraded by Fitch IBCA.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board
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in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period. This
means that the Control Board's powers of approval are suspended, but the Board
continues to have oversight responsibilities.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in its Financial
Plan can be successfully implemented or that the City will maintain a balanced
budget in future years without additional State aid, revenue increases or
expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the City's Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the Financial Plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, the ability of the Health and Hospitals Corporation and the BOE to
take actions to offset reduced revenues, the ability to complete revenue
generating transactions, provision of State and Federal aid and mandate relief
and the impact on City revenues and expenditures of Federal and State welfare
reform and any future legislation affecting Medicare or other entitlements.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the City from
entering into new capital contracts. To prevent these disruptions in the capital
program, two entities were created to issue debt to increase the City's capital
financing capacity: (i) the State Legislature created the Transitional Finance
Authority ("TFA") in 1997, and (ii) the City created the Tobacco Settlement
Asset Securitization Corporation in 1999. Despite these actions, the City, in
order to continue its capital program, will need additional financing capacity
in fiscal year 2002, which could be provided through increasing the borrowing
authority of the TFA or amending the State constitutional debt limit.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The delay
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in the adoption of the State's budget in certain past fiscal years has required
the City to issue short-term notes in amounts exceeding those expected early in
such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
fiscal
year.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance. To date, the State has experienced no
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significant Year 2000 computer disruptions. Monitoring will continue over the
next few months to identify and correct any problems that may arise. However,
there can be no assurance that outside parties who provide goods and services to
the State will not experience computer problems related to Year 2000 programming
in the future, or that such disruptions, if they occur, will not have an adverse
impact on State operations or finances.
Investment Limitations
----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of a Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment
-23-
<PAGE>
policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of such Company or such Fund, or (b) 67% or more of the
shares of such Company or such Fund present at a meeting if more than 50% of the
outstanding shares of such Company or such Fund are represented at the meeting
in person or by proxy. Investment limitations which are "operating policies"
with respect to the Funds may be changed by the Companies' Boards of Directors
without shareholder approval.
No Fund may:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Taxable Funds might be deemed to
be underwriters upon disposition of certain portfolio securities acquired within
the limitation on purchases of restricted securities; and except to the extent
that purchase by the Tax-Exempt Money Fund of Municipal Securities or other
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
and except to the extent that purchase by the New York Tax-Exempt Money Fund of
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
2. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate; and except that the
Tax-Exempt Money Fund may invest in Municipal Securities secured by real estate
or interests therein; and except that the New York Tax-Exempt Money Fund may
invest in securities secured by real estate or interests therein;
3. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or other mineral exploration or development programs; and
4. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitations might be considered to be the
issuance of a senior security.
Each of the Money, Government Money, Treasury Money and Tax-Exempt
Money Funds may not:
5. Purchase securities of any one issuer if immediately after such
purchase more than 5% of the value of its total assets would be invested in the
securities of such issuer, provided that up to 25% of the value of each Fund's
total assets may be invested without regard to this 5% limitation;
notwithstanding the foregoing restriction, each Fund may invest without regard
to the 5% limitation in Government Securities (as defined in the 1940 Act) and
as otherwise permitted in accordance with Rule 2a-7 under the 1940 Act or any
successor rule;
6. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to
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<PAGE>
facilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) A Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position; and
8. Invest in or sell puts, calls, straddles, spreads, or any
combination thereof.
Each of the Money, Government Money and Treasury Money Funds may not:
9. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and the
Money Fund and the Government Money Fund may enter into repurchase agreements
with respect to obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and (ii) the Money Fund and the Government Money
Fund may lend portfolio securities in an amount not exceeding 30% of their total
assets;
10. Invest in bank obligations having remaining maturities in excess
of one year, except that securities subject to repurchase agreements may bear
longer maturities;
11. Invest in companies for the purpose of exercising management or
control;
12. Invest more than 5% of a Fund's total assets in securities issued
by companies which, together with any predecessor, have been in continuous
operation for fewer than three years;
13. Purchase foreign securities; except the Money Fund may purchase
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks and foreign branches of U.S. banks
in an amount not to exceed 20% of its total net assets;
14. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;
15. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of a Fund's total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of its total assets
would be invested in foreign branches of financial institutions or in domestic
branches of foreign banks;
16. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no
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<PAGE>
limitation with respect to securities issued or guaranteed by the U.S.
government or domestic bank obligations, and (b) neither all finance companies,
as a group, nor all utility companies, as a group, are considered a single
industry for purposes of this policy; and
17. Knowingly invest more than 10% of the value of a Fund's total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.
The Tax-Exempt Money Fund may not:
18. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
19. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation;
20. Knowingly invest more than 10% of the value of its total assets
in securities which may be illiquid in light of legal or contractual
restrictions on resale or the absence of readily available market quotations;
21. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the United
States; any state or territory; any possession of the U.S. government; the
District of Columbia; or any of their authorities, agencies, instrumentalities,
or political subdivisions; and
22. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
The New York Tax-Exempt Money Fund may not:
23. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
24. Invest less than 80% of its net assets in securities the interest
on which is exempt from federal income tax, except during defensive periods or
periods of unusual market conditions;
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<PAGE>
25. Borrow money or mortgage, pledge, or hypothecate its assets
except to the extent permitted under the 1940 Act; and
26. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the U.S.
government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, and repurchase agreements secured by such securities.
The Treasury Money Fund may not:
27. Purchase securities other than obligations issued or guaranteed
by the U.S. Treasury or an agency or instrumentality of the U.S. government and
securities issued by investment companies that invest in such obligations.
In addition, the New York Tax-Exempt Money Fund is subject to the
following non-fundamental limitations, which may be changed without shareholder
approval. The New York Tax-Exempt Money Fund may not:
28. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that the Fund may obtain short-term credit as
may be necessary for the clearance of portfolio transactions;
29. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;
30. Invest in companies for the purpose of exercising management or
control; and
31. Invest more than 10% of its net assets in illiquid securities.
* * *
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
In Investment Limitation No. 5 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c)
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<PAGE>
securities issued or guaranteed as to principal or interest by the United
States, or by a person controlled or supervised by and acting as an
instrumentality of the government of the United States, or any certificate of
deposit for any of the foregoing, are deemed to be Government Securities.
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
Notwithstanding Investment Limitations Nos. 17 and 20 above, the
Companies intend to limit the Funds' investments in illiquid securities to 10%
of each Fund's net (rather than total) assets.
Notwithstanding the proviso in Investment Limitation No. 21, to the
extent that the Tax-Exempt Money Fund has invested more than 20% of the value of
its assets in taxable securities on a temporary defensive basis, the industry
diversification limitation in Investment Limitation No. 21 shall apply to
taxable securities issued or guaranteed by any state, territory, or possession
of the U.S. government; the District of Columbia; or any of their authorities,
agencies, instrumentalities, or political subdivisions.
In order to obtain a rating from a rating organization, a Fund will
comply with special investment limitations.
NET ASSET VALUE AND NET INCOME
------------------------------
The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the security. This method may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund involved would receive if it sold the security. The market value of
portfolio securities held by the Funds can be expected to vary inversely with
changes in prevailing interest rates.
The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated. If
the Boards of Directors believe that the
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<PAGE>
extent of any deviation from a Fund's $1.00 amortized cost price per Share may
result in material dilution or other unfair results to new or existing
investors, they will take appropriate steps to eliminate or reduce, to the
extent reasonably practicable, any such dilution or unfair results. These steps
may include selling portfolio instruments prior to maturity; shortening the
average portfolio maturity; withholding or reducing dividends; redeeming Shares
in kind; reducing the number of the Fund's outstanding Shares without monetary
consideration; or utilizing a net asset value per Share determined by using
available market quotations.
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
-----------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Companies' sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of Shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
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<PAGE>
Purchase of Shares
------------------
Shares of the Funds are offered for sale at their net asset value per
Share next computed after a purchase request is received in good order by the
Companies' sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
Shares in order to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors or to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase Shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
Shares selected by the Customer. Investors purchasing Shares may include
officers, directors, or employees of the particular Shareholder Organization.
Institutional Shares may be purchased directly only by financial
institutions ("Institutional Investors"). Retail Shares may be purchased
directly by individuals ("Direct Investors") or by Institutional Investors
(collectively with Direct Investors, "Investors"). Retail Shares may also be
purchased by Customers of the Adviser, its affiliates and correspondent banks,
and other Shareholder Organizations that have entered into agreements with the
Companies.
A Shareholder Organization may elect to hold of record Shares for its
Customers and to record beneficial ownership of Shares on the account statements
provided by it to its Customers. If it does so, it is the Shareholder
Organization's responsibility to transmit to the Distributor all purchase
requests for its Customers and to transmit, on a timely basis, payment for such
requests to Chase Global Funds Services Company ("CGFSC"), the Funds' sub-
transfer agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
(and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."
Redemption Procedures
---------------------
Customers of Shareholder Organizations holding Shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted
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<PAGE>
to CGFSC by telephone at (800) 446-1012 or by terminal access. No charge for
wiring redemption payments to Shareholder Organizations or Institutional
Investors is imposed by the Companies, although Shareholder Organizations may
charge a Customer's account for wiring redemption proceeds. Information relating
to such redemption services and charges, if any, is available from the
Shareholder Organizations. An Investor redeeming Shares through a registered
investment adviser or certified financial planner may incur transaction charges
in connection with such redemptions. Such Investors should contact their
registered investment adviser or certified financial planner for further
information on transaction fees. Investors may redeem all or part of their
Shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).
Shares may be redeemed by an Investor by submitting a written request
for redemption to:
Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
As discussed in the Prospectus, a redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for Retail Shares
redeemed will ordinarily be made by mail within five Business Days after receipt
by CGFSC of the redemption request in good order. Payment for Institutional
Shares redeemed will normally be sent the next Business Day after receipt by
CGFSC of the redemption request in good order. Questions with respect to the
proper form for redemption requests should be directed to CGFSC at (800) 446-
1012 (from overseas, call (617) 557-8280).
Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem Shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Investor's account at any commercial bank in the United States. Institutional
Investors may also redeem Shares by instructing CGFSC by telephone at (800) 446-
1012 or by terminal access.
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<PAGE>
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
----------------------------
Except as described in "Investor Programs" below, Investors may be
required to redeem Shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance in the particular account with respect to the
Fund remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance in his or her account at the
institution with respect to Shares of a Fund, and the balance in such account
falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her Shares to the extent necessary
to maintain the required minimum balance.
The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
The Companies reserve the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Companies and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Each Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its Shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.
Under certain circumstances, the Companies may, in their discretion,
accept securities as payment for Shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
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<PAGE>
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An Investor who owns Retail Shares with a value of $10,000 or more may
begin a Systematic Withdrawal Plan. The withdrawal can be on a monthly,
quarterly, semiannual or annual basis. There are four options for such
systematic withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for Retail Shares with CGFSC. Under
this Plan, dividends and distributions are automatically reinvested in
additional Retail Shares of a Fund. Amounts paid to investors under this Plan
should not be considered as income. Withdrawal payments represent proceeds from
the sale of Retail Shares, and there will be a reduction of the shareholder's
equity in the Fund involved if the amount of the withdrawal payments exceeds the
dividends and distributions paid on the Retail Shares and the appreciation of
the Investor's investment in the Fund. This in turn may result in a complete
depletion of the shareholder's investment. An Investor may not participate in a
program of systematic investing in a Fund while at the same time participating
in the Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Retail Shares having a value of at least $500 for Shares of any other portfolio
of the Companies or for Shares of Excelsior Institutional Trust. Institutional
Shares may be exchanged for Institutional Shares of any portfolio of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.
Shares may be exchanged by wire, telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of
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<PAGE>
other shareholders, the Companies and Excelsior Institutional Trust reserve the
right to limit the number of exchange requests of Investors to no more than six
per year. The Companies and Excelsior Institutional Trust may modify or
terminate the exchange program at any time upon 60 days' written notice to
shareholders, and may reject any exchange request. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and
their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment for
IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase Shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.
Automatic Investment Program
----------------------------
The Automatic Investment Program permits Investors to purchase Retail
Shares (minimum of $50 per Fund per transaction) at regular intervals selected
by the Investor. The
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<PAGE>
minimum initial investment for an Automatic Investment Program account is $50
per Fund. Provided the Investor's financial institution allows automatic
withdrawals, Retail Shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and Retail Shares will be purchased, once a month, on
either the first or fifteenth day, or twice a month, on both days.
Additional Information
----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of common stock, $0.001 par
value per share; and Excelsior Tax-Exempt Fund's Charter authorizes its Board of
Directors to issue up to twenty-four billion full and fractional shares of
common stock, $0.001 par value per share. Both Charters authorize the respective
Boards of Directors to classify or reclassify any unissued shares of the
respective Companies into one or more additional classes or series by setting or
changing in any one or more respects their respective preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the particular Company's Board of
Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued for
payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, shareholders
of that Fund are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the portfolios of the Company involved, of any general assets of
that Company not belonging to any particular portfolio of that Company which are
available for distribution. In the event of a liquidation or dissolution of
either Company, shareholders of such Company will be entitled to the same
distribution process.
Shareholders of the Companies are entitled to one vote for each full
Share held, and fractional votes for fractional Shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of a Company's
aggregate
-35-
<PAGE>
outstanding Shares may elect all of that Company's directors, regardless of the
votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding Shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The exercise
of such authority by the Boards of Directors will be subject to the provisions
of the 1940 Act, and the Boards of Directors will not take any action described
in this paragraph unless the proposed action has been disclosed in writing to
the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of a Company's Common Stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, each
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of its outstanding common stock voting without regard to class.
Certificates for Shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional Shares.
-36-
<PAGE>
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The business and affairs of the Funds are managed under the direction
of the Companies' Boards of Directors. The directors and executive officers of
the Companies, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
---------------- --------- ------------------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards (since 1997), and
238 June Road President and Treasurer President, Treasurer and Director (since 1995) of the
Stamford, CT 06903 Companies; Chairman of the Boards (since 1997),
Age: 69 President, Treasurer and Trustee (since 1995) of
Excelsior Funds and Excelsior Institutional Trust;
Vice Chairman of U.S. Trust Corporation and U.S.
Trust New York (from February 1990 until September
1995); and Chairman, U.S. Trust Company (from March
1993 to May 1997).
Rodman L. Drake Director Director of the Companies (since 1996); Trustee of
Continuation Investments Group, Inc. Excelsior Institutional Trust and Excelsior Funds
1251 Avenue of the Americas (since 1994); Director, Parsons Brinkerhoff, Inc.
9/th/ Floor (engineering firm) (since 1995); President,
New York, NY 10020 Continuation Investments Group, Inc. (since 1997);
Age: 57 President, Mandrake Group (investment and consulting
firm) (1994-1997); Chairman, MetroCashcard
International, Inc. (since 1999); Director,
Hotelivision, Inc. (since 1999); Director, Alliance
Group Services, Inc. (since 1998); Director, Hyperion
Total Return Fund, Inc. and three other funds for
which Hyperion Capital Management, Inc. serves as
investment adviser (since 1991); Co-Chairman, KMR
Power Corporation (power plants) (from 1993 to 1996);
Director, The Latin America Smaller Companies Fund,
Inc. (from 1993 to 1998); Member of Advisory Board,
Argentina Private Equity Fund L.P. (from 1992 to
1996) and Garantia L.P. (Brazil) (from 1993 to 1996);
and Director, Mueller Industries, Inc. (from 1992 to
1994).
Joseph H. Dugan Director Retired; Director of the Companies (since 1984);
913 Franklin Lake Road Director of UST Master Variable Series, Inc. (from
Franklin Lakes, NJ 07417 1994 to June 1997); and Trustee of Excelsior
Age: 75 Institutional Trust (since 1995).
</TABLE>
____________________
/1/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-37-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past
----------------- --------------------------------
Name and Address Companies 5 Years and Other Affiliations
---------------- --------- ------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since 1986);
2320 Cumberland Road Director of UST Master Variable Series, Inc. (from
Charlottesville, VA 22901-7726 1994 to June 1997); Trustee of Excelsior
Age: 79 Institutional Trust (since 1995); Director, Deutsche
Bank Financial, Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and Trustee, HSBC
Funds Trust and HSBC Mutual Funds Trust (since 1988).
Morrill Melton Hall, Jr. Director Director of the Companies (since July 30, 2000); Trustee
Comprehensive Health Services, Inc. of Excelsior Institutional Trust (since July 30, 2000);
8229 Boone Blvd., Suite 700 Chief Executive Officer, Comprehensive Health Services,
Vienna, VA 22182 Inc. (health care management and administration).
Age: 55
Jonathan Piel Director Director of the Companies (since 1996); Trustee of
558 E. 87th Street Excelsior Institutional Trust and Excelsior Funds
New York, NY 10128 (since 1994); Vice President and Editor, Scientific
Age: 61 American, Inc. (from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute of
Technology (since 1984).
Robert A. Robinson Director Director of the Companies (since 1987); Director of
Church Pension Group UST Master Variable Series, Inc. (from 1994 to June
445 Fifth Avenue 1997); Trustee of Excelsior Institutional Trust
New York, NY 10017 (since 1995); President Emeritus, The Church Pension
Age: 74 Fund and its affiliated companies (since 1966);
Trustee, H.B. and F.H. Bugher Foundation and Director
of its wholly owned subsidiaries--- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy Corporation
(since 1984); Director, Morehouse Publishing Co.
(1974-1998); Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of the Companies (since 1985);
6549 Pine Meadows Drive Chairman of the Board of Excelsior Funds, Inc. and
Spring Hill, FL 34606 Excelsior Tax-Exempt Funds, Inc. (1991-1997) and
Age: 74 Excelsior Institutional Trust (1996-1997); President
and Treasurer of Excelsior Fund and Excelsior
Tax-Exempt Fund (1994-1997) and Excelsior
Institutional Trust (1996-1997); Chairman of the
Board, President and Treasurer of UST Master Variable
Series, Inc. (1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
</TABLE>
____________________________
/2/ This director is considered to be an "interested person" of the Companies as
defined in the 1940 Act.
-38-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past
----------------- --------------------------------
Name and Address Companies 5 Years and Other Affiliations
---------------- --------- ------------------------------
<S> <C> <C>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global Funds
Chase Global Funds Services Company Services Company (November 1996 to present); and
73 Tremont Street Officer and Manager of Financial Reporting, Investors
Boston, MA 02108-3913 Bank & Trust Company (January 1991 to November 1996).
Age: 39
Patricia M. Leyne Assistant Treasurer Vice President, Senior Manager of Fund
Chase Global Funds Services Company Administration, Chase Global Funds Services Company
73 Tremont Street (since August 1999); Assistant Vice President, Senior
Boston, MA 02108-3913 Manager of Fund Administration, Chase Global Funds
Age: 33 Services Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund Administration,
Chase Global Funds Services Company (from November
1996 to July 1998); Supervisor, Chase Global Funds
Services Company (from September 1995 to November
1996); Fund Administrator, Chase Global Funds
Services Company (from February 1993 to September
1995).
</TABLE>
Each director receives an annual fee of $9,000 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a per-Company meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses incurred in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. In addition,
Messrs. Drake, Piel and Robinson each receive $2,000 per annum for their
services on Excelsior Funds, Inc.'s Nominating Committee. Drinker Biddle & Reath
LLP, of which Messrs. McConnel and Malloy are partners, receives legal fees as
counsel to the Companies. The employees of CGFSC do not receive any compensation
from the Companies for acting as officers of the Companies. No person who is
currently an officer, director or employee of the Adviser serves as an officer,
director or employee of the Companies. As of July 7, 2000, the directors and
officers of each Company as a group owned beneficially less than 1% of the
outstanding shares of each fund of each Company, and less than 1% of the
outstanding shares of all funds of each Company in the aggregate.
-39-
<PAGE>
The following chart provides certain information about the fees received by
the Companies' directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Total
Compensation
Pension or from the
Retirement Companies
Aggregate Benefits Accrued Estimated Annual and Fund
Name of Compensation from as Part of Benefits Upon Complex*
Person/Position the Companies Fund Expenses Retirement Paid to Directors
--------------- ------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Donald L. Campbell***
Director $18,000 None None $22,000(3)**
Rodman L. Drake
Director $31,000 None None $38,750(4)**
Joseph H. Dugan
Director $33,000 None None $38,250(3)**
Wolfe J. Frankl
Director $30,000 None None $35,000(3)**
Jonathan Piel
Director $34,000 None None $42,000(4)**
Robert A. Robinson
Director $34,000 None None $39,500(3)**
Alfred C. Tannachion
Director $33,000 None None $38,250(3)**
Frederick S. Wonham
Chairman of the Board,
President and Treasurer $43,000 None None $52,000(4)**
</TABLE>
-------------------------------
* The "Fund Complex" consists of the Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Institutional Trust, and, until December 15, 1999,
Excelsior Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
*** Donald L. Campbell resigned from the Boards of the Companies on July 31,
2000.
Investment Advisory and Administration Agreements
-------------------------------------------------
United States Trust Company of New York ("U. S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, if any, purchased for the
Funds.
-40-
<PAGE>
Prior to May 16, 1997, U.S. Trust New York served as investment adviser to
the Money, Government Money, Treasury Money and Tax-Exempt Money Funds pursuant
to advisory agreements substantially similar to the Investment Advisory
Agreements currently in effect for the Funds.
For the services provided and expenses assumed pursuant to its Investment
Advisory Agreements, the Adviser is entitled to be paid a fee computed daily and
paid monthly, at the annual rate of 0.25% of the average daily net assets of
each of the Money, Government Money and Tax-Exempt Money Funds; 0.30% of the
Treasury Money Fund's average daily net assets; and 0.50% of the New York Tax-
Exempt Money Fund's average daily net assets.
From time to time, the Adviser may voluntarily waive all or a portion of
the advisory fees payable to it by a Fund, which waiver may be terminated at any
time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Companies
paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Fund $1,812,027 $1,475,748 $1,036,066
Government Money Fund $1,707,384 $1,381,779 $1,216,265
Treasury Money Fund $1,317,831 $1,403,045 $1,108,480
Tax-Exempt Money Fund $2,755,240 $2,696,982 $2,325,765
New York Tax-Exempt Money Fund $1,599,304 $ 277,593 $ 0
</TABLE>
-41-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for certain funds.
During the periods stated, these waivers reduced advisory fees by the following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Fund $1,182,749 $358,360 $231,368
Government Money Fund $ 273,569 $184,188 $168,737
Treasury Money Fund $ 100,084 $151,843 $ 82,614
Tax-Exempt Money Fund $1,009,060 $827,107 $627,413
New York Tax-Exempt Money Fund $ 39,686 $532,521 $ 0
</TABLE>
The Investment Advisory Agreements provide that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreements to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab
Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc. Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
CGFSC, Federated Services Company, an affiliate of the Distributor, and
U.S. Trust Company (together, the "Administrators") serve as the Companies'
administrators and provide the Funds with general administrative and operational
assistance. Prior to July 31,
-42-
<PAGE>
2000, Federated Administrative Services, a subsidiary of Federated Services
Company, served as the Funds' administrator. On July 31, 2000, Federated
Services Company assumed all of its subsidiaries' rights and obligations under
the Administration Agreement. Under the Administration Agreements, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt-interest dividends," and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing Share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company, and U.S. Trust New York served as the
Money, Government Money, Treasury Money and Tax-Exempt Money Funds'
administrators pursuant to administration agreements substantially similar to
the Administration Agreements currently in effect for the Funds.
The Administrators also provide administrative services to the other
investment portfolios of the Companies and to all of the investment portfolios
of Excelsior Institutional Trust which are also advised by U.S. Trust and its
affiliates and distributed by the Distributor. For services provided to all of
the investment portfolios of the Companies and Excelsior Institutional Trust
(except for the international portfolios of Excelsior Fund and Excelsior
Institutional Trust), the Administrators are entitled jointly to fees, computed
daily and paid monthly, based on the combined aggregate average daily net assets
of the three companies (excluding the international portfolios of Excelsior Fund
and Excelsior Institutional Trust) as follows:
Combined Aggregate Average Daily Net Assets
of Excelsior Fund, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust (excluding
the international portfolios of Excelsior Fund
and Excelsior Institutional Trust)
----------------------------------
Annual Fee
----------
First $200 million...................................... 0.200%
Next $200 million....................................... 0.175%
Over $400 million....................................... 0.150%
Administration fees payable to the Administrators by each portfolio of the
Companies and Excelsior Institutional Trust are allocated in proportion to their
relative average daily net assets at the time of determination. From time to
time, the Administrators may voluntarily waive all or a portion of the
administration fee payable to them by a Fund, which waivers may be terminated at
any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees paid by
the Funds for administration services were as follows:
-43-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Fund $1,822,501 $1,122,463 $ 11
Government Money Fund $1,206,118 $ 958,200 $172
Treasury Money Fund $ 719,231 $ 792,993 $ 0
Tax-Exempt Money $2,291,147 $2,156,742 $ 0
New York Tax-Exempt Money Fund $ 498,766 $ 248,317 $ 0
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Fund $ 0 $ 775,667 $ 3
Government Money Fund $238 $ 847,526 $96
Treasury Money Fund $ 0 $ 607,458 $ 0
Tax-Exempt Money Fund $ 0 $1,807,345 $ 0
New York Tax-Exempt Money Fund $ 0 $ 0 $ 0
</TABLE>
Shareholder Organizations
-------------------------
The Companies have entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
Retail Shares or Institutional Shares in consideration for a Fund's payment of
not more than the annual rate of 0.40% or 0.15%, respectively, of the average
daily net assets of the Fund's Retail Shares or Institutional Shares
beneficially owned by Customers of the Shareholder Organization. Such services
may include: (a) acting as recordholder of Retail Shares or Institutional
Shares; (b) assisting in processing purchase, exchange and redemption
transactions; (c) transmitting and receiving funds in connection with Customer
orders to purchase, exchange or redeem Retail Shares or Institutional Shares;
(d) providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (e) providing tax and dividend
information to shareholders as appropriate; (f) transmitting proxy statements,
annual reports, updated
-44-
<PAGE>
prospectuses and other communications from the Companies to Customers; and (g)
providing or arranging for the provision of other related services. It is the
responsibility of Shareholder Organizations to advise Customers of any fees that
they may charge in connection with a Customer's investment.
The Companies' agreements with Shareholder Organizations are governed by
Administrative Services Plans (the "Plans") adopted by the Companies. Pursuant
to the Plans, each Company's Board of Directors will review, at least quarterly,
a written report of the amounts expended under the Company's agreements with
Shareholder Organizations and the purposes for which the expenditures were made.
In addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of each Company's directors, including a majority of the
directors who are not "interested persons" of the Company as defined in the 1940
Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Companies'
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Companies' Boards of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Companies will be
committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
Money Fund $1,182,749 $1,182,726
Government Money Fund $ 273,807 $ 272,351
Treasury Money Fund $ 100,084 $ 100,083
Tax-Exempt Money Fund $1,009,060 $1,009,057
New York Tax-Exempt Money Fund $ 39,686 $ 39,676
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:
-45-
<PAGE>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
Money Fund $358,371 $358,333
Government Money Fund $184,360 $183,330
Treasury Money Fund $151,843 $151,843
Tax-Exempt Money Fund $827,107 $827,104
New York Tax-Exempt Money Fund $ 7,879 $ 7,879
For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
Money Fund $231,371 $231,347
Government Money Fund $168,833 $168,139
Treasury Money Fund $ 82,614 $ 82,614
Tax-Exempt Money Fund $627,413 $627,412
New York Tax-Exempt Money Fund $ 0 $ 0
Expenses
--------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include taxes;
interest; fees (including fees paid to the Companies' directors and officers who
are not affiliated with the Distributor or the Administrators); SEC fees; state
securities qualifications fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent, and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; cost of independent pricing services; costs
of shareholder reports and shareholder meetings; and any extraordinary expenses.
The Funds also pay for brokerage fees and commissions in connection with the
purchase of portfolio securities.
-46-
<PAGE>
Custodian and Transfer Agent
----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of the Chase
Manhattan Corporation, serves as custodian of the Funds' assets. Under the
Custodian Agreements, Chase has agreed to: (i) maintain a separate account or
accounts in the name of the Funds; (ii) make receipts and disbursements of money
on behalf of the Funds; (iii) collect and receive all income and other payments
and distributions on account of the Funds' portfolio securities; (iv) respond to
correspondence from securities brokers and others relating to its duties; (v)
maintain certain financial accounts and records; and (vi) make periodic reports
to each Company's Board of Directors concerning the Funds' operations. Chase
may, at its own expense, open and maintain custody accounts with respect to the
Funds with other banks or trust companies, provided that Chase shall remain
liable for the performance of all its custodial duties under the Custodian
Agreements, notwithstanding any delegation. Communications to the custodian
should be directed to Chase, Mutual Funds Service Division, 3 Chase MetroTech
Center, 8/th/ Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i) issue
and redeem Shares; (ii) address and mail all communications by the Funds to
their shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to each Company's Board of
Directors concerning the Funds' operations. For its transfer agency, dividend-
disbursing, and subaccounting services, U.S. Trust New York is entitled to
receive $15.00 per annum per account and subaccount. In addition, U.S. Trust New
York is entitled to be reimbursed for its out-of-pocket expenses for the cost of
forms, postage, processing purchase and redemption orders, handling of proxies,
and other similar expenses in connection with the above services. U.S. Trust New
York is located at 114 W. 47/th/ Street, New York, New York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer agency
obligations to another transfer agent registered or qualified under applicable
law, provided that U.S. Trust New York shall remain liable for the performance
of all of its transfer agency duties under the Transfer Agency Agreements,
notwithstanding any delegation. Pursuant to this provision in the agreement,
U.S. Trust New York has entered into a sub-transfer agency arrangement with
CGFSC, an affiliate of Chase, with respect to accounts of shareholders who are
not Customers of U.S. Trust New York. CGFSC is located at 73 Tremont Street,
Boston, Massachusetts 02108-3913. For the services provided by CGFSC, U.S. Trust
New York has agreed to pay CGFSC $15.00 per annum per account or subaccount plus
out-of-pocket expenses. CGFSC receives no fee directly from the Companies for
any of its sub-transfer agency services. U.S. Trust New York may, from time to
time, enter into sub-transfer agency arrangements with third party providers of
transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of all portfolio securities of each of the Funds.
-47-
<PAGE>
The Funds do not intend to seek profits from short-term trading. Their
annual portfolio turnover will be relatively high, but brokerage commissions are
not normally paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the net income of the Funds.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.
The Investment Advisory Agreements between the Companies and the Adviser
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Companies, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser, to
the extent permitted by law and subject to the review of the Companies' Boards
of Directors from time to time with respect to the extent and continuation of
the policy, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion. Such
brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy.
Supplementary research information so received is in addition to and not in
lieu of services required to be performed by the Adviser and does not reduce the
investment advisory fees payable by the Funds. Such information may be useful to
the Adviser in serving the Funds and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to the Adviser in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the Adviser, the
Distributor, or any of their affiliated persons (as such term is defined in the
1940 Act) acting as principal, except to the extent permitted by the SEC.
Investment decisions for the Funds are made independently from those for
other investment companies, common trust funds and other types of funds managed
by the Adviser. Such other investment companies and funds may also invest in the
same securities as the Funds.
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<PAGE>
When a purchase or sale of the same security is made at substantially the same
time on behalf of the Funds and another investment company or common trust fund,
the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which the Adviser believes to be equitable
to the Funds and such other investment company or common trust fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Funds or the size of the position obtained by the Funds. To the
extent permitted by law, the Adviser may aggregate the securities to be sold or
purchased for the Funds with those to be sold or purchased for other investment
companies or common trust funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, the Money Fund held one corporate bond issued by Morgan Stanley
Dean Witter with a principal amount of $50,000,000 and commerical paper issued
by Goldman Sachs Group, Inc. with a principal amount of $75,000,000.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston, MA
02116 serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-
6996, is counsel to the Companies.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
---------
The following supplements the tax information contained in the Prospectus.
For federal income tax purposes, each Fund is treated as a separate
corporate entity, and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves a Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether or
not derived from interest on Municipal Securities) would be
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<PAGE>
taxable as ordinary income to shareholders to the extent of the Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders. Moreover, if a Fund
were to fail to make sufficient distributions in a year, the Fund would be
subject to corporate income taxes and/or excise taxes in respect of the
shortfall or, if the shortfall is large enough, the Fund could be disqualified
as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute an amount equal to specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). The Funds intend to make sufficient distributions
or deemed distributions of their ordinary taxable income and any capital gain
net income prior to the end of each calendar year to avoid liability for this
excise tax.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends or gross proceeds realized upon sale paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."
The Tax-Exempt Funds are not intended to constitute a balanced investment
program and is not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Tax-Exempt Funds would not be suitable for tax-exempt institutions or for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Tax-Exempt Funds' dividends being tax-exempt, but such dividends would be
ultimately taxable to the beneficiaries when distributed to them. In addition,
the Tax-Exempt Funds may not be appropriate investments for entities which are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under the Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenue derived by all users of such facilities (or who occupies more than 5% of
the total usable area of such facilities) or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
In order for the Tax-Exempt Funds to pay exempt-interest dividends for any
taxable year, at least 50% of the aggregate value of a Fund's portfolio must
consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, the Tax-
Exempt Funds will notify their shareholders of the portion of the dividends paid
by such Fund which constitutes an exempt-interest dividend with respect to such
taxable year. However, the aggregate amount of dividends so designated by the
Tax-Exempt Funds cannot exceed the excess of the amount of interest exempt from
tax under Section 103 of
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<PAGE>
the Code received by the Tax-Exempt Funds during the taxable year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
The percentage of total dividends paid by the Tax-Exempt Funds with respect to
any taxable year which qualifies as exempt-interest dividends will be the same
for all shareholders receiving dividends from the Tax-Exempt Funds for such
year.
The Tax-Exempt Funds intend to distribute to their shareholders any
investment company taxable income earned by such Fund for each taxable year. In
general, the Tax-Exempt Funds' investment company taxable income will be its
taxable income (including taxable interest and short-term capital gains) subject
to certain adjustments and excluding the excess of any net long-term capital
gain for the taxable year over the net short-term capital loss, if any, for such
year. Such distributions will be taxable to the shareholders as ordinary income
(whether paid in cash or additional shares).
The foregoing discussion is based on federal tax laws and regulations which
are in effect on the date of this Statement of Additional Information; such laws
and regulations may be changed by legislative or administrative action. You
should consult your tax advisor for further information regarding federal,
state, local and/or foreign tax consequences relevant to your specific
situation. Shareholders may also be subject to state and local taxes on
distributions and redemptions. State income taxes may not apply, however, to
the portions of each Funds' distributions, if any, that are attributable to
intent on federal securities or interest on securities of the particular state
or localities within the state. For example, distributions from the New York
Tax-Exempt Money Fund will generally be exempt from federal, New York State and
New York City taxes.
YIELD INFORMATION
-----------------
Each Fund may advertise its seven-day yield which refers to the income
generated over a particular seven-day period identified in the advertisement by
an investment in the Fund. This income is annualized, i.e., the income during a
particular week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The Funds may also advertise their
"effective yields" which are calculated similarly but, when annualized, income
is assumed to be reinvested, thereby making the effective yields slightly higher
because of the compounding effect of the assumed reinvestment.
Yields will fluctuate and any quotation of yield should not be considered
as representative of a Fund's future performance. Since yields fluctuate, yield
data cannot necessarily be used to compare an investment in the Funds with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that yield is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses, and market conditions. Any fees charged by Shareholder Organizations
with respect to accounts of Customers that have invested in Shares will not be
included in calculations of yield.
The standardized annualized seven-day yields for the Shares of the Funds
are computed separately by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the Fund
involved, having a balance of one Share at the
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<PAGE>
beginning of the period, dividing the net change in account value by the value
of the account at the beginning of the period to obtain the base period return,
and multiplying the base period return by (365/7). The net change in the value
of an account in each of the Funds includes the value of additional Shares
purchased with dividends from the original Share and dividends declared on both
the original Share and any such additional Shares, net of all fees that are
charged to all Shareholder accounts and to the particular series of Shares in
proportion to the length of the base period, other than nonrecurring account or
any sales charges. For any account fees that vary with the size of the account,
the amount of fees charged is computed with respect to the Fund's mean (or
median) account size. The capital changes to be excluded from the calculation of
the net change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. In addition, each Fund
may use effective compound yield quotations for its Shares computed by adding 1
to the unannualized base period return (calculated as described above), raising
the sums to a power equal to 365 divided by 7, and subtracting 1 from the
results.
From time to time, in advertisements, sales literature or in reports to
shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
The yields of the Taxable Funds may also be compared to the average yields
reported by the Bank Rate Monitor for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas. Advertisements, sales literature or reports to
shareholders may from time to time also include a discussion and analysis of
each Fund's performance, including without limitation, those factors, strategies
and techniques that, together with market conditions and events, materially
affected each Fund's performance.
Yield data as reported in national financial publications including, but
not limited to, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature, may also
be used in comparing the Funds' yields.
The current yields for the Funds' Shares may be obtained by calling (800)
446-1012. For the seven-day period ended March 31, 2000, the annualized yields
for Retail Shares of the Money Fund, Government Money Fund, Treasury Money Fund,
Tax-Exempt Money Fund and New York Tax-Exempt Money Fund were 5.59%, 5.77%,
5.33%, 3.35% and 3.09%, respectively, and the effective yields for Retail Shares
of such respective Funds were 5.74%, 5.94%, 5.47%, 3.41% and 3.14%.
The "tax-equivalent" yield of the Tax-Exempt Money Fund is computed by:
(a) dividing the portion of the yield (calculated as above) that is exempt from
federal income tax by one minus a stated federal income tax rate and (b) adding
that figure to that portion, if any of the yield that is not exempt from federal
income tax. Tax-equivalent yields assume the payment of federal income taxes at
a rate of 31%.
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<PAGE>
The "tax-equivalent" yield of the New York Tax-Exempt Money Fund is
computed by: (a) dividing the portion of the yield (calculated as above) that
is exempt from both federal and New York State income taxes by one minus a
stated combined federal and New York State income tax rate; (b) dividing the
portion of the yield (calculated as above) that is exempt from federal income
tax only by one minus a stated federal income tax rate; and (c) adding the
figures resulting from (a) and (b) above to that portion, if any, of the yield
that is not exempt from federal income tax. Tax-equivalent yields assume a
federal income tax rate of 31%, a New York State and New York City marginal
income tax rate of 10.21% and an overall tax rate taking into account the
federal tax deduction for state and local taxes paid of 38.04%.
Based on the foregoing calculation, the annualized tax-equivalent yield of
the Retail Shares of the Tax-Exempt Money Fund and the New York Tax-Exempt Money
Fund for the seven-day period ended March 31, 2000 were 4.94% and 5.07%.
CODE OF ETHICS
--------------
The Funds, U.S. Trust New York, U.S. Trust Company and the Distributor have
adopted codes of ethics that allow personnel subject to the codes to invest in
securities, including securities that may be purchased or held by the Funds.
MISCELLANEOUS
-------------
As used herein, "assets belonging to a Fund" means the consideration
received upon the issuance of Shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company involved not belonging to a particular portfolio of that Company.
In determining the net asset value of a Fund's Shares, assets belonging to the
Fund are charged with the direct liabilities in respect of that Fund and with a
share of the general liabilities of the Company involved which are normally
allocated in proportion to the relative asset values of the Company's portfolios
at the time of allocation. Subject to the provisions of the Companies'
Charters, determinations by the Boards of Directors as to the direct and
allocable liabilities, and the allocable portion of any general assets with
respect to a particular Fund, are conclusive.
As of July 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding Shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such Retail Shares.
As of July 7, 2000, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that owned beneficially or
of record 5% or more of the outstanding Shares of a Fund were as follows:
Treasury Money Fund: Longitude, Inc., 660 Madison Avenue, New York, New York
10021, 5.65%; New York Tax-Exempt Money Fund: Sara Wilford, c/o United States
------------------------------
Trust Company of New York, 114 West 47/th/ Street, New York, New York 10036,
6.25%; Government Money Fund: Sweetheart Cup Company, Inc., Coll. Ac., c/o
United States Trust Company of New York, 114 West 47/th/ Street, New York,
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<PAGE>
New York 10036, 15.77%; and Hillside Capital Incorporated, c/o United States
Trust Company of New York, 114 West 47th Street, New York, New York, 10036,
5.32%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies' Annual
Reports to Shareholders for the fiscal year ended March 31, 2000 (the "2000
Annual Reports") for the Funds are incorporated in this Statement of Additional
Information by reference. No other parts of the 2000 Annual Reports are
incorporated by reference herein. The financial statements included in the 2000
Annual Reports for the Funds have been audited by the Companies' independent
auditors, Ernst & Young LLP, whose reports thereon also appear in the 2000
Annual Reports and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 2000 Annual Reports may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
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APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard &Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished
A-1
<PAGE>
from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial
A-4
<PAGE>
or economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
-PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
-N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c)
A-6
<PAGE>
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
A-7
<PAGE>
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
-RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest. Issues
rated "BBB" are more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
A-9
<PAGE>
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
A-10
<PAGE>
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-11
<PAGE>
EXCELSIOR FUNDS, INC.
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information (the "SAI") is not a prospectus
but should be read in conjunction with the current prospectuses for the Short-
Term Government Securities, Intermediate-Term Managed Income and Managed Income
Funds of Excelsior Funds, Inc. and the Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt Funds of Excelsior Tax-
Exempt Funds, Inc. (individually, a "Fund" and collectively, the "Funds") dated
August 1, 2000 (the "Prospectuses"). Copies of the Prospectuses may be obtained
by writing Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc. c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by
calling (800) 446-1012. Capitalized terms not otherwise defined have the same
meaning as in the Prospectus.
The audited financial statements and related reports of Ernst & Young LLP,
independent auditors, contained in the annual reports to the Funds' shareholders
for the fiscal year ended March 31, 2000 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual
reports are incorporated herein by reference. Copies of the annual reports may
be obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY................................................. 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS................................ 1
Additional Investment Policies........................................ 1
Additional Information on Portfolio Instruments....................... 4
Investment Limitations................................................ 16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................. 21
Distributor........................................................... 21
Purchase of Shares.................................................... 21
Redemption Procedures................................................. 22
Other Redemption Information.......................................... 23
INVESTOR PROGRAMS.......................................................... 24
Systematic Withdrawal Plan............................................ 24
Exchange Privilege.................................................... 25
Retirement Plans...................................................... 25
Automatic Investment Program.......................................... 26
Additional Information................................................ 26
DESCRIPTION OF CAPITAL STOCK............................................... 26
MANAGEMENT OF THE FUNDS.................................................... 28
Directors and Officers................................................ 28
Investment Advisory and Administration Agreements..................... 33
Shareholder Organizations............................................. 39
Expenses.............................................................. 41
Custodian and Transfer Agent.......................................... 41
PORTFOLIO TRANSACTIONS..................................................... 42
PORTFOLIO VALUATION........................................................ 44
INDEPENDENT AUDITORS....................................................... 45
COUNSEL.................................................................... 45
ADDITIONAL INFORMATION CONCERNING TAXES.................................... 45
Generally............................................................. 45
PERFORMANCE AND YIELD INFORMATION.......................................... 47
Yields and Performance................................................ 47
</TABLE>
<PAGE>
<TABLE>
<S> <C>
CODE OF ETHICS............................................................ 52
MISCELLANEOUS............................................................. 53
FINANCIAL STATEMENTS...................................................... 53
APPENDIX A................................................................ A-1
</TABLE>
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. ("Excelsior Fund") and Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund" and collectively with Excelsior Fund,
the "Companies") are open-end, management investment companies. The Short-Term
Government Securities, Intermediate-Term Managed Income and Managed Income Funds
(collectively, the "Fixed-Income Funds") are separate series of Excelsior Fund.
The Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt and Long-Term
Tax-Exempt Funds (collectively, the "Tax-Exempt Funds") are separate series of
Excelsior Tax-Exempt Fund. Each Fund is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund offers
one class of shares, except that the Intermediate-Term Managed Income Fund also
offers Advisory Shares which are described in a separate SAI. Excelsior Fund and
Excelsior Tax-Exempt Fund were organized as Maryland corporations on August 2,
1984 and August 8, 1984, respectively. Prior to December 28, 1995, Excelsior
Fund and Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and
"UST Master Tax-Exempt Funds, Inc.," respectively.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectuses. The investment objective of each of the Funds may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined below). Except as expressly noted below, each Fund's investment policies
may be changed without shareholder approval.
For ease of reference, the various Funds are referred to as follows:
Short-Term Tax-Exempt Securities Fund as "ST Tax-Exempt Fund;" Intermediate-Term
Tax-Exempt Fund as "IT Tax-Exempt Fund;" Long-Term Tax-Exempt Fund as "LT Tax-
Exempt Fund;" Short-Term Government Securities Fund as "ST Government Fund;" and
Intermediate-Term Managed Income Fund as "IT Managed Income Fund."
Additional Investment Policies
------------------------------
Short-Term Government Securities Fund
-------------------------------------
Under normal circumstances, at least 65% of the ST Government Fund's
total assets will be invested in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
collateralized by such obligations. As a result, the interest income on such
investments generally should be exempt from state and local personal income
taxes in most states. In all states this tax exemption is passed through to the
Fund's shareholders.
-1-
<PAGE>
Intermediate-Term Managed Income and Managed Income Funds
---------------------------------------------------------
The IT Managed Income and Managed Income Funds may invest in the
following types of securities: corporate debt obligations such as bonds,
debentures, obligations convertible into common stocks and money market
instruments; preferred stocks; and obligations issued or guaranteed by the U.S.
government and its agencies or instrumentalities. The Funds are also permitted
to enter into repurchase agreements. The Funds may, from time to time, invest in
debt obligations issued by or on behalf of states, territories and possessions
of the United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Obligations"). The purchase of Municipal Obligations may be
advantageous when, as a result of prevailing economic, regulatory or other
circumstances, the performance of such securities, on a pre-tax basis, is
comparable to that of corporate or U.S. government debt obligations.
Under normal market conditions, at least 75% of the IT Managed Income
and Managed Income Funds' total assets will be invested in investment-grade debt
obligations rated within the three highest ratings of Standard & Poor's Ratings
Services ("S&P") or Moody's Investors Service, Inc. ("Moody's") (or in unrated
obligations considered to be of comparable credit quality by the Adviser) and in
U.S. government obligations and money market instruments of the types listed
below under "Additional Information on Portfolio Instruments - Money Market
Instruments." When, in the opinion of the Adviser, a defensive investment
posture is warranted, the Funds may invest temporarily and without limitation in
high quality, short-term money market instruments.
Unrated securities will be considered of investment grade if deemed
by the Adviser to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers of such securities are rated "Baa/BBB" or
better. It should be noted that obligations rated in the lowest of the top four
ratings ("Baa" by Moody's or "BBB" by S&P) are considered to have some
speculative characteristics and are more sensitive to economic change than
higher rated bonds.
The IT Managed Income and Managed Income Funds may invest up to 25% of
their respective total assets in: preferred stocks; dollar-denominated debt
obligations of foreign issuers, including foreign corporations and foreign
governments; and dollar-denominated debt obligations of U.S. companies issued
outside the United States. The Funds may also enter into foreign currency
exchange transactions for hedging purposes. The Funds may invest up to 10% and
25% of their respective total assets in obligations rated below the four highest
ratings of S&P or Moody's ("junk bonds") with no minimum rating required. The
Funds will not invest in common stocks, and any common stocks received through
conversion of convertible debt obligations will be sold in an orderly manner as
soon as possible.
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<PAGE>
Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt and Long-Term
----------------------------------------------------------------------------
Tax-Exempt Funds
----------------
The Tax-Exempt Funds will invest substantially all of their assets in
Municipal Obligations which are determined by the Adviser to present minimal
credit risks. As a matter of fundamental policy, except during temporary
defensive periods, each Fund will maintain at least 80% of its net assets in
Municipal Obligations. (This policy may not be changed with respect to a Fund
without the vote of the holders of a majority of its outstanding shares.)
However, from time to time on a temporary defensive basis due to market
conditions, each Fund may hold uninvested cash reserves or invest in taxable
obligations in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions may warrant. Uninvested cash reserves will not
earn income. Should a Fund invest in taxable obligations, it would purchase: (i)
obligations of the U.S. Treasury; (ii) obligations of agencies and
instrumentalities of the U.S. government; (iii) money market instruments such as
certificates of deposit, commercial paper, and bankers' acceptances; (iv)
repurchase agreements collateralized by U.S. government obligations or other
money market instruments; (v) municipal bond index and interest rate futures
contracts; or (vi) securities issued by other investment companies that invest
in high quality, short-term securities.
In seeking to achieve its investment objective, each Tax-Exempt Fund
may invest in "private activity bonds" (see "Additional Information on Portfolio
Instruments -- Municipal Obligations" below), the interest on which is treated
as a specific tax preference item under the federal alternative minimum tax.
Investments in such securities, however, will not exceed under normal market
conditions 20% of a Fund's total assets when added together with any taxable
investments held by that Fund.
The Municipal Obligations purchased by the Funds will consist of: (1)
bonds rated "BBB" or higher by S&P or by Fitch IBCA ("Fitch"), or "Baa" or
higher by Moody's, or, in certain instances, bonds with lower ratings if they
are determined by the Adviser to be comparable to BBB/Baa-rated issues; (2)
notes rated "MIG-3" or higher ("VMIG-3" or higher in the case of variable rate
notes) by Moody's, or "SP-3" or higher by S&P, or "F3" or higher by Fitch; and
(3) commercial paper rated "Prime-3" or higher by Moody's, or "A-3" or higher by
S&P, or "F3" or higher by Fitch. Securities rated "BBB" by S&P and Fitch or
"Baa" by Moody's are generally considered to be investment grade, although they
have speculative characteristics and are more sensitive to economic change than
higher rated securities. If not rated, securities purchased by the Funds will be
of comparable quality to the above ratings as determined by the Adviser under
the supervision of the Board of Directors. A discussion of Moody's, Fitch's and
S&P's rating categories is contained in Appendix A.
Although the Funds do not presently intend to do so on a regular
basis, they may invest more than 25% of their assets in Municipal Obligations
the interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
a Fund's assets are concentrated in Municipal Obligations payable from revenues
on similar projects, the Fund will be subject to the peculiar risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated.
-3-
<PAGE>
Additional Information on Portfolio Instruments
-----------------------------------------------
Municipal Obligations
---------------------
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Obligations" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.
The two principal classifications of Municipal Obligations which may
be held by the Tax-Exempt Funds are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as user
fees of the facility being financed.
The Tax-Exempt Funds' portfolios may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund--the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Funds.
The Tax-Exempt Funds may also purchase custodial receipts evidencing
the right to receive either the principal amount or the periodic interest
payments or both with respect to specific underlying Municipal Obligations. In
general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The Funds intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the limit described below under "Illiquid Securities." The Tax-Exempt
Funds will limit their investments in interest-only and principal-only Municipal
Obligations to 5% of their total assets.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the
-4-
<PAGE>
financial condition of the issuer, general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ratings of nationally recognized statistical rating
organizations ("NRSROs") such as Moody's and S&P described in Appendix A hereto
represent their opinion as to the quality of Municipal Obligations. It should be
emphasized that these ratings are general and are not absolute standards of
quality, and Municipal Obligations with the same maturity, interest rate, and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Obligations may
cease to be rated, or its rating may be reduced below the minimum rating
required for purchase by that Fund. The Adviser will consider such an event in
determining whether a Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multistate
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Funds are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.
Among other instruments, the Tax-Exempt Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, each Fund may invest in
-5-
<PAGE>
long-term tax-exempt instruments, such as municipal bonds and private activity
bonds, to the extent consistent with the maturity restrictions applicable to it.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Tax-
Exempt Funds nor the Adviser will review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions.
The IT Managed Income and Managed Income Funds may, when deemed
appropriate by the Adviser in light of the Funds' investment objectives, also
invest in Municipal Obligations. Although yields on Municipal Obligations can
generally be expected under normal market conditions to be lower than yields on
corporate and U.S. government obligations, from time to time municipal
securities have outperformed, on a total return basis, comparable corporate and
federal debt obligations as a result of prevailing economic, regulatory or other
circumstances. Dividends paid by the IT Managed Income and Managed Income Funds
that are derived from interest on municipal securities would be taxable to the
Funds' shareholders for federal income tax purposes.
Insured Municipal Obligations
-----------------------------
The Tax-Exempt Funds may purchase Municipal Obligations which are
insured as to timely payment of principal and interest at the time of purchase.
The insurance policies will usually be obtained by the issuer of the bond at the
time of its original issuance. Bonds of this type will be acquired only if at
the time of purchase they satisfy quality requirements generally applicable to
Municipal Obligations. Although insurance coverage for the Municipal Obligations
held by the Tax-Exempt Funds reduces credit risk by insuring that the Funds will
receive timely payment of principal and interest, it does not protect against
market fluctuations caused by changes in interest rates and other factors. Each
Tax-Exempt Fund may invest more than 25% of its net assets in Municipal
Obligations covered by insurance policies.
Repurchase Agreements
---------------------
Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). Each Fund will enter into repurchase agreements only
with financial institutions such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser. The Funds will not enter into repurchase
agreements with the Adviser or its affiliates. Repurchase agreements with
remaining maturities in excess of seven days will be considered illiquid
securities subject to the 10% limit described below under "Illiquid Securities."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose a
Fund to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the
-6-
<PAGE>
underlying securities were less than the repurchase price under the agreement.
Income on the repurchase agreements will be taxable.
The repurchase price under a repurchase agreement generally equals the
price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to repurchase agreements are held by
the Funds' custodian (or sub-custodian) or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered loans by a Fund under the
1940 Act.
Investment Company Securities
-----------------------------
The Funds may also invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by the Funds within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.
Each Fund may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be contained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the
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pricing mechanism for SPDRs is based on a basket of stocks. Disruptions in the
markets for the securities underlying SPDRs purchased or sold by the Funds could
result in losses on SPDRs.
Securities Lending
------------------
To increase return on their portfolio securities, the Fixed Income
Funds may lend their portfolio securities to broker/dealers pursuant to
agreements requiring the loans to be continuously secured by collateral equal at
all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. government,
its agencies or instrumentalities, or an irrevocable letter of credit issued by
a bank which meets the investment standards of a Fund, or any combination
thereof. Such loans will not be made if, as a result, the aggregate of all
outstanding loans of a Fund exceeds 30% of the value of its total assets. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. However, loans are made only to borrowers
deemed by the Adviser to be of good standing and when, in the Adviser's
judgment, the income to be earned from the loan justifies the attendant risks.
When the Fixed Income Funds lend their portfolio securities, they
continue to receive interest or dividends on the securities lent and may
simultaneously earn interest on the investment of the cash loan collateral,
which will be invested in readily marketable, high-quality, short-term
obligations. Although voting rights, or rights to consent, attendant to
securities lent pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by the pertinent Fund if a
material event affecting the investment is to occur.
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The Securities and Exchange Commission (the "SEC") views
reverse repurchase agreements as a form of borrowing. At the time a Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account liquid assets having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements involve the risk that the market
value of the securities sold by a Fund may decline below the repurchase price of
those securities.
Illiquid Securities
-------------------
No Fund will knowingly invest more than 10% of the value of its net
assets in securities that are illiquid. A security will be considered illiquid
if it may not be disposed of within seven days at approximately the value at
which the particular Fund has valued the security. Each Fund may purchase
securities which are not registered under the Securities Act of
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1933, as amended (the "1933 Act"), but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act. Any such
security will not be considered illiquid so long as it is determined by the
Adviser, acting under guidelines approved and monitored by the Boards, that an
adequate trading market exists for that security. This investment practice could
have the effect of increasing the level of illiquidity in a Fund during any
period that qualified institutional buyers are no longer interested in
purchasing these restricted securities.
Government Obligations
----------------------
The Funds may purchase government obligations which include
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the
U.S. government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Obligations of such instrumentalities will be
purchased only when the Adviser believes that the credit risk with respect to
the instrumentality is minimal.
Examples of the types of U.S. government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, the Farm Credit System Financial Assistance
Corporation, Federal Land Banks, the Federal Financing Bank, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, the Tennessee Valley Authority and Maritime
Administration.
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will
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<PAGE>
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. Because a Fund will set
aside cash or liquid assets to satisfy its purchase commitments in the manner
described, its liquidity and ability to manage its portfolio might be affected
in the event its forward commitments or commitments to purchase "when-issued"
securities ever exceeded 25% of the value of its assets.
It is expected that forward commitments and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Managed Income and IT Managed Income Funds and the Tax-Exempt
Funds may acquire "stand-by commitments" with respect to Municipal Obligations
held by them. Under a "stand-by commitment," a dealer or bank agrees to purchase
from a Fund, at the Fund's option, specified Municipal Obligations at a
specified price. The amount payable to a Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the Municipal
Obligations (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. "Stand-by commitments" are exercisable by a Fund at any time
before the maturity of the underlying Municipal Obligations, and may be sold,
transferred or assigned by the Fund only with the underlying instruments.
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<PAGE>
The Managed Income and IT Managed Income Funds and the Tax-Exempt
Funds expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for a "stand-by commitment" either separately in cash
or by paying a higher price for securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). Where a Fund has paid any consideration directly or indirectly for
a "stand-by commitment," its cost will be reflected as unrealized depreciation
for the period during which the commitment was held by the Fund.
The Managed Income and IT Managed Income Funds and the Tax-Exempt
Funds intend to enter into "stand-by commitments" only with banks and
broker/dealers which, in the Adviser's opinion, present minimal credit risks. In
evaluating the creditworthiness of the issuer of a "stand-by commitment," the
Adviser will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information. The Funds will acquire "stand-
by commitments" solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes. "Stand-by commitments"
acquired by a Fund will be valued at zero in determining the Fund's net asset
value.
Futures Contracts
-----------------
The Funds may invest in interest rate futures contracts and municipal
bond index futures contracts as a hedge against changes in market conditions. A
municipal bond index assigns values daily to the municipal bonds included in the
index based on the independent assessment of dealer-to-dealer municipal bond
brokers. A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make delivery of an amount equal to a
specified dollar amount multiplied by the difference between the municipal bond
index value on the last trading date of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities in the index is made. Any income from investments in futures
contracts will be taxable income of the Funds.
The Fund may enter into contracts for the future delivery of fixed-
income securities commonly known as interest rate futures contracts. Interest
rate futures contracts are similar to municipal bond index futures contracts
except that, instead of a municipal bond index, the "underlying commodity" is
represented by various types of fixed-income securities.
The Funds will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which they hold or intend to purchase where the transactions are intended to
reduce risks inherent in the management of the Funds. Each Fund may engage in
futures contracts only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the SEC. Each Fund currently intends to limit its
hedging transactions in futures contracts so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by the
Fund under the rules of the exchange on which the futures contract is traded
does not exceed 5% of the Fund's total assets, after taking into account any
unrealized profits and unrealized losses on the Fund's open contracts.
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<PAGE>
When investing in futures contracts, the Funds must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When a Fund takes a long position in a futures contract, it must maintain a
segregated account containing liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" a futures position
generally by entering into an offsetting position. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event of
adverse price movements, a Fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if a Fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. In addition, a Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on a Fund's
ability to effectively hedge.
Transactions by a Fund in futures contracts may subject the Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts and movements in the price of the instruments being hedged. In
addition, investments in futures may subject a Fund to losses due to
unanticipated market movements which are potentially unlimited. Further, there
is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, a Fund may realize a loss on a
futures transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements. In addition, in some
situations, if a Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss
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<PAGE>
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equiptment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Forward Currency Transactions
-----------------------------
The Managed Income and IT Managed Income Funds will conduct their
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange markets, or by entering into forward
currency contracts. A forward foreign currency contract involves an obligation
to purchase or sell a specific currency for a set price at a future date. In
this respect, forward currency contracts are similar to foreign currency futures
contracts; however, unlike futures contracts which are traded on recognized
commodities exchange, forward currency contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. Also, forward currency contracts usually involve
delivery of the currency involved instead of cash payment as in the case of
futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose of
transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions
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<PAGE>
denominated or quoted in that currency. The Funds will not speculate in foreign
currency exchange transactions. Transaction and position hedging will not be
limited to an overall percentage of a Fund's assets, but will be employed as
necessary to correspond to particular transactions or positions. A Fund may not
hedge its currency positions to an extent greater than the aggregate market
value (at the time of entering into the forward contract) of the securities held
in its portfolio denominated, quoted in, or currently convertible into that
particular currency. When the Funds engage in forward currency transactions,
certain asset segregation requirements must be satisfied to ensure that the use
of foreign currency transactions is unleveraged. When a Fund takes a long
position in a forward currency contract, it must maintain a segregated account
containing liquid assets equal to the purchase price of the contract, less any
margin or deposit. When a Fund takes a short position in a forward currency
contract, the Fund must maintain a segregated account containing liquid assets
in an amount equal to the market value of the currency underlying such contract
(less any margin or deposit), which amount must be at least equal to the market
price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" a forward currency position
generally by entering into an offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
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<PAGE>
Money Market Instruments
------------------------
"Money market instruments" that may be purchased by the Tax-Exempt
Funds and the IT Managed Income and Managed Income Funds in accordance with
their investment objectives and policies include, among other things, bank
obligations, commercial paper and corporate bonds with remaining maturities of
13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations acquired
by the IT Managed Income and Managed Income Funds may also include U.S. dollar-
denominated obligations of foreign branches of U.S. banks and obligations of
domestic branches of foreign banks. Investments in bank obligations of foreign
branches of domestic financial institutions or of domestic branches of foreign
banks are limited so that no more than 5% of the value of the Managed Income
Fund's total assets will be invested in obligations of any one foreign or
domestic branch and no more than 20% of the Fund's total assets at the time of
purchase will be invested in the aggregate in such obligations. Investments in
time deposits are limited to no more than 5% of the value of a Fund's total
assets at time of purchase.
Investments by the Fixed-Income Funds in commercial paper will consist
of issues that are rated "A-2" or better by S&P, "Prime-2" or better by Moody's,
or "F2" or better by Fitch. Investments by the Tax-Exempt Funds in commercial
paper will consist of issues that are rated "A-3" or better by S&P, "Prime-3" or
better by Moody's, or "F3" or better by Fitch. In addition, each Fund may
acquire unrated commercial paper that is determined by the Adviser at the time
of purchase to be of comparable quality to rated instruments that may be
acquired by the particular Fund.
Variable and Floating Rate Instruments
--------------------------------------
Securities purchased by the Tax-Exempt Funds may include variable and
floating rate instruments. The interest rates on such instruments are not fixed
and vary with changes in the particular interest rate benchmarks or indexes.
Unrated variable and floating rate instruments will be purchased by the Funds
based upon the Adviser's determination that their quality at the time of
purchase is comparable to at least the minimum ratings set forth on page 3. In
some cases a Fund may require that the issuer's obligation to pay the principal
be backed by an unconditional and irrevocable bank letter or line of credit,
guarantee or commitment to lend. Although there may be no active secondary
market with respect to a particular variable or floating rate instrument
purchased by a Fund, the Fund may (at any time or during specified intervals
within a prescribed period, depending upon the instrument involved) demand
payment in full of the principal and may resell the instrument to a third party.
The absence of an active secondary market, however, could make it difficult for
a Fund to dispose of a variable or floating rate instrument in the event the
issuer defaulted on its payment obligation or during periods when
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<PAGE>
the Fund is not entitled to exercise its demand rights. In such cases, the Fund
could suffer a loss with respect to the instrument.
Portfolio Turnover
------------------
Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with a
Fund's investment objective. Portfolio investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold the investments. A high rate
of portfolio turnover may involve correspondingly greater transaction costs,
which must be borne directly by a Fund and ultimately by its shareholders.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
High portfolio turnover may result in the realization of substantial net capital
gains. To the extent that net short-term gains are realized, any distributions
resulting from such gains are considered ordinary income for federal income tax
purposes. The portfolio turnover of the Intermediate-Term Managed Income Fund
decreased from 229% in 1999 to 122% in 2000; the portfolio turnover of the
Managed Income Fund decreased from 268% in 1999 to 112% in 2000; the portfolio
turnover of the Short-Term Tax-Exempt Securities Fund increased from 47% in 1999
to 130% in 2000. The decreases in the Intermediate-Term Managed Income and
Managed Income Funds occurred because of fewer investment opportunities in 2000.
The increase in the Short-Term Tax-Exempt Securities Fund occurred because the
portfolio was restructured to eliminate certain longer term instruments in favor
of shorter maturity instruments.
Investment Limitations
----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of a Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of such Company or such Fund, or (b) 67% or more of the shares of such
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of such Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
the Funds may be changed by the Companies' Boards of Directors without
shareholder approval.
The following investment limitations are fundamental with respect to
each Fund. No Fund may:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Tax-Exempt Funds' investment objectives, policies, and limitations may
be deemed to be underwriting; and except insofar as the Managed
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<PAGE>
Income Fund might be deemed to be an underwriter upon disposition of certain
portfolio securities acquired within the limitation on purchases of restricted
securities;
2. Purchase or sell real estate, except that each Tax-Exempt Fund may
invest in Municipal Obligations secured by real estate or interests therein, and
the Managed Income and IT Managed Income Funds may purchase securities of
issuers which deal in real estate and may purchase securities which are secured
by interests in real estate;
3. Issue any senior securities, except insofar as any borrowing by
each Fund in accordance with its investment limitations might be considered to
be the issuance of a senior security; provided that each Fund may enter into
futures contracts and futures options;
4. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing, provided that each Fund may enter into futures contracts and
futures options. (This borrowing provision is included solely to facilitate the
orderly sale of portfolio securities to accommodate abnormally heavy redemption
requests and is not for leverage purposes.) A Fund will not purchase portfolio
securities while borrowings in excess of 5% of its total assets are outstanding;
5. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) with respect to the IT Tax-Exempt and LT
Tax-Exempt Funds, there is no limitation with respect to domestic bank
obligations or securities issued or guaranteed by the United States; any state
or territory; any possession of the U.S. government; the District of Columbia;
or any of their authorities, agencies, instrumentalities, or political
subdivisions, (b) with respect to the Managed Income Fund, there is no
limitation with respect to securities issued or guaranteed by the U.S.
government or domestic bank obligations, (c) with respect to the ST Tax-Exempt
Fund, there is no limitation with respect to securities issued or guaranteed by
the United States; any state or territory; any possession of the U.S.
government; the District of Columbia; or any of their authorities, agencies,
instrumentalities, or political subdivisions, (d) with respect to the ST
Government and IT Managed Income Funds, there is no limitation with respect to
securities issued or guaranteed by the U.S. government and (e) with respect to
the Fixed Income Funds, neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy; and
6. Purchase securities of any one issuer, other than U.S. government
obligations, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that up
to 25% of the value of its total assets may be invested without regard to this
5% limitation.
-17-
<PAGE>
The following investment limitation is fundamental with respect to the
Fixed-Income Funds. Each Fixed-Income Fund may not:
7. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and (ii)
each Fund may lend portfolio securities in an amount not exceeding 30% of its
total assets.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds, but is an operating
policy with respect to the ST Tax-Exempt, ST Government and IT Managed Income
Funds. The Funds may not:
8. Purchase securities on margin, make short sales of securities, or
maintain a short position; provided that each Fund may enter into futures
contracts and futures options.
The following investment limitation is fundamental with respect to
each Tax-Exempt Fund. A Tax-Exempt Fund may not:
9. Make loans, except that each Tax-Exempt Fund may purchase or hold
debt obligations in accordance with its investment objective, policies, and
limitations.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt and LT Tax-Exempt Funds, but is an operating policy with respect
to the ST Tax-Exempt Fund. A Tax-Exempt Fund may not:
10. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that a Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Managed Income and ST Government Funds. A Fixed-Income Fund may not:
11. Invest in companies for the purpose of exercising management or
control;
12. Purchase foreign securities; provided that subject to the limit
described below, the IT Managed Income and Managed Income Funds may purchase (a)
dollar-denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
-18-
<PAGE>
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and
13. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt, LT
Tax-Exempt and Managed Income Funds may not:
14. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that each Fund may enter into futures contracts and futures
options; and
15. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Funds may
enter into futures contracts and futures options.
The following investment limitation is fundamental with respect to the
ST Tax-Exempt, ST Government and IT Managed Income Funds. The ST Tax-Exempt, ST
Government and IT Managed Income Funds may not:
16. Purchase or sell commodities or commodity futures contracts, or
invest in oil, gas, or mineral exploration or development programs; provided
that the Funds may enter into futures contracts and futures options.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds. Each of the IT Tax-Exempt and LT Tax-
Exempt Funds may not:
17. Knowingly invest more than 10% of the value of its total assets in
securities which may be illiquid in light of legal or contractual restrictions
on resale or the absence of readily available market quotations; and
18. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.
The following investment limitations are fundamental with respect to
the Managed Income Fund. The Managed Income Fund may not:
19. Knowingly invest more than 10% of the value of its total assets in
illiquid securities, including repurchase agreements with remaining maturities
in excess of seven days, restricted securities, and other securities for which
market quotations are not readily available;
-19-
<PAGE>
20. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years; and
21. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks if immediately after such
purchase (i) more than 5% of the value of its total assets would be invested in
obligations of any one foreign branch of the financial institution or domestic
branch of a foreign bank, or (ii) more than 20% of its total assets would be
invested in foreign branches of financial institutions or in domestic branches
of foreign banks.
* * *
In addition to the investment limitations described above, as a matter
of fundamental policy for each Fund, which may not be changed without the vote
of the holders of a majority of the Fund's outstanding shares, a Fund may not
invest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.
The Managed Income, IT Tax-Exempt and LT Tax-Exempt Funds will not
invest more than 25% of the value of their respective total assets in domestic
bank obligations.
In Investment Limitation No. 6 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the United States government, its agencies or
instrumentalities (including securities backed by the full faith and credit of
the United States) are deemed to be U.S. government obligations.
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts. The Funds do not
currently intend to invest in real estate investment trusts.
In addition to the above investment limitations, Excelsior Fund
currently intends to limit the IT Managed Income and Managed Income Funds'
investments in warrants so that, valued at the lower of cost or market value,
they do not exceed 5% of a Fund's net assets. For the purpose of this
limitation, warrants acquired by the IT Managed Income or Managed Income Fund in
units or attached to securities will be deemed to be without value.
The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.
-20-
<PAGE>
The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities on
margin, short sales of securities and the maintenance of a short position; the
issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
-----------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Companies' sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Purchase of Shares
------------------
Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Companies' sub-transfer
-21-
<PAGE>
agent or by an authorized broker or designated intermediary. The Distributor has
established several procedures for purchasing shares in order to accommodate
different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Companies. A
Shareholder Organization may elect to hold of record shares for its Customers
and to record beneficial ownership of shares on the account statements provided
by it to its Customers. If it does so, it is the Shareholder Organization's
responsibility to transmit to the Distributor all purchase requests for its
Customers and to transmit, on a timely basis, payment for such requests to Chase
Global Funds Services Company ("CGFSC"), the Funds' sub-transfer agent, in
accordance with the procedures agreed to by the Shareholder Organization and the
Distributor. Confirmations of all such Customer purchases (and redemptions)
will be sent by CGFSC to the particular Shareholder Organization. As an
alternative, a Shareholder Organization may elect to establish its Customers'
accounts of record with CGFSC. In this event, even if the Shareholder
Organization continues to place its Customers' purchase (and redemption)
requests with the Funds, CGFSC will send confirmations of such transactions and
periodic account statements directly to the shareholders of record. Shares in
the Funds bear the expense of fees payable to Shareholder Organizations for such
services. See "Shareholder Organizations."
Redemption Procedures
---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Companies, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in
-22-
<PAGE>
connection with such redemptions. Such Investors should contact their registered
investment adviser or certified financial planner for further information on
transaction fees. Investors may redeem all or part of their shares in accordance
with any of the procedures described below (these procedures also apply to
Customers of Shareholder Organizations for whom individual accounts have been
established with CGFSC).
As discussed in the Prospectus, a redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
----------------------------
The Companies may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
-23-
<PAGE>
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Each Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Each Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.
Under certain circumstances, the Companies may, at their discretion,
accept securities as payment for shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a
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<PAGE>
program of systematic investing in a Fund while at the same time participating
in the Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and procedures and fees relating to, the Systematic Withdrawal
Plan directly from their Shareholder Organizations.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Companies or for Shares of Excelsior Institutional Trust. An exchange involves a
redemption of all or a portion of the shares of Excelsior Institutional Trust.
An exchange involves a redemption of all or a portion of the shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio.
The redemption will be made at the per share net asset value of the shares being
redeemed next determined after the exchange request is received in good order.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares next determined after receipt of the exchange
request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
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<PAGE>
. Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and
their employees; and
. Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase
shares of the Funds pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
Automatic Investment Program
----------------------------
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using dollar cost averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find dollar cost averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Companies may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the dollar cost averaging method on
his own initiative or through other entities.
Additional Information
----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of common stock, $.001 par
value per share; and Excelsior Tax-Exempt Fund's Charter authorizes its Board of
Directors to issue up to fourteen billion full and fractional shares of common
stock, $.001 par value per share. Both Charters authorize the respective Boards
of Directors to classify or reclassify any unissued shares of the respective
Companies into one or more additional classes or series by setting or changing
in any one or
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<PAGE>
more respects their respective preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the particular Company's Board of
Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued for
payment as described in the Prospectuses, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, shareholders
of that Fund are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the portfolios of the Company involved, of any general assets of
that Company not belonging to any particular portfolio of that Company which are
available for distribution. In the event of a liquidation or dissolution of
either Company, shareholders of such Company will be entitled to the same
distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of a
Company's outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection
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<PAGE>
therewith, to cause all outstanding shares to be redeemed at their net asset
value; or (c) combine the assets belonging to a Fund with the assets belonging
to another portfolio of the Company involved, if the Board of Directors
reasonably determines that such combination will not have a material adverse
effect on shareholders of any portfolio participating in such combination, and,
in connection therewith, to cause all outstanding shares of any portfolio to be
redeemed at their net asset value or converted into shares of another class of
the Company's capital stock at net asset value. The exercise of such authority
by the Boards of Directors will be subject to the provisions of the 1940 Act,
and the Boards of Directors will not take any action described in this paragraph
unless the proposed action has been disclosed in writing to the particular
Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Companies' Common Stock (or of the shares of a Fund voting separately as
a class) in connection with any corporate action, unless otherwise provided by
law (for example, by Rule 18f-2, discussed above) or by the Companies' Charters,
the Companies may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the particular
Company voting without regard to class.
Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued in fractional shares.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The business and affairs of the Funds are managed under the direction
of the Companies' Boards of Directors. The directors and executive officers of
the Companies, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
---------------- ------------- -----------------------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards (since 1997),
238 June Road President and Treasurer and President, Treasurer and Director (since
Stamford, CT 06903 1995) of the Companies; Chairman of the Board
Age: 69 (since 1997), and President, Treasurer and
Trustee (since 1995) of Excelsior Funds and
Institutional Trust; Vice Chairman of U.S.
Trust Corporation and U.S. Trust New York (from
February 1990 until September 1995); and
Chairman, U.S. Trust Company (from March 1993
to May 1997).
</TABLE>
____________________
/1/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-28-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
---------------- ------------- -----------------------------------
<S> <C> <C>
Rodman L. Drake Director Director of the Companies (since 1996); Trustee
Continuation Investments Group, of Excelsior Institutional Trust and Excelsior
Inc. Funds (since 1994); Director, Parsons
1251 Avenue of the Americas, Brinkerhoff, Inc. (engineering firm) (since
9/th/ Floor 1995); President, Continuation Investments
New York, NY 10020 Group, Inc. (since 1997); President, Mandrake
Age: 57 Group (investment and consulting firm)
(1994-1997); Chairman, MetroCashcard
International, Inc. (since 1999); Director,
Hotelivision, Inc. (since 1999); Director,
Alliance Group Services, Inc. (since 1998);
Director, Hyperion Total Return Fund, Inc. and
three other funds for which Hyperion Capital
Management, Inc. serves as investment adviser
(since 1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993 to 1996);
Director, The Latin America Smaller Companies
Fund, Inc. (from 1993 to 1998); Member of
Advisory Board, Argentina Private Equity Fund
L.P. (from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and Director,
Mueller Industries, Inc. (from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of the Companies (since
913 Franklin Lake Road 1984); Director of UST Master Variable Series,
Franklin Lakes, NJ 07417 Inc. (from 1994 to June 1997); and Trustee of
Age: 75
Excelsior Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable Series,
Charlottesville, VA 22901-7726 Inc. (from 1994 to June 1997); Trustee of
Age: 79 Excelsior Institutional Trust (since 1995);
Director, Deutsche Bank Financial, Inc. (since
1989); Director, The Harbus Corporation (since
1951); and Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
---------------- ------------- -----------------------------------
<S> <C> <C>
Morrill Melton Hall, Jr. Director Director of the Companies (since July 30, 2000); Trustee
Comprehensive Health Services, Inc. of Excelsior Institutional Trust (since July 30, 2000);
8229 Boone Blvd., Suite 700 Chief Executive Officer, Comprehensive Health Services, Inc.
Vienna, VA 22182 (health care management and administration).
Age: 55
Jonathan Piel Director Director of the Companies (since 1996); Trustee
558 E. 87/th/ Street of Excelsior Institutional Trust and Excelsior
New York, NY 10128 Funds (since 1994); Vice President and Editor,
Age: 61 Scientific American, Inc. (from 1986 to 1994);
Director, Group for The South Fork,
Bridgehampton, New York (since 1993); and
Member, Advisory Committee, Knight Journalism
Fellowships, Massachusetts Institute of
Technology (since 1984).
Robert A. Robinson Director Director of the Companies (since 1987);
Church Pension Group Director of UST Master Variable Series, Inc.
445 Fifth Avenue (from 1994 to June 1997); Trustee of Excelsior
New York, NY 10016 Institutional Trust (since 1995); President
Age: 74
Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and Director of
its wholly owned subsidiaries -- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse
Publishing Co. (1974-1998); Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1982);
and Director, Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of the Companies (since
26549 Pine Meadows Drive 1985); Chairman of the Board of the Companies
Spring Hill, FL 34606 (1991-1997) and Excelsior Institutional Trust
Age: 74 (1996-1997); President and Treasurer of the
Companies (1994-1997) and Excelsior
Institutional Trust (1996-1997); Chairman of
the Board, President and Treasurer of UST
Master Variable Series, Inc. (1994-1997); and
Trustee of Excelsior Institutional Trust (since
1995).
</TABLE>
______________________________
/2/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-30-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
---------------- ------------- -----------------------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 39
Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 33
Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services
Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company
(from September 1995 to November 1996); Fund
Administrator, Chase Global Funds Services
Company (from February 1993 to September 1995).
</TABLE>
-31-
<PAGE>
Each director receives an annual fee of $9,000 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a per-Company meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses incurred in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. In addition,
Messrs. Drake, Piel and Robinson each receive $2,000 per annum for their
services on the Nominating Committee of Excelsior Funds, Inc. Drinker Biddle &
Reath LLP, of which Messrs. McConnel and Malloy are partners, receives legal
fees as counsel to the Companies. The employees of CGFSC do not receive any
compensation from the Companies for acting as officers of the Companies. No
person who is currently an officer, director or employee of the Adviser serves
as an officer, director or employee of the Companies. As of July 7, 2000, the
directors and officers of each Company as a group owned beneficially less than
1% of the outstanding shares of each fund of each Company, and less than 1% of
the outstanding shares of all funds of each Company in the aggregate.
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal year.
-32-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Accrued as Annual from the Company
Aggregate Part of Benefits and Fund
Name of Compensation from Fund Upon Complex* Paid
Person/Position the Companies Expenses Retirement to Directors
--------------- ------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Donald L. Campbell*** $18,000 None None $22,000 (3)**
Director
Rodman L. Drake $31,000 None None $38,750 (4)**
Director
Joseph H. Dugan $33,000 None None $38,250 (3)**
Director
Wolfe J. Frankl $30,000 None None $35,000 (3)**
Director
Jonathan Piel $34,000 None None $42,000 (4)**
Director
Robert A. Robinson $34,000 None None $39,500 (3)**
Director
Alfred C. Tannachion $33,000 None None $38,250 (3)**
Director
Frederick S. Wonham $43,000 None None $52,000 (4)**
Chairman of the Board,
President and Treasurer
</TABLE>
____________________
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund,
Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.
Investment Advisory and Administration Agreements
-------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectuses. The Adviser has also agreed to pay
-33-
<PAGE>
all expenses incurred by it in connection with its activities under the
respective agreements other than the cost of securities, including brokerage
commissions, if any, purchased for the Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Funds pursuant to an advisory agreement substantially similar to
the Investment Advisory Agreement currently in effect for the Funds.
For the services provided and expenses assumed pursuant to its
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly at the annual rate of .30% of the average daily
net assets of the ST Government and ST Tax-Exempt Funds; .35% of the average
daily net assets of the IT Managed Income and IT Tax-Exempt Funds; .50% of the
average daily net assets of the LT Tax-Exempt Fund; and .75% of the average
daily net assets of the Managed Income Fund.
From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to them by a Fund, which waiver may be terminated
at any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the
particular Company paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Short-Term Government Fund $ 134,285 $ 98,059 $ 72,860
Intermediate-Term Managed $ 405,484 $ 317,118 $ 260,708
Income Fund
Managed Income Fund $1,340,412 $1,495,928 $1,203,851
Short-Term Tax-Exempt $ 105,368 $ 92,164 $ 99,010
Securities Fund
Intermediate-Term $ 859,668 $ 844,392 $ 746,025
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $ 657,856 $ 690,785 $ 545,298
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for certain funds.
During the periods stated, these waivers reduced advisory fees by the following:
-34-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------- ------------------- ----------------------
<S> <C> <C> <C>
Short-Term Government Fund $ 46,764 $ 40,855 $ 21,549
Intermediate-Term Managed $102,520 $ 74,201 $ 42,260
Income Fund
Managed Income Fund $ 59,713 $ 64,413 $243,873
Short-Term Tax-Exempt $ 31,657 $ 28,715 $ 24,358
Securities Fund
Intermediate-Term $213,990 $186,350 $133,635
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $107,456 $150,919 $ 89,459
</TABLE>
The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreement to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
-35-
<PAGE>
CGFSC, Federated Services Company, an affiliate of the Distributor,
and U.S. Trust Company (together, the "Administrators") serve as the Companies'
administrators and provide the Funds with general administrative and operational
assistance. Until July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as the Companies' administrator. On
July 31, 2000, Federated Services Company assumed all of its subsidiary's rights
and obligations under the Administration Agreement. Under the Administration
Agreements, the Administrators have agreed to maintain office facilities for the
Funds, furnish the Funds with statistical and research data, clerical,
accounting and bookkeeping services, and certain other services required by the
Funds, and to compute the net asset value, net income, "exempt interest
dividends" and realized capital gains or losses, if any, of the respective
Funds. The Administrators prepare semiannual reports to the SEC, prepare
federal and state tax returns, prepare filings with state securities
commissions, arrange for and bear the cost of processing share purchase and
redemption orders, maintain the Funds' financial accounts and records, and
generally assist in the Funds' operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company, and U.S. Trust New York served as the
Funds' administrators pursuant to an administrative agreement substantially
similar to the Administration Agreement currently in effect for the Funds.
The Administrators also provide administrative services to the other
investment portfolios of the Companies and to all of the investment portfolios
of Excelsior Institutional Trust which are also advised by U.S. Trust and its
affiliates and distributed by the Distributor. For services provided to all
portfolios of the Companies and Excelsior Institutional Trust (except for the
international portfolios of Excelsior Fund and Excelsior Institutional Trust),
the Administrators are entitled jointly to fees, computed daily and paid
monthly, based on the combined aggregate average daily net assets of the three
companies (excluding the international portfolios of Excelsior Fund and
Excelsior Institutional Trust) as follows:
Combined Aggregate Average Daily
Net Assets of Excelsior Tax-Exempt Fund,
Excelsior Fund and Excelsior Institutional Trust
(excluding the international portfolios of
Excelsior Fund and Excelsior Institutional Trust)
------------------------------------------------
Annual Fee
----------
First $200 million....................... 0.200%
Next $200 million........................ 0.175%
Over $400 million........................ 0.150%
Administration fees payable to the Administrators by each portfolio of
the Companies and Excelsior Institutional Trust are allocated in proportion to
their relative average daily net assets at the time of determination. From time
to time, the Administrators may
-36-
<PAGE>
voluntarily waive all or a portion of the administration fee payable to them by
a Fund, which waiver may be terminated at any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------- ------------------- ---------------------
<S> <C> <C> <C>
Short-Term Government Fund $ 91,152 $ 70,684 $ 48,138
Intermediate-Term Managed $220,613 $170,673 $132,050
Income Fund
Managed Income Fund $327,936 $316,445 $294,955
Short-Term Tax-Exempt $ 69,463 $ 61,646 $ 62,813
Securities Fund
Intermediate-Term $465,818 $449,336 $383,863
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $219,829 $243,351 $189,687
</TABLE>
-37-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived administration fees as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------- ------------------- ---------------------
<S> <C> <C> <C>
Short-Term Government Fund $ 674 $ 162 $ 11
Intermediate-Term Managed $ 340 $ 389 $ 390
Income Fund
Managed Income Fund $ 184 $ 1,864 $ 381
Short-Term Tax-Exempt $ 76 $ 3 $ 104
Securities Fund
Intermediate-Term $ 1,376 $ 1,245 $ 674
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $13,169 $14,210 $4,549
</TABLE>
-38-
<PAGE>
Shareholder Organizations
-------------------------
The Companies have entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a)
acting as recordholder of shares; (b) assisting in processing purchase, exchange
and redemption transactions; (c) transmitting and receiving funds in connection
with Customer orders to purchase, exchange or redeem shares; (d) providing
periodic statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Companies to Customers;
and (g) providing or arranging for the provision of other related services. It
is the responsibility of Shareholder Organizations to advise Customers of any
fees that they may charge in connection with a Customer's investment.
The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the
Companies' arrangements with Shareholder Organizations are in effect, the
selection and nomination of the members of the Companies' Boards of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Companies
will be committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the particular Company made
payments to Shareholder Organizations in the following amounts:
-39-
<PAGE>
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------
<S> <C> <C>
Short-Term Government Fund $ 47,456 $ 45,558
Intermediate-Term Managed $102,860 $101,668
Income Fund
Managed Income Fund $383,171 $ 58,039
Short-Term Tax-Exempt $ 31,733 $ 31,544
Securities Fund
Intermediate-Term Tax-Exempt $215,366 $206,133
Fund
Long-Term Tax-Exempt Fund $120,625 $ 61,055
</TABLE>
For the fiscal year ended March 31, 1999, the particular Company made
payments to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------
<S> <C> <C>
Short-Term Government Fund $ 41,017 $ 40,538
Intermediate-Term Managed $ 74,590 $ 73,338
Income Fund
Managed Income Fund $ 66,277 $ 64,528
Short-Term Tax-Exempt $ 28,718 $ 28,709
Securities Fund
Intermediate-Term Tax-Exempt $187,595 $182,945
Fund
Long-Term Tax-Exempt Fund $165,129 $114,441
</TABLE>
-40-
<PAGE>
For the fiscal year ended March 31, 1998, the particular Company made
payments to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
Short-Term Government Fund $ 19,835 $ 19,800
Intermediate-Term Managed $ 42,650 $ 41,041
Income Fund
Managed Income Fund $ 51,215 $ 48,468
Short-Term Tax-Exempt $ 24,462 $ 24,157
Securities Fund
Intermediate-Term Tax-Exempt $134,309 $131,684
Fund
Long-Term Tax-Exempt Fund $ 94,008 $ 78,373
</TABLE>
Expenses
--------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include:
taxes; interest; fees (including fees paid to the Companies' directors and
officers who are not affiliated with the Distributor or the Administrators); SEC
fees; state securities qualification fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; cost of independent pricing
service; costs of shareholder reports and meetings; and any extraordinary
expenses. The Funds also pay for any brokerage fees and commissions in
connection with the purchase of portfolio securities.
Custodian and Transfer Agent
----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under
the Custodian Agreements, Chase has agreed to: (i) maintain a separate account
or accounts in the name of the Funds; (ii) make receipts and disbursements of
money on behalf of the Funds; (iii) collect and receive income and other
payments and distributions on account of the Funds' portfolio securities; (iv)
respond to correspondence from securities brokers and others relating to its
duties; (v) maintain certain financial accounts and records; and (vi) make
periodic reports to each Company's Board of Directors concerning the Funds'
operations. Chase may, at its own
-41-
<PAGE>
expense, open and maintain custody accounts with respect to the Funds with other
banks or trust companies, provided that Chase shall remain liable for the
performance of all its custodial duties under the Custodian Agreements,
notwithstanding any delegation. Communications to the custodian should be
directed to Chase, Mutual Funds Service Division, 3 Chase MetroTech Center,
8/th/ Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for their meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
each Company's Board of Directors concerning the Funds' operations. For its
transfer agency, dividend-disbursing, and subaccounting services, U.S. Trust New
York is entitled to receive $15.00 per annum per account and subaccount. In
addition, U.S. Trust New York is entitled to be reimbursed for its out-of-pocket
expenses for the cost of forms, postage, processing purchase and redemption
orders, handling of proxies, and other similar expenses in connection with the
above services. U.S. Trust New York is located at 114 W. 47/th/ Street, New
York, New York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreements, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Companies for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of all portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other investment companies with similar
investment objectives and policies. However, since brokerage commissions are
not normally paid on instruments purchased by the Funds, portfolio turnover is
not expected to have a material effect on the net income of any of the Funds.
The
-42-
<PAGE>
Funds' portfolio turnover rates may also be affected by cash requirements for
redemptions of shares and by regulatory provisions which enable the Funds to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. See "Financial Highlights" in the
Prospectuses for the Funds' portfolio turnover rates.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
With respect to over-the-counter transactions, the Funds, where possible, will
deal directly with dealers who make a market in the securities involved, except
in those situations where better prices and execution are available elsewhere.
The Investment Advisory Agreements between the Companies and the
Adviser provide that, in executing portfolio transactions and selecting brokers
or dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Companies, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Companies'
Boards of Directors from time to time with respect to the extent and
continuation of the policy, to cause the Funds to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser to the accounts as to which it exercises
investment discretion. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fee payable by the Funds. Such information may
be useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Adviser, the Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
-43-
<PAGE>
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of the Funds and
another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Funds and such other
investment company or common trust fund. In some instances, this investment
procedure may adversely affect the price paid or received by the Funds or the
size of the position obtained by the Funds. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Funds with
those to be sold or purchased for other investment companies or common trust
funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, the Managed Income Fund held a collateralized mortgage
obligation issued by Morgan Stanley Capital with a principal amount of
$5,000,000; a corporate bond issued by Lehman Brothers Holdings with a principal
amount of $3,000,000; and a corporate bond issued by Morgan Stanley Dean Witter
& Co. with a principal amount of $5,000,000. As of March 31, 2000, the
Intermediate-Term Managed Income Fund held a corporate bond issued by Morgan
Stanley Dean Witter & Co. with a principal amount of $4,000,000; a
collateralized mortgage obligation issued by Morgan Stanley Capital with a
principal amount of $2,964,162; and a collateralized mortgage obligation issued
by PaineWebber Mortgage Acceptance Corp. with a principal amount of $2,200,000.
PORTFOLIO VALUATION
-------------------
Assets in the Funds which are traded on a recognized stock exchange
are valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. A futures contract is valued at the last sales price
quoted on the principal exchange or board of trade on which such contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices. Restricted securities and securities or other assets for which market
quotations are not readily available are valued at fair value pursuant to
guidelines adopted by the Companies' Boards of Directors. Absent unusual
circumstances, portfolio securities maturing in 60 days or less are normally
valued at amortized cost. The net asset value of shares in the Funds will
fluctuate as the market value of their portfolio securities changes in response
to changing market rates of interest and other factors.
Portfolio securities held by the IT Managed Income and Managed Income
Funds which are primarily traded on foreign securities exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an event subsequent to the time when value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors under the
direction of the Boards of Directors. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange determined to
be the primary market for such security. Investments in foreign debt securities
having a maturity of 60 days or less are valued based upon the amortized cost
method. All other foreign securities are valued at the last current bid
quotation if market quotations are available, or at fair value as determined in
-44-
<PAGE>
accordance with guidelines adopted by the Boards of Directors. For valuation
purposes, quotations of foreign securities in foreign currency are converted to
U.S. dollars equivalent at the prevailing market rate on the day of conversion.
Some of the securities acquired by the Funds may be traded on foreign exchanges
or over-the-counter markets on days which are not Business Days. In such cases,
the net asset value of the shares may be significantly affected on days when
investors can neither purchase nor redeem a Fund's shares.
The Administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
portfolio securities in the Funds where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations so established will be reviewed by the
Administrators under the general supervision of the Boards of Directors.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116 serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectuses and the financial statements for the fiscal year
ended March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103,
is counsel to the Companies.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
---------
For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to qualify as a regulated
investment company. Such qualification generally relieves a Fund of liability
for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, the Fund would be subject to federal tax
treatment afforded regulated investment companies, the Fund would be subject to
federal tax on all of its taxable income at regular corporate rates, without any
deduction for distributions to shareholders. In such event, dividend
distributions would be taxable as ordinary income to shareholders to the extent
of such Fund's current and accumulated earnings and profits and would be
eligible for the dividends received deduction in the case of corporate
shareholders. Moreover, if a Fund were to fail to make sufficient distributions
in year, the Fund would be subject to corporate income taxes and/or
-45-
<PAGE>
excise taxes in respect of the shortfall or, if the shortfall is large enough,
the Fund could be disqualified as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute an amount equal to specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends or gross proceeds realized upon sale paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."
The Tax-Exempt Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Tax-Exempt Funds would not be suitable for tax-exempt institutions or for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Tax-Exempt Funds' dividends being tax-exempt, but such dividends would be
ultimately taxable to the beneficiaries when distributed to them. In addition,
the Tax-Exempt Funds may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under the Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. "Related persons"
include certain related natural persons, affiliated corporations, a partnership
and its partners and an S corporation and its shareholders.
In order for a Tax-Exempt Fund to pay exempt-interest dividends for any
taxable year, at least 50% of the aggregate value of such Fund's portfolio must
consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, each of the
Tax-Exempt Funds will notify its shareholders of the portion of the dividends
paid by that Fund which constitutes an exempt-interest dividend with respect to
such taxable year. However, the aggregate amount of dividends so designated by
that Fund cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by that Fund during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. The percentage of total dividends paid by each of the Tax-Exempt Funds
with respect to any taxable year which qualifies as exempt-interest dividends
-46-
<PAGE>
will be the same for all shareholders receiving dividends from that Tax-Exempt
Fund for such year.
Generally, if a shareholder holds Tax-Exempt Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six-month holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation. Share owners may also be
subject to state and local taxes on distributions and redemptions. State income
taxes may not apply however to the portions of each Fund's distributions, if
any, that are attributable to interest on federal securities or interest on
securities of the particular state. For example, interest earned on the New
York Intermediate-Term Tax-Exempt Fund will generally be exempt from federal,
New York State and New York City taxes; and interest earned on the California
Tax-Exempt Income Fund will generally be exempt from federal and California
taxes. Shareowners should consult their tax advisers regarding the tax status
of distributions in their state and locality.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
Yields and Performance
----------------------
The Funds may advertise the standardized effective 30-day (or one
month) yields calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for each Fund according
to the following formula:
a-b
Yield = 2 [(-------- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that were
entitled to receive dividends.
-47-
<PAGE>
d = maximum offering price per share on the last day of
the period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), each of the Funds computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. Each of
the Funds calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by each of the Funds to all shareholder accounts and
to the particular series of shares in proportion to the length of the base
period and that Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per share (variable "d" in
the formula).
Based on the foregoing calculations, the effective yields for shares
of the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the 30-day period ended March 31, 2000 were
4.04%, 4.54%, 4.81%, 6.14%, 6.57% and 6.14%, respectively.
The "tax-equivalent" yield of the ST Tax-Exempt, IT Tax-Exempt and LT
Tax-Exempt Funds is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate and (b) adding that figure to that portion, if
any, of the yield that is not exempt from federal income tax. Tax-equivalent
yields assume the payment of federal income taxes at a rate of 31%. Based on
the foregoing calculations, the tax-equivalent yields of the ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds for the 30-day period ended March 31, 2000
were 5.86%, 6.58% and 6.97%, respectively.
Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial
-48-
<PAGE>
amount invested to the ending redeemable value of such investment according to
the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1,
5 or 10 year (or other) periods at the end of
the applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund may also advertise the "aggregate total return" for its
shares, which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the average annual total returns
for each Fund for the fiscal year ended March 31, 2000 and the average annual
total returns for the 5-year and 10-year periods ended March 31, 2000, were as
follows:
-49-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
For the Year For the 5 Years For the 10 Years
Ended 3/31/00 Ended 3/31/00 Ended 3/31/00
----------------- ------------------- --------------------
<S> <C> <C> <C>
ST Tax-Exempt Fund* 1.39% 3.96% N/A
IT Tax Exempt Fund (0.58)% 5.27% 6.33%
LT Tax-Exempt Fund (4.01)% 5.54% 7.61%
ST Government Fund* 3.02% 5.39% N/A
IT Managed Income Fund* 0.59% 6.38% N/A
Managed Income Fund 0.72% 6.78% 7.84%
</TABLE>
* Commenced operations on December 31, 1992.
Based on the foregoing calculations, the aggregate annual total
returns for each Fund for the 5-year, 10-year and since inception periods ended
March 31, 2000, were as follows:
-50-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annual Total Returns
For the 5 Years For the 10 Years Since Inception
Ended 3/31/00 Ended 3/31/00 Period Ended 3/31/00
------------------- -------------------- ------------------------
<S> <C> <C> <C>
ST Tax-Exempt Fund* 21.46% N/A 30.99%
IT Tax-Exempt Fund 29.30% 84.77% 170.40%
LT Tax-Exempt Fund 30.92% 108.15% 246.85%
ST Government Fund * 30.10% N/A 40.92%
IT Managed Income Fund* 36.28% N/A 49.22%
Managed Income Fund 38.89% 112.90% 253.60%
</TABLE>
* Commenced operations on December 31, 1992.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as Money Magazine, Forbes, Barron's, The Wall Street
----- -------- ------ -------- --- ---- ------
Journal and
-------
-51-
<PAGE>
The New York Times, or in publications of a local or regional nature, may also
--- --- ---- -----
be used in comparing the performance of a Fund. Advertisements, sales literature
or reports to shareholders may from time to time also include a discussion and
analysis of each Fund's performance, including without limitation, those
factors, strategies and technologies that together with market conditions and
events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation's of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisement, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communicators may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Funds with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.
CODE OF ETHICS
--------------
The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics which allow for personnel subject to the codes to
invest in securities including securities that may be purchased or held by the
Funds.
-52-
<PAGE>
MISCELLANEOUS
-------------
As used herein, "assets allocable to a Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company involved not belonging to a particular portfolio of that Company.
In determining the net asset value of a Fund's shares, assets belonging to the
Fund are charged with the direct liabilities in respect of that Fund and with a
share of the general liabilities of the Company involved which are normally
allocated in proportion to the relative asset values of the Company's portfolios
at the time of allocation. Subject to the provisions of the Companies'
Charters, determinations by the Boards of Directors as to the direct and
allocable liabilities and the allocable portion of any general assets with
respect to a particular Fund are conclusive.
As of July 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of July 7, 2000, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that owned beneficially or
of record 5% or more of the outstanding shares of a Fund were as follows:
Short-Term Government Securities Fund: U.S. Trust Company of New York, Trustee,
-------------------------------------
FBO U.S. Trust Plan, Attn: Sandra Woolcock, 4380 South SW Macadam Ave., Suite
450, Portland, Oregon 97201, 10.92%; Managed Income Fund: U.S. Trust Retirement
-------------------
Fund, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 46.82%; and U.S. Trust Company of New York, Trustee, FBO
U.S. Trust Plan, Attn: Sandra Woolcock, 4380 SW Macadam Ave., Suite 450,
Portland, Oregon 97201, 5.18%; and Long-Term Tax-Exempt Fund: Charles Schwab &
-------------------------
Co., Inc., Special Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street,
San Francisco, California 94104, 7.32%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Reports") Reports for the Funds are incorporated in this Statement
of Additional Information by reference. No other parts of the 2000 Annual
Reports are incorporated by reference herein. The financial statements included
in the 2000 Annual Reports for the Funds have been audited by the Companies'
independent auditors, Ernst & Young LLP, whose reports thereon also appear in
the 2000 Annual Reports and are incorporated herein by reference. Such
financial statements have been incorporated herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 2000 Annual Reports may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
-53-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard &Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished
A-1
<PAGE>
from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial
A-4
<PAGE>
or economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
-PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
-N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c)
A-6
<PAGE>
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
A-7
<PAGE>
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
-RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest. Issues
rated "BBB" are more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
A-9
<PAGE>
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
A-10
<PAGE>
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-11
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
New York Intermediate-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the current prospectus for the New York
Intermediate-Term Tax-Exempt Fund (the "Fund") of Excelsior Tax-Exempt Funds,
Inc. dated August 1, 2000 (the "Prospectus"). A copy of the Prospectus may be
obtained by writing Excelsior Tax-Exempt Funds, Inc. c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800)
446-1012. Capitalized terms not otherwise defined have the same meaning as in
the Prospectus.
The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Fund's
shareholders for the fiscal year ended March 31, 2000 are incorporated hereby by
reference in the section entitled "Financial Statements." No other parts of the
annual report are incorporated hereby by reference. Copies of the annual report
may be obtained upon request by request and without charge by calling (800) 446-
1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
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Page
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<S> <C>
CLASSIFICATION AND HISTORY................................................................................. 1
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS................................................................. 1
Additional Investment Policies.................................................................... 1
Additional Information on Portfolio Instruments................................................... 2
Special Considerations Relating to New York Municipal Obligations................................. 12
Additional Investment Limitations................................................................. 22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................................................. 24
Distributor....................................................................................... 24
Purchase of Shares................................................................................ 24
Redemption Procedures............................................................................. 25
Other Redemption Information...................................................................... 26
INVESTOR PROGRAMS.......................................................................................... 27
Systematic Withdrawal Plan........................................................................ 27
Exchange Privilege................................................................................ 28
Retirement Plans.................................................................................. 28
Automatic Investment Program...................................................................... 29
Additional Information............................................................................ 29
DESCRIPTION OF CAPITAL STOCK............................................................................... 29
MANAGEMENT OF THE FUND..................................................................................... 31
Directors and Officers............................................................................ 31
Investment Advisory and Administration Agreements................................................. 36
Shareholder Organizations......................................................................... 39
Expenses.......................................................................................... 41
Custodian and Transfer Agent...................................................................... 41
PORTFOLIO TRANSACTIONS..................................................................................... 42
PORTFOLIO VALUATIONS....................................................................................... 44
INDEPENDENT AUDITORS....................................................................................... 44
COUNSEL.................................................................................................... 45
ADDITIONAL INFORMATION CONCERNING TAXES.................................................................... 45
PERFORMANCE AND YIELD INFORMATION.......................................................................... 46
CODE OF ETHICS............................................................................................. 50
</TABLE>
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<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
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<S> <C>
MISCELLANEOUS.............................................................................................. 50
FINANCIAL STATEMENTS....................................................................................... 51
APPENDIX A................................................................................................. A-1
</TABLE>
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<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Tax-Exempt Funds, Inc. (the "Company") is an open-end,
management investment company. The Fund is a series of the Company and is
classified as non-diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company was organized as a Maryland corporation on
August 8, 1984. Prior to December 28, 1995 the Company was known as "UST Master
Tax-Exempt Funds, Inc."
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
------------------------------------------
The following information supplements the description of the
investment objective, strategies and risks as set forth in the Prospectus. The
investment objective of the Fund may be changed without shareholder approval.
Except as expressly noted below, the investment policies of the Fund also may be
changed without shareholder approval.
Additional Investment Policies
------------------------------
The Fund expects that, except during temporary defensive periods,
under normal market conditions 65% of the Fund's total assets will be invested
in debt securities of the State of New York, its political sub-divisions,
authorities, agencies, instrumentalities and corporations, and certain other
governmental issuers, the interest from which is, in the opinion of bond counsel
to the issuer, exempt from federal and New York State and New York City personal
income taxes ("New York Municipal Obligations"). In general, the Fund
anticipates that dividends derived from interest on Municipal Obligations (as
defined below under "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.
The Fund invests in Municipal Obligations which are determined by the
Adviser to present minimal credit risks. As a matter of fundamental policy,
except during temporary defensive periods, the Fund will maintain at least 80%
of its net assets in Municipal Obligations. (This policy may not be changed with
respect to the Fund without the vote of the holders of a majority of its
outstanding shares.) However, from time to time on a temporary defensive basis
due to market conditions, the Fund may hold uninvested cash reserves or invest
in taxable obligations in such proportions as, in the opinion of the Adviser,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Should the Fund invest in taxable obligations, it would
purchase: (i) obligations of the U.S. Treasury; (ii) obligations of agencies and
instrumentalities of the U.S. government; (iii) money market instruments such as
certificates of deposit, commercial paper, and bankers' acceptances; (iv)
repurchase agreements collateralized by U.S. government obligations or other
money market instruments; (v) municipal bond index and interest rate futures
contracts; or (vi) securities issued by other investment companies that invest
in high quality, short-term securities.
In seeking to achieve its investment objective, the Fund may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest on
which is treated as a specific tax preference item under the federal alternative
minimum tax. Investments in such
-1-
<PAGE>
securities, however, will not exceed under normal market conditions 20% of the
Fund's total assets when added together with any taxable investments held by the
Fund.
The Municipal Obligations purchased by the Fund will consist of: (1)
bonds rated "BBB" or higher by Standard & Poor's Rating 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 Adviser to be comparable to BBB/Baa-rated issues; (2) notes
rated "MIG-3" or higher ("VMIG-3" or higher in the case of variable rate notes)
by Moody's, or "SP-3" or higher by S&P, or "F3" or higher by Fitch; and (3)
commercial paper rated "Prime-3" or higher by Moody's, or "A-3" or higher by
S&P, or "F3" or higher by Fitch. Securities rated "BBB" by S&P and Fitch or
"Baa" by Moody's are generally considered to be investment grade, although they
have speculative characteristics and are more sensitive to economic change than
higher rated securities. If not rated, securities purchased by the Fund will be
of comparable quality to the above ratings as determined by the Adviser under
the supervision of the Board of Directors. A discussion of Moody's, Fitch's and
S&P's rating categories is contained in Appendix A.
Although the Fund does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
the Fund's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the Fund will be subject to the peculiar risks
presented by such projects to a greater extent that it would be if the Fund's
assets were not so concentrated.
Additional Information on Portfolio Instruments
-----------------------------------------------
Municipal Obligations
---------------------
"Municipal Obligations" are debt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest from which is, in the opinion of bond
counsel to the issuer, exempt from federal income tax.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Obligations" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.
The two principal classifications of Municipal Obligations which may
be held by the Fund 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
-2-
<PAGE>
payment of principal and interest. Revenue securities are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as user fees of the facility being financed.
The Fund's portfolio may also include "moral obligation" securities,
which are usually issued by public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund - the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Fund.
The Fund may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments or both
with respect to specific underlying Municipal Obligations. In general, such
"stripped" Municipal Obligations are offered at a substantial discount in
relation to the principal and/or interest payments which the holders of the
receipt will receive. To the extent that such discount does not produce a yield
to maturity for the investor that exceeds the original tax-exempt yield on the
underlying Municipal Obligation, such yield will be exempt from federal income
tax for such investor to the same extent as interest on the underlying Municipal
Obligation. The Fund intends to purchase "stripped" Municipal Obligations only
when the yield thereon will be, as described above, exempt from federal income
tax to the same extent as interest on the underlying Municipal Obligations.
"Stripped" Municipal Obligations are considered illiquid securities subject to
the limit described below under "Illiquid Securities."
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 and S&P described in Appendix A hereto represent
their opinion as to the quality of Municipal Obligations. It should be
emphasized that these ratings are general and are not absolute standards of
quality, and Municipal Obligations with the same maturity, interest rate, and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by 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. The Adviser will consider such an event in
determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the 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 multi-state agency of
which a state is a member, is a separate "issuer" as that term is used in this
Statement of Additional Information. The non-governmental user of facilities
financed by
-3-
<PAGE>
private activity bonds is also considered to be an "issuer." An issuer's
obligations under its Municipal Obligations are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. The
power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.
Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Fund are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.
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 and 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. 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.
-4-
<PAGE>
Money Market Instruments
------------------------
"Money market instruments" that may be purchased by the Fund in
accordance with its investment objective and policies include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Investments in time
deposits are limited to no more than 5% of the value of the Fund's total assets
at the time of purchase.
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, "F3" or higher by
Fitch, or "Prime-3" or higher by Moody's or, if not rated, determined to be of
comparable quality by the Adviser. These rating symbols are described in
Appendix A hereto.
Variable and Floating Rate Instruments
--------------------------------------
Securities purchased by the Fund may include variable and floating
rate instruments. The interest rates on such instruments are not fixed and vary
with changes in the particular interest rate benchmarks or indexes. Unrated
variable and floating rate instruments will be purchased by the Fund based upon
the Adviser's determination that their quality at the time of purchase is
comparable to at least the minimum ratings set forth above. In some cases the
Fund may require that the issuer's obligation to pay the principal be backed by
an unconditional and irrevocable bank letter or line of credit, guarantee or
commitment to lend. Although there may be no active secondary market with
respect to a particular variable or floating rate instrument purchased by the
Fund, the Fund may (at any time or during specific intervals within a prescribed
period, depending upon the instrument involved) demand payment in full of the
principal and may resell the instrument to a third party. The absence of an
active secondary market, however, could make it difficult for the Fund to
dispose of a variable or floating rate instrument in the event the issuer
defaulted on its payment obligation or during periods when the Fund is not
entitled to exercise its demand rights. In such cases, the Fund could suffer a
loss with respect to the instrument.
Repurchase Agreements
---------------------
The Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Fund will enter into repurchase agreements only
with financial institutions such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser. The Fund will not enter into repurchase
agreements with the Adviser or its affiliates. Repurchase
-5-
<PAGE>
agreements with remaining maturities in excess of seven days will be considered
illiquid securities subject to the 10% limit described below under "Illiquid
Securities."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose the
Fund to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
repurchase agreements will be taxable.
The repurchase price under a repurchase agreement 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
1940 Act.
Investment Company Securities
-----------------------------
The Fund 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 the Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, the Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by the Fund within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition against the Fund investing
more than 10% of the value of its total assets in such securities.
The Fund may invest in SPDRs. SPDRs are interests in a unit investment
trust ("UIT") that may be obtained from the UIT or purchased in the secondary
market (SPDRs are listed on the American Stock Exchange). There is a 5% limit
based on total assets on investments by any one Fund in SPDRs. The UIT will
issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity
-6-
<PAGE>
of small holdings of SPDRs, therefore, will depend upon the existence of a
secondary market. Upon redemption of a Creation Unit, the Fund will receive
Index Securities and cash identical to the Portfolio Deposit required of an
investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
When-Issued and Forward Transactions
------------------------------------
The Fund may purchase eligible securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by the Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When 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.
It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of the Fund's total assets absent unusual
market conditions, and that the length of such commitments will not exceed 45
days. The Fund does not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of its investment
objectives.
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
-7-
<PAGE>
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
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 Adviser's opinion, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. The
Fund will acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. "Stand-by commitments" acquired by the Fund will be valued at zero in
determining the Fund's net asset value.
Futures Contracts
-----------------
The Fund may invest in interest rate futures contracts and municipal
bond index futures contracts as a hedge against changes in market conditions. A
municipal bond index assigns values daily to the municipal bonds included in the
index based on the independent assessment of dealer-to-dealer municipal bond
brokers. A municipal bond index futures contract
-8-
<PAGE>
represents a firm commitment by which two parties agree to take or make delivery
of an amount equal to a specific dollar amount multiplied by the difference
between the municipal bond index value on the last trading date of the contract
and the price at which the futures contract is originally struck. No physical
delivery of the underlying securities in the index is made. Any income from
investments in futures contracts will be taxable income of the Fund.
The Fund may enter into contracts for the future delivery of fixed-
income securities commonly known as interest rate futures contracts. Interest
rate futures contracts are similar to municipal bond index futures contracts
except that, instead of a municipal bond index, the "underlying commodity" is
represented by various types of fixed-income securities.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with the Fund's securities investments. The Fund
may engage in futures contracts only to the extent permitted by the Commodity
Futures Trading Commission ("CFTC") and the Securities and Exchange Commission
("SEC"). The Fund currently intends to limit its hedging transactions in futures
contracts so that, immediately after any such transaction, the aggregate initial
margin that is required to be posted by the Fund under the rules of the exchange
on which the futures contract is traded does not exceed 5% of the Fund's total
assets, after taking into account any unrealized profits and unrealized losses
on the Fund's open contracts.
When investing in futures contracts, the Fund must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the 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 the Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when the Fund "covers" a futures position
generally by entering into an offsetting position. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if the Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. Such sale
of securities may be, but will not necessarily be, at increased prices which
reflect the rising market. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge.
Transactions by the Fund in futures contracts may subject the Fund to
a number of risks. Successful use of futures by the Fund is subject to the
ability of the Adviser 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
-9-
<PAGE>
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. There may be an
imperfect correlation, or no correlation at all, between movements in the price
of the futures contracts and movements in the price of the instruments being
hedged. In addition, investments in futures may subject the Fund to losses due
to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, the Fund may realize a loss on a
futures transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions 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.
-10-
<PAGE>
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
The Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. The 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 the Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the repurchase price of those securities.
Illiquid Securities
-------------------
The 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 Fund has valued the security. The Fund may purchase
securities which are not registered under the Securities Act of 1933, as amended
(the "Act"), but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the Act. Any such security will not be
considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in the Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.
Portfolio Turnover
------------------
The Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the Fund's investment objective. Portfolio investments may be sold for a variety
of reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold the investments.
A high rate of portfolio turnover may involve correspondingly greater
transaction costs, which must be borne directly by the Fund and ultimately by
its shareholders. Portfolio turnover will not be a limiting factor in making
portfolio decisions. High portfolio turnover may result in the realization of
substantial net capital gains. To the extent that net short-term capital gains
are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
Miscellaneous
-------------
The Fund may not invest in oil, gas, or mineral leases.
-11-
<PAGE>
Special Considerations Relating to New York Municipal Obligations
-----------------------------------------------------------------
Some of the significant financial considerations relating to the New
York Tax Exempt Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Securities that were available prior to
the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.
State Economy. New York is one of the most populous states in the
-------------
nation and has a relatively high level of personal wealth. The State's economy
is diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a multi-
state region, State personal income measured on a residence basis understates
the relative importance of the State to the national economy and the size of the
base to which State taxation applies.
The economic forecast of the State has also been modified for 2000 and
2001 from the mid-year forecast to reflect a stronger-than-expected economy.
Continued growth is projected for 2000 and 2001 for employment, wages, and
personal income, although the growth in employment will moderate from the 1999
pace. Personal income is estimated to have grown by 4.7 percent in 1999, fueled
in part by a large increase in financial sector bonus payments at the year's
end. Personal income is projected to grow 5.5 percent in 2000 and 4.8 percent in
2001. Total bonus payments are projected to increase by 11 percent in 2000 and
10.5 percent in 2001. Overall employment growth is expected to continue at a
more modest pace than in 1999, reflecting the slower growth in the national
economy, continued spending restraint by government employers, and restructuring
in the manufacturing, health care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
------------
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or
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<PAGE>
reappropriations and any new or modified revenue measures to be enacted in
connection with the executive budget. The entire plan constitutes the proposed
State financial plan for that fiscal year. The Governor is required to submit to
the Legislature quarterly budget updates which include a revised cash-basis
state financial plan, and an explanation of any changes from the previous state
financial plan.
State law requires the Governor to propose a balanced budget each
year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
The State revised the cash-basis 1999-2000 State Financial Plan on
January 11, 2000, with the release of the 2000-01 Executive Budget. The State
updated the Financial Plan on January 31, 2000 to reflect the Governor's
amendments to his Executive Budget. After these changes, the Division of the
Budget ("DOB") now expects the State to close the 1999-2000 fiscal year with an
available cash surplus of $758 million in the General Fund, an increase of $733
million over the surplus estimate in the mid-year update. The larger projected
surplus derives from $499 million in net higher projected receipts and $259
million in net lower estimated disbursements. DOB revised both its projected
receipts and disbursements based on a review of actual operating results through
December 1999, as well as an analysis of underlying economic and programmatic
trends it believes may affect the Financial Plan for the balance of the year.
The State plans to use the entire $758 million surplus to make
additional deposits to reserve funds. At the close of the current fiscal year,
the State expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund ("TSRF") - the fifth consecutive annual deposit. In
the 2000-01 Executive Budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ("DRRF") ($250 million).
DOB projects total General Fund disbursements of $37.06 billion in
1999-2000, a decline of $282 million from the October estimate. Of this amount,
$33 million is related to the timing of spending and accounting adjustments and
therefore does not contribute to the surplus projected by DOB. The $33 million
consists of lower timing-related spending of $65 million from the Community
Projects Fund ("CPF") and $50 million from the Collective Bargaining Reserve,
offset by the Medicaid reclassification of $82 million described above.
Accordingly, lower disbursements since October contribute $249 million to the
1999-2000 surplus, which, when combined with the $10 million in lower
disbursements recognized in the mid-year update, produce a total reduction in
estimated disbursements of $259 million for the current year.
State Operations spending is now projected to total $6.63 billion in
1999-2000. In the revised Financial Plan, $50 million of an original $100
million for new collective bargaining
-13-
<PAGE>
costs is set aside in a reserve to cover the cost of labor agreements in 1999-
2000, and the balance is transferred to General State Charges in the current
year to pay for the recently approved labor contract with State University
employees and other labor costs. The remaining revisions to the State Operations
estimate are comprised of savings from agency efficiencies and timing-related
changes that do not affect the surplus.
The State projects a closing balance of $1.17 billion in the General
Fund, after the tax refund reserve transaction. The balance is comprised of $548
million in the Tax Stabilization Reserve Fund ("TSRF") after a $75 million
deposit in 1999-2000; $265 million in the CPF, which pays for Legislative
initiatives; $250 million in the DRRF; and $107 million in the Contingency
Reserve Fund ("CRF") (which guards against litigation risks).
In addition to the General Fund closing balance of $1.17 billion, the
State will have a projected $3.09 billion in the tax refund reserve account at
the end of 1999-2000. The refund reserve account is used to adjust personal
income tax collections across fiscal years to pay for tax refunds, as well as to
accomplish other Financial Plan objectives. The projected balance of $3.09
billion is comprised of $1.82 billion in tax reduction reserves from the 1998-99
surplus; $683 million from the 1999-2000 surplus; $521 million from LGAC that
may be used to pay tax refunds during 2000-01 but must be on deposit at the
close of the fiscal year; $50 million in collective bargaining reserves from
1999-2000; and $25 million in reserves for tax credits.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions except those required to be
accounted for in another fund. It is the State's largest fund and received
almost all State taxes and other resources not dedicated to particular purposes.
General Fund moneys are also transferred to other funds, primarily to support
certain capital projects and debt service payments in other fund types.
The Governor presented his 2000-01 Executive Budget to the Legislature
on January 10, 2000. The Executive Budget contains financial projections for the
State's 1999-2000 through 2002-03 fiscal years, a detailed explanation of
receipts estimates and the economic forecast on which it is based, and proposed
Capital Program and Financing Plan for the 2000-01 through 2004-05 fiscal years.
On January 31, 2000, the Governor submitted amendments to his Executive Budget,
the most significant of which recommends eliminating all gross receipts taxes on
energy providers.
There can be no assurance that the Legislature will enact into law the
Governor's Executive Budget, as amended, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth therein.
The 2000-01 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1999-2000 to 2000-01. Under the Governor's
Executive Budget, as amended, total General Fund receipts, including transfers
from other funds, are projected at $38.62 billion, an increase of $1.28 billion
(3.4 percent) over the current fiscal year. General Fund disbursements,
including transfers to other funds, are recommended to grow by 2.3 percent to
$37.93 billion, an
-14-
<PAGE>
increase of $869 million over 1999-2000. State Funds spending (the portion of
the budget supported exclusively by State taxes, fees, and revenues) is
projected to total $52.46 billion, an increase of $2.57 billion or 5.1 percent.
Spending from all government funds is expected to grow by 5.5 percent,
increasing by $4.0 billion to $76.82 billion.
The State projects a closing balance of $1.61 billion in the General
Fund at the end of 2000-01. This balance is comprised of a $433 million reserve
set aside from the 1999-2000 surplus to finance the estimated costs of the
Governor's proposed tax reduction package in 2001-02 and 2002-03, $475 million
in cumulative reserves for collective bargaining ($425 million from 2000-01 plus
$50 million from 1999-2000), $548 million in the TSRF, and $150 million in the
CRF after a proposed $43 million deposit in 2000-01. The change in the closing
fund balance compared to 1999-2000 results from the planned use in 2000-01 of
$265 million for existing legislative initiatives financed from the CPF and the
reclassification of DRRF into the CPF, offset by increased reserves for
collective bargaining, tax reduction, and litigation discussed above.
In addition to the General Fund closing balance of $1.61 billion, the
State will have a projected $567 million in the tax refund reserve at the end of
2000-01. Also, $1.2 billion is proposed to be on deposit in the Star Special
Revenue Fund to be used in 2001-02 for State-funded local tax reductions and
$250 million is proposed to be on deposit in the DRRF. The balance in the DRRF
is projected to be used in 2001-02 to retire existing high-cost State-supported
debt and increase pay-as-you-go financing of capital projects.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by
--------------------------------
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
-15-
<PAGE>
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the LGAC to restructure the way the State
makes certain local aid payments.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-than-
projected tax receipts and in lower-than-expected entitlement spending. The
State assumes that the 2000-01 Financial Plan will achieve $500 million in
savings from initiatives by State agencies to deliver services more efficiently,
workforce management efforts, maximization of federal and non-General Fund
spending offsets, and other actions necessary to help bring projected
disbursements and receipts into balance. The projections do not assume any gap-
closing benefit from the potential settlement of State claims against the
tobacco industry.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds. Subsequent
to that time, the State's general obligations have not been downgraded by S&P.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
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<PAGE>
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its
----------
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action seeking enforcement
of certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; and (4) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's 1994-
95 fiscal year. Litigation challenging the constitutionality of the treatment of
certain moneys held in a reserve fund was settled in June 1996 and certain
amounts in a Supplemental Reserve Fund previously credited by the State against
prior State and local pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the current fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
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<PAGE>
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
On November 23, 1998, the attorneys general for forty-six states
(including New York) entered into a master settlement agreement ("MSA") with the
nation's largest tobacco manufacturers. Under the terms of the MSA, the states
agreed to release the manufacturers from all smoking-related claims in exchange
for specified payments and the imposition of restrictions on tobacco advertising
and marketing. New York is projected to receive $25 billion over 25 years under
the MSA, with payments apportioned among the State (51 percent), counties (22
percent), and New York City (27 percent). The projected payments are an estimate
and subject to adjustments for, among other things, the annual change in the
volume of cigarette shipments and the rate of inflation.
From 1999-2000 through 2002-03, the State expects to receive $1.54
billion under the nationwide settlement with cigarette manufacturers. Counties,
including New York City, will receive settlement payments of $1.47 billion over
the same period.
Authorities. The fiscal stability of New York State is related, in
-----------
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is State-
supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in
-18-
<PAGE>
order to restructure and improve JDA's capital structure. Due to concerns
regarding the economic viability of its programs, JDA's loan and loan guarantee
activities had been suspended since 1995. As a result of the structural
imbalances in JDA's capital structure, and defaults in its loan portfolio and
loan guarantee program incurred between 1991 and 1996, JDA would have
experienced a debt service cash flow shortfall had it not completed its recent
refinancing. JDA anticipates that it will transact additional refinancings in
1999, 2000 and 2003 to complete its long-term plan of finance and further
alleviate cash flow imbalances which are likely to occur in future years. JDA
recently resumed its lending activities under a revised set of lending programs
and underwriting guidelines.
New York City and Other Localities. The fiscal health of the State may
----------------------------------
also be impacted by the fiscal health of its localities, particularly the City,
which has required and continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. There can be no assurance that
there will not be reductions in State aid to the City from amounts currently
projected or that State budgets will be adopted by the April 1 statutory
deadline or that any such reductions or delays will not have adverse effects on
the City's cash flow or expenditures. In addition, the federal budget
negotiation process could result in a reduction in or a delay in the receipt of
federal grants which could have additional adverse effects on the City's cash
flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979. In 1975, S&P suspended its A rating
of City bonds. This suspension remained in effect until March 1981, at which
time the City received an investment grade rating of BBB from S&P. On July 2,
1985, S&P revised its rating of City bonds upward to BBB+ and on November 19,
1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P assigned a BBB+
rating to the City's general obligation debt and placed the ratings on
CreditWatch with positive implications. On March 9, 1999, S&P assigned its A-
rating to Series 1999H of New York City general obligation bonds and affirmed
the A- rating on various previously issued New York City bonds. Subsequent to
that time, the City's general obligation bonds have not been downgraded by S&P.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Bal, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A. Subsequent to that time, the
City's general obligation bonds have not been downgraded by Fitch IBCA.
-19-
<PAGE>
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in its Financial
Plan can be successfully implemented or that the City will maintain a balanced
budget in future years without additional State aid, revenue increases or
expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the City's Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the Financial Plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, the ability of the Health and Hospitals Corporation and the BOE to
take actions to offset reduced revenues, the ability to complete
-20-
<PAGE>
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the City from
entering into new capital contracts. To prevent these disruptions in the capital
program, two entities were created to issue debt to increase the City's capital
financing capacity: (i) the State Legislature created the Transitional Finance
Authority ("TFA") in 1997, and (ii) the City created the Tobacco Settlement
Asset Securitization Corporation in 1999. Despite these actions, the City, in
order to continue its capital program, will need additional financing capacity
in fiscal year 2002, which could be provided through increasing the borrowing
authority of the TFA or amending the State constitutional debt limit.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The delay in the adoption of the State's budget in
certain past fiscal years has required the City to issue short-term notes in
amounts exceeding those expected early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
fiscal year.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are
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<PAGE>
authorized by State law to issue debt to finance deficits during the period that
such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance. To date, the State has experienced no
--------------------
significant Year 2000 computer disruptions. Monitoring will continue over the
next few months to identify and correct any problems that may arise. However,
there can be no assurance that outside parties who provide goods and services to
the State will not experience computer problems related to Year 2000 programming
in the future, or that such disruptions, if they occur, will not have an adverse
impact on State operations or finances.
Additional Investment Limitations
---------------------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed only by a vote of the
holders of a majority of the Fund's outstanding shares. As used herein, a "vote
of the holders of a majority of the outstanding shares" of the Company or the
Fund means, with respect to the approval of an investment advisory agreement or
a change in a fundamental investment policy, the affirmative vote of the lesser
of (a) more than 50% of the outstanding shares of the Company or the Fund, or
(b) 67% or more of the shares of the Company or the Fund present at a meeting if
more than 50% of the outstanding shares of the Company or the Fund are
represented at the meeting in person or by proxy.
The Fund may not:
1. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing, provided that the Fund may enter into futures contracts and
futures options. (This borrowing provision is included solely to facilitate the
orderly sale of portfolio securities to accommodate abnormally heavy redemption
requests and is not for leverage purposes.) The Fund will not purchase portfolio
securities while borrowings in excess of 5% of its total assets are outstanding;
2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers
-22-
<PAGE>
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;
3. 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;
4. Knowingly invest more than 10% of the value of its total assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days and other securities which are not readily
marketable;
5. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
6. 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;
7. 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;
8. Purchase or sell real estate, except that the Fund may invest in
Municipal Obligations secured by real estate or interests therein;
9. 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;
10. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that the Fund may enter into futures contracts and futures
options;
11. 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
12. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; provided that the Fund may enter into futures
contracts and futures options.
* * *
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<PAGE>
In addition to the investment limitations described above, the Fund
will not knowingly invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements with remaining maturities
in excess of seven days and other securities which are not readily marketable.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of the Fund's securities will not constitute a violation of such limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
-----------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Fund.
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 Fund or for providing substantial marketing, sales and operational
support. The support may include initiating customer accounts, participating in
sales, educational and training seminars, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution.
Purchase of Shares
------------------
Shares of the Fund are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.
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<PAGE>
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility to
transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Fund's sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization continues
to place its Customers' purchase (and redemption) requests with the Fund, CGFSC
will send confirmations of such transactions and periodic account statements
directly to the shareholders of record. Shares in the Fund bear the expense of
fees payable to Shareholder Organizations for such services. See "Shareholder
Organizations."
Redemption Procedures
---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may
-25-
<PAGE>
redeem all or part of their shares in accordance with any of the procedures
described below (these procedures also apply to Customers of Shareholder
Organizations for whom individual accounts have been established with CGFSC).
As discussed in the Prospectus, a redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until CGFSC receives all
required documents in good order. Payment for shares redeemed will ordinarily be
made by mail within five Business Days after receipt by CGFSC of the redemption
request in good order. Questions with respect to the proper form for redemption
requests should be directed to CGFSC at (800) 446-1012 (from overseas, call
(617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
----------------------------
The Company may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
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<PAGE>
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
the Fund's portfolio securities.
The Company 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 the Company and valued in the same way as they would be
valued for purposes of computing the Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. The Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, 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, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of the Fund.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund 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
-27-
<PAGE>
Organizations may obtain information on the availability of, and the procedures
and fees relating to, the Systematic Withdrawal Plan directly from their
Shareholder Organizations.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Funds, Inc. ("Excelsior Fund" and, collectively with the
Company, the "Companies") or for shares of Excelsior Institutional Trust. An
exchange involves a redemption of all or a portion of the shares in the Fund and
the investment of the redemption proceeds in shares of another portfolio. The
redemption will be made at the per share net asset value of the shares being
redeemed next determined after the exchange request is received in good order.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares next determined after receipt of the exchange
request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
----------------
Shares are available for purchase by Investors in connection
with the following tax-deferred prototype retirement plans offered by United
States Trust Company of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
-28-
<PAGE>
. Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and
their employees; and
. Keogh Plans for self-employed individuals.
Investors investing in the Fund pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment for
IRAs is $250 and the minimum subsequent investment is $50. Detailed information
concerning eligibility, service fees and other matters related to these plans
can be obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Customers of Shareholder Organizations may purchase shares of the Fund pursuant
to retirement plans if such plans are offered by their Shareholder
Organizations.
Automatic Investment Program
----------------------------
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using dollar cost averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find dollar cost averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Company may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the dollar cost averaging method on
his own initiative or through other entities.
Additional Information
----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
The Company's Charter authorizes its Board of Directors to issue up to
twenty-four billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into nineteen series of shares representing interests in seven
investment portfolios.
-29-
<PAGE>
Each share in the Fund represents an equal proportionate interest in
the 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 the Fund
as are declared in the discretion of the Company's Board of Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of 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 the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.
Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of the Company voting
without regard to class.
The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of 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 of the Fund 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 the Company, if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on shareholders of any portfolio participating in such
combination, and, in
-30-
<PAGE>
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
the Company's common stock at net asset value. The exercise of such authority by
the Board of Directors will be subject to the provisions of the 1940 Act, and
the Board of Directors will not take any action described in this paragraph
unless the proposed action has been disclosed in writing to the Fund's
shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of 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 the Company's Charter,
the Company may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the Company voting
without regard to class.
Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.
MANAGEMENT OF THE FUND
----------------------
Directors and Officers
----------------------
The business and affairs of the Fund are managed under the direction
of the Company's Board of Directors. The directors and executive officers of the
Company, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
-31-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards (since 1997) and
238 June Road President & Treasurer President, Treasurer and Director (since 1995) of
Stamford, CT 06903 Excelsior Funds, Inc. and the Company; Chairman of the
Age: 69 Boards (since 1997), President, Treasurer and Trustee
(since 1995) of Excelsior Funds and Excelsior
Institutional Trust; Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York (from February 1990
until September 1995); and Chairman, U.S. Trust Company
(from March 1993 to May 1997).
Rodman L. Drake Director Director of Excelsior Funds, Inc. and the Company (since
Continuation Investments Group, Inc. 1996); Trustee of Excelsior Institutional Trust and
1251 Avenue of the Americas, 9/th/ Floor Excelsior Funds (since 1994); Director, Parsons
New York, NY 10020 Brinkerhoff, Inc. (engineering firm) (since 1995);
Age: 57 President, Continuation Investments Group, Inc. (since
1997); President, Mandrake Group (investment and
consulting firm) (1994-1997); Chairman, MetroCashcard
International, Inc. (since 1999); Director, Hotelivision,
Inc. (since 1999); Director, Alliance Group Services,
Inc. (since 1998); Director, Hyperion Total Return Fund,
Inc. and three other funds for which Hyperion Capital
Management, Inc. serves as investment adviser (since
1991); Co-Chairman, KMR Power Corporation (power plants)
(from 1993 to 1996); Director, The Latin America Smaller
Companies Fund, Inc. (from 1993 to 1998); Member of
Advisory Board, Argentina Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P. (Brazil) (from 1993 to
1996); and Director, Mueller Industries, Inc. (from 1992
to 1994).
</TABLE>
______________
/1/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-32-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Joseph H. Dugan Director Retired; Director of Excelsior Funds, Inc. and the
913 Franklin Lake Road Company (since 1984); Director of UST Master Variable
Franklin Lakes, NJ 07417 Series, Inc. (from 1994 to June 1997); and Trustee of
Age: 75 Excelsior Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Funds, Inc. and the
2320 Cumberland Road Company (since 1986); Director of UST Master Variable
Charlottesville, VA Series, Inc. (from 1994 to June 1997); Trustee of
22901-7726 Excelsior Institutional Trust (since 1995); Director,
Age: 79 Deutsche Bank Financial, Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1988).
Morrill Melton Hall, Jr. Director Director of Excelsior Funds, Inc. and the Company (since
Comprehensive Health Services, Inc. July 30, 2000); Trustee, Excelsior Institutional Trust
8229 Boone Blvd., Suite 700 (since July 30, 2000); Chief Executive Officer,
Vienna, VA 22182 Comprehensive Health Services, Inc. (health care
Age: 55 management and adminstration).
Jonathan Piel Director Director of Excelsior Funds, Inc. and the Company (since
558 E. 87th Street 1996); Trustee, Excelsior Institutional Trust and
New York, New York 10128 Excelsior Funds (since 1994); Vice President and Editor,
Age: 61 Scientific American, Inc. (from 1986 to 1994); Director,
Group for The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight Journalism
Fellowships, Massachusetts Institute of Technology (since
1984).
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Robert A. Robinson Director Director of Excelsior Funds, Inc. and the Company (since
Church Pension Group 1987); Director of UST Master Variable Series, Inc.
445 Fifth Avenue (from 1994 to June 1997); Trustee of Excelsior
New York, NY 10016 Institutional Trust (since 1995); President Emeritus,
Age: 74 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/2/ Director Retired; Director of Excelsior Funds, Inc. and the
6549 Pine Meadows Drive Company (since 1985); Chairman of the Board of Excelsior
Spring Hill, FL 34606 Funds, Inc. and the Company (1991-1997) and Excelsior
Age: 74 Institutional Trust (1996-1997); President and Treasurer
of Excelsior Funds, Inc. and the Company (1994-1997) and
Excelsior Institutional Trust (1996-1997); Chairman of
the Board, President and Treasurer of UST Master Variable
Series, Inc. (1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
</TABLE>
_______________
/2/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-34-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global Funds
Chase Global Funds Services Company (November 1996 to present); and
Services Company Officer and Manager of Financial Reporting, Investors
73 Tremont Street Bank & Trust Company (January 1991 to November 1996).
Boston, MA 02108-3913
Age: 39
Patricia M. Leyne Assistant Treasurer Vice President, Senior Manager of Fund Administration,
Chase Global Funds Chase Global Fund Services Company (since August
Services Company 1999); Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration, Chase Global Funds Services Company
Boston, MA 02108-3913 (from July 1998 to August 1999); Assistant Treasurer,
Age: 33 Manager of Fund Administration, Chase Global Funds
Services Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company (from
September 1995 to November 1996); Fund Administrator,
Chase Global Funds Services Company (from February 1993
to September 1995).
</TABLE>
Each director receives an annual fee of $9,000 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and an annual fee of $4,000
from Excelsior Institutional Trust, plus a meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received an annual fee of $4,000 from Excelsior Funds plus a
per-Company meeting fee of $250 and each of these persons was reimbursed for
expenses incurred in attending meetings of Excelsior Funds. The Chairman of the
Board of Excelsior Funds received $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Company. The employees of Chase
Global Funds Services Company do not receive any compensation from the Company
for acting as officers of the Company. No person who is currently an officer,
director or employee of the Adviser serves as an officer, director or employee
of the Company. As of July 7, 2000, the directors and officers of the Company as
a group owned beneficially less than 1% of the outstanding shares of each fund
of the Company, and less than 1% of the outstanding shares of all funds of the
Company in the aggregate.
-35-
<PAGE>
The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation from the
Aggregate Benefits Accrued Annual Company and Fund
Name of Compensation as Part of Fund Benefits Upon Complex* Paid
Person/Position from the Company Expenses Retirement to Directors
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald L. Campbell*** $9,0000 None None $22,000 (3) **
Director
Rodman L. Drake $15,500 None None $38,750 (4) **
Director
Joseph H. Dugan $16,500 None None $38,250 (3) **
Director
Wolfe J. Frankl $15,000 None None $35,000 (3) **
Director
Jonathan Piel $17,000 None None $42,000 (4) **
Director
Robert A. Robinson $17,000 None None $39,500 (3) **
Director
Alfred C. Tannachion $16,500 None None $38,250 (3) **
Director
Frederick S. Wonham $21,500 None None $52.000 (4) **
Chairman of the Board
President and Treasurer
</TABLE>
______________
* The "Fund Complex" consists of the Company, Excelsior Funds, Inc. and
Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.
Investment Advisory and Administration Agreements
-------------------------------------------------
U.S. Trust New York and U.S. Trust Company (together with U.S. Trust
New York, "U.S. Trust" or the "Adviser") serve as co-investment advisers to the
Fund. In the Investment Advisory Agreement, U.S. Trust has agreed to provide the
services described in the
-36-
<PAGE>
Prospectus. The 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
Adviser may, from time to time, voluntarily waive a portion of its 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 services provided and expenses assumed pursuant to the
Investment Advisory Agreement, the Adviser is entitled to be paid a fee computed
daily and paid monthly, at the annual rate of 0.50% of the Fund's average daily
net assets.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Company
paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
New York Intermediate-Term
Tax-Exempt Fund $696,851 $696,284 $1,549,765
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for the Fund. During
the periods stated, these waivers reduced advisory fees by the following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
New York Intermediate-Term
Tax-Exempt Fund $29,152 $33,685 $33,485
</TABLE>
The Investment Advisory Agreement provides that the 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
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreement to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
-37-
<PAGE>
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
CGFSC, Federated Services Company (an affiliate of the Distributor)
and U.S. Trust Company (together, the "Administrators") serve as the Fund's
administrators and provide the Fund with general administrative and operational
assistance. Prior to July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as the Company's administrator. On
July 31, 2000, Federated Services Company assumed all of its subsidiary's rights
and obligations under the Administration Agreement. Under the Administration
Agreement, the Administrators have agreed to maintain office facilities for the
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.
Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company, 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.
The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior Fund and Excelsior Institutional Trust which are also advised by U.S.
Trust and its affiliates and distributed by the Distributor. For services
provided to all of the investment portfolios of the Company, Excelsior Fund and
Excelsior Institutional Trust (except for the international portfolios of
Excelsior Fund and Excelsior Institutional Trust), the Administrators are
entitled jointly to fees, computed daily and paid monthly, based on the combined
aggregate average daily net assets of the three companies (excluding the
international portfolios of Excelsior Fund and Excelsior Institutional Trust) as
follows:
-38-
<PAGE>
Combined Aggregate Average Daily Net Assets
of the Company, Excelsior Fund and
Excelsior Institutional Trust (excluding the international portfolios
of Excelsior Fund and Excelsior Institutional Trust)
----------------------------------------------------
<TABLE>
<CAPTION>
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 Company, 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 the Fund, which
waivers may be terminated at any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
New York Intermediate-Term
Tax-Exempt Fund $220,921 $223,318 $178,440
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
New York Intermediate-Term
Tax-Exempt Fund $235 $53 $34
</TABLE>
Shareholder Organizations
-------------------------
The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for 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
-39-
<PAGE>
may include: (a) acting as recordholder of shares; (b) assisting in processing
purchase, exchange and redemption transactions; (c) transmitting and receiving
funds in connection with Customer orders to purchase, exchange or redeem shares;
(d) providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (e) providing tax and dividend
information to shareholders as appropriate; (f) transmitting proxy statements,
annual reports, updated prospectuses and other communications from the Company
to Customers; and (g) providing or arranging for the provision of other related
services. It is the responsibility of Shareholder Organizations to advise
Customers of any fees that they may charge in connection with a Customer's
investment.
The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company. Pursuant
to the Plan, the Company's Board of Directors will review, at least quarterly, a
written report of the amounts expended under the Company's agreements with
Shareholder Organizations and the purposes for which the expenditures were made.
In addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of the Company's directors, including a majority of the
directors who are not "interested persons" of the Company as defined in the 1940
Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
Any material amendment to the Company's arrangements with Shareholder
Organizations must be approved by a majority of the Board of Directors
(including a majority of the Disinterested Directors). So long as the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates of
Total Paid U.S. Trust
---------- -------------------------------
<S> <C> <C>
New York Intermediate-Term Tax-
Exempt Fund $29,387 $28,692
</TABLE>
-40-
<PAGE>
For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:
Amounts Paid to Affiliates of
Total Paid U.S. Trust
---------- -----------------------------
New York Intermediate-Term Tax-
Exempt Fund $33,738 $33,512
For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:
Amounts Paid to Affiliates of
Total Paid U.S. Trust
---------- -----------------------------
New York Intermediate-Term Tax-
Exempt Fund $33,519 $33,418
Expenses
--------
Except as otherwise noted, the 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 the Company'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"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, 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 the Company'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. Communications to the
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<PAGE>
custodian should be directed to Chase, Mutual Funds Service Division, 3 Chase
MetroTech Center, 8/th/ Floor, Brooklyn, New York 11245.
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 the Company'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 is located at 114 W. 47/th/ Street, New York, New York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Company's Board of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of 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.
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<PAGE>
Securities purchased and sold by the Fund are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Fund, where possible, will deal
directly with dealers who make a market in the securities involved, except in
those situations where better prices and execution are available elsewhere.
The Investment Advisory Agreement provides that, in executing
portfolio transactions and selecting brokers or dealers, the Adviser will seek
to obtain the best net price and the most favorable execution. The Adviser shall
consider factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and whether such broker or dealer is selling
shares of the Company, and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreement authorizes the Adviser,
to the extent permitted by law and subject to the review of the Company's Board
of Directors from time to time with respect to the extent and continuation of
the policy, to cause the Fund to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion. Such
brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the 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 Adviser and does not
reduce the investment advisory fee payable by the Fund. Such information may be
useful to the 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 Adviser in carrying out its obligations to the Fund.
Portfolio securities will not be purchased from or sold to the
Adviser, the Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
Investment decisions for the Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the 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
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<PAGE>
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 Adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or its parents
held by the Fund as of the close of the most recent fiscal year. As of March 31,
2000, the Fund did not hold any securities of the Company's regular brokers or
dealers or their parents.
PORTFOLIO VALUATIONS
--------------------
Portfolio securities in the Fund for which market quotations are
readily available (other than debt securities maturing in 60 days or less) are
valued at market value. Securities and other assets for which market quotations
are not readily available are valued at fair value, pursuant to the guidelines
adopted by the Company's Board of Directors. Absent unusual circumstances,
portfolio securities maturing in 60 days or less are normally valued at
amortized cost. The net asset value of shares in the Fund will fluctuate as the
market value of its portfolio securities changes in response to changing market
rates or 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 prices.
A futures contract is valued at the last sales price quoted on the principal
exchange or board of trade on which such contract is traded, or in the absence
of a sale, the mean between the last bid and asked prices. Restricted securities
and securities or other assets for which market quotations are not readily
available are valued at fair value pursuant to guidelines adopted by the Board
of Directors.
The Administrators have undertaken to price the securities in the
Fund's portfolio and may use one or more pricing services to value certain
portfolio securities in the Fund 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 to be established will be reviewed by the
Administrators under the general supervision of the Board of Directors.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Company. The Fund's Financial Highlights
included in the Prospectus and the financial statements for the fiscal year
ended March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
-44-
<PAGE>
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-6996,
is counsel to the Company.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, the Fund is treated as a separate
corporate entity, and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves the Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. 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. Moreover, if the Fund were to fail to
make sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The 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 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 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 or for retirement plans
qualified under Section 401 of the Code, H.R. 10 plans and individual
-45-
<PAGE>
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 that 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 its 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.
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. You should consult your tax advisor for further information regarding
federal, state, local and/or foreign tax consequences relevant to your specific
situation. Shareholders may also be subject to state and local taxes on
distributions and redemptions. State income taxes may not apply, however, to the
portions of the Fund's distributions, if any, that are attributable to interest
on federal securities or interest on securities of a particular state or
localities within that state. For example, distributions from the Fund will
generally be exempt from federal income tax and, New York State and New York
City personal income taxes.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
The Fund may advertise the standardized effective 30-day (or one
month) yield calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for the Fund according to
the following formula:
a-b
Yield = 2 [(--- + 1)/6/- 1]
cd
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<PAGE>
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.
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, 2000 was 4.36%.
The Fund may from time to time advertise its "tax-equivalent yield" to
demonstrate the level of taxable yield necessary to produce an after-tax yield
equivalent to that achieved by the Fund. This yield is computed by increasing
the yield of the Fund's shares (calculated as above) by the amount necessary to
reflect the payment of federal income taxes (and New York State and New York
City income taxes) at a stated tax rate. 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
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<PAGE>
combined federal and New York State income tax rate; (b) dividing the portion of
the yield (calculated as above) that is exempt from federal income tax only by
one minus a stated federal income tax rate; and (c) adding the figures resulting
from (a) and (b) above to that portion, if any, of the yield that is not exempt
from federal income tax. Tax-equivalent yields assume a federal income tax rate
of 31%, a New York State and New York City marginal income tax rate of 10.21%
and an overall tax rate taking into account the federal deduction for state and
local taxes paid of 38.04%. Based on the foregoing calculation, the tax-
equivalent yield of the Fund for the 30-day period ended March 31, 2000 was
7.04%.
From time to time, the Fund may advertise its performance by using
"average annual total return" over various periods of time. Such total return
figure reflects the average percentage change in the value of an investment in
the Fund from the beginning date of the measuring period to the end of the
measuring period. Average total return figures will be given for the most recent
one-year period and may be given for other periods as well (such as from the
commencement of the Fund's operations, or on a year-by-year basis). The Fund may
also use aggregate total return figures for various periods, representing the
cumulative change in the value of an investment in the Fund for the specific
period. Both methods of calculating total return assume that dividends and
capital gain distributions made by the Fund during the period are reinvested in
Fund shares. 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.
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<PAGE>
Based on the foregoing calculations, the average annual total returns
for the period from the commencement of operations (May 31, 1990) until March
31, 2000 and the average annual total returns for the 5-year and 10-year periods
ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
Average Annual Total Returns
For the Period from May
For the Year Ended For the 5 Years 31, 1990 (commencement of
3/31/00 Ended 3/31/00 operations) until 3/31/00
-------------------- --------------------- ----------------------------
<S> <C> <C> <C>
New York Intermediate-
Term Tax-Exempt Fund (0.51)% 4.80% 5.70%
</TABLE>
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.
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<PAGE>
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.
Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of the Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.
CODE OF ETHICS
--------------
The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics that allow for personnel subject to the codes to
invest in securities including securities that may be purchased or held by the
Fund.
MISCELLANEOUS
-------------
As used herein, "assets allocable to the Fund" means the
consideration received upon the issuance of shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular portfolio of the Company. In
determining the net asset value of the Fund, assets allocable to the Fund are
charged with the direct liabilities of the Fund and with a share of the general
liabilities of the Company which are normally allocated in proportion to the
relative asset values of the Company's portfolios at the time of allocation.
Subject to the provisions of the Company's Charter, determinations by the
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<PAGE>
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 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the outstanding shares of the Company as agent or custodian
for their customers, but did not own such shares beneficially because they did
not have voting or investment discretion with respect to such shares.
As of July 7, 2000, no persons other than U.S. Trust and its
affiliates, owned of record 5% or more of the outstanding shares of the
Fund.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report") for the Fund are incorporated in this Statement of
Additional Information by reference. No other parts of the 2000 Annual Report
are incorporated by reference herein. The financial statements included in the
2000 Annual Report for the Fund have been audited by the Company's independent
auditors, Ernst & Young LLP, whose reports thereon also appear in the 2000
Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 2000 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
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<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard &Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished
A-1
<PAGE>
from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial
A-4
<PAGE>
or economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
-PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
-N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c)
A-6
<PAGE>
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
A-7
<PAGE>
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
-RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest. Issues
rated "BBB" are more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
A-9
<PAGE>
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
A-10
<PAGE>
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-11
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
California Tax-Exempt Income Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the California Tax-Exempt
Income Fund (the "Fund") of Excelsior Tax-Exempt Funds, Inc. dated August 1,
2000 (the "Prospectus"). A copy of the Prospectus may be obtained by writing
Excelsior Tax-Exempt Funds, Inc. c/o Chase Global Funds Services Company, 73
Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012. Capitalized
terms not otherwise defined have the same meaning as in the Prospectus.
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Fund's shareholders
for the fiscal year ended March 31, 2000 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual report
are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY................................................ 1
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS................................ 1
Additional Investment Policies....................................... 1
Additional Information on Portfolio Instruments...................... 2
Special Considerations Relating to California Municipal Obligations.. 12
Investment Limitations............................................... 24
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 25
Distributor.......................................................... 25
Purchase of Shares................................................... 26
Redemption Procedures................................................ 27
Other Redemption Information......................................... 28
INVESTOR PROGRAMS......................................................... 29
Systematic Withdrawal Plan........................................... 29
Exchange Privilege................................................... 29
Retirement Plans..................................................... 30
Automatic Investment Program......................................... 30
Additional Information............................................... 31
DESCRIPTION OF CAPITAL STOCK.............................................. 31
MANAGEMENT OF THE FUND.................................................... 33
Directors and Officers............................................... 33
Investment Advisory, Sub-Advisory and Administration Agreements...... 39
Shareholder Organizations............................................ 42
Expenses............................................................. 43
Custodian and Transfer Agent......................................... 44
PORTFOLIO TRANSACTIONS.................................................... 45
PORTFOLIO VALUATION....................................................... 46
INDEPENDENT AUDITORS...................................................... 47
COUNSEL................................................................... 47
ADDITIONAL INFORMATION CONCERNING TAXES................................... 47
PERFORMANCE AND YIELD INFORMATION......................................... 51
CODE OF ETHICS............................................................ 54
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
MISCELLANEOUS............................................................. 54
FINANCIAL STATEMENTS...................................................... 55
APPENDIX A................................................................ A-1
</TABLE>
-ii-
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Tax-Exempt Funds, Inc. (the "Company") is an open-end,
management investment company. The Fund is a series of the Company and is
classified as non-diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company was organized as a Maryland corporation
on August 8, 1984. Prior to December 28, 1995 the Company was known as "UST
Master Tax-Exempt Funds, Inc."
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
------------------------------------------
The following information supplements the description of the
investment objective, strategies and risks as set forth in the Prospectus. The
investment objective of the Fund may be changed without shareholder approval.
Except as expressly noted below, the investment policies of the Fund also may be
changed without shareholder approval.
Additional Investment Policies
------------------------------
The Fund expects that, except during temporary defensive periods,
under normal market conditions 65% of the Fund's total assets will be invested
in debt securities of the State of California, its political sub-divisions,
authorities, agencies, instrumentalities and corporations, and certain other
governmental issuers, the interest from which is, in the opinion of bond counsel
to the issuer, exempt from federal and California personal income taxes
("California Municipal Obligations"). In general, the Fund anticipates that
dividends derived from interest on Municipal Obligations (as defined below under
"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.
The Fund invests in Municipal Obligations which are determined by the
Sub-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 net assets in Municipal Obligations. (This policy may not be changed
with respect to the Fund without the vote of the holders of a majority of its
outstanding shares.) However, from time to time on a temporary defensive basis
due to market conditions, the Fund may hold uninvested cash reserves or invest
in taxable obligations in such proportions as, in the opinion of the Sub-
Adviser, prevailing market or economic conditions may warrant. Uninvested cash
reserves will not earn income. Should the Fund invest in taxable obligations,
it would purchase: (i) obligations of the U.S. Treasury; (ii) obligations of
agencies and instrumentalities of the U.S. government; (iii) money market
instruments such as certificates of 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.
-1-
<PAGE>
In seeking to achieve its investment objective, the Fund may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest on
which is treated as a specific tax preference item under the federal alternative
minimum tax. Investments in such securities, however, will not exceed under
normal market conditions 20% of the Fund's total assets when added together with
any taxable investments held by the Fund.
The Municipal Obligations purchased by the Fund will consist of: (1)
bonds rated "BBB" or higher by Standard & Poor's Rating 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 Sub-Adviser to be comparable to BBB/Baa-rated issues; (2)
notes rated "MIG-3" or higher ("VMIG-3" or higher in the case of variable rate
notes) by Moody's, or "SP-3" or higher by S&P, or "F3" or higher by Fitch; and
(3) commercial paper rated "Prime-3" or higher by Moody's, or "A-3" or higher by
S&P, or "F3" or higher by Fitch. Securities rated "BBB" by S&P and Fitch or
"Baa" by Moody's are generally considered to be investment grade, although they
have speculative characteristics and are more sensitive to economic change than
higher rated securities. If not rated, securities purchased by the Fund will be
of comparable quality to the above ratings as determined by the Sub-Adviser
under the supervision of the Board of Directors. A discussion of Moody's,
Fitch's and S&P's rating categories is contained in Appendix A.
Although the Fund does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Sub-Adviser. To the extent
that the Fund's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the Fund will be subject to the peculiar risks
presented by such projects to a greater extent that it would be if the Fund's
assets were not so concentrated.
Additional Information on Portfolio Instruments
-----------------------------------------------
Municipal Obligations
---------------------
"Municipal Obligations" are debt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest from which is, in the opinion of bond
counsel to the issuer, exempt from federal income tax.
Municipal Obligations 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.
-2-
<PAGE>
The two principal classifications of Municipal Obligations which may
be held by the Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as user fees of
the facility being financed.
The Fund's portfolio may also include "moral obligation" securities,
which are usually issued by public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund - the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Fund.
The Fund may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments or both
with respect to specific underlying Municipal Obligations. In general, such
"stripped" Municipal Obligations are offered at a substantial discount in
relation to the principal and/or interest payments which the holders of the
receipt will receive. To the extent that such discount does not produce a yield
to maturity for the investor that exceeds the original tax-exempt yield on the
underlying Municipal Obligation, such yield will be exempt from federal income
tax for such investor to the same extent as interest on the underlying Municipal
Obligation. The Fund intends to purchase "stripped" Municipal Obligations only
when the yield thereon will be, as described above, exempt from federal income
tax to the same extent as interest on the underlying Municipal Obligations.
"Stripped" Municipal Obligations are considered illiquid securities subject to
the limit described below under "Illiquid Securities."
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 and S&P described in Appendix A hereto represent
their opinion as to the quality of Municipal Obligations. It should be
emphasized that these ratings are general and are not absolute standards of
quality, and Municipal Obligations with the same maturity, interest rate, and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by 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. The Sub-Adviser will consider such an event
in determining whether the Fund should continue to hold the obligation.
-3-
<PAGE>
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 multi-state agency of
which a state is a member, is a separate "issuer" as that term is used in this
Statement of Additional Information. The non-governmental user of facilities
financed by private activity bonds is also considered to be an "issuer." An
issuer's obligations under its Municipal Obligations are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Fund are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.
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, 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. 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.
-4-
<PAGE>
Money Market Instruments
------------------------
"Money market instruments" that may be purchased by the Fund in
accordance with its investment objective and policies include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Investments in time
deposits are limited to no more than 5% of the value of the Fund's total assets
at the time of purchase.
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, "F3" or higher by
Fitch, or "Prime-3" or higher by Moody's or, if not rated, determined to be of
comparable quality by the Sub-Adviser. These rating symbols are described in
Appendix A hereto.
Variable and Floating Rate Instruments
--------------------------------------
Securities purchased by the Fund may include variable and floating
rate instruments. The interest rates on such instruments are not fixed and vary
with changes in the particular interest rate benchmarks or indexes. Unrated
variable and floating rate instruments will be purchased by the Fund based upon
the Sub-Adviser's determination that their quality at the time of purchase is
comparable to at least the minimum ratings set forth above. In some cases the
Fund may require that the issuer's obligation to pay the principal be backed by
an unconditional and irrevocable bank letter or line of credit, guarantee or
commitment to lend. Although there may be no active secondary market with
respect to a particular variable or floating rate instrument purchased by the
Fund, the Fund may (at any time or during specific intervals within a prescribed
period, depending upon the instrument involved) demand payment in full of the
principal and may resell the instrument to a third party. The absence of an
active secondary market, however, could make it difficult for the Fund to
dispose of a variable or floating rate instrument in the event the issuer
defaulted on its payment obligation or during periods when the Fund is not
entitled to exercise its demand rights. In such cases, the Fund could suffer a
loss with respect to the instrument.
Repurchase Agreements
---------------------
The Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Fund will enter into repurchase agreements only
with financial institutions such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser. The Fund will not enter into repurchase
agreements with the Adviser, Sub-Adviser or their affiliates.
-5-
<PAGE>
Repurchase agreements with remaining maturities in excess of seven days will be
considered illiquid securities subject to the 10% limit described below under
"Illiquid Securities."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose
the Fund to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
repurchase agreements will be taxable.
The repurchase price under a repurchase agreement 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
1940 Act.
Investment Company Securities
-----------------------------
The Fund 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 the Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, the Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses. As such, the
Fund's shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by the Fund within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition against the Fund investing
more than 10% of the value of its total assets in such securities.
The Fund may invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a
Creation Unit. The liquidity
-6-
<PAGE>
of small holdings of SPDRs, therefore, will depend upon the existence of a
secondary market. Upon redemption of a Creation Unit, the Fund will receive
Index Securities and cash identical to the Portfolio Deposit required of an
investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of
a SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
When-Issued and Forward Transactions
------------------------------------
The Fund may purchase eligible securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by the Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When 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.
It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of the Fund's total assets absent unusual
market conditions, and that the length of such commitments will not exceed 45
days. The Fund does not intend to engage in "when-issued" purchases and
"forward commitments" for speculative purposes, but only in furtherance of its
investment objectives.
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
-7-
<PAGE>
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
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 Adviser's or Sub-Adviser's opinion, present
minimal credit risks. In evaluating the creditworthiness of the issuer of a
"stand-by commitment," the Adviser or Sub-Adviser will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information. The Fund will acquire "stand-by commitments" solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. "Stand-by commitments" acquired by the Fund will be valued at
zero in determining the Fund's net asset value.
Futures Contracts
-----------------
The Fund may invest in interest rate futures contracts and municipal
bond index futures contracts as a hedge against changes in market conditions. A
municipal bond index assigns values daily to the municipal bonds included in the
index based on the independent
-8-
<PAGE>
assessment of dealer-to-dealer municipal bond brokers. A municipal bond index
futures contract represents a firm commitment by which two parties agree to take
or make delivery of an amount equal to a specific dollar amount multiplied by
the difference between the municipal bond index value on the last trading date
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the underlying securities in the index is made.
Any income from investments in futures contracts will be taxable income of the
Fund.
The Fund may enter into contracts for the future delivery of fixed-
income securities commonly known as interest rate futures contracts. Interest
rate futures contracts are similar to municipal bond index futures contracts
except that, instead of a municipal bond index, the "underlying commodity" is
represented by various types of fixed-income securities.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with the Fund's securities investments. The Fund
may engage in futures contracts only to the extent permitted by the Commodity
Futures Trading Commission ("CFTC") and the Securities and Exchange Commission
("SEC"). The Fund currently intends to limit its hedging transactions in
futures contracts so that, immediately after any such transaction, the aggregate
initial margin that is required to be posted by the Fund under the rules of the
exchange on which the futures contract is traded does not exceed 5% of the
Fund's total assets, after taking into account any unrealized profits and
unrealized losses on the Fund's open contracts.
When investing in futures contracts, the Fund must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the 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 the Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when the Fund "covers" a futures position
generally by entering into an offsetting position. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if the Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. Such
sale of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge.
Transactions by the Fund in futures contracts may subject the Fund to
a number of risks. Successful use of futures by the Fund is subject to the
ability of the Sub-Adviser to correctly predict movements in the direction of
the market. For example, if the Fund has hedged
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<PAGE>
against the possibility of a decline in the market adversely affecting
securities held by it and securities prices increase instead, the Fund will lose
part or all of the benefit to the increased value of its securities which it has
hedged because it will have approximately equal offsetting losses in its futures
positions. There may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts and movements in the
price of the instruments being hedged. In addition, investments in futures may
subject the Fund to losses due to unanticipated market movements which are
potentially unlimited. Further, there is no assurance that a liquid market will
exist for any particular futures contract at any particular time. Consequently,
the Fund may realize a loss on a futures transaction that is not offset by a
favorable movement in the price of securities which it holds or intends to
purchase or may be unable to close a futures position in the event of adverse
price movements.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions 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.
-10-
<PAGE>
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
The Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. The 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 the Fund enters into a reverse repurchase agreement,
it will place in a segregated custodial account liquid assets having a value
equal to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the repurchase price of those securities.
Illiquid Securities
-------------------
The 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 Fund has valued the security. The 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 Sub-Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in the Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.
Portfolio Turnover
------------------
The Fund may sell a portfolio investment immediately after its
acquisition if the Sub-Adviser believes that such a disposition is consistent
with the Fund's investment objective. Portfolio investments may be sold for a
variety of reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold the investments.
A high rate of portfolio turnover may involve correspondingly greater
transaction costs, which must be borne directly by the Fund and ultimately by
its shareholders. Portfolio turnover will not be a limiting factor in making
portfolio decisions. High portfolio turnover may result in the realization of
substantial net capital gains. To the extent that net short-term capital gains
are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
Miscellaneous
-------------
The Fund may not invest in oil, gas, or mineral leases.
-11-
<PAGE>
Special Considerations Relating to California Municipal Obligations
-------------------------------------------------------------------
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. While the Company has not independently
verified such information, it has no reason to believe that such information is
not correct in all material respects.
Economic Factors
1995-96 through 1997-98 Fiscal Years
With the end of the recession of the early 1990's and a growing
economy beginning in 1995, the State's financial condition improved markedly
through a combination of increasing revenues, slowdown in growth of social
welfare programs, and continued spending restraint.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (approximately $2.2
billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.7
billion in 1998-99) than were initially planned when the budgets were enacted.
These additional funds were largely directed to school spending as mandated by
Proposition 98, to make up shortfalls from reduced federal health and welfare
aid in 1995-96 and 1996-97 and to fund new program incentives in 1998-99. The
accumulated budget deficit from the recession years was eliminated.
1998-99 Fiscal Year Budget
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement on a total
of $1.4 billion of tax cuts. The central element was a bill which provided for
a phased-in reduction of the Vehicle License Fee ("VLF"). Since the VLF is
transferred to cities and counties under existing law, the bill provided for the
General Fund to replace the lost revenues. Starting on January 1, 1999, the VLF
was reduced by 25 percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, and less in future years), a nonrefundable
renter's tax credit ($133 million), and various targeted business tax credits
($106 million).
-12-
<PAGE>
2. Proposition 98 funding for K-14 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, approximately $300
million higher than the minimum Proposition 98 guarantee. Of the 1998-99 funds,
major new programs included money for instructional and library materials,
previously deferred maintenance, support for increasing the school year to 180
days and reduction of class sizes in Grade 9.
3. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $340 million (15.6
percent) for the University of California and $267 million (14.1 percent) for
the California State University system. In addition, Community Colleges funding
increased by $300 million (6.6 percent).
4. The budget included increased funding for health, welfare and
social services programs. A 4.9 percent grant increase was included in the basic
welfare grants, the first increase in those grants in nine years.
5. Funding for the judiciary and criminal justice programs increased
approximately 11 percent over 1997-98, primarily to reflect increased State
support for local trial courts and rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State realized
savings of $433 million from a reduction in the State's contribution to the
State Teacher's Retirement System in 1998-99.
1999-2000 Fiscal Year Budget
The following were major features of the 1999 Budget Act:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-2000 funds, major
new programs included money for reading improvement, new textbooks, school
safety, improving teacher quality, funding teacher bonuses, providing greater
accountability for school performance, increasing preschool and after school
care programs and funding deferred maintenance of school facilities.
2. Funding for higher education increased substantially above the
actual 1998-99 level. General Fund support was increased by $184 million (7.3
percent) for the University of California and $126 million (5.9 percent) for the
California State University system. In addition, Community Colleges funding
increased by $324.3 million (6.6 percent). As a result, undergraduate fees at
the University of California and the
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<PAGE>
California State University System were reduced for the second consecutive year,
and the per-unit charge at Community Colleges was reduced by $1.
3. The Budget included increased funding of nearly $600 million for
health and human services.
4. About $800 million from the General Fund was directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, initial planning costs for a new prison in the Central
Valley, additional equipment for train and ferry service, and payment of
deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about $250
million in each of FY 1999-2000 and 2000-01 to make up lost funding to local
governments. Conversion of this one-time reduction to a permanent cut will
remain subject to the revenue tests in the legislation adopted in the prior
year.
6. A one-time appropriation of $150 million, to be split between
cities and counties, was made to offset property tax shifts during the early
1990's. Additionally, an ongoing $50 million was appropriated as a subvention to
cities for jail booking or processing fees charged by counties when an
individual arrested by city personnel is taken to a county detention facility.
The State's Legislative Analyst ("LAO") issued a report in February 2000
indicating General Fund revenues for the 18-month period (January 2000 through
June 2001) could be as much as $4.2 billion higher than the 2000-01 Governor's
Budget estimates. The LAO estimate was issued after analyzing actual revenues
for December 1999 and January 2000, which were not available at the time the
Governor's Budget estimates were prepared. The LAO report assumed the
continuation of strong economic growth in the State during this period.
Proposed 2000-01 Fiscal Year Budget
On January 10, 2000, Governor Davis released his proposed budget for
Fiscal Year 2000-01. The 2000-01 Governor's Budget generally reflects that
General Fund revenues for Fiscal Year 1999-2000 will be higher than projections
made at the time of the 1999 Budget Act.
The Governor's Budget projects General Fund revenues and transfers in
2000-01 of $68.2 billion. This includes anticipated payments from the tobacco
litigation settlement of $387.9 million and the receipt of one-time revenue from
the sale of assets.
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More accurate revenue estimates will be available in May and June before the
adoption of the Budget. The Governor has proposed $167 million in tax reduction
initiatives.
The Governor's Budget proposes General Fund expenditures of $68.8 billion.
Included in the Budget are set-asides of $500 million for legal contingencies
and $100 million for various one-time legislative initiatives. Based on the
proposed revenues and expenditures, the Governor's Budget projects the June 30,
2001 balance in the SFEU to be $1.238 billion.
Constitutional, Legislative and Other Factors
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.
Revenue Distribution. Certain debt obligations in the Fund may be
obligations of issuers which rely in whole or in part on 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.
Health Care Legislation. Certain debt obligations in the Portfolio
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 Debt 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 requires that
the State 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 are paid for
non-emergency acute inpatient services rendered to 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 state legislature
appropriates adequate funding therefor.
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<PAGE>
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient 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 debt 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 debt obligations, State law requires the State Treasurer to
issue debentures payable out of a reserve fund established under the insurance
program or to pay principal and interest on an unaccelerated basis from
unappropriated State funds. The Office of Statewide Health Planning and
Development commissioned various studies commencing 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. The most recent study, prepared in December 1998 by
Ernst & Young LLP, concluded, among other things, that although the fund would
not meet California private insurance reserve standards, reserves were
sufficient and, assuming "normal and expected" conditions, the Health Facility
Construction Loan Insurance Fund, as of June 30, 1998, should maintain a
positive balance over the long term.
Mortgages and Deeds. Certain debt obligations in 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 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
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<PAGE>
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 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 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 after expiration of the three-month
reinstatement period which notice of sale must be given at least 20 days before
the scheduled sales date. 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 debt obligations if such defaults occur with
respect to a substantial number of mortgages or deeds of trust securing an
issuer's obligations.
In addition, a court could find that there is sufficient involvement
of the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the private-
right-of-sale proceedings violate the due process requirements of the Federal or
State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain debt obligations in 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 statutory limitations described above
applicable to obligations secured by real property. Under 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.
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 debt obligations which financed such home mortgages.
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<PAGE>
Proposition 13. Certain of the Debt Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value to be collected by the counties
and apportioned according to law. The 1% limitation does not apply to ad
valorem taxes or special assessments to pay the interest and redemption charges
on any bonded indebtedness for the acquisition or improvement of real property
approved by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under `full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978, and that each county will levy the maximum
tax permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In 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.
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<PAGE>
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.
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;
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<PAGE>
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;
5. Prohibits the imposition of transaction taxes and sales taxes on
the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or after
August 1, 1985 be ratified by a majority vote of the electorate within two years
of the adoption of the initiative;
7. Requires that, in the event a local government fails to comply
with the provisions of this measure, a reduction in the amount of property tax
revenue allocated to such local government occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in violation of
the initiative; and
8. Permits these provisions to be amended exclusively by the voters
of the State of California.
In September 1988, the California Court of Appeal in City of
-------
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
-------------------------------
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal. App. 3d
-------------------------
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
-------------------
City of Woodlake decisions.
----------------
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28,
------------------------------------------------------
1995) 11 Cal. 4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal. 4th 344e,
----- ------ --------
the California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
----------------
correctness of the City of Westminster decision, because that case appeared
-------------------
distinguishable, was not relied on by the parties in
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<PAGE>
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.
----------------
In McBrearty v. City of Brawley, 59 Cal. App. 4th 1441, 69 Cal. Rptr.
----------------------------
2d 862 (Cal. Ct. App. 1997), the Court of Appeal held that the city of Brawley
must either hold an election or cease collection of utility taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance imposing
a utility tax on its residents and began collecting the tax without first
seeking voter approval. In 1996, the taxpayer petitioned for writ of mandate
contending that Proposition 62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of
mandamus and the city appealed.
First, the Court of Appeal held that the taxpayer's cause of action
accrued for statute of limitation purposes at the time of the Guardino decision
--------
rather than at the time when the city adopted the tax ordinance which was July
1991. Second, the Court held that the voter approval requirement in Proposition
62 was not an invalid mechanism under the state constitution for the involvement
of the electorate in the legislative process. Third, the Court rejected the
city's argument that Guardino should only be applied on a prospective basis.
--------
Finally, the Court held Proposition 218 (see discussion below) did not impliedly
protect any local general taxes imposed prior January 1, 1995 against challenge.
Assembly Bill 1362 (Mazzoni), introduced February 28, 1997, which
would have made the Guardino decision inapplicable to any tax first imposed or
--------
increased by an ordinance or resolution adopted before December 14, 1995, was
vetoed by the Governor on October 11, 1997. The California State Senate had
passed the Bill on May 16, 1996 and the California State Assembly had passed the
bill on September 11, 1997. It is not clear whether the Bill, if enacted, would
have been constitutional as a non-voted amendment to Proposition 62 or as a non-
voted change to Proposition 62's operative date.
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. 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. For example, as discussed below, a California appellate
court in the case of Consolidated Fire Protection Dist. et al. v. Howard Jarvis
Taxpayers' Assoc., 63 Cal. App. 4/th/ 211 (1998) upheld one of the provisions of
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<PAGE>
Proposition 218 that allows a majority of affected property owners to defeat
local government attempts to increase certain property-based fee or charges.
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.
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 revenues
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
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<PAGE>
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. This aspect of
Proposition 218, section 4 of Article XIIID, was found not to constitute an
unlawful referendum pursuant to Article II, section 9 of the California
Constitution. Following Guardino, supra, in this regard, the court held that
--------- -----
these "balloting procedures" were constitutional. Consolidated Fire Protection
----------------------------
Dist., supra, at 225-26. 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 approved by voters on or after January 1, 1989.
Information Technology
The State's and other political subdivisions' reliance on information
technology in many aspects of their operations has made Year 2000-related
("Y2K") information technology ("IT") issues a high priority for such agencies.
At the State level, the Department of Information Technology ("DOIT"), an
independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000. The DOIT has created a Year 2000 Task Force and a
California 2000 Office to establish statewide policy requirements; to gather,
coordinate, and share information; and to monitor statewide progress. In
December 1996, the DOIT began requiring departments to report on Y2K activities
and currently requires departmental monthly reporting of Y2K status. Various
other regional and local programs have also been undertaken at those levels of
government.
While substantial progress has been made toward the goal of Y2K
compliance, the State has indicated that it cannot predict whether all mission
critical systems will be ready and tested by late 1999 or what the impact
failure of any particular IT system(s) or of outside interfaces with IT systems
might have. Similar issues could arise with respect to programs at other levels
of government.
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<PAGE>
Investment Limitations
----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed only by a vote of the
holders of a majority of the Fund's outstanding shares. As used herein, a "vote
of the holders of a majority of the outstanding shares" of the Company or the
Fund means, with respect to the approval of an investment advisory agreement or
a change in a fundamental investment policy, the affirmative vote of the lesser
of (a) more than 50% of the outstanding shares of the Company or the Fund, or
(b) 67% or more of the shares of the Company or the Fund present at a meeting if
more than 50% of the outstanding shares of the Company or the Fund are
represented at the meeting in person or by proxy.
The Fund may not:
1. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing, provided that the Fund may enter into futures contracts and
futures options. (This borrowing provision is included solely to facilitate the
orderly sale of portfolio securities to accommodate abnormally heavy redemption
requests and is not for leverage purposes.) The Fund will not purchase portfolio
securities while borrowings in excess of 5% of its total assets are outstanding;
2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that 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;
3. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
4. 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;
5. 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;
6. Purchase or sell real estate, except that the Fund may invest in
Municipal Obligations secured by real estate or interests therein;
-24-
<PAGE>
7. 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;
8. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that the Fund may enter into futures contracts and futures
options;
9. 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
10. 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.
* * *
In addition to the investment limitations described above, the Fund
will not purchase securities of any one issuer if, as a result, more than 5% of
the value of the Fund's total assets would be invested in the 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 the Company's Board of Directors without shareholder
approval. For purposes of this policy: (a) a security is considered to be
issued by the governmental entity or entities whose assets and revenues back the
security, or, with respect to a private activity bond that is backed only by the
assets and revenues of a non-governmental user, such non-governmental user; (b)
in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the United States government, its agencies or
instrumentalities (including securities backed by the full faith and credit of
the United States) are deemed to be U.S. government obligations.
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 securities will not constitute a violation of such limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
-----------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800
-25-
<PAGE>
Corporate Drive, Pittsburgh, PA 15237-5829. The Distributor has agreed to use
appropriate efforts to solicit all purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Fund.
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 Fund or for providing substantial marketing, sales and operational
support. The support may include initiating customer accounts, participating in
sales, educational and training seminars, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of shares the
financial institution sells or may sell, and/or upon the type and nature of
sales or marketing support furnished by the financial institution.
Purchase of Shares
------------------
Shares of the Fund are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser and Sub-Adviser, their affiliates and correspondent banks, and other
Shareholder Organizations that have entered into agreements with the Company. A
Shareholder Organization may elect to hold of record shares for its
-26-
<PAGE>
Customers and to record beneficial ownership of shares on the account statements
provided by it to its Customers. If it does so, it is the Shareholder
Organization's responsibility to transmit to the Distributor all purchase
requests for its Customers and to transmit, on a timely basis, payment for such
requests to Chase Global Funds Services Company ("CGFSC"), the Fund's sub-
transfer agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
(and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Fund, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Fund bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."
Redemption Procedures
---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).
As discussed in the Prospectus, a redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
-27-
<PAGE>
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
----------------------------
The Company may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
the Fund's portfolio securities.
The Company 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 the Company and valued in the same way as they would be
valued for purposes of computing the Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. The Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, 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, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of the Fund.
-28-
<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 CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund 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 the
Company or Excelsior Funds, Inc. ("Excelsior Fund" and, collectively with the
Company, the "Companies") or for shares of Excelsior Institutional Trust. An
exchange involves a redemption of all or a portion of the shares in the Fund and
the investment of the redemption proceeds in shares of another portfolio. The
redemption will be made at the per share net asset value of the shares being
redeemed next determined after the exchange request is received in good order.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares next determined after receipt of the exchange
request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other
-29-
<PAGE>
shareholders, the Companies and Excelsior Institutional Trust reserve the right
to limit the number of exchange requests of Investors to no more than six per
year. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, such program directly
from their Shareholder Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
. Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and
their employees; and
. Keogh Plans for self-employed individuals.
Investors investing in the Fund pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment for
IRAs is $250 and the minimum subsequent investment is $50. Detailed information
concerning eligibility, service fees and other matters related to these plans
can be obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Customers of Shareholder Organizations may purchase shares of the Fund pursuant
to retirement plans if such plans are offered by their Shareholder
Organizations.
Automatic Investment Program
----------------------------
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows
-30-
<PAGE>
more shares to be purchased during periods of lower share prices and fewer
shares during periods of higher prices. In order to be effective, dollar cost
averaging should usually be followed on a sustained, consistent basis. Investors
should be aware, however, that shares bought using dollar cost averaging are
purchased without regard to their price on the day of investment or to market
trends. In addition, while Investors may find dollar cost averaging to be
beneficial, it will not prevent a loss if an Investor ultimately redeems his
shares at a price which is lower than their purchase price. The Company may
modify or terminate this privilege at any time or charge a service fee, although
no such fee currently is contemplated. An Investor may also implement the dollar
cost averaging method on his own initiative or through other entities.
Additional Information
----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
The Company's Charter authorizes its Board of Directors to issue up to
twenty-four billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into nineteen series of shares representing interests in seven
investment portfolios.
Each share in the Fund represents an equal proportionate interest in
the 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 the Fund
as are declared in the discretion of the Company's Board of Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of 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 the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.
Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted
-31-
<PAGE>
upon affects only the interests of the shareholders of a particular class.
Voting rights are not cumulative and, accordingly, the holders of more than 50%
of the aggregate of the Company's shares may elect all of the Company's
directors, regardless of votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of the Company voting
without regard to class.
The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of 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 of the Fund 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 the Company, if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
the Fund to be redeemed at their net asset value or converted into shares of
another class of the Company's common stock at net asset value. The exercise
of such authority by the Board of Directors will be subject to the provisions of
the 1940 Act, and the Board of Directors will not take any action described in
this paragraph unless the proposed action has been disclosed in writing to the
Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of 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 the Company's Charter,
the Company may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the Company voting
without regard to class.
Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.
-32-
<PAGE>
MANAGEMENT OF THE FUND
----------------------
Directors and Officers
----------------------
The business and affairs of the Fund are managed under the direction
of the Company's Board of Directors. The directors and executive officers of
the Company, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ---------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards
238 June Road President & Treasurer (since 1997) and President, Treasurer
Stamford, CT 06903 and Director (since 1995) of
Age: 69 Excelsior Funds, Inc. and the
Company; Chairman of the Boards
(since 1997), President, Treasurer
and Trustee (since 1995) of Excelsior
Funds and Excelsior Institutional
Trust; Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York
(from February 1990 until September
1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).
</TABLE>
____________________________
/1/ This director is considered to be an "interested person" of the Company
as defined in the 1940 Act.
-33-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ---------- ------------------
<S> <C> <C>
Rodman L. Drake Director Director of Excelsior Funds, Inc. and
Continuation Investments Group, Inc. the Company (since 1996); Trustee,
1251 Avenue of the Americas, 9/th/ Floor Excelsior Institutional Trust and
New York, NY 10020 Excelsior Funds (since 1994);
Age: 57 Director, Parsons Brinkerhoff, Inc.
(engineering firm) (since 1995);
President, Continuation Investments
Group, Inc. (since 1997); President,
Mandrake Group (investment and
consulting firm) (1994-1997);
Chairman, MetroCash, Card
International, Inc. (since 1999);
Director, Hotelvision, Inc. (since
1999); Director, Alliance Group
Services, Inc. (since 1998);
Director, Hyperion Total Return Fund,
Inc. and three other funds for which
Hyperion Capital Management, Inc.
serves as investment adviser (since
1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993
to 1996); Director, The Latin America
Smaller Companies Fund, Inc.
(1993-1998); Member of Advisory
Board, Argentina Private Equity Fund
L.P. (from 1992 to 1996) and Garantia
L.P. (Brazil) (from 1993 to 1996);
and Director, Mueller Industries,
Inc. (from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of Excelsior Funds,
913 Franklin Lake Road Inc. and the Company (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable
Age: 75 Series, Inc. (from 1994 to June
1997); and Trustee of Excelsior
Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Funds,
2320 Cumberland Road Inc. and the Company (since 1986);
Charlottesville, VA Director of UST Master Variable
22901-7726 Series, Inc. (from 1994 to June
Age: 79 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>
-34-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ---------- ------------------
<S> <C> <C>
Morrill Melton Hall, Jr. Director Director of Excelsior Funds, Inc. and the Company
Comprehensive Health Services, Inc. (since July 30, 2000); Trustee, Excelsior
8229 Boone Blvd., Suite 700 Institutional Trust (since July 30, 2000);
Vienna, VA 22182 Chief Executive Officer, Comprehensive
Age: 55 Health Services, Inc. (health care
management and administration).
Jonathan Piel Director Director of Excelsior Funds, Inc. and
558 E. 87th Street the Company (since 1996); Trustee,
New York, New York 10128 Excelsior Institutional Trust and
Age: 61 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 Funds, Inc. and
Church Pension Group the Company (since 1987); Director of
445 Fifth Avenue UST Master Variable Series, Inc.
New York, NY 10016 (from 1994 to June 1997); Trustee of
Age: 74 Excelsior Institutional Trust (since
1995); President Emeritus, The Church
Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and
Director of its wholly-owned
subsidiaries--Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1995);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since
1995).
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ---------- ------------------
<S> <C> <C>
Alfred C. Tannachion/2/ Director Retired; Director of Excelsior Funds,
6549 Pine Meadows Drive Inc. and the Company (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior
Age: 74 Funds, Inc. and the Company
(1991-1997) and Excelsior
Institutional Trust (1996-1997);
President and Treasurer of Excelsior
Funds, Inc. and the Company
(1994-1997) and Excelsior
Institutional Trust (1996-1997);
Chairman of the Board, President and
Treasurer of UST Master Variable
Series, Inc. (1994-1997); and Trustee
of Excelsior Institutional Trust
(since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company
Services Company (November 1996 to present); and
73 Tremont Street Officer and Manager of Financial
Boston, MA 02108-3913 Reporting, Investors Bank & Trust
Age: 39 Company (January 1991 to November
1996).
</TABLE>
_______________________________________
/2/ This director is considered tobe an "interested person" of the Company as
defined in the 1940 Act.
-36-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
---------------- ---------- ------------------
<S> <C> <C>
Patricia M. Leyne Assistant Treasurer Vice President, Senior Manager of
Chase Global Funds Fund Administration, Chase Global
Services Company Funds Administration, Chase Global
73 Tremont Street Funds Services Company (since
Boston, MA 02108-3913 August, 1999); Assistant Vice
Age: 33 President, Senior Manager of Fund
Administration, Chase Global Funds
Services Company (from July 1998
to August 1999); Assistant
Treasurer, Manager of Fund
Administration, Chase Global Funds
Services Company (from November
1996 to July 1998); Supervisor,
Chase Global Funds Services
Company (from September 1995 to
November 1996); Fund
Administrator, Chase Global Funds
Services Company (from February
1993 to September 1995).
</TABLE>
Each director of the Company receives an annual fee of $9,000 from
each of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000
from Excelsior Institutional Trust plus a meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses received in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. Drinker Biddle &
Reath LLP, of which Messrs. McConnel and Malloy are partners, receives legal
fees as counsel to the Company. The employees of Chase Global Funds Services
Company do not receive any compensation from the Company for acting as officers
of the Company. No person who is currently an officer, director or employee of
the Adviser or Sub-Adviser serves as an officer, director or employee of the
Company. As of July 7, 2000, the directors and officers of the Company as a
group owned beneficially less than 1% of the outstanding shares of each fund of
the Company, and less than 1% of the outstanding shares of all funds of the
Company in the aggregate.
The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.
-37-
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Estimated Compensation
Aggregate Retirement Annual from
Compensation Benefits Accrued Benefits the Company and
from As Part of Upon Fund Complex*
Name of Person/Position the Company Fund Expenses Retirement Paid to Directors
--------------------------- ------------------- --------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Donald L. Campbell*** $ 9,000 None None $22,000(3)**
Director
Rodman L. Drake $15,500 None None $38,750(4)**
Director
Joseph H. Dugan $16,500 None None $38,250(3)**
Director
Wolfe J. Frankl $15,000 None None $35,000(3)**
Director
Jonathan Piel $17,000 None None $42,000(4)**
Director
Robert A. Robinson $17,000 None None $39,500(3)**
Director
None
Alfred C. Tannachion $16,500 None $38,250(3)**
Director
Frederick S. Wonham $21,500 None None $52,000(4)**
Chairman of the Board,
President and Treasurer
</TABLE>
_______________
* The "Fund Complex" consists of the Company, Excelsior Funds, Inc.,
Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
*** Mr. Campbell resigned from the Boards of the Companies as of July 31,
2000.
-38-
<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 (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Fund. U.S. Trust Company,
N.A. 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 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 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 services provided and expenses assumed pursuant to the
Investment Advisory Agreement, the Adviser is entitled to be paid a fee computed
daily and paid monthly, at the annual rate of 0.50% of the Fund's average daily
net assets. The Sub-Adviser is entitled to receive from the Adviser an annual
fee, computed and paid monthly, at the annual rate of 0.50% of the Fund's
average daily net assets.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Company
paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------------- ----------------------- -----------------------
<S> <C> <C> <C>
California Tax-Exempt Income Fund $317,994 $0 $0
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for the Fund. During
the periods stated, these waivers reduced advisory fees by the following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------------- ----------------------- -----------------------
<S> <C> <C> <C>
California Tax-Exempt Income Fund $176,664 $240,924 $129,359
</TABLE>
-39-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Company
paid the Sub-Adviser fees for sub-advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------------- ----------------------- -----------------------
<S> <C> <C> <C>
California Tax-Exempt Income Fund $ 0 $0 $0
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Sub-
Adviser voluntarily agreed to waive a portion of its sub-advisory fees for the
Fund. During the periods stated, these waivers reduced sub-advisory fees by the
following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------------- ----------------------- -----------------------
<S> <C> <C> <C>
California Tax-Exempt Income Fund $0 $0 $129,359
</TABLE>
For the fiscal year ended March 31, 1998, the Adviser reimbursed
expenses totaling $63,053 with respect to the Fund.
The Investment Advisory Agreement and the Sub-Advisory Agreement
provide that the 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 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 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 Adviser has undertaken in the Investment Advisory
Agreement to maintain its policy and practice of conducting its Asset Management
Group independently of its Banking Group.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
officers, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
-40-
<PAGE>
CGFSC, Federated Services Company (an affiliate of the Distributor)
and U.S. Trust Company (together, the "Administrators") serve as the Fund's
administrators and provide the Fund with general administrative and operational
assistance. Prior to July 31, 2000 Federated Administrative Services, a
subsidiary of Federated Services Company, served as the Fund's Administrator.
On July 31, 2000, Federated Services Company assumed all of its subsidiaries'
rights and obligations under the Administration Agreement. 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.
Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company, 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.
The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior Fund and Excelsior Institutional Trust which are also advised by U.S.
Trust and its affiliates and distributed by the Distributor. For services
provided to all of the investment portfolios of the Company, Excelsior Fund and
Excelsior Institutional Trust (except for the international portfolios of
Excelsior Fund and Excelsior Institutional Trust), the Administrators are
entitled jointly to fees, computed daily and paid monthly, based on the combined
aggregate average daily net assets of the three companies (excluding the
international portfolios of Excelsior Fund and Excelsior Institutional Trust) as
follows:
Combined Aggregate Average Daily Net Assets
of the Company, Excelsior Fund and
Excelsior Institutional Trust (excluding the international portfolios
of Excelsior Fund and Excelsior Institutional Trust)
----------------------------------------------------
Annual Fee
----------
First $200 million.................................... 0.200%
Next $200 million.................................... 0.175%
Over $400 million.................................... 0.150%
Administration fees payable to the Administrators by each portfolio of
the Company, 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 the Fund, which
waivers may be terminated at any time.
-41-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Fund for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
California Tax-Exempt Income Fund $96,808 $73,723 $39,584
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
California Tax-Exempt Income Fund $0 $0 $0
</TABLE>
Shareholder Organizations
-------------------------
The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for 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) transmitting and receiving funds in connection
with Customer orders to purchase, exchange or redeem shares; (d) providing
periodic statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Company to Customers; and
(g) providing or arranging for the provision of other related services. It is
the responsibility of Shareholder Organizations to advise Customers of any fees
that they may charge in connection with a Customer's investment.
The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company.
Pursuant to the Plan, the Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of the Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
-42-
<PAGE>
Any material amendment to the Company'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 the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------
<S> <C> <C>
California Tax-Exempt Income Fund $208,281 $108,271
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------
<S> <C> <C>
California Tax-Exempt Income Fund $139,223 $139,223
</TABLE>
For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------
<S> <C> <C>
California Tax-Exempt Income Fund $91,274 $91,274
</TABLE>
Expenses
--------
Except as otherwise noted, the 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 the Company'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.
-43-
<PAGE>
Custodian and Transfer Agent
----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, 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 the Company'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. Communications to the
custodian should be directed to Chase, Mutual Funds Service Division, 3 Chase
MetroTech Center, 8/th/ Floor, Brooklyn, New York 11245.
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 the Company'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 is located at 114 W. 47/th/ Street, New York, New York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
-44-
<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Company's Board of Directors,
the 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.
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 securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
With respect to over-the-counter transactions, the Fund, where possible, will
deal directly with dealers who make a market in the securities involved, except
in those situations where better prices and execution are available elsewhere.
The Investment Advisory and Sub-Advisory Agreements provide that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
and Sub-Adviser will seek to obtain the best net price and the most favorable
execution. The 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 the Company, 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 Adviser and Sub-Adviser, to the extent permitted by law and
subject to the review of the Company's Board of Directors from time to time with
respect to the extent and continuation of the policy, to cause the Fund to pay a
broker which furnishes brokerage and research services a higher commission than
that which might be charged by another broker for effecting the same
transaction, provided that the Adviser 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 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.
-45-
<PAGE>
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and the Sub-
Adviser and does not reduce the investment advisory fee payable by the Fund.
Such information may be useful to the 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 Adviser or Sub-
Adviser in carrying out its obligations to the Fund.
Portfolio securities will not be purchased from or sold to the
Adviser, the Sub-Adviser, the Distributor, or any of their affiliated persons
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the SEC.
Investment decisions for the Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the 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 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 Adviser and the Sub-Adviser may aggregate the securities to be sold
or purchased for the Fund with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Fund as of the close of the most recent fiscal year. As of
March 31, 2000, the Fund did not hold any securities of the Company's regular
brokers or dealers or their parents.
PORTFOLIO VALUATION
-------------------
Portfolio securities in the Fund for which market quotations are
readily available (other than debt securities maturing in 60 days or less) are
valued at market value. Securities and other assets for which market quotations
are not readily available are valued at fair value, pursuant to the guidelines
adopted by the Company's Board of Directors. Absent unusual circumstances,
portfolio securities maturing in 60 days or less are normally valued at
amortized cost. The net asset value of shares in the Fund will fluctuate as the
market value of its portfolio securities changes in response to changing market
rates or 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
prices. A futures contract is valued at the last sales price quoted on the
principal exchange or board of trade on which such contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices. Restricted
securities and
-46-
<PAGE>
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 Administrators have undertaken to price the securities in the
Fund's portfolio and may use one or more pricing services to value certain
portfolio securities in the Fund 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 to established will be reviewed by the
Administrators under the general supervision of the Board of Directors.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Company. The Fund's Financial Highlights
included in the Prospectus and the financial statements for the fiscal year
ended March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-6996,
is counsel to the Company.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Federal
-------
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, each Fund is treated as a separate
corporate entity, and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves a Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether
or not derived from interest on Municipal Securities) would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders. Moreover, if a Fund
were to fail to make sufficient distributions in a
-47-
<PAGE>
year, the Fund would be subject to corporate income taxes and/or excise taxes in
respect of the shortfall or, if the shortfall is large enough, the Fund could be
disqualified as a regulated investment company.
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 or for retirement plans
qualified under Section 401 of the Code, H.R. 10 plans and individual retirement
accounts because such plans and accounts are generally tax-exempt and,
therefore, not only would not gain any additional benefit from the 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.
-48-
<PAGE>
Any net long-term capital gains realized by the Fund will be
distributed at least annually. The Fund will generally have no tax liability
with respect to such gains and the distributions will be taxable to shareholders
as long-term capital gains, regardless of how long a shareholder has held
Shares. Such distributions will be designated as a capital gain dividend in a
written notice mailed by the Fund to shareholders not later than 60 days after
the close of the Fund's taxable year.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 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
-49-
<PAGE>
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 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
-50-
<PAGE>
application of such taxes to the receipt of Fund dividends and as to their own
California state tax situation, in general.
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. Shareholders will be advised at least annually as to the federal
and California personal income tax consequences of distributions made each year.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
The Fund may advertise the standardized effective 30-day (or one
month) yield calculated in accordance with the method prescribed by the SEC for
mutual funds. 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
-51-
<PAGE>
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, 2000 was 3.97%.
The Fund may from time to time advertise its "tax-equivalent yield" to
demonstrate the level of taxable yield necessary to produce an after-tax yield
equivalent to that achieved by the Fund. This yield is computed by increasing
the yield of the Fund's shares (calculated as above) by the amount necessary to
reflect the payment of federal income taxes (and California income taxes) at a
stated tax rate. 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, 2000 was 5.75%.
From time to time, the Fund may advertise its performance by using
"average annual total return" over various periods of time. Such total return
figure reflects the average percentage change in the value of an investment in
the Fund from the beginning date of the measuring period to the end of the
measuring period. Average total return figures will be given for the most
recent one-year period and may be given for other periods as well (such as from
the commencement of the Fund's operations, or on a year-by-year basis). The
Fund may also use aggregate total return figures for various periods,
representing the cumulative change in the value of an investment in the Fund for
the specific period. Both methods of calculating total return assume that
dividends and capital gain distributions made by the Fund during the period are
reinvested in Fund shares. 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.
-52-
<PAGE>
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, 2000 and for the period from October 1, 1996
(commencement of operations) to March 31, 2000 were 1.13% and 4.07%,
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 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.
-53-
<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.
Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of the Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.
CODE OF ETHICS
--------------
The Fund, U.S. Trust New York, U.S. Trust Company, U.S. Trust Company,
N.A. and the Distributor have adopted codes of ethics that allow personnel
subject to the codes to invest in securities, including securities that may be
purchased or held by the Funds.
MISCELLANEOUS
-------------
As used herein, "assets allocable to the Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments,
-54-
<PAGE>
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Company not belonging to a particular
portfolio of the Company. In determining the net asset value of the Fund, assets
allocable to the Fund are charged with the direct liabilities of the Fund and
with a share of the general liabilities of the Company which are normally
allocated in proportion to the relative asset values of the Company's portfolios
at the time of allocation. Subject to the provisions of the Company's Charter,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to the
Fund, are conclusive.
As of July 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the outstanding shares of the Company as agent or custodian
for their customers, but did not own such shares beneficially because they did
not have voting or investment discretion with respect to such shares.
As of July 7, 2000, the name, address and percentage of ownership of
each person, in addition to U.S. Trust and its affiliates, that owned
beneficially or of record 5% or more of the outstanding Shares of a Fund were as
follows: California Tax-Exempt Income Fund: David and Suzanne Johnson Comm.
---------------------------------
Prop., c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York 10036, 10.30%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report") for the Fund are incorporated in this Statement of
Additional Information by reference. No other parts of the 2000 Annual Report
are incorporated by reference herein. The financial statements included in the
2000 Annual Report for the Fund have been audited by the Company's independent
auditors, Ernst & Young LLP, whose reports thereon also appear in the 2000
Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 2000 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
-55-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard &Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished
A-1
<PAGE>
from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial
A-4
<PAGE>
or economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
-PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
-N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c)
A-6
<PAGE>
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
A-7
<PAGE>
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
-RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest. Issues
rated "BBB" are more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
A-9
<PAGE>
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
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"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
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