<PAGE>
As filed with the Securities and Exchange Commission on May 26, 2000
Registration Nos. 2-93068; 811-4101
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Excelsior Tax-Exempt Funds, Inc: Post-Effective Amendment No. 28 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
Excelsior Tax-Exempt Funds, Inc.: Amendment No. 30 [X]
(Exact Name of Registrant as Specified in Charter)
73 Tremont Street
Boston, Massachusetts 02108-3913
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 446-1012
W. Bruce McConnel, III
Drinker Biddle & Reath LLP
One Logan Square
18/th/ & Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(Name and Address of Agent for Service)
It is proposed that this post-effective amendment will become effective (check
appropriate box)
[_] Immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
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
Prospectus
August 1, 2000
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.
Page 1 of 52
<PAGE>
Any representation to the contrary is a criminal offense.
Page 2 of 52
<PAGE>
Table of Contents
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. are mutual fund
families that offer shares in separate investment portfolios which have
individual investment goals and strategies. This prospectus gives you important
information about 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. (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
Government 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 easily
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...............................................XXX
Government Money Fund....................................XXX
Treasury Money Fund......................................XXX
Tax-Exempt Money Fund....................................XXX
New York Tax-Exempt Money Fund...........................XXX
More Information About Risk..............................XXX
More Information About Fund Investments..................XXX
The Investment Adviser...................................XXX
Purchasing, Selling and Exchanging Fund Shares...........XXX
Dividends and Distributions..............................XXX
Taxes....................................................XXX
Financial Highlights.....................................XXX
How to Obtain More Information About Excelsior Funds.....Back Cover
</TABLE>
Page 3 of 52
<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 and strategies 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 manager's
judgments about the markets, the economy, or companies may not anticipate 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 investment 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 Insurance
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.
Page 4 of 52
<PAGE>
Money Fund
<TABLE>
<CAPTION>
Fund Summary
<S> <C>
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
</TABLE>
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
deposit, 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
conditions, 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
Page 5 of 52
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, 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
investment 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 calculate
how they will respond to changing interest rates.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility 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.
<TABLE>
<S> <C>
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 X.XX%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
Page 6 of 52
<PAGE>
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) X.XX% X.XX% X.XX%
</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.
Page 7 of 52
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
<TABLE>
<S> <C>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period of
one year from the date of this prospectus. For more information about these
fees, see "Investment Adviser."
</TABLE>
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
distributions. Although your actual costs and returns 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>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 8 of 52
<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
consistent 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
quality U.S. dollar-denominated money market instruments, including mortgage-
backed securities, issued or guaranteed by the U.S. government, its agencies and
instrumentalities and fully collateralized repurchase agreements. 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 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
Page 9 of 52
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, 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
investment 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 movements
due to changing interest rates. Obligations issued by some U.S. government
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 calculate
how they will respond to changing interest rates.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility 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.
<TABLE>
<S> <C>
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 X.XX%
BEST QUARTER WORST QUARTER
</TABLE>
Page 10 of 52
<PAGE>
<TABLE>
<S> <C> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
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>
Government Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Page 11 of 52
<PAGE>
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 X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
</TABLE>
Page 12 of 52
<PAGE>
<TABLE>
<S> <C> <C> <C>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 13 of 52
<PAGE>
TREASURY MONEY FUND
Fund Summary
<TABLE>
<S> <C>
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
</TABLE>
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. Treasury
obligations. The Fund also may invest, to a lesser extent, in high quality
obligations issued or guaranteed by U.S. government agencies and
instrumentalities. Generally, interest payments on obligations held by the Fund
will be exempt 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 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 Treasury Money Fund
Page 14 of 52
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, 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
investment 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 movements
due to changing interest rates. Obligations issued by some U.S. government
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.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility 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.
<TABLE>
<S> <C>
1992 3.68%
1993 2.66%
1994 3.61%
1995 5.27%
1996 4.81%
1997 4.89%
1998 4.82%
1999 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
Page 15 of 52
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Fund X.XX% X.XX% X.XX%
</TABLE>
* Since February 13, 1991
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Page 16 of 52
<PAGE>
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 17 of 52
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 18 of 52
<PAGE>
TAX-EXEMPT MONEY FUND
Fund Summary
<TABLE>
<S> <C>
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
</TABLE>
Investment Objective
The Tax-Exempt Money Fund seeks a moderate level of current interest income
exempt 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
quality money market instruments issued by state and local governments and
agencies, and other U.S. territories and possessions, that pay interest exempt
from federal taxes ("municipal money market instruments"). Banks and other
creditworthy entities may provide letters of credit and other credit
enhancements as to municipal money market instruments. Such institutions may
also provide liquidity 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.
Page 19 of 52
<PAGE>
In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment and an
extensive credit analysis, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes in interest rates and selects securities that it
believes 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
developments, 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
investment 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
securities. 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.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility 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.
<TABLE>
<S> <C>
1990 5.56%
1991 4.34%
1992 3.02%
1993 1.98%
1994 2.46%
1995 3.53%
</TABLE>
Page 20 of 52
<PAGE>
<TABLE>
<S> <C>
1996 3.11%
1997 3.25%
1998 3.09%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
<S> <C> <C>
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Fund X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Page 21 of 52
<PAGE>
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>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
</TABLE>
Page 22 of 52
<PAGE>
<TABLE>
<S> <C> <C> <C>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 23 of 52
<PAGE>
NEW YORK TAX-EXEMPT MONEY FUND
Fund Summary
<TABLE>
<S> <C>
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
</TABLE>
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
Page 24 of 52
<PAGE>
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 instruments"). Banks and other
creditworthy entities may provide letters of credit and other credit
enhancements for New York money market instruments. Such institutions may also
provide liquidity facilities that shorten the effective maturity 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 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
conditions, particularly interest rates. Based on this assessment and an
extensive credit analysis, 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.
Page 25 of 52
<PAGE>
Principal Risks of Investing in the New York Tax-Exempt Money Fund
The prices of the Fund's fixed income securities respond to economic
developments, 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
investment 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
securities. 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 adverse 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
obligations. 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
Page 26 of 52
<PAGE>
The bar chart and the performance table below illustrate the risks and
volatility 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.
<TABLE>
1999 X.XX%
---- -----
<S> <C>
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/XX/XX) (X/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the Fund's average annual total returns for the periods ended
December 31,1999.
<TABLE>
<CAPTION>
1 Year
- ---------------------------------------------------------
<S> <C>
New York Tax-Exempt Money Fund X.XX%
</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.
Page 27 of 52
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)*
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%/+/
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser."
+ Annualized.
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
distributions. Although your actual costs and returns 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>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 28 of 52
<PAGE>
More Information About Risk
Fixed Income Risk - The market value of fixed income All Funds
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. 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 - During periods of falling interest rates, All Funds
certain debt obligations 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 fluctuate, and may require a Fund to invest
the resulting proceeds at lower interest rates.
Credit Risk - The possibility that an issuer will be unable All Funds
to make timely payments of either principal or interest.
Event Risk - Securities may suffer declines in credit All Funds
quality and market value due to issuer restructurings
or other factors. This risk should be reduced because
of the Fund's multiple holdings.
<TABLE>
<S> <C>
Municipal Issuer Risk - There may be economic or political Tax-Exempt Money Fund
changes that impact the ability of municipal issuers to New York Tax-Exempt Money Fund
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
legislative limits
</TABLE>
Page 29 of 52
<PAGE>
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.
<TABLE>
<S> <C>
In addition, the Fund's concentration of investments in New York Tax-Exempt Money Fund
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 numerous
states.
</TABLE>
Page 30 of 52
<PAGE>
Page 31 of 52
<PAGE>
<TABLE>
<S> <C>
Mortgage-Backed Securities - Mortgage-backed securities are Money Fund
fixed income securities representing an interest in a pool Government Money Fund
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
possibility 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 security 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.
</TABLE>
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.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. The Merger, however, will represent a change of ownership
of the Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Funds, Inc. and the Adviser and between Excelsior Tax-Exempt
Funds, Inc. and the Adviser.
Page 32 of 52
<PAGE>
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Boards of Directors of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. approved new advisory agreements with the
Adviser on March 3, 2000. The new advisory agreements were subsequently
approved by a vote of shareholders of the Funds at meetings held in May 2000.
The new advisory agreements will become effective on the date of the
Merger.
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
management, 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.
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 [0.20%]
Government Money Fund [0.22%]
Treasury Money Fund [0.27%]
Tax-Exempt Money Fund [0.19%]
</TABLE>
Page 33 of 52
<PAGE>
New York Tax-Exempt Money Fund [X.XX%]
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to buy, 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, Boston,
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
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
ABA
#021000021
Excelsior Funds, Account Number 9102732915
For Further Credit:
To:
Excelsior
Funds
[Wire Control Number]
[Excelsior Funds Account Registration (including account number)]
Page 34 of 52
<PAGE>
Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
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
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 dealers,
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 merchandise,
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"). 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 order.
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
dividends 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.
Page 35 of 52
<PAGE>
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
portfolio 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
purchase 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
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.
Page 36 of 52
<PAGE>
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).
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
account number and sign the request.
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business 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. We may reject a telephone redemption request if we deem it advisable to
do so.
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
institution 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).
Page 37 of 52
<PAGE>
If you own your shares directly and previously indicated on your account
application 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
receives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic
withdrawal 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).
Page 38 of 52
<PAGE>
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
required 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 trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
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 any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or
by telephone if you previously selected the telephone exchange option on the
account application.
You may also exchange shares through your financial institution. Exchange
requests 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.
Page 39 of 52
<PAGE>
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
instructions, 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.
Page 40 of 52
<PAGE>
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 purchase,
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 transmitting
requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay a shareholder 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
organization.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying
accumulated 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
affiliates 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
(0.15% in the case of the Money Fund and Government Money Fund).
Page 41 of 52
<PAGE>
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' investments,
that a portion of these Funds' distributions could be taxable to shareholders 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.
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 railroad
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.
Page 42 of 52
<PAGE>
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
distributions, 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 nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, 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 situation.
More information about taxes is in the Statement of Additional Information.
Page 43 of 52
<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
single 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
_____________, independent public accountants. 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).
Page 44 of 52
<PAGE>
Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income 0.04901 0.05139 0.04888 0.05336
Net Gains on Securities (both realized and unrealized) 0.00000 0.00000 0.00000 0.00000
------- ------- ------- -------
Total From Investment Operations 0.04901 0.05139 0.04888 0.05336
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.04901) (0.05139) (0.04888) (0.05336)
Dividends in Excess of Net Investment Income 0.00000/2/ 0.00000 0.00000 0.00000
---------- --------- --------- ---------
Total Distributions (0.04901) (0.05139) (0.04888) (0.05336)
---------- --------- --------- ---------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
=========== ========= ========= =========
Total Return 5.01% 5.26% 5.00% 5.47%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $973.67 $658.87 $498.07 $394.29
Ratio of Net Operating Expenses to Average Net Assets 0.48% 0.48% 0.47% 0.50%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.52% 0.52% 0.53% 0.53%
Ratio of Net Investment Income to Average Net Assets 4.85% 5.14% 4.89% 5.40%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
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.
</TABLE>
Page 45 of 52
<PAGE>
Government Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income 0.04838 0.05082 0.04862 0.05296
Total From Investment Operations 0.04838 0.05082 0.04862 0.05296
------- ------- ------- --------
Less Distributions
Dividends From Net Investment Income (0.04838) (0.05082) (0.04862) (0.05296)
Dividends in Excess of Net Investment Income 0.00000/2/ 0.00000 0.00000 0.00000
---------- ------- ------- -------
Total Distributions (0.04838) (0.05082) (0.04862) (0.05296)
------- ------- ------- -------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return 4.95% 5.20% 4.97% 5.43%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $641.83 $600.12 $533.83 $461.47
Ratio of Net Operating Expenses to Average Net Assets 0.47% 0.47% 0.47% 0.50%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.50% 0.50% 0.51% 0.53%
Ratio of Net Investment Income to Average Net Assets 4.85% 5.09% 4.86% 5.36%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
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.
</TABLE>
<PAGE>
Treasury Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00
----- ----- ----- ------
Income From Investment Operations
Net Investment Income 0.04543 0.04853 0.04676 0.05043
Net Gains on Securities (both realized and unrealized) 0.00002 0.00000 0.00000 0.00000
------- ------- ------- -------
Total From Investment Operations 0.04545 0.04853 0.04676 0.05043
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.04545) (0.04853) (0.04676) (0.05043)
Dividends in Excess of Net Investment Income 0.00000 0.00000/2/ 0.00000 0.00000
Total Distributions (0.04545) (0.04853) (0.04676) (0.05043)
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00
========= =========== ========= =========
Total Return 4.64% 4.96% 4.78% 5.16%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $494.22 $469.64 $349.09 $258.17
Ratio of Net Operating Expenses to Average Net Assets 0.52% 0.52% 0.52% 0.55%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.55% 0.54% 0.54% 0.57%
Ratio of Net Investment Income to Average Net Assets 4.55% 4.86% 4.68% 5.03%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
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.
</TABLE>
Page 47 of 52
<PAGE>
Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income 0.02911 0.03216 0.03050 0.03362
Total From Investment Operations 0.02911 0.03216 0.03050 0.03362
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.02910) (0.03216) (0.03050) (0.03362)
Dividends in Excess of Net Investment Income (0.00001) 0.00000 0.00000 0.00000
--------- --------- --------- ---------
Total Distributions (0.02911) (0.03216) (0.03050) (0.03362)
--------- --------- --------- ---------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
========= ========= ========= =========
Total Return 2.95% 3.26% 3.09% 3.41%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $1,503.07 $1,396.53 $1,069.69 $ 966.71
Ratio of Net Operating Expenses to Average Net Assets 0.46% 0.47% 0.47% 0.49%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.52% 0.53% 0.52% 0.53%
Ratio of Net Investment Income to Average Net Assets 2.91% 3.21% 3.05% 3.35%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<S> <C>
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
</TABLE>
Page 48 of 52
<PAGE>
New York Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Period Ended March 31, 2000 Period Ended March 31, 1999/1/
--------------------------- -------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period
$1.00
-----
Income From Investment Operations
Net Investment Income 0.01711
Total From Investment Operations 0.01711
-------
Less Distributions
Dividends From Net Investment Income (0.01711)
Total Distributions (0.01711)
Net Asset Value, End of Period $1.00
=========
Total Return 1.72%/3/
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $305.72
Ratio of Net Operating Expenses to Average Net Assets 0.47%/2/
Ratio of Gross Operating Expenses to Average Net Assets/3/ 0.79%/2/
Ratio of Net Income to Average Net Assets 2.24%/2/
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
1. Inception date of the Fund was August 3, 1998.
2. Annualized.
3. Not Annualized.
</TABLE>
Page 49 of 52
<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
following:
Statement of Additional Information (SAI)
Page 50 of 52
<PAGE>
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
Page 51 of 52
<PAGE>
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, 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 Public
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 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]. The Investment Company Act
------------------
registration numbers of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
Inc. are 811-4088 and 811-4101, respectively.
Page 52 of 52
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
PROSPECTUS
AUGUST 1, 2000
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.
Page 1 of 37
<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 and
strategies. This prospectus gives you important information about the Long-Term
Tax-Exempt, Intermediate-Term Tax-Exempt, Short-Term Tax-Exempt Securities, 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 easily
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:
Page
LONG-TERM TAX-EXEMPT FUND.......................................XXX
INTERMEDIATE-TERM TAX-EXEMPT FUND...............................XXX
SHORT-TERM TAX-EXEMPT SECURITIES FUND...........................XXX
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND......................XXX
CALIFORNIA TAX-EXEMPT INCOME FUND...............................XXX
MORE INFORMATION ABOUT RISK.....................................XXX
MORE INFORMATION ABOUT FUND INVESTMENTS.........................XXX
THE INVESTMENT ADVISER, SUB-ADVISER
AND PORTFOLIO MANAGERS..........................................XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES..................XXX
DIVIDENDS AND DISTRIBUTIONS.....................................XXX
TAXES...........................................................XXX
FINANCIAL HIGHLIGHTS............................................XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR TAX-EXEMPT FUNDS......................................Back Cover
Page 2 of 37
<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 and strategies 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 manager's
judgments about the markets, the economy, or companies may not anticipate 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 investment 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 Insurance
Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, 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.
Page 3 of 37
<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
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 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
securities 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
developments, 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
Page 4 of 37
<PAGE>
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
securities. 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
markets as a whole.
Performance Information
- -----------------------
The bar chart and the performance table below illustrate the risks and
volatility 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.
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 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
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.
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Long-Term Tax-Exempt Fund X.XX% X.XX% X.XX%
Lehman Brothers Current Municipal Bond Index X.XX% X.XX% X.XX%
Page 5 of 37
<PAGE>
What is an Index?
An index measures the market prices of a specific group of securities in a
particular 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)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- -------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- -------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser, Sub-Adviser
and Portfolio 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 6 of 37
<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 stability
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 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 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
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 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
developments, 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
Page 7 of 37
<PAGE>
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
securities. 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 securities
may underperform other segments of the fixed income market or the fixed income
markets as a whole.
Performance Information
- -----------------------
The bar chart and the performance table below illustrate the risks and
volatility 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.
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 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
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.
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Intermediate-Term Tax-Exempt Fund X.XX% X.XX% X.XX%
Lehman Brothers 5 Year Municipal G.O. Bond Index X.XX% X.XX% X.XX%
Page 8 of 37
<PAGE>
What is an Index?
An index measures the market prices of a specific group of securities in a
particular 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)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- -----------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- -----------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser, Sub-Adviser
and Portfolio 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 9 of 37
<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
interest 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
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 emphasizes preservation of principal and
considers each security's yield and total return potential relative to other
available municipal securities. The Fund generally will have a dollar-weighted
average 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
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 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
developments, 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.
Page 10 of 37
<PAGE>
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 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
markets as a whole.
Performance Information
- -----------------------
The bar chart and the performance table below illustrate the risks and
volatility 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.
1993 5.49%
1994 (0.30)%
1995 7.41%
1996 3.68%
1997 4.58%
1998 4.58%
1999 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
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.
SINCE
1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
Short-Term Tax-Exempt Securities Fund X.XX% X.XX% X.XX%*
Lehman Brothers 3 Year Municipal Bond Index X.XX% X.XX% X.XX%*
* Since December 31, 1992
Page 11 of 37
<PAGE>
What is an Index?
An index measures the market prices of a specific group of securities in a
particular 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)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser, Sub-Adviser
and Portfolio 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 12 of 37
<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
investors with as high a level of current interest income exempt from federal
income tax and, to the extent possible, from New York State and New York City
personal income taxes as is consistent with relative stability of principal.
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
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 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
invest 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.
Page 13 of 37
<PAGE>
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
developments, 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
securities. 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 investments
in those securities.
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
markets as a whole.
Page 14 of 37
<PAGE>
Performance Information
- -----------------------
The bar chart and the performance table below illustrate the risks and
volatility 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.
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 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
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.
SINCE
1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
New York Intermediate-Term Tax-Exempt Fund X.XX% X.XX% X.XX%*
Lehman Brothers 5 Year Municipal Bond Index X.XX% X.XX% X.XX%*
* Since May 31, 1990
What is an Index?
An index measures the market prices of a specific group of securities in a
particular 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.
Page 15 of 37
<PAGE>
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)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ---------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ---------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser, Sub-Adviser
and Portfolio 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 16 of 37
<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 principal.
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 securities and
manages the Fund through gradual shifts in the Fund's average maturity. 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
ordinarily will not invest 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 California Tax-Exempt Income Fund
- ---------------------------------------------------------------------
The prices of the Fund's fixed income securities respond to economic
developments, 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
Page 17 of 37
<PAGE>
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
securities. 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
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 investments
in those securities.
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
markets as a whole.
Performance Information
- -----------------------
The bar chart and the performance table below illustrate the risks and
volatility 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.
1997 5.72%
1998 5.25%
1999 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
Page 18 of 37
<PAGE>
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 Index.
1 YEAR SINCE INCEPTION
- ---------------------------------------------------------------------------
California Tax-Exempt Income Fund X.XX% X.XX%*
Merrill Lynch 3-7 Year Municipal Index X.XX% X.XX%**
* 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
particular 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)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ----------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser, Sub-Adviser
and Portfolio 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
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 19 of 37
<PAGE>
MORE INFORMATION ABOUT RISK
FIXED INCOME RISK - The market value of fixed income All Funds
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. 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 - During periods of falling interest All Funds
rates, certain debt obligations 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 fluctuate, and may require a
Fund to invest the resulting proceeds at lower
interest rates.
CREDIT RISK - The possibility that an issuer will be All Funds
unable to make timely payments of either principal
or interest.
EVENT RISK - Securities may suffer declines in All Funds
credit quality and market value due to issuer
restructurings or other factors. This risk should
be reduced because of a Fund's multiple holdings.
MUNICIPAL ISSUER RISK - There may be economic or political All Funds
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 Fund's municipal securities. Constitutional or
legislative 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.
Page 20 of 37
<PAGE>
These Funds' concentration of investments New York Intermediate-Term
in issuers located in a single state makes the Tax-Exempt Fund
Funds more susceptible to adverse political or California Tax-Exempt
economic developments affecting that state. Income Fund
These Funds also may be riskier than mutual funds
that buy securities of issuers in numerous states.
Page 21 of 37
<PAGE>
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
conditions, 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.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. U.S. Trust Company, N.A. will continue to serve as
sub-adviser to the California Tax-Exempt Income Fund after the Merger. The
Merger, however, will represent a change of ownership of the Adviser's and
Sub-Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Tax-Exempt Funds, Inc. and the Adviser and the existing
sub-advisory agreement between the Adviser and U.S. Trust Company, N.A. with
respect to the California Tax-Exempt Income Fund.
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Board of Directors of Excelsior Funds, Inc.
approved a new advisory agreement with the Adviser and a new sub-advisory
agreement with the Adviser and U.S. Trust Company, N.A. on March 3, 2000. The
new advisory and sub-advisory agreements were subsequently approved by a vote of
shareholders of the Funds at meetings held in May 2000. The new advisory and
sub-advisory agreements will become effective on the date of the Merger.
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
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1999,
U.S.
Page 22 of 37
<PAGE>
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 Securities,
Intermediate-Term Tax-Exempt, Long-Term Tax-Exempt and New York
Intermediate-Term Tax-Exempt Funds and continuously reviews, supervises and
administers 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-Adviser out of the investment advisory fee it receives from the Fund
(described below).
The Board of Directors of Excelsior Tax-Exempt Funds, Inc. supervises the
Adviser 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:
Short-Term Tax-Exempt Securities Fund [0.23%]
Intermediate-Term Tax-Exempt Fund [0.29%]
Long-Term Tax-Exempt Fund [0.41%]
New York Intermediate-Term Tax-Exempt Fund [0.48%]
California Tax-Exempt Income Fund [0.00%]
PORTFOLIO MANAGERS
Kenneth J. McAlley has served as the Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt and New York Intermediate-Term Tax-Exempt Funds'
portfolio 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 Income 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. has served as the California Tax-Exempt Income Fund's
portfolio manager since 1997. Ms. Ingham, a Senior Vice President and Director
of Fixed Income Investments, has been with the Sub-Adviser since 1990. Ms.
Ingham is primarily responsible for the day to day management of the California
Tax-Exempt Income Fund's portfolio. Research, analyses, trade execution and
other facilities provided by the Sub-Adviser and other personnel also play a
significant role in portfolio management and performance.
Page 23 of 37
<PAGE>
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, Boston,
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 enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
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
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 dealers,
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 merchandise,
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.
Page 24 of 37
<PAGE>
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"). 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 order.
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
using methods approved by the 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.
Page 25 of 37
<PAGE>
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
purchase 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
investments 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
account number and sign the request.
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business 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. We may reject a telephone redemption request if we deem it advisable to do
so.
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
institution may charge a fee for its services, in addition to the fees charged
by the Fund.
Page 26 of 37
<PAGE>
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
receives your request in good order.
Systematic Withdrawal Plan
- --------------------------
If you have at least $10,000 in your account, you may use the systematic
withdrawal 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
account (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.
Involuntary Sales of Your Shares
- --------------------------------
If your account balance drops below $500 because of redemptions, you may be
required 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 trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
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 any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged
Page 27 of 37
<PAGE>
directly by mail, or by telephone if you previously selected the telephone
exchange option on the account application.
You may also exchange shares through your financial institution. Exchange
requests 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
instructions, 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 purchase,
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 transmitting
requests and delivering funds on a timely basis.
SHAREHOLDER SERVICING
- ---------------------
The Funds are permitted to pay a shareholder 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
organization.
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes its income by declaring a dividend daily and paying
accumulated 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
affiliates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions will be paid in
Page 28 of 37
<PAGE>
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.
However, 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
minimum tax liability. Exempt-interest dividends will also be considered along
with other adjusted gross income in determining whether any Social Security or
railroad 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
account 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
securities 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
obligations, 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
individual 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 nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, 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 situation.
More Information About Taxes is in the Statement of Additional Information.
Page 29 of 37
<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 single
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
___________, independent public accountants. 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).
Page 30 of 37
<PAGE>
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 $ 10.03 $ 9.43 $ 9.53 $ 9.27
------- ------- ------- -------
Income From Investment Operations
Net Investment Income 0.42 0.44 0.46 0.47
Net Gains on Securities
(both realized and unrealized) 0.12 0.71 0.03 0.39
------- ------- ------- -------
Total From Investment Operations 0.54 1.15 0.49 0.86
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.42) (0.43) (0.46) (0.46)
Distributions From Net Realized Gain on Investments (0.28) (0.12) (0.13) (0.14)
Distributions in Excess of Net Realized Gain on Investments 0.00 0.00(2) 0.00(2) 0.00
------- ------- ------- -------
Total Distributions (0.70) (0.55 (0.59) (0.60)
------- ------- ------- -------
Net Asset Value, End of Year $ 9.87 $ 10.03 $ 9.43 $ 9.53
======= ======= ======= =======
Total Return 5.42% 12.18% 5.47% 9.35%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $182.45 $149.54 $107.93 $ 91.06
Ratio of Net Operating Expenses to Average NetAssets 0.76% 0.74% 0.74% 0.77%
Ratio of Gross Operating Expenses to Average Net Assets(1) 0.86% 0.81% 0.81% 0.82%
Ratio of Net Investment Income to Average Net Assets 4.17% 4.40% 4.80% 4.85%
Portfolio Turnover Rate 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.
Page 31 of 37
<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 $ 9.48 $ 9.11 $ 9.12 $ 8.80
------ ------ ------ ------
Income From Investment Operations
Net Investment Income 0.38 0.42 0.40 0.40
Net Gains or (Losses) on Securities
(both realized and unrealized) 0.14 0.37 0.00 0.32
------ ------ ------ ------
Total From Investment Operations 0.52 0.79 0.40 0.72
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.35) (0.41) (0.41) (0.40)
Dividends in Excess of Net Investment Income (0.03) 0.00 0.00(2) 0.00
Distributions From Net Realized Gain on Investments (0.13) (0.01) 0.00 0.00
Total Distributions (0.51) 0.42) (0.41) (0.40)
------ ------ ------ ------
Net Asset Value, End of Year $ 9.49 $ 9.48 $ 9.11 $ 9.12
====== ======= ======= ======
Total Return 5.53% 8.81% 4.58% 8.30%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $323.99 $271.02 $244.05 $255.18
Ratio of Net Operating Expenses to Average Net Assets 0.58% 0.58% 0.58% 0.60%
Ratio of Gross Operating Expenses to Average Net Assets(1) 0.64% 0.64% 0.64% 0.65%
Ratio of Net Investment Income to Average Net Assets 3.95% 4.47% 4.56% 4.44%
Portfolio Turnover Rate 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.
Page 32 of 37
<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 $ 7.11 $ 7.03 $ 7.05 $ 6.96
------ ------ ------ ------
Income From Investment Operations
Net Investment Income 0.26 0.27 0.26 0.28
Net Gains on Securities
(both realized and unrealized) 0.06 0.08 (0.01) 0.09
------ ------ ------ ------
Total From Investment Operations 0.32 0.35 0.25 0.37
------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.26) (0.27) (0.27) (0.28)
Dividends in Excess of Net Investment Income 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
------ ------ ------ ------
Total Distributions (0.26) (0.27) (0.27) (0.28)
------ ------ ------ ------
Net Asset Value, End of Period $ 7.17 $ 7.11 $ 7.03 $ 7.05
====== ====== ====== ======
Total Return 4.51% 5.01 3.55% 5.42%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $45.16 $42.35 $41.08 $42.97
Ratio of Net Operating Expenses to Average Net Assets 0.58% 0.59% 0.58% 0.58%
Ratio of Gross Operating Expenses to Average Net Assets1 0.65% 0.65% 0.65% 0.64%
Ratio of Net Investment Income to Average Net Assets 3.58% 3.76% 3.73% 4.05%
Portfolio Turnover Rate 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.
Page 33 of 37
<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 $ 8.79 $ 8.45 $ 8.44 $ 8.24 $ 8.18
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income 0.33 0.35 0.36 0.35 0.33
Net Gains on Securities
(both realized and unrealized) 0.12 0.34 0.01 0.20 0.15
------- ------- ------- ------- -------
Total From Investment Operations 0.45 0.69 0.37 0.55 0.48
------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.33) (0.35) (0.36) (0.35) (0.33)
Distributions in Excess of Net Investment Income 0.00 0.00(2) 0.00 0.00 0.00
Distributions From Net Realized Gain on Investments (0.11) 0.00 0.00 0.00 (0.09)
Total Distributions (0.44) (0.35) (0.36) (0.35) (0.42)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 8.80 $ 8.79 $ 8.45 $ 8.44 $ 8.24
======= ======= ======= ======= =======
Total Return 5.16% 8.35% 4.46% 6.77% 6.05%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $154.83 $131.29 $ 102.25 $ 96.41 $ 87.16
Ratio of Net Operating Expenses to Average Net Assets 0.73% 0.71% 0.72% 0.75% 0.78%
Ratio of Gross Operating Expenses to Average Net Assets(1) 0.75% 0.74% 0.75% 0.77% 0.80%
Ratio of Net Investment Income to Average Net Assets 3.75% 4.08% 4.25% 4.15% 4.06%
Portfolio Turnover Rate 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.
Page 34 of 37
<PAGE>
CALIFORNIA TAX-EXEMPT INCOME FUND
<TABLE>
<CAPTION>
Year ended Year ended Year ended Period ended
---------- ---------- ---------- ------------
March 31, March 31, March 31, March 31,
2000 1999 1998 1997(1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $7.18 $ 6.95 $ 7.00
----- ----- ------
Income From Investment Operations
Net Investment Income 0.27 0.28 0.12
Net Gains on Securities
(both realized and unrealized) 0.07 0.23 (0.05)
----- ---- ------
Total From Investment Operations 0.34 0.51 0.07
----- ---- ------
Less Distributions
Dividends From Net Investment Income (0.27) (0.28) (0.12)
----- ------ ------
Total Distribution (0.27) (0.28) (0.12)
------ ------ ------
Net Asset Value, End of Period $ 7.25 $ 7.18 $ 6.95
====== ====== ======
Total Return 4.74% 7.42% 2.12%(2)
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $64.91 $32.57 $13.23
Ratio of Net Operating Expenses to Average Net Assets 0.50% 0.50% 0.66%(2)
Ratio of Gross Operating Expenses to Average Net Assets(3) 1.08% 1.24% 1.53%(2)
Ratio of Net Income to Average Net Assets 3.65% 3.90% 3.69%(2)
Portfolio Turnover Rate 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.
Page 35 of 37
<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
following:
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
reference 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
Page 36 of 37
<PAGE>
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
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 duplicating
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 37 of 37
<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
________, 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
_________________________, independent auditors, contained in the annual report
to the Funds' shareholders for the fiscal year ended March 31, _____ 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
Additional Information On Portfolio Instruments..................... 4
Special Considerations Relating To New York Municipal Securities.... 13
Investment Limitations.............................................. 24
NET ASSET VALUE AND NET INCOME........................................... 29
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 29
Distributor......................................................... 29
Purchase Of Shares.................................................. 30
Redemption Procedures............................................... 31
Other Redemption Information........................................ 32
INVESTOR PROGRAMS........................................................ 33
Systematic Withdrawal Plan.......................................... 33
Exchange Privilege.................................................. 34
Retirement Plans.................................................... 35
Automatic Investment Program........................................ 35
Additional Information.............................................. 35
DESCRIPTION OF CAPITAL STOCK............................................. 36
MANAGEMENT OF THE FUNDS.................................................. 37
Directors And Officers.............................................. 37
Investment Advisory And Administration Agreements................... 42
Shareholder Organizations........................................... 45
Expenses............................................................ 47
Custodian And Transfer Agent........................................ 48
PORTFOLIO TRANSACTIONS................................................... 49
INDEPENDENT AUDITORS..................................................... 50
COUNSEL.................................................................. 50
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 50
Generally........................................................... 50
YIELD INFORMATION........................................................ 52
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
CODE OF ETHICS.................................................... 54
MISCELLANEOUS..................................................... 54
FINANCIAL STATEMENTS.............................................. 55
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
-------------
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
-13-
<PAGE>
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 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.
-14-
<PAGE>
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 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).
-15-
<PAGE>
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 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
-16-
<PAGE>
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.
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.
-17-
<PAGE>
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the 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
----------
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
-18-
<PAGE>
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.
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
-19-
<PAGE>
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 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.
-20-
<PAGE>
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 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
-21-
<PAGE>
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
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
-22-
<PAGE>
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 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
-23-
<PAGE>
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.
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.
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
-24-
<PAGE>
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 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;
-25-
<PAGE>
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 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
-26-
<PAGE>
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;
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;
-27-
<PAGE>
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) 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.
-28-
<PAGE>
NET ASSET VALUE AND NET INCOME
------------------------------
The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the security. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Fund involved would receive if it sold the security. The market value of
portfolio securities held by the Funds can be expected to vary inversely with
changes in prevailing interest rates.
The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated.
If the Boards of Directors believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming Shares in kind; reducing the number
of the Fund's outstanding Shares without monetary consideration; or utilizing a
net asset value per Share determined by using available market quotations.
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.
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.
-29-
<PAGE>
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 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
-30-
<PAGE>
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 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).
-31-
<PAGE>
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.
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
-32-
<PAGE>
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.
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
-33-
<PAGE>
(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 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
-34-
<PAGE>
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 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.
-35-
<PAGE>
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 fourteen 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 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.
-36-
<PAGE>
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.
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:
-37-
<PAGE>
<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 Board (since 1997),
Age: 68 President, Treasurer and Trustee of Excelsior
Institutional Trust (since 1995); Chairman of the
Board (from 1997 to 1999), President, Treasurer and
Trustee of Excelsior Funds (from 1995 to 1999); 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).
Donald L. Campbell Director Retired; Director of the Companies (since 1984);
333 East 69th Street Director of UST Master Variable Series, Inc. (from
Apt. 10-H 1994 to June 1997); and Trustee of Excelsior
New York, NY 10021 Institutional Trust (since 1995).
Age: 73
Rodman L. Drake Director Director of the Companies (since 1996); Trustee of
Continuation Investments Group, Inc. Excelsior Institutional Trust (since 1994); Trustee,
1251 Avenue of the Americas Excelsior Funds (from 1994 to 1999); Director,
9/th/ Floor Parsons Brinkerhoff, Inc. (engineering firm) (since
New York, NY 10020 1995); President, Continuation Investments Group,
Age: 56 Inc. (since 1997); President, Mandrake Group
(investment and consulting firm) (1994-1997);
Chairman, MetroCashcard International, Inc.
(1999-present); Director, Hotelivision, Inc.
(1999-present); Director, Alliance Group Services,
Inc. (1998-present); 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 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: 74 Institutional Trust (since 1995).
</TABLE>
____________________________
/1./ 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>
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).
Jonathan Piel Director Director of the Companies (since 1996); Trustee of
558 E. 87th Street Excelsior Institutional Trust (since 1994); Trustee
New York, NY 10128 of Excelsior Funds (from 1994 to 1999); Vice
Age: 60 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 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: 73 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 Fund and Excelsior
Spring Hill, FL 34606 Tax-Exempt Fund (1991-1997) and Excelsior
Age: 74 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
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56
</TABLE>
______________________________
/2/ This Director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-39-
<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
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
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: 38
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,
Boston, MA 02108-3913 Senior Manager of Fund Administration, Chase Global
Age: 32 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 receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum with respect to each
Company for services in such capacity. Drinker Biddle & Reath LLP, of which
Messrs. McConnel and Malloy are partners, receives legal fees as counsel to the
Companies. The employees of 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 May 18, 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.
-40-
<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
from the
Pension or 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 $_______ None None _______ (3)**
Director
Rodman L. Drake $_______ None None _______ (4)**
Director
Joseph H. Dugan $_______ None None _______ (3)**
Director
Wolfe J. Frankl $_______ None None _______ (3)**
Director
Jonathan Piel $_______ None None _______ (4)**
Director
Robert A. Robinson $_______ None None _______ (3)**
Director
Alfred C. Tannachion $_______ None None _______ (3)**
Director
Frederick S. Wonham $_______ None None _______ (4)**
Chairman of the Board,
President and Treasurer
</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.
-41-
<PAGE>
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.
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 $ $1,475,748 $1,036,066
Government Money Fund $ $1,381,779 $1,216,265
Treasury Money Fund $ $1,403,045 $1,108,480
Tax-Exempt Money Fund $ $2,696,982 $2,325,765
New York Tax-Exempt Money $ $ 277,593 $ 0
Fund
</TABLE>
-42-
<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 $ $358,360 $231,368
Government Money Fund $ $184,188 $168,737
Treasury Money Fund $ $151,843 $ 82,614
Tax-Exempt Money Fund $ $827,107 $627,413
New York Tax-Exempt Money $ $532,521 $ 0
Fund
</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.
As discussed in the prospectus, U.S. Trust Corporation, parent of U.S.
Trust, and The Charles Schwab Corporation entered into a definitive agreement to
merge on January 12, 2000. After the merger, U.S. Trust Corporation will be a
wholly-owned subsidiary of Schwab. The merger is anticipated to close by July
2000; however, it is subject to a number of conditions, including certain
regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreements"). Accordingly, the shareholders of the Funds have been
asked to approve new investment advisory agreements ("New Agreements") between
the Funds and U.S. Trust. The New Agreements will become effective upon the date
of the merger. If the merger is not consummated, the Funds will operate under
the New Agreements, which will become effective upon the date of termination of
the merger agreement.
-43-
<PAGE>
The New Agreements contain substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreements.
CGFSC, Federated Administrative Services, 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. Under the Administration Agreements, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt-interest dividends," and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing Share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the 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
-44-
<PAGE>
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:
<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 $ $1,122,463 $ 11
Government Money Fund $ $ 958,200 $172
Treasury Money Fund $ $ 792,993 $ 0
Tax-Exempt Money $ $2,156,742 $ 0
New York Tax-Exempt Money $ $ 248,317 $ 0
Fund
</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 $ $ 775,667 $ 3
Government Money Fund $ $ 847,526 $96
Treasury Money Fund $ $ 607,458 $ 0
Tax-Exempt Money Fund $ $1,807,345 $ 0
New York Tax-Exempt Money $ $ 0 $ 0
Fund
</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
-45-
<PAGE>
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 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. Until further notice, the Adviser
and Administrators have voluntarily agreed to waive fees payable by a Fund in an
aggregate amount equal to administrative service fees payable by that Fund.
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 $ $
Government Money Fund $ $
Treasury Money Fund $ $
Tax-Exempt Money Fund $ $
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
<S> <C> <C>
New York Tax-Exempt Money Fund $ $
</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>
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
</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>
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
</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
-47-
<PAGE>
Companies' directors and officers who are not affiliated with the Distributor or
the Administrators); SEC fees; state securities qualifications fees; costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders; advisory, administration and administrative servicing fees;
charges of the custodian, transfer agent, and dividend disbursing agent; certain
insurance premiums; outside auditing and legal expenses; cost of independent
pricing services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions in
connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase"), 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.
-48-
<PAGE>
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.
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
-49-
<PAGE>
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. 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 ________ Fund held one corporate bond issued by
______________ with a principal amount of $____________.
INDEPENDENT AUDITORS
--------------------
________________, independent auditors, __________________
serve as auditors of the Companies. The Funds' Financial Highlights included in
the Prospectus and the financial statements for the period ended March 31,
______ incorporated by reference in this Statement of Additional Information
have been audited by _________________ 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
- ---------
-50-
<PAGE>
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 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."
Each Tax-Exempt Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt 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
-51-
<PAGE>
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 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.
-52-
<PAGE>
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 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
-53-
<PAGE>
of the Money Fund, Government Money Fund, Treasury Money Fund, Tax-Exempt Money
Fund and New York Tax-Exempt Money Fund were ____%, ____%, ____%, ____% and
____%, respectively, and the effective yields for Retail Shares of such
respective Funds were ____%, ____%, ____%, ____% and ____%.
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%.
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, ____ were ____% and
____%.
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 May 18, 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
-54-
<PAGE>
own such shares beneficially because they did not have voting or investment
discretion with respect to such Retail Shares.
As of May 18, 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: NEW
YORK TAX-EXEMPT MONEY FUND: Sara Wilford, c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10036, 6.61%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, _____ (the
"_____ Annual Reports") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the _____ Annual
Reports are incorporated by reference herein. The financial statements included
in the _______ Annual Reports for the Funds have been audited by the Companies'
independent auditors, _____________, whose reports thereon also appear in the
_____ 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 ______ 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.
-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
A-1
<PAGE>
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 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.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the 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 uncertain 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.
A-3
<PAGE>
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:
"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.
A-4
<PAGE>
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 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 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.
"c" - The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p - The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing
A-5
<PAGE>
credit quality subsequent to completion of the project, makes no comment on the
likelihood of or the risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of 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. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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
A-6
<PAGE>
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: 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 long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
A-7
<PAGE>
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of 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.
"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.
A-8
<PAGE>
"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 serve 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.
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.
Rating Alert: Ratings are place on Rating Alert 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. Rating Alert 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-9
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents 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.
"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.
A-10
<PAGE>
"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.
"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 margins of protection.
Fitch IBCA and Duff & Phelps use 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 _________________,
independent auditors, contained in the annual reports to the Funds' shareholders
for the fiscal year ended March 31, _______ 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
CODE OF ETHICS.......................................... 51
MISCELLANEOUS........................................... 51
FINANCIAL STATEMENTS.................................... 52
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.
-2-
<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
-4-
<PAGE>
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 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
-5-
<PAGE>
funds, the proceeds of bond placements or other revenues. In addition, each Fund
may invest in long-term tax-exempt instruments, such as municipal bonds and
private activity bonds, to the extent consistent with the maturity restrictions
applicable to it.
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
-7-
<PAGE>
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.]
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
-8-
<PAGE>
security. Each Fund may purchase securities which are not registered under the
Securities Act of 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
-9-
<PAGE>
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, its liquidity and ability to manage its
portfolio might be affected in the event its forward commitments or commitments
to purchase "when-issued" securities ever exceeded 25% of the value of its
assets.
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.
-10-
<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.
-11-
<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
-12-
<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 equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Forward Currency Transactions
-----------------------------
The Managed Income and IT 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
-13-
<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.
-14-
<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
-15-
<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. (See "Additional Information Concerning Taxes.")
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 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;
-16-
<PAGE>
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.
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.
-17-
<PAGE>
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
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.
-18-
<PAGE>
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;
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
-19-
<PAGE>
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.
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.
-20-
<PAGE>
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 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
-21-
<PAGE>
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 connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may
-22-
<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 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
-24-
<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;
-25-
<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
-26-
<PAGE>
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 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
-27-
<PAGE>
may be paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The exercise
of such authority by the Boards of Directors will be subject to the provisions
of the 1940 Act, and the Boards of Directors will not take any action described
in this paragraph unless the proposed action has been disclosed in writing to
the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote of
the Companies' Common Stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Companies' Charters, the
Companies may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the particular
Company voting without regard to class.
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 of the
Stamford, CT 06903 Companies (since 1995); Chairman of the Board
Age: 68 (since 1997), and President, Treasurer and
Trustee of Excelsior Institutional Trust (since
1995); Chairman of the Board (from 1997 to
1999), and President, Treasurer and Trustee of
Excelsior Funds (from 1995 to 1999); Vice
Chairman of U.S. Trust Corporation and U.S.
</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>
Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).
Donald L. Campbell Director Retired; Director of the Companies (since
333 East 69th Street 1984); Director of UST Master Variable Series,
Apt. 10-H Inc. (from 1994 to June 1997); and Trustee of
New York, NY 10021 Excelsior Institutional Trust (since 1995).
Age: 73
Rodman L. Drake Director Director of the Companies (since 1996); Trustee
Continuation Investments of Excelsior Institutional Trust (since 1994);
Group, Inc. Trustee of Excelsior Funds (from 1994 to 1999);
1251 Avenue of the Americas, Chairman, MetroCashcard International, Inc.
9th Floor (1999-present); Director, Hotelivision, Inc.
New York, NY 10020 (1999-present); Director, Alliance Group
Age: 56 Services, Inc. (1998-present); Director,
Parsons Brinkerhoff, Inc. (engineering firm)
(since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994-1997); Director,
Hyperion Total Return Fund, Inc. and 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 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: 74 Excelsior Institutional Trust (since 1995).
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable Series,
Charlottesville, Inc. (from 1994 to June 1997); Trustee of
VA 22901-7726 Excelsior Institutional Trust (since 1995);
Age: 79 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).
Jonathan Piel Director Director of the Companies (since 1996); Trustee
558 E. 87th Street of Excelsior Institutional Trust (since 1994);
New York, NY 10128 Trustee of Excelsior Funds (from 1994 to 1999);
Age: 60 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 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: 73 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).
</TABLE>
-30-
<PAGE>
<TABLE>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
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).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia,
PA 19103-6996
Age: 56
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia,
PA 19103-6996
Age: 40
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: 38
</TABLE>
_______________________________
/2/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-31-
<PAGE>
<TABLE>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
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: 32 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 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Companies. The employees of
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
May 18, 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 Company Expenses Retirement to Directors
--------------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Donald L. Campbell $______ None None $______ (3)**
Director
Rodman L. Drake $______ None None $______ (4)**
Director
Joseph H. Dugan $______ None None $______ (3)**
Director
Wolfe J. Frankl $______ None None $______ (3)**
Director
Jonathan Piel $______ None None $______ (4)**
Director
Robert A. Robinson $______ None None $______ (3)**
Director
Alfred C. Tannachion $______ None None $______ (3)**
Director
Frederick S. Wonham $______ None None $______ (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.
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
-33-
<PAGE>
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 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 $ 98,059 $ 72,860
Intermediate-Term Managed $ 317,118 $ 260,708
Income Fund
Managed Income Fund $1,287,808 $1,203,851
Short-Term Tax-Exempt $ 92,164 $ 99,010
Securities Fund
Intermediate-Term $ 844,392 $ 746,025
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $ 690,785 $ 545,298
</TABLE>
-34-
<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 Fiscal Year Fiscal Year ended
ended ended March 31, 1998
March 31, 2000 March 31, 1999 --------------
-------------- --------------
<S> <C> <C> <C>
Short-Term Government Fund $ 40,855 $ 21,549
Intermediate-Term Managed $ 74,201 $ 42,260
Income Fund
Managed Income Fund $272,533 $243,873
Short-Term Tax-Exempt $ 28,715 $ 24,358
Securities Fund
Intermediate-Term $186,350 $133,635
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $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.
As discussed in the prospectus, U.S. Trust Corporation, parent of
U.S. Trust, and The Charles Schwab Corporation entered into a definitive
agreement to merge on January 12, 2000. After the merger, U.S. Trust
Corporation will be a wholly-owned subsidiary of Schwab. The merger is
anticipated to close by July 2000; however, it is subject to a number of
conditions, including certain regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreements"). Accordingly, the
-35-
<PAGE>
Shareholders of the Funds have been asked to approve a new investment advisory
agreements ("New Agreements") between the Funds and U.S. Trust. The New
Agreement will become effective upon the date of the merger. If the merger is
not consummated, the Fund will operate under the New Agreements, which will
become effective upon the date of termination of the merger agreement.
The New Agreements contain substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreements.
CGFSC, Federated Administrative Services, 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. Under the Administration Agreements, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt interest dividends" and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Funds' administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Funds.
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:
-36-
<PAGE>
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 voluntarily waive all or a portion of the
administration fee payable to them by a Fund, which waiver may be terminated at
any time.
-37-
<PAGE>
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 $ 70,684 $ 48,138
Intermediate-Term Managed $170,673 $132,050
Income Fund
Managed Income Fund $316,445 $294,955
Short-Term Tax-Exempt $ 61,646 $ 62,813
Securities Fund
Intermediate-Term $449,336 $383,863
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $243,351 $189,687
</TABLE>
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 $ 162 $ 11
Intermediate-Term Managed $ 389 $ 390
Income Fund
Managed Income Fund $ 1,864 $ 381
Short-Term Tax-Exempt $ 3 $ 104
Securities Fund
Intermediate-Term $ 1,245 $ 674
Tax-Exempt Fund
</TABLE>
-38-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Long-Term Tax-Exempt Fund $14,210 $4,549
</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
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. Until
further notice, the Adviser and Administrators have agreed to waive fees payable
by a Fund in an aggregate amount equal to administrative service fees payable by
that Fund.
The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Companies'
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Companies' Boards of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Companies will be
committed to the discretion of such Disinterested Directors.
For the fiscal years ended March 31, 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
Intermediate-Term Managed
Income Fund
Managed Income Fund
Short-Term Tax-Exempt
Securities Fund
Intermediate-Term Tax-Exempt
Fund
Long-Term Tax-Exempt Fund
</TABLE>
For the fiscal years 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 years ended March 31, 1998, the particular Company made
payments to Shareholder Organizations in the following amounts:
Amounts Paid to
Total Paid Affiliates
of U.S. Trust
Short-Term Government Fund $134,970 $133,194
Intermediate-Term Managed $ 96,449 $ 86,789
Income Fund
Managed Income Fund
Short-Term Tax-Exempt $ 67,805 $ 67,453
Securities Fund
Intermediate-Term Tax-Exempt $120,297 $117,511
Fund
Long-Term Tax-Exempt Fund $ 994 $ 994
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
-41-
<PAGE>
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 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
-42-
<PAGE>
investment companies with similar investment objectives and policies. However,
since brokerage commissions are not normally paid on instruments purchased by
the Funds, portfolio turnover is not expected to have a material effect on the
net income of any of the Funds. The Funds' portfolio turnover 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.
-43-
<PAGE>
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. 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, ____.
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
-44-
<PAGE>
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 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
--------------------
________________, independent auditors, ________________ 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,
____ incorporated by reference in this Statement of Additional Information have
been audited by _______________ 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, 18th 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,
-45-
<PAGE>
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 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
-46-
<PAGE>
taxable year. However, the aggregate amount of dividends so designated by that
Fund cannot exceed the excess of the amount of interest exempt from tax under
Section 103 of the Code received by that Fund during the taxable year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
The percentage of total dividends paid by each of the Tax-Exempt Funds with
respect to any taxable year which qualifies as exempt-interest dividends will be
the same for all shareholders receiving dividends from that Tax-Exempt Fund for
such year.
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.
-47-
<PAGE>
b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that were
entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), 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
____%, ____%, ____%, ____%, ____% and ____%, 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
-48-
<PAGE>
Tax-Exempt Funds for the 30-day period ended March 31, 2000 were ____%, ____%
and ____%, respectively.
Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund may also advertise the "aggregate total return" for its
shares, which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
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 shares of the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT
Managed Income and Managed Income Funds for the one year period ended March 31,
2000 were ____%, ____%, ____%, ____%, ____% and ____%, respectively. The
average annual total returns for
-49-
<PAGE>
the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the five year period ended March 31, 2000
were ____%, ____%, ____%, ____%, ____% and ____%, respectively. The average
annual total returns for shares of the ST Tax-Exempt Securities, ST Government
and IT Managed Income Funds for the period from December 31, 1992 (commencement
of operations) to March 31, 2000 were ____%, ____% and ____%, respectively. The
average annual total returns for the IT Tax-Exempt, LT Tax-Exempt and Managed
Income Funds for the ten year period ended March 31, 2000 were ____%, ____% and
____%, respectively.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional
nature, may also be used in comparing the performance of a Fund. Advertisements,
sales literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and technologies that together with market
conditions and events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital 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
-50-
<PAGE>
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.
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 May 18, 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
-51-
<PAGE>
such shares beneficially because they did not have voting or investment
discretion with respect to such shares.
As of May 18, 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 SW Macadam Ave., Suite 450,
Portland, Oregon 97201, 12.73%; MANAGED INCOME FUND: U.S. Trust Retirement Fund,
c/o United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 47.23%; 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, 5.42%; LONG-TERM TAX-EXEMPT FUND: Charles Schwab & Co., Inc., Special
Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street, San Francisco,
California 94104, 6.83%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, ___ (the
"_____ Annual Reports") Reports for the Funds are incorporated in this Statement
of Additional Information by reference. No other parts of the ______ Annual
Reports are incorporated by reference herein. The financial statements included
in the ______ Annual Reports for the Funds have been audited by the Companies'
independent auditors, ________________, whose reports thereon also appear in the
____ 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 ______ 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.
-52-
<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
A-1
<PAGE>
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 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.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the 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 uncertain 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.
A-3
<PAGE>
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:
"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.
A-4
<PAGE>
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 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 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.
"c" - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while
A-5
<PAGE>
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of 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. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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 in 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
A-6
<PAGE>
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: 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 long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
A-7
<PAGE>
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of 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.
"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.
A-8
<PAGE>
"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 serve 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.
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-9
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents 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.
"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.
A-10
<PAGE>
"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 that 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.
"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 margins of protection.
Fitch IBCA and Duff & Phelps use 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 ____________,
independent auditors, contained in the annual report to the Fund's shareholders
for the fiscal year ended March 31, _______ 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>
<CAPTION>
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 New York Municipal Obligations........... 11
Additional Investment Limitations........................................... 22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................... 24
Distributor................................................................. 24
Purchase of Shares.......................................................... 25
Redemption Procedures....................................................... 26
Other Redemption Information................................................ 27
INVESTOR PROGRAMS................................................................ 28
Systematic Withdrawal Plan.................................................. 28
Exchange Privilege.......................................................... 28
Retirement Plans............................................................ 29
Automatic Investment Program................................................ 29
Additional Information...................................................... 30
DESCRIPTION OF CAPITAL STOCK..................................................... 30
MANAGEMENT OF THE FUND........................................................... 32
Directors and Officers...................................................... 32
Investment Advisory and Administration Agreements........................... 37
Shareholder Organizations................................................... 40
Expenses.................................................................... 42
Custodian and Transfer Agent................................................ 42
PORTFOLIO TRANSACTIONS........................................................... 43
PORTFOLIO VALUATIONS............................................................. 45
INDEPENDENT AUDITORS............................................................. 45
COUNSEL.......................................................................... 46
ADDITIONAL INFORMATION CONCERNING TAXES.......................................... 46
PERFORMANCE AND YIELD INFORMATION................................................ 47
CODE OF ETHICS................................................................... 51
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
MISCELLANEOUS........................................................ 51
FINANCIAL STATEMENTS................................................. 52
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 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 of small holdings of SPDRs, therefore, will depend
upon the existence of a
-6-
<PAGE>
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.
-7-
<PAGE>
When the Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Fund may acquire "stand-by commitments" with respect to Municipal
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
-8-
<PAGE>
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 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
-9-
<PAGE>
predict movements in the direction of the market. For example, if the Fund has
hedged against the possibility of a decline in the market adversely affecting
securities held by it and securities prices increase instead, the Fund will lose
part or all of the benefit to the increased value of its securities which it has
hedged because it will have approximately equal offsetting losses in its futures
positions. 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. (See "Additional Information
Concerning Taxes.")
Miscellaneous
-------------
The Fund may not invest in oil, gas, or mineral leases.
Special Considerations Relating to New York Municipal Obligations
- -----------------------------------------------------------------
-11-
<PAGE>
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 reappropriations
and any new or modified revenue measures to be enacted in connection with
-12-
<PAGE>
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.
-13-
<PAGE>
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 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.
-14-
<PAGE>
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-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.
-15-
<PAGE>
Debt Limits and Outstanding Debt. There are a number of methods by
--------------------------------
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations
("Authorities"). Payments of debt service on New York State general obligation
and New York State-guaranteed bonds and notes are legally enforceable
obligations of the State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the LGAC 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
-16-
<PAGE>
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
----------
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
-17-
<PAGE>
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
-----------
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
-18-
<PAGE>
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
----------------------------------
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 Ba1, in November 1983 to Baa, in December 1985 to
Baa1, in May 1988 to
-19-
<PAGE>
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 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
-20-
<PAGE>
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 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
-21-
<PAGE>
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
--------------------
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%
-22-
<PAGE>
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. 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;
-23-
<PAGE>
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.
* * *
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.
-24-
<PAGE>
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the 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, 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
-25-
<PAGE>
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.
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).
-26-
<PAGE>
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.
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.
-27-
<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 shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the
-28-
<PAGE>
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
-29-
<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
fourteen 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
-30-
<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.
-31-
<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 of Excelsior Funds,
Age: 68 Inc. and the Company (since 1995);
Chairman of the Board (from 1997 to
1999), President, Treasurer and
Trustee of Excelsior Funds (from
1995 to 1999); Chairman of the Board
(from 1997 to 1999), President,
Treasurer and Trustee of Excelsior
Institutional Trust (from 1995 to
1997); 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, Inc. (from March 1993 to May
1997).
Donald L. Campbell Director Retired; Director of Excelsior Fund
333 East 69th Street and the Company (since 1984);
Apt. 10-H Director of UST Master Variable
New York, NY 10021 Series, Inc. (from 1994 to June
Age: 73 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
</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>
Rodman L. Drake Director Director of Excelsior Funds, Inc.
Continuation Investments Group, Inc. and the Company (since 1996);
1251 Avenue of the Americas, 9/th/ Floor Trustee, Excelsior Institutional
New York, NY 10020 Trust (since 1994); Trustee,
Age: 56 Excelsior Funds (from 1994 to 1999);
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, MetroCashcard
International, Inc. (1999-present);
Director, Hotelivision, Inc.
(1999-present); Director, Alliance
Group Services, Inc. (1998-present);
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
913 Franklin Lake Road Funds, Inc. and the Company (since
Franklin Lakes, NJ 07417 1984); Director of UST Master
Age: 74 Variable Series, Inc. (from 1994 to
June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of Excelsior
2320 Cumberland Road Funds, Inc. and the Company (since
Charlottesville, VA 1986); Director of UST Master
22901-7726 Variable Series, Inc. (from 1994 to
Age: 79 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
Jonathan Piel Director Director of Excelsior Funds, Inc.
558 E. 87th Street and the Company (since 1996);
New York, New York 10128 Trustee, Excelsior Institutional
Age: 60 Trust (since 1994); Trustee,
Excelsior Funds (from 1994 to 1999);
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.
Church Pension Group and the Company (since 1987);
445 Fifth Avenue Director of UST Master Variable
New York, NY 10016 Series, Inc. (from 1994 to June
Age: 73 1997); Trustee of Excelsior
Institutional Trust (since 1995);
President Emeritus, The Church
Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and
Director of its wholly-owned
subsidiaries--Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1995);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since
1995).
</TABLE>
-34-
<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
6549 Pine Meadows Drive Funds, Inc. and the Company (since
Spring Hill, FL 34606 1985); Chairman of the Board of
Age: 74 Excelsior 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: 56
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: 40
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: 38 Company (January 1991 to November
1996).
</TABLE>
_________________________
2 This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-35-
<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 Fund Services Company (since August
73 Tremont Street 1999); Assistant Vice President,
Boston, MA 02108-3913 Senior Manager of Fund
Age: 32 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 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to receive
an additional $5,000 per annum for services in such capacity. Drinker Biddle &
Reath LLP, of which Messrs. McConnel and Malloy are partners, receives legal
fees as counsel to 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
May 18, 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.
-36-
<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>
Total
Pension or Estimated Compensation from
Aggregate Retirement Annual the Company
Compensation Benefits Benefits and Fund
Name of from Accrued as Part Upon Complex* Paid
Person/Position the Company of Fund Expenses Retirement to Directors
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald L. Campbell $________ None None $_____(3) **
Director
Rodman L. Drake $________ None None $_____(4) **
Director
Joseph H. Dugan $________ None None $_____(3) **
Director
Wolfe J. Frankl $________ None None $_____(3) **
Director
Jonathan Piel $________ None None $_____(4) **
Director
Robert A. Robinson $________ None None $_____(3) **
Director
Alfred C. Tannachion $________ None None $_____(3) **
Director
Frederick S. Wonham $________ None None $_____(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.
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 Prospectus. The Adviser has also agreed to pay
all expenses incurred by it in connection with its
-37-
<PAGE>
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 $_________ $696,284 $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 $________ $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.
-38-
<PAGE>
As discussed in the prospectus, U.S. Trust Corporation, parent of U.S.
Trust, and The Charles Schwab Corporation entered into a definitive agreement to
merge on January 12, 2000. After the merger, U.S. Trust Corporation will be a
wholly-owned subsidiary of Schwab. The merger is anticipated to close by July
2000; however, it is subject to a number of conditions, including certain
regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Fund
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreement (the
"Existing Agreement"). Accordingly, the shareholders of the Fund have been asked
to approve a new investment advisory agreement ("New Agreement") between the
Fund and U.S. Trust. The New Agreement will become effective upon the date of
the merger. If the merger is not consummated, the Fund will operate under the
New Agreement, which will become effective upon the date of termination of the
merger agreement.
The New Agreement contains substantially the same terms and conditions
as the Existing Agreement, and the advisory fee will remain the same under the
New Agreement.
CGFSC, Federated Administrative Services (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. 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 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:
-39-
<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)
---------------------------------------------------
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.
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 $ $223,318 $178,440
Intermediate - Term
Tax-Exempt Fund
</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 $ $53 $34
</TABLE>
Shareholder Organizations
- -------------------------
-40-
<PAGE>
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. Until further
notice, the Adviser and Administrators have voluntarily agreed to waive fees
payable by the Fund in an aggregate amount equal to administrative service fees
payable by the Fund.
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:
Amounts Paid to
Total Paid Affiliates of U.S. Trust
---------- -------------------------
New York Intermediate - Term
Tax-Exempt Fund
-41-
<PAGE>
For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to
Total Paid Affiliates of U.S. Trust
---------- ------------------------------
<S> <C> <C>
New York Intermediate - Term $33,738 $33,512
Tax-Exempt Fund
</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
Total Paid Affiliates of U.S. Trust
---------- ------------------------------
<S> <C> <C>
New York Intermediate - Term $33,519 $33,418
Tax-Exempt Fund
</TABLE>
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
-42-
<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.
-43-
<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
-44-
<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
--------------------
_____________, independent auditors, _____________ 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, ______ incorporated
by reference in this Statement of Additional Information have been audited by
_________________ for the periods included in their reports thereon which appear
therein.
-45-
<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
-46-
<PAGE>
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 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:
-47-
<PAGE>
a-b
Yield = 2 [(----- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = average daily number of shares outstanding that were
entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), the Fund computes the yield to maturity of any
debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. The
Fund calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
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 ___%.
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
-48-
<PAGE>
(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 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 ____%.
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
-49-
<PAGE>
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 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 31, 1990
(commencement of
For the Year For the 5 Years operations) until
Ended 3/31/00 Ended 3/31/00 3/31/00
------------------- -------------------- -------------------------
<S> <C> <C> <C>
New York Intermediate - % % %
Term Tax-Exempt Fund
</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.
-50-
<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 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
-51-
<PAGE>
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 May 18, 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 May 18, 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, ___ (the
"____ Annual Report") for the Fund are incorporated in this Statement of
Additional Information by reference. No other parts of the ____ Annual Report
are incorporated by reference herein. The financial statements included in the
____ Annual Report for the Fund have been audited by the Company's independent
auditors, _____________, whose reports thereon also appear in the ______
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 ______ 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.
-52-
<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
rated 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
A-1
<PAGE>
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 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.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the 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 uncertain 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.
A-3
<PAGE>
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:
"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.
A-4
<PAGE>
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 non-payment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to non-payment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to non-
payment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. 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. "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.
"c" - The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p - The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon
A-5
<PAGE>
the successful, timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of 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. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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.
A-6
<PAGE>
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: 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 long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt
A-7
<PAGE>
rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of 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.
"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.
A-8
<PAGE>
"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 serve 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.
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-9
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents 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.
"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.
A-10
<PAGE>
"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 that 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.
"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 obligations
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use 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 _____________,
independent auditors, contained in the annual report to the Fund's shareholders
for the fiscal year ended March 31, _____ 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 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............................................... 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 22
Distributor.......................................................... 22
Purchase of Shares................................................... 22
Redemption Procedures................................................ 23
Other Redemption Information......................................... 25
INVESTOR PROGRAMS......................................................... 25
Systematic Withdrawal Plan........................................... 25
Exchange Privilege................................................... 26
Retirement Plans..................................................... 27
Automatic Investment Program......................................... 27
Additional Information............................................... 27
DESCRIPTION OF CAPITAL STOCK.............................................. 28
MANAGEMENT OF THE FUND.................................................... 29
Directors and Officers............................................... 29
Investment Advisory, Sub-Advisory and Administration Agreements...... 36
Shareholder Organizations............................................ 39
Expenses............................................................. 41
Custodian and Transfer Agent......................................... 41
PORTFOLIO TRANSACTIONS.................................................... 42
PORTFOLIO VALUATION....................................................... 44
INDEPENDENT AUDITORS...................................................... 44
COUNSEL................................................................... 44
ADDITIONAL INFORMATION CONCERNING TAXES................................... 44
Federal.............................................................. 45
California........................................................... 46
PERFORMANCE AND YIELD INFORMATION......................................... 48
CODE OF ETHICS............................................................ 52
MISCELLANEOUS............................................................. 52
FINANCIAL STATEMENTS...................................................... 52
APPENDIX A................................................................ A-1
</TABLE>
<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 of small holdings of SPDRs, therefore, will depend upon the
existence of a
-6-
<PAGE>
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.
-7-
<PAGE>
When the Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Fund may acquire "stand-by commitments" with respect to Municipal
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.
-8-
<PAGE>
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 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.
-9-
<PAGE>
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 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.
-10-
<PAGE>
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.
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. (See "Additional Information
Concerning Taxes.")
-11-
<PAGE>
Miscellaneous
-------------
The Fund may not invest in oil, gas, or mineral leases.
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
----------------
Fiscal Years Prior to 1995-96. Pressures on the State's budget in the
late 1980's and early 1990's were caused by a combination of external economic
conditions and growth of the largest General Fund Programs - K-14 education,
health, welfare and corrections -- at rates faster than the revenue base. These
pressures could continue as the State's overall population and school age
population continue to grow, and as the State's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders. In addition, the State's health
and welfare programs are in a transition period as a result of recent federal
and State welfare reform initiatives.
As a result of these factors and others, from the late 1980's until
1992-93, the State had periods of significant budget imbalance.
During this period, the State was forced to rely on external debt
market borrowings to meet its cash needs in the period from June 1992 to July
1994, often needed to pay previously maturing borrowings.
1995-96 through 1997-98 Fiscal Years
The State's financial condition improved markedly in the last three
fiscal years, with a combination of greater than expected revenues, slowdown in
growth of social welfare programs, and continued spending restraint. The State's
cash position also improved and no external deficit borrowing has occurred over
the last three fiscal years.
The economy grew strongly during this period, 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 and $2.4 billion in 1997-98) than
were initially planned when the budgets were enacted. These additional funds
were largely directed to school spending as mandated by Proposition 98, and to
cover shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated.
-12-
<PAGE>
1998-99 Fiscal Year Budget
The Governor's proposed 1998-99 Fiscal Year Budget projected General
Fund revenues for the 1998-99 Fiscal Year of $55.4 billion, and proposed
expenditures in the same amount. By the time the May Revision to the 1998-99
Budget ("the May Revision") was released the Administration projected that
revenues for the 1997-98 and 1998-99 Fiscal Years combined would be more than
$4.2 billion higher than projected in January. Most of this increased revenue
was proposed to be dedicated to fund a 75% cut in the Vehicle License Fee
("VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. In signing the Budget Bill, the
Governor used his line-item veto power to reduce expenditures by $1.360 billion
from the General Fund, and $160 million from Special Funds. Of this total, the
Governor indicated that about $250 million of vetoed funds were "set aside" to
fund programs for education.
The 1998-99 Budget Act is based on projected (using the May Revision)
General Fund revenues and transfers of $57.0 billion (after giving effect to
various tax reductions enacted in 1997 and 1998), a 4.2% increase from the
revised 1997-98 figures. Special Fund revenues were estimated at $14.3 billion.
After giving effect to the Governor's vetoes, the Budget Act provided
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projected a balance in the SFEU at June 30, 1999
(but without including the "set aside" veto amount) of $1.255 billion, a little
more than 2% of General Fund revenues. The Budget Act assumes the State will
carry out its normal intra-year cash flow borrowing in the amount of $1.7
billion of revenue anticipation notes which were issued on October 1, 1998.
The most significant feature of the 1998-99 Budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the VLF. Sine the VLF is currently transferred to
cities and counties, the bill provides for the General Fund to replace lost
revenues. Commencing January 1, 1999, the VLF will be reduced 25%, 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, the1998-99 Budget includes other
various tax credits of approximately $851 million.
1999-00 Fiscal Year Budget
On June 29, 1999, Governor Davis signed the new state budget for
Fiscal Year 1999-2000 (the "Budget"). The Budget anticipates $79.3 billion of
expenditures in FY 1999-00, with an $881 million SFEU reserve at June 30, 2000.
The Budget represented a 10% increase from the 1998-1999 budget. Some of the
principal budget matters are summarized below:
-13-
<PAGE>
Spending for education is increased by $2.3 billion to a record $26.4
billion. New program initiatives were proposed for: reading improvement, new
textbooks, school safety, improving teacher quality, funding teacher bonuses,
providing greater accountability for school performance, increasing preschool
and child care programs and funding deferred maintenance of school facilities.
The Budget also proposed increased funding for higher education at the
University of California and California State University.
About $1 billion would be directed toward infrastructure costs,
including $425 million in funding for the Infrastructure Bank, construction of a
new prison in the Central Valley, additional equipment for train and ferry
service, and payment of deferred maintenance for State parks.
The Governor proposed to maintain the SFEU budget reserve at a level
of $881 million at June 30, 2000, about $470 million above the Budget proposal.
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 Portfolio 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,
-14-
<PAGE>
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.
California law 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.
Mortgages and Deeds. Certain Debt Obligations in the Portfolio 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 debtor as the result of low
bids at a judicial sale. The fifth statutory provision gives the debtor
-15-
<PAGE>
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 for at least 20 days after expiration of the three-
month reinstatement period. The debtor may reinstate the mortgage, in the manner
described above, up to five business days prior to the scheduled sale date.
Therefore, the effective minimum period for foreclosing on a mortgage could be
in excess of seven months after the initial default. Such time delays in
collections could disrupt the flow of revenues available to an issuer for the
payment of debt service on the 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 Portfolio 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.
Local Governments
-16-
<PAGE>
The primary units of local government in California are the counties,
ranging in population from 1,200 to over 9,600,000. Counties are responsible for
the provision of many basic services, including indigent health care, welfare
and public safety in unincorporated areas. There are also about 470 incorporated
cities, and thousands of special districts formed for education, utility and
various other services. The fiscal condition of local governments has been
constrained since the enactment of "Proposition 13" in 1978, which reduced and
limited the future growth of property taxes, and limited the ability of local
governments to impose "special taxes" (those devoted to a specific purpose)
without two-thirds voter approval. Counties, in particular, have had fewer
options to raise revenues than many other local government entities, and have
been required to maintain many services.
Following the enactment of Proposition 13, the State provided aid to
local governments from the General Fund to make up some of the loss of property
tax moneys, including taking over the principal responsibility of funding K-12
schools and community colleges. Over time, the Legislature eliminated most of
the remaining components of post-Proposition 13 aid to local government entities
other than K-14 education districts by requiring cities and counties to transfer
some of their property tax revenues to school districts. However, the
Legislature also provided additional funding sources (such as sales taxes) and
reduced certain mandates for local services. Since then the State has also
provided additional funding to counties and cities through such programs as
health and welfare realignment, welfare reform, trial court restructuring and
various other measures.
Historically, funding for the State's trial court system was divided
between the State and the counties. In 1997, the Legislature implemented a
restructuring of the State's trial court funding system. Funding for the courts,
with the exception of costs for facilities, local judicial benefits, and revenue
collection, was consolidated at the State level. Employing a 1994-95 cap level
for county contributions, the State assumed responsibility for future growth in
trial court funding. The consolidation of funding is intended to streamline the
operation of the courts, provide a dedicated revenue source, and relieve fiscal
pressure on counties. Beginning in 1998-99, the county General Fund contribution
for court operations was reduced by $300 million, with cities retaining $62
million in fine and penalty revenue previously remitted to the State; the
General Fund reimbursed the $362 million revenue loss to the Trial Court Trust
Fund.
The entire statewide welfare system has been changed in response to
the change in federal welfare law enacted in 1996. Under the CalWORKs program,
counties are given flexibility to develop their own plans, consistent with State
law, to implement the program and to administer many of its elements, and their
costs for administrative and support services are capped at 1996-97 levels.
Counties are also given financial incentives if, at the individual county level
or statewide, the program produces savings associated with specified standards.
Counties are still required to provide "general assistance" aid to certain
persons who cannot obtain welfare from other programs.
In 1996, voters approved Proposition 218, entitled the "Right to Vote
on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise
-17-
<PAGE>
various taxes, fees, charges and assessments without voter approval. Certain
"general taxes" imposed after January 1, 1995, must be approved by voters in
order to remain in effect. In addition, Article XIIIC clarifies the right of
local voters to reduce taxes, fees, assessments or charges through local
initiatives. There are a number of ambiguities concerning the Proposition and
its impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. Proposition 218 does not affect
the State or its ability to levy or collect taxes.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by
Article XIIIB of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.
Article XIIIB prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. "Appropriations
subject to limitation" with respect to the State, are authorizations to spend
"proceeds of taxes," which consists of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most state subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs on voter authorized bonds, appropriations required to comply
with court or federal government mandates, emergencies and appropriations for
types of projects and sources of revenues.
The State's Appropriations Limit in each year is based on the limit
for the prior year, adjusted annually for changes in state per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government or any transfer of the financial source for the provisions of
services from tax proceeds to non-tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
Any excess of the aggregate "proceeds of taxes" received over a two-year testing
period above the combined Appropriations Limit for those two years is divided
equally between transfers to K-14 districts and refunds to taxpayers.
The Legislature enacted legislation to implement Article XIIIB which
defines certain terms in Article XIIIB and sets forth the methods for
determining the Appropriations Limit, California law requires an estimate of the
Appropriations Limit to be included in the Budget, and thereafter to be subject
to the budget process and established in the budget act.
-18-
<PAGE>
Proposition 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute. Proposition 98 changed
State funding of public education below the university level and the operation
of the State Appropriations Limit, primarily by guaranteeing K-14 schools a
minimum share of General Fund revenues. Under Proposition 98, K-14 schools are
guaranteed a fixed percent of General Fund revenues determined pursuant to one
of those mandated formulas.
Proposition 98 permits the Legislature, 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 XIIIB limit to K-14 schools.
During the recession in the early 1990s, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' entitlements, and also intended that the "extra" payments would
not be included in the "base" for calculating future years' entitlements. By
implementing these actions, per-pupil funding from Proposition 98 sources stayed
almost constant from Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. Settlement of
the case was finalized in 1996 and provided, among other things, that both the
State and K-14 schools would share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while school will repay $825 million.
The State share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact.
Substantially increased General Fund revenues, above initial budget
projection, in the fiscal years 1994-95 through 1998-99 have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets. Because of the State's increasing revenues, per-pupil funding
at the K-12 level has increased by about 42 percent from the level in place from
1991-92 through 1993-94, and is estimated at about $5,944 per ADA in 1999-00. A
significant amount of the "extra" Proposition 98 monies in the last few years
have been allocated to special programs, most particularly an initiative to
allow each classroom from grades K-3 to have no more than 20 pupils by the end
of the 1997-98 school year.
Information Technology
-19-
<PAGE>
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.
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
-20-
<PAGE>
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;
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,
-21-
<PAGE>
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 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
-22-
<PAGE>
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 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
-23-
<PAGE>
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.
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.
-24-
<PAGE>
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.
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.
-25-
<PAGE>
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 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.
-26-
<PAGE>
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 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.
-27-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
----------------------------
The Company'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, 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 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.
-28-
<PAGE>
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.
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:
-29-
<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
238 June Road President & Treasurer (since 1997) and President, Treasurer
Stamford, CT 06903 and Director of Excelsior Funds,
Age: 68 Inc. and the Company (since 1995);
Chairman of the Board (since 1977),
President, Treasurer and Trustee
(since 1995) of Excelsior
Institutional Trust; Trustee of
Excelsior Funds (from 1995 to 1999);
Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York
(from February 1990 until September
1995); and Chairman, U.S. Trust
Connecticut (from March 1993 to May
1997).
Donald L. Campbell Director Retired; Director of Excelsior
333 East 69th Street Funds, Inc. and the Company (since
Apt. 10-H 1984); Director of UST Master
New York, NY 10021 Variable Series, Inc. (from 1994 to
Age: 73 June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
</TABLE>
______________
/1/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-30-
<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.
Continuation Investments Group, Inc. and the Company (since 1996);
1251 Avenue of the Americas, 9th Floor Trustee, Excelsior Institutional
New York, NY 10020 Trust (since 1994); Trustee,
Age: 56 Excelsior Funds (from 1994 to 1999);
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. (1999-present);
Director, Hotelivision, Inc.
(1999-present); Director, Alliance
Group Services, Inc. (1998-present);
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
913 Franklin Lake Road Funds, Inc. and the Company (since
Franklin Lakes, NJ 07417 1984); Director of UST Master
Age: 74 Variable Series, Inc. (from 1994 to
June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of Excelsior
2320 Cumberland Road Funds, Inc. and the Company (since
Charlottesville, VA 1986); Director of UST Master
22901-7726 Variable Series, Inc. (from 1994 to
Age: 79 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
Jonathan Piel Director Director of Excelsior Funds, Inc.
558 E. 87th Street and the Company (since 1996);
New York, New York 10128 Trustee, Excelsior Institutional
Age: 60 Trust (since 1994); Trustee of
Excelsior Funds (from 1994 to 1999);
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.
Church Pension Group and the Company (since 1987);
445 Fifth Avenue Director of UST Master Variable
New York, NY 10016 Series, Inc. (from 1994 to June
Age: 73 1997); Trustee of Excelsior
Institutional Trust (since 1995);
President Emeritus, The Church
Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and
Director of its wholly-owned
subsidiaries--Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1995);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since
1995).
</TABLE>
-32-
<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
6549 Pine Meadows Drive Funds, Inc. and the Company (since
Spring Hill, FL 34606 1985); Chairman of the Board of
Age: 74 Excelsior 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.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
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: 38 Company (January 1991 to November
1996).
</TABLE>
______________________
/2/ This Director is considered to be an "interested person" of the Company.
-33-
<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: 32 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 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to receive
an additional $5,000 per annum for services in such capacity. Drinker Biddle &
Reath LLP, of which Messrs. McConnel and Malloy are partners, receives legal
fees as counsel to 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 May 18, 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.
-34-
<PAGE>
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Estimated Compensation from
Compensation Benefits Accrued Annual Benefits the Company and
from As Part of 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 $______ None None ______(3)**
Director
Rodman L. Drake $______ None None ______(4)**
Director
Joseph H. Dugan $______ None None ______(3)**
Director
Wolfe J. Frankl $______ None None ______(3)**
Director
Jonathan Piel $______ None None ______(4)**
Director
Robert A. Robinson $______ None None ______(3)**
Director
None
Alfred C. Tannachion $______ None ______(3)**
Director
Frederick S. Wonham $______ None None ______(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.
-35-
<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 and 1999, 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 $0 $0
</TABLE>
For the fiscal years ended March 31, 2000 and 1999, 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
</TABLE>
-36-
<PAGE>
For the fiscal years ended March 31, 2000 and 1999, 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 $240,924 $129,359
</TABLE>
For the fiscal years ended March 31, 2000 and 1999, 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] $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.
As discussed in the prospectus, U.S. Trust Corporation, parent of U.S.
Trust, and The Charles Schwab Corporation entered into a definitive agreement to
merge on January 12, 2000. After the merger, U.S. Trust Corporation will be a
wholly-owned subsidiary of Schwab. The merger is anticipated to close by July
2000; however, it is subject to a number of conditions, including certain
regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser, and the Sub-
Adviser will continue to serve as sub-adviser, to the Fund after the merger.
The merger, however, will represent a change of ownership of U.S. Trust's and
the Sub-Adviser's parent corporation and, as such, will have the effect under
the 1940 Act of terminating the existing investment advisory and sub-advisory
agreements (the "Existing Agreements").
-37-
<PAGE>
Accordingly, the shareholders of the Fund have been asked to approve a new
investment advisory and sub-advisory agreement ("New Agreements"). The New
Agreements will become effective upon the date of the merger. If the merger is
not consummated, the Fund will operate under the New Agreement, which will
become effective upon the date of the termination of the merger agreement.
The New Agreements contains substantially the same terms and
conditions as the Existing Agreement, and the advisory fee will remain the same
under the New Agreement.
CGFSC, Federated Administrative Services (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. 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 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%
-38-
<PAGE>
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 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 $73,723 $39,584
</TABLE>
For the fiscal years ended March 31, 2000 and 1999, 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 N/A
</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. Until further
notice, the Adviser and
-39-
<PAGE>
Administrators have voluntarily agreed to waive fees payable by the Fund in an
aggregate amount equal to administrative service fees payable by the Fund.
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>
Total Paid Amounts Paid to Affiliates
of U.S. Trust
<S> <C> <C>
California Tax-Exempt Income Fund
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Total Paid Amounts Paid to Affiliates
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>
Total Paid Amounts Paid to Affiliates
of U.S. Trust
<S> <C> <C>
California Tax-Exempt Income Fund $91,274 $91,274
</TABLE>
-40-
<PAGE>
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.
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
-41-
<PAGE>
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 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.
-42-
<PAGE>
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.
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.
-43-
<PAGE>
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 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
--------------------
_______________, independent auditors, _____________________________
_________ 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, _____incorporated by reference in this Statement of Additional
Information have been audited by _________________ 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
---------------------------------------
-44-
<PAGE>
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 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.
As stated in the Prospectus, the Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Fund will not be suitable for tax-exempt institutions
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
-45-
<PAGE>
the taxable year over any amounts disallowed as deductions under Sections 265
and 171(a)(2) of the Code. The percentage of total dividends paid by the Fund
with respect to any taxable year which qualifies as exempt-interest dividends
will be the same for all shareholders receiving dividends from the Fund for such
year.
Interest on indebtedness incurred by a shareholder to purchase or
carry the Fund's Shares generally is not deductible for income tax purposes. In
addition, if a shareholder holds Shares for six months or less, any loss on the
sale or exchange of those Shares will be disallowed to the extent of the amount
of exempt-interest dividends received with respect to the Shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular dividend distributions where the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.
Any net long-term capital gains realized by the Fund will be
distributed at least annually. The Fund will generally have no tax liability
with respect to such gains and the distributions will be taxable to shareholders
as long-term capital gains, regardless of how long a shareholder has held
Shares. Such distributions will be designated as a capital gain dividend in a
written notice mailed by the Fund to shareholders not later than 60 days after
the close of the Fund's taxable year.
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
-46-
<PAGE>
Fund's taxable income may be subject to California state franchise or income tax
at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Obligations"), then a regulated investment company, or series thereof, will be
qualified to pay dividends exempt from California state personal income tax to
its non-corporate shareholders (hereinafter referred to as "California exempt-
interest dividends"). For this purpose, California Exempt Obligations are
generally limited to California Municipal Obligations and certain U.S.
Government and U.S. Possession obligations. A "series" of a regulated
investment company is defined as a segregated portfolio of assets, the
beneficial interest in which is owned by the holders of an exclusive class or
series of stock of the company. The Fund intends to qualify under the above
requirements so that it can pay California exempt-interest dividends. If the
Fund fails to so qualify, no part of its dividends to shareholders will be
exempt from the California state personal income tax. The Fund may reject
purchase orders for Shares if it appears desirable to avoid failing to so
qualify.
Within 60 days after the close of its taxable year, the Fund will
notify each shareholder of the portion of the dividends paid by the Fund to the
shareholder with respect to such taxable year which is exempt from California
state personal income tax. The total amount 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
-47-
<PAGE>
not deductible for California state personal income tax purposes if the Fund
distributes California exempt-interest dividends during the shareholder's
taxable year.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Fund or its shareholders,
and this discussion is not intended as a substitute for careful planning.
Further, it should be noted that the portion of any Fund dividends constituting
California exempt-interest dividends is excludable from income for California
state personal income tax purposes only. Any dividends paid to shareholders
subject to California state franchise tax or California state corporate income
tax may therefore be taxed as ordinary dividends to such purchasers
notwithstanding that all or a portion of such dividends is exempt from
California state personal income tax. Accordingly, potential investors in the
Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation, in
general.
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.
-48-
<PAGE>
For the purpose of determining interest earned during the period
(variable "a" in the formula), the Fund computes the yield to maturity of any
debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. The
Fund calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Fund to all shareholder accounts and to the
particular series of shares in proportion to the length of the base period and
the Fund's mean (or median) account size. Undeclared earned income will be
subtracted from the maximum offering price per share (variable "d" in the
formula).
Based on the foregoing calculations, the Fund's standardized effective
yield for the 30-day period ended March 31, 2000 was ____%.
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 ____%.
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
-49-
<PAGE>
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. 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 ____% and ____%,
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
-50-
<PAGE>
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value.
The total return and yield of the Fund may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the total return and/or yield of the Fund may be compared to data
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
and Weisenberger Investment Company Service. Total return and yield data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature, may also be used in comparing the performance of the
Fund. Advertisements, sales literature or reports to shareholders may from time
to time also include a discussion and analysis of the Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected the Fund's
performance.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciations of the Fund would increase the value, not only
of the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of the Fund), as well as the views of the Investment
Adviser as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of the
Fund. In addition, advertisements, sales literature or shareholder
communications may include a discussion of 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
-51-
<PAGE>
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, 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 May 18, 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 May 18, 2000, no person 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, ____ (the
"____ Annual Report") for the Fund are incorporated in this Statement of
Additional Information by reference. No other parts of the _____ Annual Report
are incorporated by reference herein. The financial statements included in the
_____ Annual Report for the Fund have been audited by the Company's independent
auditors, ___________, whose reports thereon also appear in the
-52-
<PAGE>
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 _____ 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.
-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
A-1
<PAGE>
considerations are incorporated in the debt ratings assigned to specific issues.
Foreign currency issuer ratings are also distinguished 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.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the 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 uncertain 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.
A-3
<PAGE>
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:
"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.
A-4
<PAGE>
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 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 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 is also 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.
"c" - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent
A-5
<PAGE>
upon the successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the project, makes
no comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of 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. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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 in 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.
A-6
<PAGE>
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa" "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: 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 long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt
A-7
<PAGE>
rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of 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.
"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 reliant upon
sustained, favorable business or economic developments. "CC" ratings indicate
that default of some kind appears probable, and "C" ratings signal imminent
default.
A-8
<PAGE>
"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 serve 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.
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-9
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents 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.
"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.
A-10
<PAGE>
"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 that 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.
"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 obligations
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
FORM N-1A
---------
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Articles of Incorporation of Registrant dated
as of August 7, 1984 (4).
(2) Articles Supplementary of Registrant dated as
of April 27, 1990 (4).
(3) Articles Supplementary of Registrant dated as
of December 23, 1992 (4).
(4) Articles Supplementary of Registrant dated as
of December 27, 1995 (1).
(5) Articles Supplementary of Registrant dated as
of July 31, 1998 (5).
(6) Articles Supplementary of Registrant dated as
of November 13, 1998 (5).
(7) Articles Supplementary of Registrant dated as
of May 19, 2000 (7).
(b) (1) Amended and Restated Bylaws of Registrant
dated February 10, 1995 (4).
(2) Amendment No. 1 to Amended and Restated
Bylaws of Registrant dated May 16, 1997 (4).
(c) (1) Articles VI, VII, VIII and X of Registrant's
Articles of Incorporation dated as of August 7, 1984 (4).
(2) Articles I, II, IV and VI of Registrant's
Amended and Restated By-Laws dated February 10, 1995 (4).
(d) (1) Investment Advisory Agreement among
Registrant, U.S. Trust Company of Connecticut and United
States Trust Company of New York dated May 16, 1997 with
respect to the Tax-Exempt Money Fund, Intermediate-Term Tax-
Exempt Fund and Long-Term Tax-Exempt Fund (3).
<PAGE>
(2) Investment Advisory Agreement among
Registrant, U.S. Trust Company of Connecticut and United
States Trust Company of New York dated May 16, 1997 with
respect to the New York Intermediate-Term Tax-Exempt Fund,
Short-Term Tax-Exempt Securities Fund and California Tax-
Exempt Income Fund (3).
(3) Amendment No. 1 dated July 31, 1998 to
Investment Advisory Agreement among Registrant, U.S Trust
Company of Connecticut and United States Trust Company of
New York with respect to the New York Tax-Exempt Money Fund
(5).
(4) Sub-Advisory Agreement among U.S. Trust
Company of Connecticut, United States Trust Company of New
York and United States Trust Company of California dated May
16, 1997 with respect to the California Tax-Exempt Income
Fund (4).
(5) Form of Investment Advisory Agreement among
Registrant (on behalf of the New York Intermediate-Term Tax-
Exempt, Short-Term Tax-Exempt Securities, California Tax-
Exempt Income, Tax-Exempt Money, Intermediate-Term Tax-
Exempt, Long-Term Tax-Exempt and New York Tax-Exempt Funds),
U.S. Trust Company and United States Trust Company of New
York (to become effective on the date of the merger of The
Charles Schwab Corporation with U.S. Trust Corporation
(parent company of the investment adviser)) (6).
(6) Form of Sub-Advisory Agreement among
Registrant (on behalf of the California Tax-Exempt Income
Fund), U.S. Trust Company, United States Trust Company of
New York and United States Trust Company, N.A. (to become
effective on the date of the merger of The Charles Schwab
Corporation with U.S. Trust Corporation (parent company of
the investment adviser)) (6).
(e) Amended and Restated Distribution Contract dated
July 31, 1998 between Registrant and Edgewood Services, Inc.
(5).
(f) None.
(g) (1) Custody Agreement dated September 1, 1995 (as
amended and restated on August 1, 1997) between Registrant
and The Chase Manhattan Bank (4).
(2) Amended Exhibit A dated July 31, 1998 to
Custody Agreement between Registrant and The Chase Manhattan
Bank (5).
(3) Amendment No. 1 dated July 31, 1998 to
Custody
-2-
<PAGE>
Agreement between Registrant and The Chase Manhattan Bank
(5).
(h) (1) Amended and Restated Administrative Services
Plan and Related Form of Shareholder Servicing Agreement
dated February 21, 1994, as amended as of May 16, 1997 (4).
(2) Amended and Restated Administration Agreement
dated July 31, 1998 among Registrant, Chase Global Funds
Services Company, Federated Administrative Services and U.S.
Trust Company of Connecticut (5).
(3) Amended and Restated Mutual Funds Transfer
Agency Agreement dated as of July 31, 1998 by and between
Registrant and United States Trust Company of New York (5).
(4) Amended and Restated Mutual Funds Sub-
Transfer Agency Agreement dated as of July 31, 1998 by and
between United States Trust Company of New York and Chase
Global Funds Services Company (5).
(5) Credit Agreement dated December 27, 1999 by
and among Registrant, Excelsior Funds, Inc., Excelsior
Institutional Trust, The Chase Manhattan Bank and the other
lenders thereunder (7).
(6) Form of Waiver and Reimbursement Agreement
among Registrant, United States Trust Company of New York
and U.S. Trust Company (7).
(i) Opinion of counsel (5).
(j)(1) Consent of Drinker Biddle & Reath LLP (7).
(k) None.
(l) (1) Purchase Agreement between Registrant and
Shearson Lehman Brothers Inc. dated February 6, 1985 (4).
(2) Purchase Agreement between Registrant and
Edgewood Services, Inc. dated September 25, 1996 (2).
(3) Purchase Agreement between Registrant and
Edgewood Services, Inc. dated August 3, 1998 (5).
(m) None.
(n) None.
-3-
<PAGE>
(p)(1) Code of Ethics of Registrant (7).
(p)(2) Code of Ethics of U.S. Trust Corporation
(including U.S. Trust Company, United States Trust
Company of New York and United States Trust
Company, N.A.) (7).
(p)(3) Code of Ethics of Edgewood Services, Inc.
(7).
Notes:
- -----
(1) Incorporated by reference to Registrant's Post-Effective Amendment No.
19 to its Registration Statement on Form N-1A filed July 18, 1996.
(2) Incorporated by reference to Registrant's Post-Effective Amendment No.
21 to its Registration Statement on Form N-1A filed March 31, 1997.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No.
23 to its Registration Statement on Form N-1A filed July 31, 1997.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No.
24 to its Registration Statement on Form N-1A filed May 15, 1998.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No.
26 to its Registration Statement on Form N-1A filed May 28, 1999.
(6) Incorporated by reference to Registrant's Definitive Proxy Statement
pursuant to Section 14 (a) of the Securities and Exchange Act of 1934
filed March 22, 2000.
(7) Filed herewith.
Item 24. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
Registrant is controlled by its Board of Directors.
Item 25. Indemnification
---------------
Article VII, Section 3 of Registrant's Articles of Incorporation,
incorporated herein by reference to Exhibit (a)(1) hereto, and Article VI,
Section 2 of Registrant's Amended and Restated Bylaws, incorporated herein by
reference to Exhibit (b)(1) hereto, provide for the indemnification of
Registrant's directors and officers. Indemnification of Registrant's principal
underwriter, custodian, transfer agent and co-administrators is provided for,
respectively, in Section 1.11 of the Amended and Restated Distribution Contract
incorporated herein by reference to Exhibit (e) hereto, Section 12 of the
Custody Agreement incorporated herein by reference to Exhibit (g)(1) hereto,
Section 7 of the Amended and Restated Mutual Funds
-4-
<PAGE>
Transfer Agency Agreement incorporated herein by reference to Exhibit (h)(3)
hereto, and Section 6 of the Amended and Restated Administration Agreement
incorporated herein by reference to Exhibit (h)(2) hereto. Registrant has
obtained from a major insurance carrier a directors' and officers' liability
policy covering certain types of errors and omissions. In no event will
Registrant indemnify any of its directors, officers, employees, or agents
against any liability to which such person would otherwise be subject by reason
of his willful misfeasance, bad faith, gross negligence in the performance of
his duties, or by reason of his reckless disregard of the duties involved in the
conduct of his office or arising under his agreement with Registrant. Registrant
will comply with Rule 484 under the Securities Act of 1933 and Release No. 11330
under the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer, or controlling person of Registrant in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
(a) U.S. Trust Company of Connecticut:
U.S. Trust Company of Connecticut ("U.S. Trust CT") is a
Connecticut state bank and trust company located in Stamford, Connecticut. Set
forth below are the names and principal businesses of the directors and certain
senior executive officers of U.S. Trust CT, including those who are engaged in
any other business, profession, vocation or employment of a substantial nature.
-5-
<PAGE>
<TABLE>
<CAPTION>
Positions
with U.S. Principal Type of
Trust CT Name Occupation Business
- -------- ---- ----------------- --------
<S> <C> <C> <C>
Director Tucker H. Warner Co-Founder, Consulting Firm
The Nutmeg Financial Partner &
Group, LLC Director
1157 Highland Avenue
West Cheshire, CT 06903
Director Thomas C. Clark Managing Director, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
11 West 54th Street
New York, NY 10019
Director, Maribeth S. Rahe Vice Chairman, Asset Management,
Chairman United States Trust United States Trust Investment and
of Board Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
Director Frederick B. Taylor Vice Chairman, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
Director Robert C. Bodine Chairman Asset Management,
U.S. Trust Company Investment and
100 West Lancaster Avenue Fiduciary Services
Suite 200
Wayne, PA 19087
Director Howard E.N. Wilson Chairman Asset Management,
U.S. Trust Company Investment and
100 West Lancaster Avenue Fiduciary Services
Suite 200
Wayne, PA 19087
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Director Kenneth G. Walsh Executive Vice Asset Management,
United States Trust President, Investment and
Company of New York United States Fiduciary Services
114 West 47th Street Trust Company of
New York, NY 10036 New York
</TABLE>
<TABLE>
<CAPTION>
Positions
with U.S. Principal Type of
Trust CT Name Occupation Business
- -------- ---- ----------------- --------
<S> <C> <C> <C>
Director, William V. Ferdinand Managing Director Asset Management,
Managing U.S. Trust Company & CIO Fiduciary Services
Director & 225 High Ridge Road & Private Banking
CIO, CT Stamford, CT 06905
Offices
Director, W. Michael Funck President & CEO Asset Management,
President & U.S. Trust Company Fiduciary Services
CEO, CT 225 High Ridge Road & Private Banking
Offices Stamford, CT 06905
</TABLE>
-7-
<PAGE>
(b) United States Trust Company of New York:
United States Trust Company of New York ("U.S. Trust NY") is a
full-service state-chartered bank located in New York, New York. Set forth below
are the names and principal businesses of the trustees and certain senior
executive officers of U.S. Trust NY, including those who are engaged in any
other business, profession, vocation, or employment of a substantial
nature.
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- --------- ---- ---------- --------
<S> <C> <C> <C>
Director Eleanor Baum Dean of School Academic
4 Arleigh Road of Engineering,
Great Neck, NY 11021 The Cooper Union for
the Advancement of
Science & Art
Director Samuel C. Butler Partner in Cravath, Law Firm
Cravath, Swaine Swaine & Moore
& Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Director Peter O. Crisp Retired Chairman of Venture
103 Horseshoe Road Venrock, Inc. Capital
Mill Neck, NY 11765
Director Antonia M. Grumbach Partner in Patterson, Law Firm
Patterson, Belknap, Belknap, Webb
Webb & Tyler, LLP & Tyler
1133 Avenue of the
Americas
New York, NY 10036
Director, H. Marshall Schwarz Chairman of the Asset Management,
Chairman United States Trust Board & Chief Investment and
of the Board Company of New York Executive Officer of Fiduciary Services
and Chief 114 West 47th Street U.S. Trust Corp. and
Executive New York, NY 10036 U.S. Trust Company of
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C>
Officer New York
</TABLE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- --------- ---- ---------- --------
<S> <C> <C> <C>
Director Philippe de Montebello Director of the Art Museum
The Metropolitan Museum Metropolitan
of Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198
Director John H. Stookey Chairman of Petrochemicals and
Suburban Propane Pts. Suburban Propane Pts. Propane
P.O. Box 455
Sheffield, MA 01257
Director Robert N. Wilson Vice Chairman of Health Care
Johnson & Johnson the Board of Johnson Products
One Johnson & & Johnson
Johnson Plaza
New Brunswick, NJ 08933
Director Peter L. Malkin Chairman of Law Firm
Wien & Malkin LLP Wien & Malkin LLP
Lincoln Building
60 East 42nd Street
New York, NY 10165
Director David A. Olsen Retired Chairman of Risk & Insurance
1120 Park Avenue Johnson & Higgins Services
New York, NY 10128
Director Ruth A. Wooden President and CEO of Not-for-Profit
60 Gramercy Park North National Parenting
Apt. 2M Association
New York, NY 10016
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Executive Paul K. Napoli Executive Asset Management,
Vice United States Trust Vice President of Investment and
President Company of New York U.S. Trust Corporation Private Banking
114 West 47th Street and United States Trust Fiduciary Services
New York, NY 10036 Company of New York
</TABLE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- --------- ---- ---------- --------
<S> <C> <C> <C>
Director and Maribeth S. Rahe Vice Chairman Asset Management,
Vice Chair- United States Trust of U.S. Trust Corporation Investment and
man Company of New York and United States Trust Fiduciary Services
114 West 47th Street Company of New York
New York, NY 10036
Director, Frederick B. Taylor Vice Chairman and Asset Management,
Vice Chair- United States Trust Chief Investment Of- Investment and
man and Company of New York ficer of U.S. Trust Fiduciary Services
Chief Invest- 114 West 47th Street Corporation and United
ment Officer New York, NY 10036 States Trust Company
of New York
Director, Jeffrey S. Maurer President and Asset Management,
President, United States Trust Chief Operating Investment and
and Chief Company of New York Officer of U.S. Trust Fiduciary Services
Operating 114 West 47th Street Corporation and United
Officer New York, NY 10036 States Trust Company of
New York
Executive John L. Kirby Executive Asset Management,
Vice United States Trust Vice President and Investment and
President Company of New York Chief Financial Fiduciary Services
and Chief 114 West 47th Street Officer of U.S. Trust
Financial New York, NY 10036 Corporation and United
Officer States Trust Company of
New York
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Executive Kenneth G. Walsh Executive Asset Management,
Vice United States Trust Vice President of Investment and
President Company of New York U.S. Trust Corporation Fiduciary Services
114 West 47th Street and United States Trust
New York, NY 10036 Company of New York
Director Philip L. Smith Corporate Director and Consumer Goods
P.O. Box 386 Trustee
Ponte Verde Beach, FL 32004
</TABLE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Robert E. Denham Partner in Manger, Tolls Law Firm
Manger, Tolls & & Olson LLP
Olson LLP
355 South Grand Avenue
35/th/ Floor
Los Angeles, CA 90071-1560
Director Carl H. Pforzheimer, II Managing Partner Broker-Dealer,
Carl H. Pforzheimer & Co. Investment
650 Madison Avenue Adviser
23/rd/ Floor
New York, NY 10022
Executive John M. Deignan Executive Investment
Vice United States Trust Vice President Management and
President Company of New York Fiduciary Services;
114 West 47th Street Private Banking
New York, NY 10036
</TABLE>
-11-
<PAGE>
(c) U.S. Trust Company N.A. (Investment Sub-Adviser for the
California Tax-Exempt Income Fund)
U.S. Trust Company, N.A. ("U.S. Trust N.A.") is a national bank
located in Los Angeles, California. Set forth below are the names and principal
businesses of the directors and certain senior executive officers of U.S. Trust
N.A., including those who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust N.A. Name Occupation Business
- ---------- ---- ---------- --------
<S> <C> <C> <C>
Director and William R. Barrett, Jr. Managing Director Asset Management,
Managing Director 515 So. Flower Street Investment and
Suite 2700 Fiduciary Services
Los Angeles, CA 90071
Director Thomas C. Clark Managing Director Asset Management,
11 W. 54th Street Investment
New York, NY 10019
Director Jeffrey Grubb Managing Director, Asset Management,
4380 S.W. Macadam Ave. Director Investment and
Suite 450 Fiduciary Services
Portland, OR 97201
Director Peter K. Maier Managing Director, Asset Management,
80 E. Sir Francis Director Investment and
Drake Blvd. Fiduciary Services
Larkspur, CA 94939
Director Jeffrey S. Maurer President and Asset Management,
114 W. 47th Street Chief Operating Investment and
New York, NY 10036 Officer Fiduciary Services
Director/Managing Robert M. Raney Managing Director Asset Management,
Director and Chief 515 So. Flower Street and Chief Investment and
Investment Officer Suite 2700 Investment Officer Fiduciary Services
Los Angeles, CA 90071
Director Ralph C. Rittenour Chairman & CEO Asset Management,
4380 S.W. Macadam Ave. Investment and
Suite 450 Fiduciary Services
Portland, OR 97201
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust N.A. Name Occupation Business
- ---------- ---- ---------- --------
<S> <C> <C> <C>
Director /President Gregory F. Sanford President and Chief Asset Management,
and Chief Executive 515 So. Flower Street Executive Officer Investment and
Officer Suite 2700 Fiduciary Services
Los Angeles, CA 90071
Director Kenneth F. Siebel Managing Director Asset Management,
80 E. Sir Francis Investment and
Drake Blvd. Fiduciary Services
Larkspur, CA 94939
Director Charles J. Swindells Vice Chairman Asset Management,
4380 S.W. Macadam Ave. Investment and
Suite 450 Fiduciary Services
Portland, OR 97201
Director/Chairman Franklin E. Ulf Chairman of the Asset Management,
of the Board 515 So. Flower Street Board Investment and
Suite 2700 Fiduciary Services
Los Angeles, CA 90071
Director Jay S. Welker Managing Director Asset Management,
One Embarcadero Center Investment and
Suite 2050 Fiduciary Services
San Francisco, CA 94111
Director and Charles E. Wert Executive Vice Asset Management,
Executive Vice 515 So. Flower Street President Investment and
President Suite 2700 Fiduciary Services
Los Angeles, CA 90071
Director Maribeth S. Rahe Vice Chairman Asset Management,
114 W. 47th Street Investment and
New York, NY 10036 Fiduciary Services
</TABLE>
Item 27. Principal Underwriter
---------------------
(a) Edgewood Services, Inc., the Distributor for shares of the Registrant,
also acts as principal underwriter for the following open-end investment
companies: Excelsior Funds, Inc., Excelsior Institutional Trust, FTI Funds, Fund
Manager Portfolios, Great Plains Funds, Old Westbury Funds, Inc., The Riverfront
Funds, Robertsons Stephens Investment Trust, WesMark Funds and WCT Funds.
-13-
<PAGE>
<TABLE>
<CAPTION>
(b) Names and Principal Positions and Offices with Offices with
Business Addresses The Distributor Registrant
------------------- -------------------------- ------------
<S> <C> <C>
Lawrence Caracciolo Director and President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Arthur L. Cherry Director, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
J. Christopher Donahue Director, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Thomas R. Donahue Director and Executive Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Ernest L. Linane Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Timothy S. Johnson Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Christine T. Johnson Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Denis McAuley, III Treasurer, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
Victor R. Siclari Assistant Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237- 7002
</TABLE>
(c) Not Applicable.
-14-
<PAGE>
Item 28. Location of Accounts and Records
--------------------------------
(1) United States Trust Company of New York, 114 W.
47th Street, New York, NY 10036 (records relating to its functions as investment
adviser and transfer agent).
(2) U.S. Trust Company , 225 High Ridge Road, East
Building, Stamford, Connecticut 06905 (records relating to its function as
investment adviser and co-administrator).
(3) U.S. Trust Company, N.A. 515 South Flower Street,
Los Angeles, CA 90071 (records relating to its function as sub-adviser to the
California Tax-Exempt Income Fund).
(4) Edgewood Services, Inc., Clearing Operations, 5800
Corporate Drive, Pittsburgh, PA 15237-5829 (records relating to its function as
distributor).
(5) Chase Global Funds Services Company, 73 Tremont
Street, Boston, Massachusetts 02108-3913 (records relating to its function as
co-administrator and sub-transfer agent).
(6) Federated Administrative Services, Federated
Investors Tower, Pittsburgh, PA 15222-3779 (records relating to its function as
co-administrator).
(7) The Chase Manhattan Bank, 3 Chase MetroTech
Center, 8/th/ Floor, Brooklyn, NY 11245 (records relating to its function as
custodian).
(8) Drinker Biddle & Reath LLP, One Logan Square,
18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-6996 (Registrants'
Articles of Incorporation, Bylaws, and Minute Books).
Item 29. Management Services
-------------------
Not Applicable.
Item 30. Undertakings
------------
Not Applicable.
-15-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 (the
"1933 Act") and the Investment Company Act of 1940, Excelsior Tax-Exempt Funds,
Inc. has duly caused this Post-Effective Amendment No. 28 to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and the State of New York on the 26th
day of May, 2000.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Registrant
/s/ Frederick S. Wonham
-----------------------
Frederick S. Wonham, President and Treasurer
(Signature and Title)
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 28 to Excelsior Tax-Exempt Funds, Inc.'s Registration Statement on
Form N-1A has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Frederick S. Wonham Chairman of the May 26, 2000
- -----------------------
Frederick S. Wonham Board, President
and Treasurer
*Joseph H. Dugan
- ----------------
Joseph H. Dugan Director May 26, 2000
- -------------------
Donald L. Campbell Director May 26, 2000
*Wolfe J. Frankl
- ----------------
Wolfe J. Frankl Director May 26, 2000
*Robert A. Robinson
- -------------------
Robert A. Robinson Director May 26, 2000
*Alfred Tannachion
- ------------------
Alfred Tannachion Director May 26, 2000
*Jonathan Piel
- --------------
Jonathan Piel Director May 26, 2000
*Rodman L. Drake
- ----------------
Rodman L. Drake Director May 26, 2000
</TABLE>
-16-
<PAGE>
By: /s/ W. Bruce McConnel
---------------------
W. Bruce McConnel, Attorney-in-Fact
-17-
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and said attorney
shall have full power and authority, to do and perform in the name and on behalf
of the undersigned in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney may
lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Alfred C. Tannachion
------------------------
Alfred C. Tannachion
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Joseph H. Dugan
-------------------
Joseph H. Dugan
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Robert A. Robinson
------------------------
Robert A. Robinson
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Wolfe J. Frankl
------------------------
Wolfe J. Frankl
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
W. Bruce McConnel, III his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in his capacity as director/trustee or officer, or both, to execute
amendments to Excelsior Funds, Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and
Excelsior Institutional Trust's (collectively, the "Companies") respective
Registration Statements on Form N-1A pursuant to the Investment Company Act of
1940, as amended, and the Securities Act of 1933, as amended (the "Acts") and
all instruments necessary or incidental in connection therewith pursuant to said
Acts and any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, and to file the same with the Securities and
Exchange Commission, and said attorney shall have full power and authority, to
do and perform in the name and on behalf of the undersigned in any and all
capacities, every act whatsoever requisite or necessary to be done, as fully and
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney may lawfully do or cause to be done by
virtue hereof.
Dated: May 19, 2000 /s/ Frederick S. Wonham
------------------------
Frederick S. Wonham
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Rodman L. Drake
------------------------
Rodman L. Drake
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Jonathan Piel
------------------------
Jonathan Piel
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
(a)(7) Articles Supplementary of Registrant dated as of
May 19, 2000.
(h)(5) Credit Agreement dated December 27, 1999 by and among
Registrant, Excelsior Funds, Inc., Excelsior
Institutional Trust, The Chase Manhattan Bank and the
other lenders thereunder.
(h)(6) Form of Waiver and Reimbursement Agreement among
Registrant, United States Trust Company of New York and
U.S. Trust Company.
(j)(1) Consent of Drinker Biddle & Reath LLP.
(j)(2) Consent of Ernst & Young LLP.
(p)(1) Code of Ethics of Registrant.
(p)(2) Code of Ethics of U.S. Trust Corporation (including
U.S. Trust Company, United States Trust Company of New
York and United States Trust Company, N.A.).
(p)(3) Code of Ethics of Edgewood Services, Inc.
<PAGE>
EXHIBIT (a)(7)
EXCELSIOR TAX-EXEMPT FUNDS, INC.
ARTICLES SUPPLEMENTARY
Excelsior Tax-Exempt Funds, Inc., a Maryland Corporation having its
principal office in the City of Baltimore, Maryland (hereinafter called the
"Company"), hereby certifies to the State Department of Assessments and Taxation
of Maryland that:
FIRST: The Company is registered as an open-end investment company under
the Investment Company Act of 1940, as amended. Pursuant to Section 2-105(c) of
the Maryland General Corporation Law, the Board of Directors of the Company (the
"Board") has increased the total number of shares of capital stock which the
Company shall have authority to issue from Fourteen Billion (14,000,000,000) to
Twenty-Four Billion (24,000,000,000) shares of Common Stock of the par value of
One Mill ($0.001) per share, and of the aggregate par value of Twenty-Four
Million Dollars ($24,000,000), pursuant to the following resolution:
RESOLVED, that pursuant Section 2-105(c) of the Maryland General
Corporation Law, the Board hereby increases the total number of shares of
capital stock which Excelsior Tax-Exempt shall have authority to issue from
Fourteen Billion (14,000,000,000) to Twenty-Four Billion (24,000,000,000)
shares of Common Stock par value one mill ($0.001) per share, with an
aggregate par value of Twenty-Four Million Dollars ($24,000,000).
SECOND: The Board of Directors of the Company has classified One Billion
(1,000,000,000) of the additional shares of unclassified capital stock of the
Company authorized under the immediately preceding resolution pursuant to the
following resolution:
FURTHER RESOLVED, that pursuant to the authority expressly given to
the Board in Article VI of the Company's Charter, the Board hereby
classifies an additional One Billion (1,000,000,000) of Excelsior Tax-
Exempt Funds, Inc.'s authorized but unissued and unclassified shares as
Class A Common Stock (with an aggregate par value of One Million Dollars
($1,000,000));
FURTHER RESOLVED, that each share of Class A Common Stock shall have
all the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the Class A Common Stock as set forth in the
Company's Charter; and
FURTHER RESOLVED, that the officers of the Company be, and each of
them hereby is, authorized and empowered to execute, seal, deliver and file
any and all documents, instruments, papers and writings, including but not
limited to Articles Supplementary to be filed with the State Department of
Assessments and Taxation of Maryland, and to do any and all other acts,
including but not limited to changing the foregoing resolutions upon advice
of Company counsel prior to filing said Articles Supplementary, in the name
of the Company and on its behalf, as any officer determines is necessary or
desirable in connection with or in furtherance of the foregoing
resolutions, such determination to be conclusively evidenced by said
officer taking any such actions.
1
<PAGE>
THIRD: The shares of capital stock of the Company classified pursuant to
the resolutions set forth herein have been classified by the Board under the
authority contained in the Charter of the Company.
FOURTH: Immediately before the increase and classification set forth in
Articles FIRST and SECOND, the Company was authorized to issue Fourteen Billion
shares (14,000,000,000) of Common Stock of the par value of One Mill ($0.001)
per share, and of the aggregate par value of Fourteen Million Dollars
($14,000,000), classified as follows:
Class A Common Stock: Two Billion (2,000,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Two Million Dollars ($2,000,000);
Class A Common Stock -- Special Series 1: One Billion (1,000,000,000)
----------------------------------------
shares of capital stock of the Company of the par value of One Mill
($0.001) per share and of the aggregate par value of One Million Dollars
($1,000,000);
Class A Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class B Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class B Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class B Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class C Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class C Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
2
<PAGE>
Class C Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class D Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class D Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class D Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars;
Class E Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class E Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class E Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class F Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class F Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class F Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000); and
Class G Common Stock: Two Billion (2,000,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Two Million Dollars ($2,000,000).
The total number of authorized and unclassified shares of capital
stock of the Company remaining after the actions described above was One
Billion (1,000,000,000) shares of capital stock of the par value of One
Mill ($0.001) per share and of the aggregate par value of One Million
Dollars ($1,000,000).
3
<PAGE>
FIFTH: Immediately following the increase and classification set forth in
Articles FIRST and SECOND, the Company was authorized to issue Twenty-Four
Billion (24,000,000,000) shares of Common Stock of the par value of One Mill
($0.001) per share, and of the aggregate par value of Twenty-Four Million
Dollars ($24,000,000), classified as follows:
Class A Common Stock: Three Billion (3,000,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Three Million Dollars ($3,000,000);
Class A Common Stock -- Special Series 1: One Billion (1,000,000,000)
----------------------------------------
shares of capital stock of the Company of the par value of One Mill
($0.001) per share and of the aggregate par value of One Million Dollars
($1,000,000);
Class A Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class B Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class B Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class B Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class C Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class C Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class C Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class D Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
4
<PAGE>
Class D Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class D Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars;
Class E Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class E Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class E Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class F Common Stock: Five Hundred Million (500,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);
Class F Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);
Class F Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000); and
Class G Common Stock: Two Billion (2,000,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Two Million Dollars ($2,000,000).
The total number of authorized and unclassified shares of capital stock of
the Company remaining after the actions described above is Ten Billion
(10,000,000,000) shares of capital stock of the par value of One Mill ($0.001)
per share and of the aggregate par value of Ten Million Dollars ($10,000,000).
5
<PAGE>
IN WITNESS WHEREOF, Excelsior Tax-Exempt Funds, Inc. has caused these
presents to be signed in its name and on its behalf by its President and its
Corporate Seal to be herewith affixed and attested to by its Assistant Secretary
as of May 19, 2000.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
[SEAL]
Attest:
/s/ Michael P. Malloy By: /s/ Frederick S. Wonham
- --------------------------- ---------------------------
Michael P. Malloy Frederick S. Wonham
Assistant Secretary President
6
<PAGE>
CERTIFICATE
THE UNDERSIGNED, President of Excelsior Tax-Exempt Funds, Inc., who
executed on behalf of said Corporation the attached Articles Supplementary of
said Corporation, of which this Certificate is made a part, hereby acknowledges,
in the name and on behalf of said Corporation, the attached Articles
Supplementary to be the corporate act of said Corporation, and certifies that to
the best of his knowledge, information and belief the matters and facts set
forth in the attached Articles Supplementary with respect to authorization and
approval are true in all material respects, under the penalties for perjury.
/s/ Frederick S. Wonham
-----------------------
Frederick S. Wonham
President
Dated as of: May 19, 2000
<PAGE>
EXHIBIT (h)(5)
- --------------------------------------------------------------------------------
EXCELSIOR FUNDS, INC.,
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
ON BEHALF OF EACH SERIES
OR PORTFOLIO NAMED HEREIN
_________
$250,000,000
CREDIT AGREEMENT
Dated as of December 27, 1999
_________
THE CHASE MANHATTAN BANK,
as Administrative Agent,
CHASE SECURITIES INC.,
as Sole Book Manager and Lead Arranger
And
THE BANK OF NOVA SCOTIA,
as Syndication Agent
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS....................................................................................... 1
1.1 Defined Terms..................................................................................... 1
1.2 Other Definitional Provisions..................................................................... 8
1.3 Assumptions Regarding Structure................................................................... 8
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS................................................................... 8
2.1 Commitments....................................................................................... 9
2.2 Procedure for Borrowing........................................................................... 9
2.3 Fees.............................................................................................. 9
2.5 Repayment of Loans; Evidence of Debt.............................................................. 10
2.6 Optional and Mandatory Prepayments................................................................ 11
2.7 Interest Rates and Payment Dates.................................................................. 12
2.8 Computation of Interest and Fees.................................................................. 12
2.9 Pro Rata Treatment and Payments................................................................... 13
2.10 Requirements of Law.............................................................................. 14
2.11 Taxes............................................................................................ 14
2.12 Change of Lending Office; Replacement of Lender.................................................. 16
2.13 Swing Line Commitment............................................................................ 17
2.14 Procedure for Swing Line Borrowing............................................................... 17
2.15 Refunding of Swing Line Loans.................................................................... 17
2.16 Designation of Additional Borrowers; Amendments to Schedule I.................................... 18
SECTION 3. REPRESENTATIONS AND WARRANTIES.................................................................... 19
3.1 Financial Condition............................................................................... 19
3.2 No Change......................................................................................... 19
3.3 Existence; Compliance with Law.................................................................... 19
3.4 Power; Authorization; Enforceable Obligations..................................................... 20
3.5 No Legal Bar...................................................................................... 20
3.6 No Material Litigation............................................................................ 20
3.7 No Default........................................................................................ 20
3.8 Ownership of Property; Liens...................................................................... 20
3.9 No Burdensome Restrictions........................................................................ 21
3.10 Taxes............................................................................................ 21
3.11 Federal Regulations.............................................................................. 21
3.12 ERISA............................................................................................ 21
3.13 Certain Regulations.............................................................................. 21
3.14 Subsidiaries..................................................................................... 21
3.15 Registration of the Funds........................................................................ 21
3.16 Offering in Compliance with Securities Laws...................................................... 21
3.17 Investment Policies.............................................................................. 22
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3.18 Permission to Borrow............................................................................. 22
3.19 Accuracy of Information.......................................................................... 22
3.20 Affiliated Persons............................................................................... 22
3.21 Year 2000........................................................................................ 20
SECTION 4. CONDITIONS PRECEDENT............................................................................... 22
4.1 Conditions to Initial Loans...................................................................... 23
4.2 Conditions to Each Loan........................................................................... 24
SECTION 5. AFFIRMATIVE COVENANTS............................................................................. 25
5.1 Financial Statements.............................................................................. 25
5.2 Certificates; Other Information................................................................... 26
5.3 Payment of Obligations............................................................................ 27
5.4 Conduct of Business and Maintenance of Existence.................................................. 27
5.5 Maintenance of Property; Insurance................................................................ 27
5.6 Inspection of Property; Books and Records; Discussions............................................ 28
5.7 Notices........................................................................................... 28
5.8 Purpose of Loans.................................................................................. 29
SECTION 6. NEGATIVE COVENANTS................................................................................ 29
6.1 Financial Condition Covenant...................................................................... 29
6.2 Limitation on Indebtedness........................................................................ 29
6.3 Limitation on Liens............................................................................... 29
6.4 Limitation on Guarantee Obligations............................................................... 30
6.5 Limitation on Fundamental Changes................................................................. 30
6.6 Limitation on Distributions....................................................................... 30
6.7 Limitation on Investments, Loans and Advances..................................................... 31
6.8 Limitation on Transactions with Affiliates........................................................ 31
6.9 Limitation on Negative Pledge Clauses............................................................. 31
6.10 Limitation on Changes to Investment Policies..................................................... 31
SECTION 7. EVENTS OF DEFAULT................................................................................. 31
SECTION 8. THE ADMINISTRATIVE AGENT.......................................................................... 34
8.1 Appointment....................................................................................... 34
8.2 Delegation of Duties.............................................................................. 34
8.3 Exculpatory Provisions............................................................................ 35
8.4 Reliance by Administrative Agent.................................................................. 35
8.5 Notice of Default................................................................................. 35
8.6 Non-Reliance on Administrative Agent and Other Lenders............................................ 36
8.7 Indemnification................................................................................... 36
8.8 Administrative Agent in Its Individual Capacity................................................... 37
</TABLE>
<PAGE>
<TABLE>
<S> <C>
8.9 Successor Administrative Agent.................................................................... 37
SECTION 9. MISCELLANEOUS..................................................................................... 37
9.1 Amendments and Waivers............................................................................ 37
9.2 Notices........................................................................................... 38
9.3 No Waiver; Cumulative Remedies.................................................................... 39
9.4 Survival of Representations and Warranties........................................................ 39
9.5 Payment of Expenses and Taxes; Indemnification.................................................... 39
9.6 Successors and Assigns; Participations and Assignments............................................ 40
9.7 Adjustments; Set-off.............................................................................. 42
9.8 Counterparts...................................................................................... 43
9.9 Severability...................................................................................... 43
9.10 Integration...................................................................................... 43
9.11 GOVERNING LAW.................................................................................... 43
9.12 Submission To Jurisdiction; Waivers.............................................................. 43
9.13 Acknowledgements................................................................................. 44
9.14 WAIVERS OF JURY TRIAL............................................................................ 44
9.15 Non-Recourse..................................................................................... 45
9.16 Waiver of Conflicts; Confidentiality............................................................. 40
</TABLE>
SCHEDULES:
- ---------
Schedule I Borrowers & Allocations
Schedule II Commitments, Addresses, Etc.
Schedule III Investment Management Agreements
Schedule IV Custodian Agreements
Schedule V Distribution Agreements
Schedule VI Shareholder Services Agreements
EXHIBITS:
- --------
Exhibit 2.5(e) Form of Note
Exhibit 2.16(a) Form for Designation of New Borrowers
Exhibit 4.1(h) Form of Opinion
Exhibit 9.6(c) Form of Assignment and Acceptance
<PAGE>
CREDIT AGREEMENT, dated as of December 27, 1999 (this "Agreement") among (i)
---------
each fund signatory hereto (each a "Fund" and, collectively, the "Funds") on
---- -----
behalf of the series or portfolios of the Fund, which series and portfolios are
listed on Schedule I beside the name of the Fund of which each series or
----------
portfolio is a series or portfolio (each such series or portfolio, a "Borrower"
--------
and, collectively, the "Borrowers"), (ii) the several banks and other financial
---------
institutions from time to time parties to this Agreement (the "Lenders"), (iii)
-------
THE BANK OF NOVA SCOTIA as Syndication Agent, and (iv) THE CHASE MANHATTAN BANK,
a New York banking corporation, as administrative agent for the Lenders
hereunder (in such capacity, the "Administrative Agent");
--------------------
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, each Fund is an open-end registered investment company under the
Investment Company Act of 1940 for which UST (as defined below) acts as an
investment manager;
WHEREAS, each Borrower has requested the Lenders to make Loans (as
hereinafter defined) severally to each Borrower and to make available to it a
credit facility for the purposes and on the terms and conditions set forth
herein; and
WHEREAS, each Lender acknowledges that each Borrower shall be liable
hereunder only for the Loans made to such Borrower hereunder and interest
thereon and for the fees and expenses associated therewith and as otherwise set
forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
-------------
have the following meanings:
"Administrative Agent": The Chase Manhattan Bank, together with its
--------------------
affiliates, as the arranger of the Commitments and as the administrative agent
for the Lenders under this Agreement and the other Loan Documents.
"Affiliate": as to any Person, any other Person (other than a
---------
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, such Person. For purposes of this definition,
"control" of a Person means the power, directly or indirectly, either to (a)
vote 10% or more of the securities having ordinary voting power for the election
of directors of such Person or (b) direct or cause the direction of the
management and policies of such Person, whether by contract or otherwise.
"Aggregate Commitment": the total of all Commitments of all Lenders,
--------------------
as may be reduced from time to time in the accordance with the terms of this
Agreement. On the Closing
<PAGE>
Date at the time of closing, the Aggregate Commitment shall be equal to
$250,000,000.
"Agreement": this Credit Agreement, as amended, restated, supplemented
---------
or otherwise modified from time to time.
"Allocation": as to each Borrower, the percentage amount stated in
----------
Schedule I to this Agreement; provided that, if no Event of Default shall have
- ---------- --------
occurred and be continuing, the Funds, on behalf of the Borrowers and without
the consent of the Lenders, by written notice to the Administrative Agent, may
change the Allocations from time to time in the Funds' sole discretion
substantially in accordance with changes in the ratio of each Borrower's Average
Net Assets to the aggregate Average Net Assets of all Borrowers; provided
--------
further, that, after any such change in Allocations, the aggregate amount of all
- -------
Allocations shall equal 100%.
"Applicable Margin": 0.5% per annum.
-----------------
"Asset Coverage Ratio": with respect to any Borrower, the ratio which
--------------------
the value of the Total Assets of such Borrower less all liabilities and
indebtedness not represented by Senior Securities, bears to the aggregate amount
of all Senior Securities representing Indebtedness of such Borrower. For the
purposes of calculating the Asset Coverage Ratio, the amount of any liability or
indebtedness deducted from Total Assets shall be equal to the greater of (x) the
outstanding amount of such liability or indebtedness and (y) the fair market
value of all assets securing such liability or indebtedness.
"Assignee": as defined in Section 9.6(c).
--------
"Available Commitment": as to any Lender with respect to any Borrower
--------------------
at any time, an amount equal to the excess, if any, of (a) the amount of such
Lender's Commitment to such Borrower less (b) the aggregate principal amount of
all Loans to such Borrower made by such Lender then outstanding; collectively,
as to all the Lenders, the "Available Commitments."
---------------------
"Average Net Assets": As to any Borrower at any date, an amount equal
------------------
to the average daily value of the aggregate net assets of such Borrower during
the specified period, determined in the manner and at the times specified in
that Borrower's Prospectus.
"Benefited Lender": as defined in Section 9.7(a).
----------------
"Borrower" and "Borrowers": as defined in the preamble hereto.
-------- ---------
"Borrowing Date": any Business Day specified in a notice pursuant to
--------------
Section 2.2 as a date on which a Borrower requests the Lenders to make Loans
hereunder.
"Business Day": a day other than a Saturday, Sunday or other day on
------------
which commercial banks in New York City are authorized or required by law to
close.
"Chase": The Chase Manhattan Bank, a New York banking corporation,
-----
and its permitted successors and assigns.
<PAGE>
"Closing Date": the date on which the conditions precedent set forth
------------
in Section 4.1 shall be satisfied.
"Code": the Internal Revenue Code of 1986, as amended from time to
----
time.
"Commitment": as to any Lender, the obligation of such Lender to make
----------
Loans to the Borrowers hereunder in an aggregate principal amount at any one
time outstanding not to exceed the amount set forth opposite such Lender's name
on Schedule II.
-----------
"Commitment Fee": as defined in Section 2.3.
--------------
"Commitment Percentage": as to any Lender at any time, the percentage
---------------------
which such Lender's Commitment then constitutes of the aggregate Commitments of
all Lenders (or, at any time after the Commitments of all the Lenders shall have
expired or terminated, the percentage which the aggregate principal amount of
such Lender's Loans then outstanding constitutes of the aggregate principal
amount of the Loans then outstanding).
"Commitment Period": the period from and including the date hereof to,
-----------------
but not including, the Termination Date.
"Commonly Controlled Entity": an entity, whether or not incorporated,
--------------------------
which is under common control with any Borrower within the meaning of Section
4001 of ERISA or is part of a group which includes any Borrower and which is
treated as a single employer under Section 414 of the Code.
"Contractual Obligation": as to any Person, any provision of any
----------------------
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Custody Agreement": as to any Fund or each Borrower, as applicable,
-----------------
the Custody Agreement(s) set forth in Schedule IV hereto.
-----------
"Default": any of the events specified in Section 7, whether or not
-------
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Distribution Agreement": as to any Fund or each Borrower, as
----------------------
applicable, the Distribution Agreement(s) set forth in Schedule V hereto.
----------
"Dollars" and "$": dollars in lawful currency of the United States of
------- -
America.
"Eligible Lender": an entity that is a "Bank" (as defined in the 1940
---------------
Act) but not an "Affiliated Person" (as defined in the 1940 Act) or a "Principal
Underwriter" (as defined in the 1940 Act) of any Borrower or any "Affiliated
Person" of any such Person.
<PAGE>
"ERISA": the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Event of Default": any of the events specified in Section 7, provided
---------------- --------
that any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
"Federal Funds Rate": for any day, the "offered rate", as determined
------------------
by Chase, for overnight federal funds, which rate is determined day to day and
will be reasonably representative of the market conditions at the times set.
"Financing Lease": any lease of property, real or personal, the
---------------
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"GAAP": generally accepted accounting principles in the United States
----
of America in effect from time to time.
"Governmental Authority": any nation or government, any state or other
----------------------
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guarantee Obligation": as to any Person (the "guaranteeing person"),
-------------------- -------------------
any obligation of (a) the guaranteeing person or (b) another Person (including,
without limitation, any bank under any letter of credit) to induce the creation
of which the guaranteeing person has issued a reimbursement, counterindemnity or
similar obligation, in either case guaranteeing or in effect guaranteeing any
Indebtedness, leases, dividends or other obligations (the "primary obligations")
-------------------
of any other third Person (the "primary obligor") in any manner, whether
---------------
directly or indirectly, including, without limitation, any obligation of the
guaranteeing person, whether or not contingent, (i) to purchase any such primary
obligation or any property constituting direct or indirect security therefor,
(ii) to advance or supply funds (A) for the purchase or payment of any such
primary obligation or (B) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation or
(iv) otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof; provided, however, that the term
-------- -------
Guarantee Obligation shall not include endorsements of instruments for deposit
or collection in the ordinary course of business. The amount of any Guarantee
Obligation of any guaranteeing person shall be deemed to be the lower of (a) an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such Guarantee Obligation is made and (b) the maximum amount
for which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary obligation
and the maximum amount for which such guaranteeing person may be liable are not
stated or determinable, in which case the amount of such Guarantee Obligation
shall be such guaranteeing person's maximum reasonably anticipated liability in
respect thereof as determined by such guaranteeing person in good faith.
<PAGE>
"Indebtedness": of any Person at any date, (a) all indebtedness of
------------
such Person for borrowed money or for the deferred purchase price of property or
services (other than current trade liabilities incurred in the ordinary course
of business and payable in accordance with customary practices), (b) any other
indebtedness of such Person which is evidenced by a note, bond, debenture or
similar debt instrument, (c) all obligations of such Person under Financing
Leases, (d) all obligations of such Person in respect of acceptances (as defined
in Section 3-410 of the UCC) issued or created for the account of such Person,
(e) all reimbursement obligations of such person arising out of any letters of
credit and (f) all liabilities secured by any Lien on any property owned by such
Person even though such Person has not assumed or otherwise become liable for
the payment thereof.
"Interest Payment Date": as to any Loan, the Maturity Date for such
---------------------
Loan, or with respect to any prepayment, the date of such prepayment.
"Investment Management Agreement": as to each Fund and each Borrower,
-------------------------------
the Investment Management Agreements set forth on Schedule III hereto.
------------
"Investment Policies": as to each Borrower, the policies and
-------------------
objectives for, and limits and restrictions on, investing by such Borrower set
forth in the Prospectus relating to such Borrower.
"Lenders": as defined in the preamble hereto.
-------
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Financing Lease
having substantially the same economic effect as any of the foregoing).
"Loan Documents": this Agreement and the Notes.
--------------
"Loans": all loans made pursuant to this Agreement; individually, a
-----
"Loan."
----
"Material Adverse Effect": a material adverse effect on (a) the
-----------------------
business, financial condition or ability to timely perform any of its material
obligations under the Loan Documents of a Borrower or (b) the legality,
validity, binding nature or enforceability of the Loan Documents or the rights
or remedies of the Administrative Agent or the Lenders under the Loan Documents.
"Maturity Date": as to each Loan, the date which is the earliest of
-------------
(a) 30 days after the Borrowing Date for such Loan (except that, with respect to
any Swingline Loan, the Maturity Date shall be the seventh day after the
Borrowing date therefor), (b) the Termination Date and (c) the payment in full
of such Loan.
<PAGE>
"Moody's": Moody's Investor Service, Inc.
-------
"1940 Act": the Investment Company Act of 1940, as amended, together
--------
with all rules and regulations promulgated from time to time thereunder.
"Non-Excluded Taxes": as defined in Section 2.11.
------------------
"Non-Recourse Person": as defined in Section 9.15.
-------------------
"Notes": the collective reference to the Revolving Credit Notes; one
-----
of the Notes, a "Note."
----
"Participant": as defined in Section 9.6(b).
-----------
"Person": an individual, partnership, corporation, business trust,
------
joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan covered by
----
ERISA which any Fund or any Borrower maintains.
"Prospectus": as to each Borrower at a particular time, shall mean the
----------
currently effective prospectus(es) and statement(s) of additional information of
such Borrower.
"Register": as defined in Section 9.6(d).
--------
"Regulation T": Regulation T of the Board of Governors of the Federal
------------
Reserve System as in effect from time to time.
"Regulation U": Regulation U of the Board of Governors of the Federal
------------
Reserve System as in effect from time to time.
"Regulation X": Regulation X of the Board of Governors of the Federal
------------
Reserve System as in effect from time to time.
"Required Lenders": at any time, Lenders the Commitment Percentages of
----------------
which aggregate more than 50%.
"Requirement of Law": as to any Person, the certificate of
------------------
incorporation, by-laws, partnership agreement, or other organizational or
governing documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Responsible Officer": the president, treasurer, assistant treasurer,
-------------------
or secretary of each Fund, or, with respect to financial matters, the treasurer
or assistant
<PAGE>
treasurer of each Fund; provided, however, that as used in (i) Section 5.1(c)
-------- -------
and (ii) with respect to the certificate required to accompany the financial
statements referred to in Section 5.1(c) only, Section 5.2(b), "Responsible
-----------
Officer" shall also include the following officers of U.S. Trust Company of
- -------
Connecticut: Brian Schmidt, Vice President; Frank Bruno, Vice President; and
Alice McClave, Financial Officer.
"Revolving Credit Loan": as defined in Section 2.1.
---------------------
"Revolving Credit Note": as defined in Section 2.5(e).
---------------------
"S&P": Standard & Poor's Ratings Group, a division of the McGraw-Hill
---
Companies.
"Senior Securities Representing Indebtedness": any Senior Security
-------------------------------------------
other than stock.
"Senior Security": any bond, debenture, note or similar obligation or
---------------
instrument constituting a security and evidencing indebtedness (including,
without limitation, all Loans under this Agreement), and any share of beneficial
interest of a Borrower of a class having priority over any other class of shares
of such Borrower as to distribution of assets or payment of dividends.
"Shareholder Services Agreement": as to each Fund or each Borrower, as
------------------------------
applicable, the Shareholder Services Agreement(s) set forth in Schedule VI
-----------
hereto.
"Subsidiary": as to any Person, a corporation, partnership or other
----------
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person.
"Swing Line Commitment": the obligation of the Swing Line Lender to
---------------------
make Swing Line Loans pursuant to Section 2.13 hereof in the aggregate principal
amount at any one time outstanding not to exceed $10,000,000.
"Swing Line Lender": as defined in Section 2.13 hereof.
-----------------
"Swing Line Loans": as defined in Section 2.13 hereof.
----------------
"Swing Line Participation Amount": as defined in Section 2.15(c)
-------------------------------
hereof.
"Termination Date": the date which is 364 days following the Closing
----------------
Date or such earlier date on which the Commitments shall terminate as provided
herein.
"Total Assets": at any time, all assets of a Borrower which in
------------
accordance with
<PAGE>
GAAP would be classified as assets on a balance sheet of such Borrower prepared
as of such time; provided, however, that the term Total Assets shall not include
--------
(a) equipment, (b) securities owned by a Borrower which are in default and (c)
deferred organizational and offering expenses.
"Transferee": as defined in Section 9.6(f).
----------
"UCC": the Uniform Commercial Code as from time to time in effect in
---
the State of New York.
"UST": United States Trust Company of New York, a New York state
---
chartered bank and trust company, U.S. Trust Company, a Connecticut state bank
and trust company, and U.S. Trust Company, N.A., a national bank acting as
investment manager for the Borrowers as indicated on Schedule III hereto.
1.2 Other Definitional Provisions. (a) Unless otherwise specified
-----------------------------
therein, all terms defined in this Agreement shall have the defined meanings
when used in any Notes or any certificate or other document made or delivered
pursuant hereto.
(b) As used herein and in any Notes, and any certificate or other
document made or delivered pursuant hereto, accounting terms relating to any
Borrower not defined in Section 1.1 and accounting terms partly defined in
Section 1.1, to the extent not defined, shall have the respective meanings given
to them under GAAP (as consistently applied).
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, subsection,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
1.3 Assumptions Regarding Structure. For the sake of clarity and
-------------------------------
construction, the parties hereto hereby set forth their acknowledgment and
agreement that each Borrower is a separate portfolio of the Fund acting on its
behalf and as such is not a separately existing legal entity entitled to enter
into contractual agreements or to execute instruments and for these reasons,
each Fund acting on behalf of a Borrower is executing this Agreement and each
respective Note on behalf of its portfolios, as Borrowers, and that such
portfolios will utilize the Loans thus made on their behalf. No Fund shall make
any designation, provide any notice or take any other action on behalf of any
Borrower that is not an investment portfolio of such Fund.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 Commitments. Subject to the terms and conditions hereof, each Lender
-----------
severally agrees to make revolving credit loans ("Revolving Credit Loans") to
----------------------
each Borrower, from time to time during the Commitment Period in an aggregate
principal amount at any one time
<PAGE>
outstanding not to exceed the amount of such Lender's Commitment. During the
Commitment Period each Borrower may use Commitments by borrowing, prepaying
Loans in whole or in part, and reborrowing, all in accordance with the terms and
conditions hereof; provided that at no time may the aggregate principal amount
--------
of Revolving Credit Loans and Swing Line Loans to all Borrowers exceed the
Aggregate Commitment.
2.2 Procedure for Borrowing. A Borrower may borrow under the Commitments
-----------------------
during the Commitment Period on any Business Day, provided that the Borrower
--------
shall give the Administrative Agent irrevocable notice (which notice must be
received by the Administrative Agent prior to 12:00 Noon, New York City time on
the requested Borrowing Date), specifying (i) the amount to be borrowed, and
(ii) the requested Borrowing Date. The aggregate amount of each borrowing by a
Borrower under the Commitments on any Borrowing Date shall be in an amount equal
to $2,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the
then Available Commitments are less than $1,000,000, such lesser amount). Upon
receipt of any such notice from a Borrower, the Administrative Agent shall
promptly notify each Lender thereof. Each Lender will make the amount of its pro
rata share of each borrowing available to the Administrative Agent for the
account of such Borrower at the office of the Administrative Agent specified in
Section 9.2 prior to 3:00 P.M., New York City time, on the Borrowing Date
requested by such Borrower in funds immediately available to the Administrative
Agent. Such borrowing will then be made available to such Borrower on such
Borrowing Date by the Administrative Agent transferring by wire to the custodian
of and for the account of such Borrower the aggregate of the amounts made
available to the Administrative Agent by the Lenders and in like funds as
received by the Administrative Agent; provided that if, on the Borrowing Date of
--------
any Revolving Credit Loans of a Borrower, any Swing Line Loans to such Borrower
shall be outstanding, the proceeds of such Revolving Credit Loans to such
Borrower shall first be applied to pay in full such Swing Line Loans, with any
remaining proceeds to be made available to such Borrower as provided above.
2.3 Fees. (a) Each Borrower severally agrees to pay to the Administrative
----
Agent for the account of each Lender such Borrower's pro rata Allocation (as
adjusted from time to time in accordance with the terms hereof) of a commitment
fee ("Commitment Fee") during the period which shall begin on the first day of
--------------
the Commitment Period and shall extend to the Termination Date, which Commitment
Fee shall be a quarterly fee, computed at the rate of .10% per annum on the
average daily amount of the Available Commitments of all Lenders in the
aggregate during each calendar quarter. Such Commitment Fee shall be payable
quarterly in arrears on the last Business Day of each March, June, September and
December and on the Termination Date, commencing on the first of such dates to
occur after the date hereof. Solely for the purpose of calculating the
Commitment Fee, Swing Line Loans will not be deemed a utilization of the
Aggregate Commitments of all Lenders.
(b) Each Borrower severally agrees to pay the Administrative Agent
for the account of the Administrative Agent the fees separately agreed to.
2.4 Termination or Reduction of Commitments. (a) Each Borrower shall have
---------------------------------------
the right, upon not less than three Business Days' notice to the Administrative
Agent, to terminate all Commitments with respect to such Borrower. Any
termination of all Commitments to a
<PAGE>
Borrower shall be accompanied by prepayment in full of the Loans to such
Borrower then outstanding, and payment of such Borrower's Allocation of (i) any
accrued Commitment Fees payable by such Borrower hereunder and (ii) any other
accrued fees, expenses or indemnified liabilities payable by such Borrower
hereunder. The amount of the Aggregate Commitment shall not be affected by any
Borrower's termination. Prior to such termination, the Funds shall notify the
Administrative Agent in writing as to the Allocations of the remaining
Borrowers, effective as of the termination.
(b) Interest accrued on the amount of any prepayment relating to such
termination and any unpaid Commitment Fee accrued hereunder shall be paid on the
date of such termination.
(c) Upon the effective date of such termination, the terminating
Borrower shall no longer be obligated to pay Commitment Fees hereunder or any
share of any other fees, expenses, or indemnified liabilities that may accrue
thereafter (except in connection with indemnification obligations with respect
to events arising prior to such termination, payment for which is not sought by
the indemnified party until after such termination), and such payment
obligations accruing after the date of such termination shall be allocated among
the remaining Borrowers.
(d) The Borrowers shall have the right, upon not less than three
Business Days' notice to the Administrative Agent, to reduce irrevocably the
Commitments of the Lenders with respect to all Borrowers. Any such reduction
shall be accompanied by prepayment in full of any amount by which the Loans
exceed the reduced Commitments then outstanding. Prior to such reduction
becoming effective, the Funds shall notify the Administrative Agent in writing
as to the Allocations of the Borrowers, effective as of the reduction.
2.5 Repayment of Loans; Evidence of Debt. (a) Each Borrower hereby
------------------------------------
severally (and neither jointly nor jointly and severally) and unconditionally
promises to pay to the Administrative Agent for the account of each Lender the
then unpaid principal amount of each Loan of such Lender to such Borrower on the
Maturity Date for such Loan (or such earlier date on which the Loans become due
and payable pursuant to Section 7). Each Borrower hereby further severally
agrees to pay to the Administrative Agent for the account of each Lender
interest on the unpaid principal amount of the Loans to such Borrower from time
to time outstanding from the date hereof until payment in full thereof at the
rates per annum, and on the dates, set forth in Section 2.7.
(b) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing indebtedness of each Borrower to such Lender
resulting from each Loan of such Lender from time to time, including the amounts
of principal and interest payable and paid to such Lender from time to time
under this Agreement.
(c) The Administrative Agent shall maintain the Register pursuant to
Section 9.6(d), and a subaccount therein for each Lender, in which shall be
recorded (i) the amount of each Loan made hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable from each
Borrower to each Lender hereunder and (iii) both the amount
<PAGE>
of any sum received by the Administrative Agent hereunder from each Borrower and
each Lender's share thereof. The Administrative Agent shall provide a copy of
the Register to each Borrower upon request.
(d) The entries made in the Register and the accounts of each Lender
maintained pursuant to Section 2.5(b) shall, to the extent permitted by
applicable law, be prima facie evidence of the existence and amounts of the
----- -----
obligations of the Borrower therein recorded, provided, however, that the
-------- -------
failure of any Lender or the Administrative Agent to maintain the Register or
any such account, or any error therein, shall not in any manner affect the
obligation of any Borrower to repay (with applicable interest) the Loans made to
such Borrower by such Lender in accordance with the terms of this Agreement.
(e) Each Fund agrees that, upon the request of any Lender to the
Administrative Agent, such Fund will execute and deliver to such Lender a
promissory note of each Borrower evidencing the Loans of such Lender to such
Borrower, substantially in the form of Exhibit 2.5(e) with appropriate
--------------
insertions as to date and principal amount (a "Revolving Credit Note").
---------------------
(f) The obligations of each Borrower under its Notes shall be several
and not joint or joint and several. Notwithstanding anything to the contrary
contained in this Agreement, the parties hereto acknowledge and agree that the
sole source of payment of the obligations of each Borrower hereunder, including,
without limitation, the principal of and interest on each Loan made hereunder to
any Borrower, the Commitment Fee payable pursuant to Section 2.3 and any other
amounts attributable to the Loans made hereunder to any Borrower shall be the
revenues and assets of such Borrower, and not the revenues and assets of any
other Borrower or the revenues and assets of a Fund acting on behalf of a
Borrower (except to the extent of such Borrower).
2.6 Optional and Mandatory Prepayments. (a) Each Borrower may prepay
----------------------------------
the Loans made to it, in whole or in part, without premium or penalty, upon at
-------
least one Business Day's irrevocable notice to the Administrative Agent,
specifying the date and amount of prepayment. Upon receipt of any such notice
the Administrative Agent shall promptly notify each Lender thereof. If any such
notice is given, the amount specified in such notice shall be due and payable on
the date specified therein. Partial prepayments shall be in an aggregate
principal amount of $100,000 or an integral multiple of $100,000 in excess
thereof.
(b) If, at any time and from time to time, either (i) the Asset
Coverage Ratio for all borrowings of a Borrower shall be less than 300% or (ii)
the aggregate amount of Loans made to a Borrower then outstanding exceeds the
borrowing limits provided in such Borrower's Prospectus, then within three
Business Days thereafter such Borrower shall repay Loans made to such Borrower
to the extent necessary to ensure that (x) the Asset Coverage Ratio of all
borrowings of such Borrower after such payments is in compliance with applicable
covenants concerning minimum Asset Coverage Ratios set forth in this Agreement
or (y) the aggregate amount of Loans made to such Borrower then outstanding does
not after such payments exceed such limits, as the case may be.
<PAGE>
2.7 Interest Rates and Payment Dates. (a) Each Loan shall bear interest at
--------------------------------
a rate per annum equal to the Federal Funds Rate plus the Applicable Margin. In
addition, during the period from December 1, 1999 to January 31, 2000, if a
Lender's cost of funds exceeds the Federal Funds Rate, then the Federal Funds
Rate shall be adjusted upwards in an amount, not to exceed 1.50% per annum,
equal to the excess of such Lender's cost of funding over the Federal Funds
Rate. If any Lender becomes entitled to claim any such additional amounts, it
shall promptly notify the Borrowers (with a copy to the Administrative Agent) of
the event by reason of which it has become so entitled by providing a
certificate setting forth in reasonable detail the basis for the claim for
additional amounts, the amounts required to be paid by the Borrowers to such
Lender, and the computations made by such Lender to determine the amounts;
provided that such Lender shall not be required to disclose any confidential
information. Failure or delay on the part of any Lender to demand compensation
pursuant hereto shall not constitute a waiver of such Lender's right to demand
such compensation; provided that a Lender claiming such compensation pursuant to
this Section 2.7 must have made its demand for such compensation on or before
March 15, 2000.
(b) Notwithstanding any provision to the contrary contained herein,
(i) upon the occurrence and continuance of any Event of Default specified in
Section 7(e) with respect to a Borrower or (ii) upon notice given by the
Administrative Agent or the Required Lenders to the Borrower of any other Event
of Default, all Loans outstanding to such Borrower shall bear interest at a rate
per annum which is the rate that would otherwise be applicable thereto pursuant
to the provisions of section 2.7(a), plus 2% per annum. If all or a portion of
(i) the principal amount of any Loan, (ii) any interest payable thereon or (iii)
any Commitment Fee or other amount payable hereunder shall not be paid when due
(whether at the stated maturity, by acceleration or otherwise), such overdue
amount shall bear interest at a rate per annum which is the rate that would
otherwise be applicable thereto pursuant to the foregoing provisions of this
section 2.7(a) plus 2% per annum from the date of such non-payment until such
amount is paid in full (before as well as after judgment).
(c) Interest shall be payable in arrears on each Interest Payment
Date, provided that interest accruing pursuant to the second sentence of
--------
paragraph (b) of this section 2.7 shall be payable from time to time on demand.
2.8 Computation of Interest and Fees. (a) Commitment Fees and interest
--------------------------------
shall be calculated on the basis of a 360-day year for the actual days elapsed.
Any change in the interest rate on a Loan resulting from a change in the Federal
Funds Rate shall become effective as of the opening of business on the day on
which such change becomes effective. The Administrative Agent shall as soon as
practicable notify the Borrower and the Lenders of the effective date and the
amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative
Agent pursuant to any provision of this Agreement shall be conclusive and
binding on each Borrower and the Lenders in the absence of manifest error. The
Administrative Agent shall, at the request of a Borrower, deliver to such
Borrower a statement showing the quotations used by the Administrative Agent in
determining any interest rate pursuant to Section 2.7(a).
<PAGE>
2.9 Pro Rata Treatment and Payments. (a) Each borrowing by a Borrower
-------------------------------
from the Lenders hereunder, each payment by a Borrower on account of any
Commitment Fee hereunder and any reduction of the Commitments of the Lenders
shall be made pro rata according to the respective Commitment Percentages of the
Lenders. Each payment (including each prepayment) by a Borrower on account of
principal of and interest on the Loans shall be made pro rata according to the
respective outstanding principal amounts of the Loans of such Borrower then held
by the Lenders. All payments (including prepayments) to be made by a Borrower
hereunder, whether on account of principal, interest, fees or otherwise, shall
be made without set off or counterclaim and shall be made no later than 10:00
A.M., New York City time, on the due date thereof to the Administrative Agent,
for the account of the Lenders, at the Administrative Agent's office specified
in Section 9.2 hereof, in Dollars and in immediately available funds. The
Administrative Agent shall distribute such payments to the Lenders promptly upon
receipt in like funds as received. If any payment hereunder becomes due and
payable on a day other than a Business Day, such payment shall be extended to
the next succeeding Business Day, and, with respect to payments of principal,
interest thereon shall be payable at the then applicable rate during such
extension.
(b) Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its Commitment Percentage of such borrowing
available to the Administrative Agent, the Administrative Agent may assume that
such Lender is making such amount available to the Administrative Agent, and the
Administrative Agent may, in reliance upon such assumption, make available to
the Fund on behalf of the requesting Borrower a corresponding amount. If such
amount is not made available to the Administrative Agent by the required time on
the Borrowing Date therefor, such Lender shall pay to the Administrative Agent,
on demand, such amount with interest thereon at a rate equal to the daily
average Federal Funds Rate for the period until such Lender makes such amount
immediately available to the Administrative Agent. A certificate of the
Administrative Agent submitted to any Lender with respect to any amounts owing
under this Section shall be conclusive in the absence of manifest error. If such
Lender's Commitment Percentage of such borrowing is not made available to the
Administrative Agent by such Lender within three Business Days of such Borrowing
Date, the Administrative Agent shall also be entitled to recover such amount
with interest thereon at the rate per annum applicable to Loans hereunder, on
demand, from the relevant Borrower (and such Borrower may borrow under the
Commitments or under the Swing Line Commitment to satisfy such demand; provided
--------
that, for purposes of determining the Available Commitment, the Commitment of
any non-funding Lender shall be excluded).
2.10 Requirements of Law. (a) If any Lender shall have determined that the
-------------------
adoption of or any change in any Requirement of Law of any Governmental
Authority regarding capital adequacy or in the interpretation or application
thereof or compliance by such Lender or any corporation controlling such Lender
with any request or directive regarding capital adequacy (whether or not having
the force of law) from any Governmental Authority made subsequent to the date
hereof shall have the effect of reducing the rate of return on such Lender's or
such corporation's capital as a consequence of its obligations hereunder to a
level below that which such Lender or such corporation could have achieved but
for such adoption, change or compliance (taking into consideration such Lender's
or such corporation's policies with respect to
<PAGE>
capital adequacy) by an amount determined by such Lender to be material, then
from time to time, each Borrower shall promptly pay to such Lender such
additional amount or amounts as will compensate such Lender for such reduction.
(b) If any Lender becomes entitled to claim any additional amounts
pursuant to this Section, it shall promptly notify the Borrowers (with a copy to
the Administrative Agent) of the event by reason of which it has become so
entitled by providing a certificate setting forth in reasonable detail the basis
for the claim for additional amounts, the amounts required to be paid by the
Borrowers to such Lender, and the computations made by such Lender to determine
the amounts; provided that such Lender shall not be required to disclose any
--------
confidential information. Such certificate as to any additional amounts payable
pursuant to this Section submitted by such Lender to the Borrowers (with a copy
to the Administrative Agent) shall be conclusive in the absence of manifest
error. The agreements in this Section shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
No Borrower shall be responsible to compensate such Lender for additional
amounts attributable to another Borrower's loans.
(c) Failure or delay on the part of any Lender to demand
compensation pursuant to this Section shall not constitute a waiver of such
Lender's right to demand such compensation; provided that the Borrowers shall
--------
not be required to compensate a Lender pursuant to this Section for any
increased costs or reductions incurred more than 270 days prior to the date that
such Lender notifies the Borrower of the change in the Requirement of Law giving
rise to such increased costs or reductions and of such Lender's intention to
claim compensation therefor; provided further that, if the change in the
-------- -------
Requirement of Law giving rise to such increased costs or reductions is
retroactive, then the 270-day period referred to above shall be extended to
include the period of retroactive effect thereof.
2.11 Taxes. (a) All payments made by any Borrower under this Agreement
-----
and any Notes shall be made free and clear of, and without deduction or
withholding for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, excluding all present and future income taxes and
franchise taxes (imposed in lieu of net income taxes) imposed on the
Administrative Agent or any Lender as a result of a present or former connection
between the Administrative Agent or such Lender and the jurisdiction of the
Governmental Authority imposing such tax or any political subdivision or taxing
authority thereof or therein (other than any such connection arising solely from
the Administrative Agent or such Lender having executed, delivered or performed
its obligations or received a payment under, or enforced, this Agreement or any
Note). If any such non-excluded taxes, levies, imposts, duties, charges, fees
deductions or withholdings ("Non-Excluded Taxes") are required to be withheld
------------------
from any amounts payable to the Administrative Agent or any Lender hereunder or
under any Note, the amounts so payable to the Administrative Agent or such
Lender shall be increased to the extent necessary to yield to the Administrative
Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any
such other amounts payable hereunder at the rates or in the amounts specified in
this Agreement, provided, however, that a Borrower shall not be required to
-------- -------
increase any such amounts payable to any Lender that is not organized under the
laws of the United States of America or a state thereof if such Lender fails to
comply
<PAGE>
with the requirements of paragraph (b) of this Section. Whenever any Non-
Excluded Taxes are payable by a Borrower, as promptly as possible thereafter
such Borrower shall send to the Administrative Agent for its own account or for
the account of such Lender, as the case may be, a certified copy of an original
official receipt received by such Borrower showing payment thereof. If a
Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing
authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, such Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Administrative Agent or any Lender as a
result of any such failure. The agreements in this Section shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.
(b) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:
(i) deliver to UST and the Administrative Agent (A) two duly
completed copies of United States Internal Revenue Service Form 1001 or
4224, or successor applicable form, as the case may be, and (B) an Internal
Revenue Service Form W-8 or W-9, or successor applicable form, as the case
may be;
(ii) deliver to UST and the Administrative Agent two further copies
of any such form or certification on or before the date that any such form
or certification expires or becomes obsolete and after the occurrence of any
event requiring a change in the most recent form previously delivered by it
to UST; and
(iii) obtain such extensions of time for filing and complete such
forms or certifications as may reasonably be requested by UST or the
Administrative Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises UST and the Administrative
Agent. Such Lender shall certify (A) in the case of a Form 1001 or 4224, that it
is entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes and (B) in the case of a
Form W-8 or W-9, that it is entitled to an exemption from United States backup
withholding tax. Each Person that shall become a Lender or a Participant
pursuant to Section 9.6 shall, upon the effectiveness of the related transfer,
be required to provide all of the forms and statements required pursuant to this
Section, provided that in the case of a Participant such Participant shall
furnish all such required forms and statements to the Lender from which the
related participation shall have been purchased.
2.12 Change of Lending Office; Replacement of Lender. (a) Each Lender
-----------------------------------------------
agrees that if it makes any demand for payment under Section 2.10, or 2.11 it
will use reasonable efforts (consistent with its internal policy and legal and
regulatory restrictions and so long as such efforts would not be disadvantageous
to it, as determined in its sole discretion) to designate a
<PAGE>
different lending office if the making of such a designation would reduce or
obviate the need for a Borrower to make payments under Section 2.10 or 2.11.
(b) If any Lender shall have required compensation pursuant to
Section 2.10, the Borrowers shall have the right, with the consent of the
Administrative Agent (which shall not be unreasonably withheld), to substitute
such Lender with an Eligible Lender (a "Replacement Lender") satisfactory to the
------------------
Borrowers (which may be one or more of the Lenders if they, in their sole
discretion, elect to become such Replacement Lender) to assume the Commitment of
such Lender and to purchase the Notes held by such Lender, if any, for an amount
equal to the principal of, and accrued and unpaid interest on, such Notes,
together with any costs reasonably incurred by such Lender in connection with
its sale of such Notes and the assignment of such Commitment (without recourse
to or warranty by such Lender and subject to all amounts owing to such Lender
under this Agreement having been paid in full). Upon the exercise of such right
by the Borrower and the satisfaction of such conditions thereto, such Lender
shall convey its interest to the Replacement Lender in accordance with the
procedures set forth in Section 9.6(c).
2.13 Swing Line Commitment. Subject to the terms and conditions hereof,
---------------------
Chase (in such capacity, the "Swing Line Lender") agrees to make available to
-----------------
each Borrower a portion of the credit otherwise available under the Commitments
from time to time during the Commitment Period by making swing line loans
("Swing Line Loans") to such Borrower in an aggregate principal amount not to
- ------------------
exceed at any one time outstanding the Swing Line Commitment (notwithstanding
that the Swing Line Loans outstanding at any time, when aggregated with the
Swing Line Lender's other outstanding Revolving Credit Loans hereunder, may
exceed the Swing Line Lender's Commitment then in effect); provided, however,
-------- -------
that on the date of the making of any Swing Line Loan, the sum of the aggregate
principal amount of all outstanding Revolving Credit Loans and Swing Line Loans
shall not exceed the total Commitments (less the Commitment of any non-funding
Lender referred to in Section 2.9(b)). During the Commitment Period applicable
to each Borrower, such Borrower may use the Swing Line Commitment by borrowing,
repaying and reborrowing, all in accordance with the terms and conditions
hereof. Each Swing Line Loan shall bear interest at a rate per annum equal to
the Federal Funds Rate plus the Applicable Margin.
2.14 Procedure for Swing Line Borrowing. Whenever a Borrower desires that
----------------------------------
the Swing Line Lender make Swing Line Loans under Section 2.13, the Borrower
shall give the Swing Line Lender irrevocable telephonic notice confirmed
promptly in writing (which telephonic notice must be received by the Swing Line
Lender not later than 3:00 P.M., New York City time, on the proposed Borrowing
Date), specifying the amount of each requested Swing Line Loan. Each borrowing
under the Swing Line Commitment shall be in an amount equal to $100,000 or an
integral multiple of $100,000 in excess thereof. Not later than 5:00 P.M., New
York City time, on the Borrowing Date specified in a notice by a Borrower in
respect of Swing Line Loans, the Swing Line Lender shall make available to the
Administrative Agent for the account of such Borrower at the office of the
Administrative Agent specified in Section 9.2 an amount in immediately available
funds equal to the amount of the Swing Line Loan to be made by the Swing Line
Lender. The proceeds of such Swing Line Loan will then be made available to such
Borrower on such Borrowing Date by the Administrative Agent transferring by wire
to the custodian of and for the account of such Borrower the aggregate of the
amounts made
<PAGE>
available to the Administrative Agent by the Swing Line Lender in immediately
available funds.
2.15 Refunding of Swing Line Loans. (a) If the Swingline Loan has not been
-----------------------------
repaid, the Swing Line Lender, at any time in its sole and absolute discretion
may, and, if any Swingline Loan has not bee repaid, on the seventh day (or if
such day is not a Business Day, the next Business Day) after the Borrowing Date
with respect to any Swing Line Loans to a Borrower, shall, on behalf of such
Borrower (and each Borrower hereby irrevocably directs the Swing Line Lender to
so act on its behalf and with respect to each Borrower), upon notice given by
the Swing Line Lender no later than 10:00 A.M., New York City time, on the
relevant refunding date, request each Lender to make, and each Lender hereby
agrees to make, a Revolving Credit Loan to such Borrower, at the rate applicable
to the Swing Line Loans of such Borrower, in an amount equal to such Lender's
Commitment Percentage of the amount of such Swing Line Loans of such Borrower
(the "Refunded Swing Line Loans") outstanding on the date of such notice, to
-------------------------
repay the Swing Line Lender. Each Lender shall make the amount of such Revolving
Credit Loan available to the Administrative Agent at its office set forth in
Section 9.2 in immediately available funds, no later than 1:00 P.M., New York
City time, on the date of such notice. The proceeds of such Revolving Credit
Loans shall be distributed by the Administrative Agent to the Swing Line Lender
and immediately applied by the Swing Line Lender to repay the Refunded Swing
Line Loans. Effective on the day such Revolving Credit Loans are made, the
portion of the Swing Line Loans so paid shall no longer be outstanding as Swing
Line Loans.
(b) The making of any Swing Line Loan hereunder at the request of a
Borrower shall be subject to the satisfaction of the applicable conditions
precedent thereto set forth in Section 4 (unless otherwise waived in accordance
with Section 9.1).
(c) If prior to the making of a Revolving Credit Loan to a Borrower
pursuant to Section 2.15(a) one of the events described in paragraph (e) of
Section 7 shall have occurred with respect to such Borrower, each Lender
severally, unconditionally and irrevocably agrees that it shall purchase a
participating interest in the applicable Swing Line Loans ("Unrefunded Swing
----------------
Line Loans") in an amount equal to the amount of Revolving Credit Loans which
- ----------
would otherwise have been made by such Lender pursuant to Section 2.15(a). Each
Lender will immediately transfer to the Administrative Agent, in immediately
available funds, the amount of its participation (the "Swing Line Participation
------------------------
Amount"), and the proceeds of such participation shall be distributed by the
- ------
Administrative Agent to the Swing Line Lender in such amount as will reduce the
amount of the participating interest retained by the Swing Line Lender in its
Swing Line Loans to the amount of the Revolving Credit Loans which were to have
been made by it pursuant to Section 2.15(a).
(d) Whenever, at any time after the Swing Line Lender has received from
any Lender such Lender's Swing Line Participation Amount, the Swing Line Lender
receives any payment on account of the Swing Line Loans, the Swing Line Lender
will distribute to such Lender its Swing Line Participation Amount
(appropriately adjusted, in the case of interest payments, to reflect the period
of time during which such Lender's participating interest was outstanding and
funded and, in the case of principal and interest payments, to reflect such
Lender's pro rata portion of such payment if such payment is not sufficient to
--------
pay the principal of an interest on all Swing Line Loans then due); provided,
--------
however, that in the event that such
- -------
<PAGE>
payment received by the Swing Line Lender is required to be returned, such
Lender will return to the Swing Line Lender any portion thereof previously
distributed to it by the Swing Line Lender.
(e) Each Lender's obligation to make the Loans referred to in Section
2.15(a) and to purchase participating interests pursuant to Section 2.15(c)
shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, (i) any setoff, counterclaim,
recoupment, defense or other right which such Lender may have against the Swing
Line Lender or any other Person for any reason whatsoever; (ii) the occurrence
or continuance of a Default or an Event of Default or the failure to satisfy any
of the other conditions specified in Section 4; (iii) any adverse change in the
condition (financial or otherwise) of any Borrower; (iv) any breach of this
Agreement or any other Loan Document by any Borrower or any Lender; or (v) any
other circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing.
2.16 Designation of Additional Borrowers; Amendments to Schedule I. (a)
-------------------------------------------------------------
Other series of each Fund and other investment companies registered under the
1940 Act, in either case (a) which have at least $2,000,000 in Total Assets and
(b) for which UST or a Subsidiary of UST acts as the investment manager, may,
with the prior written consent of the Administrative Agent and each Lender,
become parties to this Agreement in addition to those Borrowers listed on
Schedule I, and be deemed Borrowers for all purposes of this Agreement by
- ----------
executing an instrument substantially in the form of Exhibit 2.16(a) hereto
---------------
(with such changes therein as may be approved by the Administrative Agent and
the Lenders), which instrument shall (x) have attached to it a copy of this
Agreement (as the same may have been amended) with a revised Schedule I
----------
reflecting the participation of such additional series or investment company and
any prior revisions to Schedule I effected in accordance with the terms hereof
-----------
and (y) be accompanied by the documents and instruments required to be delivered
by the Borrowers pursuant to Section 4.1, including, without limitation, an
opinion of counsel for the Funds substantially in the form of Exhibit 4.1(h)
hereto.
(b) No series of any Fund or investment company shall be admitted as a
party to this Agreement as a Borrower unless at the time of such admission and
after giving effect thereto: (i) the representations and warranties set forth in
Section 3 shall be true and correct with respect to such Borrower; (ii) such
Borrower shall be in compliance in all material respects with all of the terms
and provisions set forth herein on its part to be observed or performed at the
time of the admission and after giving effect thereto; and (iii) no Default or
Event of Default with respect to such Borrower shall have occurred and be
continuing.
SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this
Agreement and to make the Loans, each Fund on behalf of itself and each Borrower
hereby represents and warrants to the Administrative Agent and each Lender that
(it being agreed that each Fund represents and warrants only to matters with
respect to itself and each Borrower that is a series of such Fund, and each
Borrower represents and warrants only to matters with respect to itself):
<PAGE>
3.1 Financial Condition. For each Borrower, the statement of assets and
-------------------
liabilities as of such Borrower's most recently ended fiscal year for which
annual reports have been prepared and the related statements of operations and
of changes in net assets for the fiscal year ended on such date, copies of which
financial statements, certified by the independent public accountants for each
Fund acting on behalf of each Borrower, have heretofore been delivered to each
Lender, fairly present, in all material respects, the financial position of such
Borrower as of such date and the results of its operations for such period, in
conformity with GAAP (as consistently applied).
3.2 No Change. For each Borrower, since the date of the statement of
---------
assets and liabilities for the most recently ended fiscal year for which annual
reports have been prepared for such Borrower, there has been no development or
event which has had or could reasonably be expected to have a Material Adverse
Effect with respect to such Borrower.
3.3 Existence; Compliance with Law. Each Fund (a) is duly organized,
------------------------------
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has the power and authority and the legal right to own its
property and to conduct the business in which it is currently engaged, (c) is
duly qualified as a foreign corporation or business trust and is in good
standing under the laws of each jurisdiction where its ownership of property or
the conduct of its business requires such qualification and (d) is in compliance
with all Requirements of Law except to the extent that the failure to comply
therewith could not, in the aggregate, reasonably be expected to have a Material
Adverse Effect. The shares of each Fund have been validly authorized.
3.4 Power; Authorization; Enforceable Obligations. Each Fund acting on
---------------------------------------------
behalf of one or more Borrowers, has the power and authority and the legal
right, to execute, deliver and perform the Loan Documents to which it is a party
and to borrow hereunder and has taken all necessary action to authorize the
borrowings on the terms and conditions of this Agreement and any Notes and to
authorize the execution, delivery and performance of the Loan Documents to which
it is a party including, but not limited to, receiving the approval of the
majority of non-interested members of the board of trustees or board of
directors of such Fund as to entering into the transactions contemplated hereby.
No consent or authorization of, filing with, notice to or other act by or in
respect of, any Governmental Authority or any other Person is required in
connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of the Loan Documents to which the Funds
and any Borrower is a party. This Agreement has been, and each other Loan
Document to which it is a party will be, duly executed and delivered by each
Fund on behalf of its Borrowers. This Agreement constitutes, and each other
Loan Document to which it is a party when executed and delivered will
constitute, a legal, valid and binding obligation of the Funds and each Borrower
enforceable against the Funds and each Borrower severally in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
3.5 No Legal Bar. The execution, delivery and performance of the Loan
------------
Documents to which each of the Funds and the Borrowers is a party, the
borrowings hereunder and the use of the proceeds thereof will not violate any
material Requirement of Law (including, without
<PAGE>
limitation, the 1940 Act) or Contractual Obligation of any Fund or any Borrower
and will not result in, or require, the creation or imposition of any Lien on
any of their respective properties or revenues pursuant to any such Requirement
of Law or Contractual Obligation.
3.6 No Material Litigation. No litigation, investigation or proceeding of
----------------------
or before any arbitrator or Governmental Authority is pending or, to the
knowledge of any Fund or any Borrower, threatened by or against any Fund or any
Borrower or against any of their respective properties or revenues (a) with
respect to any of the Loan Documents or any of the transactions contemplated
hereby or thereby, or (b) which could reasonably be expected to have a Material
Adverse Effect.
3.7 No Default. Neither any Fund nor any Borrower is in default under or
----------
with respect to any of its Contractual Obligations in any respect which could
reasonably be expected to have a Material Adverse Effect. No Default or Event
of Default has occurred and is continuing.
3.8 Ownership of Property; Liens. Each Fund and each Borrower has good
----------------------------
title to all its property, and none of such property is subject to any Lien
except as permitted by Section 6.3.
3.9 No Burdensome Restrictions. No Requirement of Law or Contractual
--------------------------
Obligation of any Fund or any Borrower could reasonably be expected to have a
Material Adverse Effect.
3.10 Taxes. (a) Each Fund and each Borrower has filed all tax returns
-----
which, to the knowledge of such Fund and such Borrower, are required to be filed
and has paid all taxes shown to be due and payable on said returns or on any
assessments made against it or any of its property and all other taxes, fees or
other charges imposed on it or any of its property by any Governmental Authority
(other than any the amount or validity of which are currently being contested in
good faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP have been provided on the books of such Fund or such
Borrower); no tax Lien has been filed, and, to the knowledge of each Fund and
each Borrower, no claim is being asserted, with respect to any such tax, fee or
other charge.
(b) Each Borrower is a "regulated investment company" as defined in the
Code.
3.11 Federal Regulations. No filing or other action is required under the
-------------------
provisions of Regulations T, U or X in connection with the execution and
delivery of the Agreement and the making of the Loans hereunder. If requested
by any Lender or the Administrative Agent from time to time, each Fund and each
Borrower will furnish to the Administrative Agent and each Lender a statement to
the foregoing effect in conformity with the requirements of FR Form U-1 and FR
Form G-3, as appropriate, referred to in said Regulation U.
3.12 ERISA. Neither any Fund, any Borrower nor any Commonly Controlled
-----
Entity has currently or has had at any time any liability or obligation under
ERISA or the Code with respect to any Plan.
3.13 Certain Regulations. Neither any Fund nor any Borrower is subject to
-------------------
regulation
<PAGE>
under any Federal or State statute or regulation (other than Regulation X of the
Board of Governors of the Federal Reserve System and the 1940 Act) which limits
its ability to incur Indebtedness.
3.14 Subsidiaries. Each Fund has no Subsidiaries, and no equity investment
------------
or interest in any other Person (other than portfolio securities which have been
acquired in the ordinary course of business).
3.15 Registration of the Funds. Each Borrower is a series or portfolio of a
-------------------------
Fund and all Funds are registered as open-end, management investment companies
under the 1940 Act.
3.16 Offering in Compliance with Securities Laws. Each Fund and each
-------------------------------------------
Borrower has issued all of its securities pursuant to an effective registration
statement on Form N-1A or otherwise in accordance with all Federal and State
securities laws applicable thereto.
3.17 Investment Policies. Each Borrower is in compliance in all material
-------------------
respects with all of its fundamental Investment Policies.
3.18 Permission to Borrow. Each Borrower is permitted to borrow hereunder
--------------------
pursuant to the limits and restrictions set forth in its statement of Additional
Information.
3.19 Accuracy of Information. All financial information, information
-----------------------
regarding each Borrower's investment policies and information contained in
exhibits attached hereto heretofore or contemporaneously furnished by or on
behalf of each Fund and each Borrower in writing to the Administrative Agent or
any Lender for purposes of or in connection with this Agreement or any
transaction contemplated hereby (in each case, as amended, superseded,
supplemented or otherwise modified) is, and all other such factual information
with respect to a Borrower or a Fund hereafter furnished in writing by or on
behalf of each Fund and each Borrower to the Administrative Agent or any Lender
(in each case, as amended, superseded, supplemented or otherwise modified) will
be, true and accurate in every material respect on the date as of which such
information is dated or certified, and to the extent such information was
furnished to the Administrative Agent or such Lender heretofore or
contemporaneously, as of the date of execution and delivery of this Agreement by
the Administrative Agent or such Lender, and such information is not, or shall
not be, as the case may be, incomplete by omitting to state any material fact
necessary to make such information not misleading.
3.20 Affiliated Persons. To the best knowledge of each Fund and each
------------------
Borrower, such Fund and such Borrower, together with their respective Affiliates
is not an "Affiliated Person" (as defined in the 1940 Act) of the Administrative
Agent or any Lender.
3.21 Year 2000. Each Fund has used commercially reasonable efforts to
---------
obtain assurances deemed reasonable by such Fund from its investment adviser,
administrator, transfer agent, distributor and custodian (together, the "Service
-------
Providers") that the services provided by such Fund will not be materially
- ---------
disrupted due to the inability of the Service Providers' computer systems to
process properly dates on and after January 1, 2000 and distinguish between the
year 2000 and the year 1900 ("Year 2000 Problem"). Each Fund has been advised
-----------------
by the Service
<PAGE>
Providers that they anticipate that the transition to the 21/st/ century will
not result in a Material Adverse Effect. The disclosures contained herein
regarding Year 2000 readiness are designated as Year 2000 readiness disclosures
related to the Year 2000 Information & Readiness Disclosure Act.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions to Closing. The effectiveness of this Agreement is subject
---------------------
to the satisfaction, prior to or on the Closing Date, of the following
conditions precedent, which conditions precedent apply to and shall be satisfied
by the Borrowers severally:
(a) Executed Agreement. The Administrative Agent shall have received
------------------
this Agreement, executed and delivered by a duly authorized officer of each
Fund on behalf of such Fund and each Borrower, with a counterpart for each
Lender.
(b) Notes. The Administrative Agent shall have received Notes for each
-----
Lender which has requested Notes pursuant to Section 2.5(e), executed and
delivered by a duly authorized officer of each Fund on behalf of each
Borrower.
(c) Related Agreements. The Administrative Agent shall have received
------------------
true and correct copies, certified as to authenticity by each Fund, of the
most recent Prospectus for each Borrower, the Shareholder Services Agreement
for each Borrower, the Custody Agreement for each Borrower, the Distribution
Agreement for each Borrower, the Investment Management Agreement of each
Fund with respect to each Borrower, the current registration statement for
each Borrower, the most recent annual and semi-annual financial reports for
each Borrower and such other documents or instruments as may be reasonably
requested by the Administrative Agent, including, without limitation, a copy
of any debt instrument, security agreement or other material contract to
which any Borrower may be a party.
(d) Proceedings of the Funds and the Borrowers. The Administrative
------------------------------------------
Agent shall have received, with a counterpart for each Lender, a copy of the
resolutions, in form and substance satisfactory to the Administrative Agent,
of the board of trustees or directors, as the case may be, of each Fund
authorizing (i) the execution, delivery and performance of this Agreement
and the other Loan Documents to which each Fund and each Borrower is a party
and (ii) the borrowings contemplated hereunder, certified by the Secretary
or an Assistant Secretary of such Person as of the Closing Date, which
certificate shall be in form and substance satisfactory to the
Administrative Agent and shall state that the resolutions thereby certified
have not been amended, modified, revoked or rescinded and are in full force
and effect.
(e) Incumbency Certificate. The Administrative Agent shall have
----------------------
received, with a counterpart for each Lender, a Certificate of each Fund,
dated the Closing Date, as to the incumbency and signature of the officers
of such Fund executing any Loan Document executed by the Secretary or any
Assistant Secretary of such Fund, satisfactory
<PAGE>
in form and substance to the Administrative Agent.
(f) Organizational Documents. The Administrative Agent shall have
------------------------
received, with a counterpart for each Lender, true and complete copies of
the charter or certificate, as the case may be, and by-laws of each Fund,
certified as of the Closing Date as complete and correct copies thereof by
the Secretary or an Assistant Secretary of each Fund.
(g) Regulations U; Forms U-1 and G-1. The Lenders shall be satisfied
--------------------------------
that the Loans and the use of proceeds thereof comply in all respects with
Regulation U. If required by Regulation , the Administrative Agent shall
have received a copy of either (i) FR Form U-1 or FR Form G3 (as
applicable), duly executed and delivered by each Fund on behalf of each
Borrower and completed for delivery to each Lender, in form acceptable to
the Administrative Agent, or (ii) a current list of "margin stock" (as
defined in Regulation U) from each Borrower, in form acceptable to the
Administrative Agent and in compliance with Section 221.3(c)(2) of
Regulation U.
(h) Legal Opinions. The Administrative Agent shall have received, with
--------------
a counterpart for each Lender, the executed legal opinion of counsel to the
Funds and each Borrower, substantially in the form of Exhibit 4.1(h)
--------------
hereto. Such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Administrative Agent may
reasonably require.
(i) Financial Information. The Administrative Agent shall have
---------------------
received, with a copy for each Lender, the most recent publicly available
financial information (which includes a list of portfolio securities) for
each Fund and each Borrower.
(j) Termination of other Credit Facilities. All other credit
--------------------------------------
facilities to which any Borrower is a party including, but not limited to,
the $50,000,000 bilateral facility heretofore entered into between Chase
and the Borrowers, shall have been terminated.
(k) Representations and Warranties. Each of the representations and
------------------------------
warranties made by a Fund acting on behalf of a requesting Borrower and by
the requesting Borrower in or pursuant to the Loan Documents shall be true
and correct in all material respects on and as of such date as if made on
and as of such date.
4.2 Conditions to Each Loan. The agreement of each Lender to make any loan
-----------------------
requested by a particular Borrower to be made by it on any date (including,
without limitation, its initial Loan) is subject to the satisfaction of the
following conditions precedent:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties (other than Section 3.2) made by a Fund acting on behalf of a
requesting Borrower and by the requesting Borrower in or pursuant to the
Loan Documents shall be true and correct in all material respects on and as
of such date as if made on and as of such date.
(b) No Default. No Default or Event of Default shall have occurred
----------
with
<PAGE>
respect to the requesting Borrower, or the Fund acting on behalf of a
requesting Borrower, and be continuing on such date or after giving effect
to the Loans requested to be made on such date.
(c) Maximum Borrowing Limitation. After giving effect to the proposed
----------------------------
Loans to be made, the Asset Coverage Ratio for all borrowings of such
Borrower shall not be less than 300% and the requesting Borrower shall not
have violated any Requirements of Law or exceeded the borrowing limits set
forth in its Prospectus.
(d) Regulation U; Forms U-1 and G-1. The Lenders shall be satisfied
-------------------------------
that the Loans and the use of proceeds thereof comply in all respects with
Regulation U. To the extent required by Regulation U, the Administrative
Agent shall have received a copy of either (i) FR Form U-1 or FR Form G3 (as
applicable), duly executed and delivered by each Fund on behalf of each
Borrower and completed for delivery to each Lender, in form acceptable to
the Administrative Agent, or (ii) a current list of "margin stock" (as
defined in Regulation U) from each Borrower, in form acceptable to the
Administrative Agent and in compliance with Section 221.3(c)(2) of
Regulation U.
(e) Additional Matters. All corporate and other proceedings, and all
------------------
documents, instruments and other legal matters in connection with the
transactions contemplated by this Agreement and the other Loan Documents
shall be reasonably satisfactory in form and substance to the Administrative
Agent, and the Administrative Agent shall have received such other documents
and legal opinions in respect of any aspect or consequence of the
transactions contemplated hereby or thereby as it shall reasonably request.
Each borrowing by a Borrower hereunder shall constitute a representation and
warranty by such Borrower as of the date thereof that the conditions contained
in this Section have been satisfied with respect to such Borrower.
SECTION 5. AFFIRMATIVE COVENANTS
Each Fund for itself and each Borrower for itself severally and not jointly
or jointly and severally hereby agrees that, so long as (i) the Commitments
remain in effect with respect to it or (in the case of any Fund) any Borrower
that is a series of such Fund or (ii) any amount is owing by it or (in the case
of any Fund) any Borrower that is a series of such Fund to any Lender or the
Administrative Agent hereunder or under any other Loan Document, it and (in the
case of any Fund) any Borrower that is a part of such Fund shall (it being
agreed that each Fund covenants only to matters with respect it itself and each
Borrower that is a part of such Fund, and each Borrower covenants only to
matters with respect to itself):
5.1 Financial Statements. Furnish to the Administrative Agent (with copies
--------------------
for each Lender):
(a) as soon as available and in any event within 75 days after the end
of each
<PAGE>
fiscal year of such Borrower, a statement of assets and liabilities of such
Borrower as at the end of such fiscal year, a statement of operations for
such fiscal year, a statement of changes in net assets for such fiscal year
and the preceding fiscal year, a portfolio of investments as at the end of
such fiscal year and the per share and other data for such fiscal year
prepared in accordance with GAAP (as consistently applied) and all
regulatory requirements, and all presented in a manner acceptable to the
Securities and Exchange Commission or any successor or analogous
Governmental Authority and acceptable to Ernst & Young LLP or any other
independent certified public accountants of recognized standing;
(b) as soon as available and in any event within 60 days after the
close of the first six-month period of each fiscal year of such Borrower, a
statement of assets and liabilities as at the end of such six-month period,
a statement of operations for such six-month period, a statement of changes
in net assets for such six-month period and a portfolio of investments as at
the end of such six-month period, all prepared in accordance with regulatory
requirements and all certified (subject to normal year end adjustments) as
to fairness of presentation, GAAP (as consistently applied) and consistency
by a Responsible Officer; and
(c) as soon as available, but in any event not later than 10 days after
the end of each month of each fiscal year of each Borrower, the net asset
value sheet of such Borrower as at the end of such month, in the form and
detail similar to those customarily prepared by the Funds' management for
internal use and reasonably satisfactory to the Administrative Agent,
certified by a Responsible Officer as being fairly stated in all material
respects; provided, however, that if any Borrower has Loans outstanding,
-------- -------
such Borrower shall provide each Lender with (i) such net asset value sheet
described above in this Section and (ii) a certificate of a Responsible
Officer showing in reasonable detail the calculations supporting such
Borrower's compliance with Section 6.1, within two Business Days after the
end of each calendar week so long as any Loans to such Borrower remain
outstanding;
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
5.2 Certificates; Other Information. Furnish to the Administration Agent
--------------------------------
(with copies for each Lender):
(a) concurrently with the delivery of the financial statements referred
to in Section 5.1(a), a certificate of the independent certified public
accountants reporting on such financial statements stating that in making
the examination necessary therefor no knowledge was obtained of any Default
or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements referred
to in
<PAGE>
Sections 5.1(a), (b) and (c) and the quarterly report in Section 5.2(d), a
certificate of a Responsible Officer stating that, to the best of such
Officer's knowledge, such Borrower during such period has observed or
performed all of its covenants and other agreements, and satisfied every
condition, contained in this Agreement and the other Loan Documents to be
observed, performed or satisfied by it, and that no Default or Event of
Default has occurred and is continuing except as specified in such
certificate;
(c) within five days after the same are sent, copies of all financial
statements and reports which each Borrower sends to its investors, and
within five Business Days after the same are filed, copies of all financial
statements and reports which each Borrower may make to, or file with, the
Securities and Exchange Commission or any successor or analogous
Governmental Authority;
(d) as soon as available, but in any event not later than ten days
after the end of each quarter, a certificate of a Responsible Officer (i)
stating that the list of each Borrower's portfolio securities attached to
such certificate is true and correct and (ii) showing in reasonable detail
the calculations supporting such Borrower's compliance with Section 6.1; and
(e) promptly, such additional financial and other information as any
Lender may from time to time reasonably request, including, but not limited
to, copies of all changes to the Prospectus and registration statement.
5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or
----------------------
before maturity or before they become delinquent, as the case may be, all its
obligations of whatever nature, except where the amount or validity thereof is
currently being contested in good faith by appropriate proceedings and reserves
in conformity with GAAP with respect thereto have been provided on the books of
such Borrower or such Fund, as the case may be.
5.4 Conduct of Business and Maintenance of Existence; Change of Custodian.
---------------------------------------------------------------------
Continue to engage in its investment business in accordance with its Investment
Policies, Prospectus and registration statement and preserve, renew and keep in
full force and effect its existence and take all reasonable action to maintain
all rights, privileges and franchises necessary or desirable in the normal
conduct of its business; comply with all Contractual Obligations and
Requirements of Law except to the extent that failure to comply therewith could
not, in the aggregate, be reasonably expected to have a Material Adverse Effect;
maintain at all times its status as an investment company or a series of an
investment company registered under the 1940 Act; maintain at all times a
custodian which is a bank or trust company organized under the laws of the
United States or a political subdivision thereof having assets of at least
$10,000,000,000 and a long-term debt or deposit rating of at least A from S&P or
A2 from Moody's.
5.5 Maintenance of Property; Insurance. Keep all property useful and
----------------------------------
necessary in its business, if any, in good working order and condition; maintain
with financially sound and reputable insurance companies insurance on all its
property in at least such amounts and against at least such risks as are usually
insured against in the same general area by entities engaged in the same or
similar business or as may otherwise be required by the Securities and Exchange
<PAGE>
Commission or any successor or analogous Governmental Authority (including,
without limitation, (a) fidelity bond coverage as shall be required by Rule 17g-
1 promulgated under the 1940 Act or any successor provision and (b) errors and
omissions insurance); and furnish to each Lender, upon written request, full
information as to the insurance carried.
5.6 Inspection of Property; Books and Records; Discussions. Keep proper
------------------------------------------------------
books of records and account in which full, true and correct in all material
respects entries in conformity with GAAP and all material Requirements of Law
shall be made of all dealings and transactions in relation to its business and
activities; and permit representatives of (i) the Administrative Agent, or its
representatives, upon its own discretion or at the reasonable request of any
Lender, and (ii) upon the occurrence and during the continuance of an Event of
Default, any Lender, or its representatives, to visit and inspect any of such
Borrower's properties and examine and make abstracts from any of its books and
records during normal business hours and to discuss the business, operations,
properties and financial and other condition of such Borrower with officers and
employees of such Borrower and with its independent certified public
accountants; provided that, unless a Default or an Event of Default shall have
--------
occurred and be continuing, the Administrative Agent shall provide the Borrowers
with five Business Days' prior notice of such visit and shall only conduct such
visit once a year.
5.7 Notices. Promptly give notice to the Administrative Agent and each
-------
Lender of:
(a) the occurrence of any Default or Event of Default with respect to
such Borrower;
(b) any (i) default or event of default under any Contractual
Obligation of such Borrower or such Fund or (ii) litigation, investigation
or proceeding which may exist at any time between any Fund and/or any
Borrower and any Governmental Authority, which in either case, if not cured
or if adversely determined, as the case may be, could reasonably be expected
to have a Material Adverse Effect;
(c) any litigation or proceeding affecting such Borrower in which the
amount reasonably determined to be at risk is $1,000,000 or more and not
covered by insurance or in which injunctive or similar relief is sought;
(d) change in such Borrower's Prospectus or registration statement
involving fundamental Investment Policies which could materially increase
the risks to the shareholders of the Borrower; and
(e) any development (other than widely reported general economic or
industry developments) or event which could reasonably be expected to have a
Material Adverse Effect on any such Borrower.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action such Fund or such Borrower proposes to take with respect
thereto.
<PAGE>
5.8 Purpose of Loans. Use the proceeds of the Loans for temporary or
----------------
emergency purposes. Without limiting the foregoing, no Borrower will, directly
or indirectly, use any part of such proceeds for any purpose which would violate
any provision of its registration statement or any applicable statute,
regulation.
SECTION 6. NEGATIVE COVENANTS
Each Fund for itself and each Borrower for itself hereby agrees that,
so long as (i) the Commitments remain in effect with respect to it or (in the
case of any Fund) any Borrower that is a part of such Fund or (ii) any amount is
owing by it or (in the case of any Fund) any Borrower that is a part of such
Fund to any Lender or the Administrative Agent hereunder or under any other Loan
Document, it and (in the case of any Fund) any Borrower that is a part of such
Fund shall not, without the prior written consent of the Required Lenders,
directly or indirectly:
6.1 Financial Condition Covenant. Permit the Asset Coverage Ratio of such
----------------------------
Borrower to be less than 300%, or allow borrowings and/or Indebtedness of such
Borrower to exceed the limits set forth in such Borrower's Prospectus or allow
borrowing and/or Indebtedness to exceed the requirements of the 1940 Act.
6.2 Limitation on Indebtedness. Create, incur, assume or suffer to exist
--------------------------
any Indebtedness of such Borrower, except Indebtedness of such Borrower incurred
(i) under this Agreement and the Notes, (ii) in the ordinary course of business
of such Borrower or (iii) in the form of reverse repurchase transactions, dollar
rolls or other transactions entered into primarily for investment purposes which
have the effect of borrowing and, in each case, which is not otherwise
prohibited by law is in the ordinary course of business, is not in contravention
of such Borrower's Prospectus and is reflected properly in the calculation of
the Asset Coverage Ratio.
6.3 Limitation on Liens. Create, incur, assume or suffer to exist any Lien
-------------------
upon any of the property, assets or revenues, whether now owned or hereafter
acquired of such Borrower, except for (i) Liens for taxes not yet due or which
are being contested in good faith by appropriate proceedings, provided that
--------
adequate reserves with respect thereto are maintained on the books of such
Borrower in conformity with GAAP, (ii) Liens arising in connection with claims
for advances made by or payments due to any custodian under the Custodian
Agreements set forth in Schedule IV hereto and (iii) any other Liens created,
-----------
incurred, assumed or suffered to exist in compliance with the registration
statement of such Borrower which are not otherwise prohibited by any Requirement
of Law, and for which the Administrative Agent has been given prior written
notice.
6.4 Limitation on Guarantee Obligations. Create, incur, assume or suffer
-----------------------------------
to exist any material Guarantee Obligation of such Borrower.
6.5 Limitation on Fundamental Changes. Enter into any merger,
---------------------------------
consolidation or amalgamation, or liquidate, wind up or dissolve such Borrower
or fund (or suffer any liquidation or dissolution), or convey, sell, lease,
assign, transfer or otherwise dispose of all of the property,
<PAGE>
business or assets of such Borrower in a single transaction or in related
transactions, or make any material change in its present method of conducting
business; except that, so long as no Default or Event of Default shall have
occurred and be continuing, a Borrower will be permitted to (i) enter into any
merger, consolidation or amalgamation with one or more Borrowers or, with the
consent of the Administrative Agent (which consent shall not be unreasonably
withheld), one or more Affiliates or such Borrower if, in each case, UST or one
of its affiliates is the investment manager to the entity surviving such merger,
consolidation or amalgamation and such entity assumes the obligations of such
Borrower under the Loan Documents and complies with the provisions hereof or
(ii) liquidate, wind up or convey, sell, lease, assign, transfer or otherwise
dispose of all of the property, business or assets of such Borrower if it repays
all Loans made to it prior to liquidation or (iii) sell, transfer or otherwise
dispose of all or substantially all of its assets to one or more Borrowers or,
with the consent of the Administrative Agent (which consent shall not be
unreasonably withheld), one or more Affiliate of such Borrower if UST or one of
its affiliates is the investment manager to the entity surviving such merger,
consolidation or amalgamation and such entity assumes the obligations of such
Borrower under the Loan Documents and complies with the provisions hereof. Any
Borrower undertaking any action described in clause (ii) above shall comply with
the termination provisions described in Section 2.4 hereof.
6.6 Limitation on Distributions. At any time, make any distribution to the
---------------------------
shareholders of such Borrower, whether now or hereafter existing, either
directly or indirectly, whether in cash or property or in obligations of the
borrower if such distribution results in a Default or an Event of Default ,
except to the extent that such distributions are required to enable such
Borrower to continue to qualify as a "regulated investment company" under
Sections 851-855 of the Code or otherwise to minimize or eliminate federal or
state income or excise taxes payable by such Borrower and except as otherwise
required by any other Requirement of Law. During the occurrence and continuation
of an Event of Default specified in paragraphs (a) or (e) of Section 7 or an
Event of Default arising in connection with a Borrower's having failed to comply
with Section 6.1, make any distribution to the shareholders of such Borrower,
whether now or hereafter existing, either directly or indirectly, whether in
cash or property or in obligations of the Borrower, except to the extent that
such distributions are required to enable such Borrower to continue to qualify
as a "regulated investment company" under Sections 851-855 of the Code or
otherwise to minimize or eliminate federal or state income or excise taxes
payable by such Borrower and except as otherwise required by any other
Requirement of Law.
6.7 Limitation on Investments, Loans and Advances. Make any advance, loan,
---------------------------------------------
extension of credit or capital contribution to, or purchase any stock, bonds,
notes, debentures or other securities of or any assets constituting a business
unit of or make any other investment in, any Person, except those not
inconsistent with such Borrower's Investment Policies.
6.8 Limitation on Transactions with Affiliates. Enter into any
------------------------------------------
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) not otherwise prohibited under this Agreement and not in
violation of the 1940 Act, (b) in the ordinary course of such Borrower's
business, and (c) upon fair and reasonable terms no less favorable to such
Borrower than it would obtain in a comparable arm's length transaction with a
Person which is not an Affiliate.
<PAGE>
6.9 Limitation on Negative Pledge Clauses. Enter into with any Person any
-------------------------------------
agreement, other than this Agreement or the other Loan Documents, which
prohibits or limits the ability of such Borrower to create, incur, assume or
suffer to exist any Lien upon any of its property, assets or revenues, whether
now owed or hereafter acquired.
6.10 Limitation on Changes to Investment Policies. Except as may be
--------------------------------------------
required by law, make any amendment to the Prospectus or registration statement
of such Borrower relating to changes in the fundamental Investment Policies of
such Borrower which amendment requires approval of such Borrower's shareholders
without the consent of the Required Lenders, which consent shall not be
unreasonably withheld.
SECTION 7. EVENTS OF DEFAULT
Subject to the final paragraph of this Section 7, if any of the following
events shall occur and be continuing with respect to a Borrower or a Fund, on
behalf of such Borrower, as the case may be (each an "Event of Default"):
----------------
(a) A Borrower shall fail to pay any principal of any Loan when due in
accordance with the terms thereof or hereof, including without limitation
any failure to make a mandatory prepayment due pursuant to the provisions of
Section 2.6(b); or a Borrower shall fail to pay any interest on any Loan, or
any other amount payable hereunder, within three Business Days after any
such interest or other amount becomes due in accordance with the terms
thereof or hereof; or
(b) Any representation or warranty made or deemed made by a Borrower or
any Fund herein or in any other Loan Document or which is contained in any
certificate, document or financial or other statement furnished by it at any
time under or in connection with this Agreement or any such other Loan
Document shall prove to have been incorrect in any material respect on or as
of the date made or deemed made; or
(c) A Borrower or a Fund shall default in the observance or performance
of any other covenant or agreement contained in this Agreement or any other
Loan Document (other than as provided in paragraphs (a) and (b) of this
Section), and such default shall continue unremedied for a period of 30 days
or, solely in the case of such default arising under Sections 5.4 or 6.5
hereof, 15 Business Days; or
(d) A Borrower or a Fund shall (i) default in any payment of principal
of or interest on any Indebtedness (other than the Loans) or in the payment
of any Guarantee Obligation, beyond the grace period (not to exceed 30
days), if any, provided in the instrument or agreement under which such
Indebtedness or Guarantee Obligation was created, if the aggregate amount of
the Indebtedness and/or Guarantee Obligations in respect of which such
default or defaults shall have occurred is at least 5% of such Borrower's or
such Fund's net assets; or (ii) default in the observance or performance of
any other agreement or condition relating to any such Indebtedness or
Guarantee
<PAGE>
Obligation or contained in any instrument or agreement evidencing, securing
or relating thereto, or any other event shall occur or condition exist, the
effect of which default or other event or condition is to cause, or to
permit the holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf
of such holder or holders or beneficiary or beneficiaries) to cause, with
the giving of notice if required, such Indebtedness to become due prior to
its stated maturity or such Guarantee Obligation to become payable; or
(e) (i) Any Fund shall commence any case, proceeding or other action
with respect to itself or any Borrower (A) under any then applicable law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any substantial
part of its assets, or a Borrower or a Fund shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against a
Borrower or a Fund any case, proceeding or other action of a nature referred
to in clause (i) above which (A) results in the entry of an order for relief
or any such adjudication or appointment or (B) remains undismissed,
undischarged or unbonded for a period of 60 days; or (iii) there shall be
commenced against a Borrower or a Fund any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in
the entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days from the entry
thereof; or (iv) a Borrower or a Fund shall take any action in writing in
furtherance of, or indicating its consent to, approval of, or acquiescence
in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) a
Borrower or a Fund shall generally not, or shall be unable to, or shall
admit in writing its inability to, pay its debts as they become due; or
(f) Either a Borrower or any Commonly Controlled Entity of such
Borrower incurs any liability to any Plan which could reasonably be expected
to have a Material Adverse Effect; or
(g) One or more judgments or decrees shall be entered against a
Borrower or a Fund involving in the aggregate a liability (not fully covered
by insurance or otherwise paid or discharged) of 5% or more of such
Borrower's net assets, and all such judgments or decrees shall not have been
vacated, discharged, stayed or bonded pending appeal within 30 days from the
entry thereof; or
(h) Unless consented to by the Lenders, UST or a Person directly
controlling, controlled by, or under common control with UST shall no longer
act as investment manager for the Funds; or
(i) A Fund or a Borrower's registration under the 1940 Act shall lapse
or be suspended (or proceedings for such purpose shall have been
instituted); or
<PAGE>
(j) A Borrower shall fail to materially comply with its fundamental
Investment Policies;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (e) of this Section with respect to such
Borrower (or a Fund acting on behalf of one or more Borrowers), automatically
the Commitments available to such Borrower (or all of the Borrowers that are
portfolios of such Fund) shall immediately terminate and the Loans hereunder
made to any such Borrower (with accrued interest thereon) and all other amounts
owing under this Agreement by such Borrower shall immediately become due and
payable, and (B) if such event is any other Event of Default with respect to
such Borrower (or a Fund acting on behalf of one or more Borrowers), any or all
of the following actions may be taken: (i) with the consent of the Required
Lenders, the Administrative Agent may, or upon the request of the Required
Lenders, the Administrative Agent shall, by notice to such Borrower declare the
Commitments available to such Borrower (or all of the Borrowers issued under
such Fund if such Event of Default is a Fund Event of Default (as defined
below)) to be terminated forthwith, whereupon such Commitments shall immediately
terminate; and (ii) with the consent of the Required Lenders, the Administrative
Agent may, or upon the request of the Required Lenders, the Administrative Agent
shall, by notice to such Borrower, declare the Loans hereunder (with accrued
interest thereon) and all other amounts owing under this Agreement by such
Borrower (or all of the Borrowers issued under such Fund if such Event of
Default is a Fund Event of Default) to be due and payable forthwith, whereupon
the same shall immediately become due and payable. Except as expressly provided
above in this Section, presentment, demand, protest and all other notices of any
kind are hereby expressly waived.
Notwithstanding any other provision herein to the contrary, Defaults and
Events of Defaults shall have the following results:
(i) a Default or Event of Default with respect to one Borrower shall
not constitute a Default or Event of Default to any other
Borrower;
(ii) except as set forth in clause (iii) below, a Default or Event of
Default with respect to a Fund acting on behalf of one or more
Borrowers shall constitute a Default or Event of Default, as the
case may be, only to the Borrower implicated in, or affected by,
the act or omission causing such Default or Event of Default;
(iii) a Fund Default or a Fund Event of Default with respect to a Fund
acting on behalf of one or more Borrowers shall constitute a
Default or Event of Default, as the case may be, to all
Borrowers issued by such Fund; and
(iv) an Event of Default of the type described in paragraph (h) of
this Section 7 shall constitute an Event of Default to all
Borrowers.
"Fund Event of Default" shall mean an Event of Default with respect to a Fund as
---------------------
a whole and not with respect to any Borrower or a Fund acting on behalf of a
Borrower (A) of any of the
<PAGE>
types described in paragraphs (d), (e), (g), or (i) of this Section 7, or (B)
arising from such Fund's failure to comply with the covenants set forth in
Sections 5.3, 5.4, 5.5 or 6.5. "Fund Default" shall mean any of the events
------------
giving rise to Fund Events of Default, whether or not any requirement for the
giving of notice, the lapse of time, or both, or any other condition, has been
satisfied. Notwithstanding anything herein to the contrary, a Default or Event
of Default with respect to one Borrower shall not constitute a Default or Event
of Default with respect to any other Borrower.
SECTION 8. THE ADMINISTRATIVE AGENT
8.1 Appointment. Each Lender hereby irrevocably designates and appoints
-----------
the Administrative Agent as the agent of such Lender under this Agreement and
the other Loan Documents, and each such Lender irrevocably authorizes the
Administrative Agent, in such capacity, to take such action on its behalf under
the provisions of this Agreement and the other Loan Documents and to exercise
such powers and perform such duties as are expressly delegated to the
Administrative Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this Agreement, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein, or any fiduciary relationship with any Lender, and
no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Administrative Agent.
8.2 Delegation of Duties. The Administrative Agent may execute any of its
--------------------
duties under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Administrative Agent shall not be
responsible for the negligence, willful misfeasance, bad faith or misconduct of
any agents or attorneys in-fact selected by it with reasonable care.
8.3 Exculpatory Provisions. Neither the Administrative Agent nor any of
----------------------
its officers, directors, employees, agents, attorneys-in-fact or Affiliates
shall be (a) liable for any action lawfully taken or omitted to be taken by it
or such Person under or in connection with this Agreement or any other Loan
Document (except for its or such Person's own gross negligence or willful
misconduct) or (b) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by any Fund or any
Borrower or any officer thereof contained in this Agreement or any other Loan
Document or in any certificate, report, statement or other document referred to
or provided for in, or received by the Administrative Agent under or in
connection with, this Agreement or any other Loan Document or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Loan Document or for any failure of any Borrower or any
Fund to perform its obligations hereunder or thereunder. The Administrative
Agent shall not be under any obligation to any Lender to ascertain or to inquire
as to the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any other Loan Document, or to inspect the
properties, books or records of any Fund or any Borrower.
<PAGE>
8.4 Reliance by Administrative Agent. The Administrative Agent shall be
--------------------------------
entitled to rely, and shall be fully protected in relying, upon any Note,
writing, resolution, notice, consent, certificate, affidavit, letter, telecopy,
telex or teletype message, statement, order or other document or conversation
reasonably believed by it to be genuine and correct and to have been signed,
sent or made by the proper Person or Persons and upon advice and statements of
legal counsel (including, without limitation, counsel to the Funds or the
Borrowers), independent accountants and other experts selected by the
Administrative Agent. The Administrative Agent may deem and treat the payee of
any Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Administrative Agent. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the
Required Lenders as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action. The
Administrative Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement and the other Loan Documents in
accordance with a request of the Required Lenders, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders and all future holders of the Loans.
8.5 Notice of Default. The Administrative Agent shall not be deemed to
-----------------
have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Administrative Agent has received notice from a Lender or a
Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event
that the Administrative Agent receives such a notice, the Administrative Agent
shall give notice thereof to the Lenders. The Administrative Agent shall take
such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders; provided that unless and until the
--------
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable in the best interests of the Lenders.
8.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender
------------------------------------------------------
expressly acknowledges that neither the Administrative Agent nor any of its
officers, directors, employees, agents, attorneys-in-fact or Affiliates has made
any representations or warranties to it and that no act by the Administrative
Agent hereinafter taken, including any review of the affairs of the Funds or
Borrowers, shall be deemed to constitute any representation or warranty by the
Administrative Agent to any Lender. Each Lender represents to the
Administrative Agent that it has, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of the Borrowers and made its own decision to
make its Loans hereunder and enter into this Agreement. Each Lender also
represents that it will, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Loan Documents, and to make such investigation as
it deems necessary to inform itself as to the
<PAGE>
business, operations, property, financial and other condition and
creditworthiness of the Borrowers. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, the Administrative Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of the Funds or the Borrowers which
may come into the possession of the Administrative Agent or any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates.
8.7 Indemnification. The Lenders agree to indemnify the Administrative
---------------
Agent in its capacity as such (to the extent not reimbursed by the Borrowers and
without limiting the obligation of the Borrowers to do so), ratably according to
their respective Commitment Percentages in effect on the date on which
indemnification is sought (or, if indemnification is sought after the date upon
which the Commitments shall have terminated and the Loans shall have been paid
in full, ratably in accordance with their Commitment Percentages immediately
prior to such date), from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind whatsoever which may at any time (including, without
limitation, at any time following the payment of the Loans) be imposed on,
incurred by or asserted against the Administrative Agent in any way relating to
or arising out of the Commitments, this Agreement, any of the other Loan
Documents or any documents contemplated by or referred to herein or therein or
the transactions contemplated hereby or thereby or any action taken or omitted
by the Administrative Agent under or in connection with any of the foregoing;
provided that no Lender shall be liable for the payment of any portion of such
- --------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Administrative
Agent's gross negligence or willful misconduct. The agreements in this Section
shall survive the payment of the Loans and all other amounts payable hereunder.
8.8 Administrative Agent in Its Individual Capacity. The Administrative
-----------------------------------------------
Agent and its Affiliates may make loans to, accept deposits from and generally
engage in any kind of business with any Fund or any Borrower as though the
Administrative Agent were not the Administrative Agent hereunder and under the
other Loan Documents. With respect to the Loans made by it, the Administrative
Agent shall have the same rights and powers under this Agreement and the other
Loan Documents as any Lender and may exercise the same as though it were not the
Administrative Agent, and the terms "Lender" and "Lenders" shall include the
Administrative Agent in its individual capacity.
8.9 Successor Administrative Agent. The Administrative Agent may resign as
------------------------------
Administrative Agent upon 10 Business Days' notice to the Lenders and the
Borrowers; provided that no such resignation shall be effective until a
successor Administrative Agent has been appointed hereunder. If the
Administrative Agent shall resign as Administrative Agent under this Agreement
and the other Loan Documents, then the Required Lenders shall appoint from among
the Lenders a successor agent for the Lenders (or, if the Required Lenders do
not appoint such successor agent within 30 days of the date of the resigning
Administrative Agents resignation notice, the resigning Administrative Agent
shall appoint from among the Lenders a successor agent) whereupon such successor
agent shall succeed to the rights, powers and duties of the Administrative
Agent, and the term "Administrative Agent" shall mean such successor
<PAGE>
agent effective upon such appointment and approval, and the former
Administrative Agent's rights, powers and duties as Administrative Agent shall
be terminated, without any other or further act or deed on the part of such
former Administrative Agent or any of the parties to this Agreement or any
holders of the Loans. After any retiring Administrative Agent's resignation as
Administrative Agent, the provisions of this Section 8 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
SECTION 9. MISCELLANEOUS
9.1 Amendments and Waivers. Neither this Agreement nor any other Loan
----------------------
Document, nor any terms hereof or thereof, may be amended, supplemented or
modified except in accordance with the provisions of this Section. The Required
Lenders may, or, with the written consent of the Required Lenders, the
Administrative Agent may, from time to time, (a) enter into with any Fund on
behalf of a Borrower written amendments, supplements or modifications hereto and
to the other Loan Documents for the purpose of adding any provisions to this
Agreement or the other Loan Documents or changing in any manner the rights of
the Lenders or of such Borrower hereunder or thereunder or (b) waive, on such
terms and conditions as the Required Lenders or the Administrative Agent, as the
case may be, may specify in such instrument, any of the requirements of this
Agreement or the other Loan Documents or any Default or Event of Default and its
consequences; provided, however, that no such waiver and no such amendment,
--------
supplement or modification shall (i) reduce the amount or extend the scheduled
date of maturity of any Loan or of any installment thereof, or reduce the stated
rate of any interest or fee payable hereunder or extend the scheduled date of
any payment thereof or increase the amount or extend the expiration date of any
Lender's Commitment, in each case without the consent of each Lender affected
thereby, or (ii) amend, modify or waive any provision of this subsection or
reduce the percentage specified in the definition of Required Lenders, or
consent to the assignment or transfer by any Borrower of any of its rights and
obligations under this Agreement and the other Loan Documents, in each case
without the written consent of all the Lenders, or (iii) amend or modify the
first two sentences of Section 2.9(a), in each case without the written consent
of all the Lenders, or (iv) amend or modify the requirement contained in the
first sentence of Section 2.16(a) that consent of all the Lenders is required
to approve the addition of Borrowers to this Agreement, in each case without the
written consent of all the Lenders, or (v) amend or modify Section 2.6(b)
without the written consent of all the lenders, or (vi) amend or modify Section
6.1 without the written consent of all the Lenders, or (vii) amend, modify or
waive any provision of Section 8 without the written consent of the then
Administrative Agent. Any such waiver and any such amendment, supplement or
modification shall be effective (i) only for such Borrower(s) on whose behalf
any Fund executed such document(s) and (ii) in the specific instance and for the
specific purpose for which given.
9.2 Notices. All notices, requests and demands to or upon the respective
-------
parties hereto to be effective shall be in writing (which writing may be in the
form of a facsimile transmission), and, unless otherwise expressly provided
herein, shall be deemed to have been duly given or made when delivered, or five
days after being deposited in the mail, postage prepaid, or, in the case of
facsimile notice, when received, addressed as follows in the case of any Fund,
any
<PAGE>
Borrower and the Administrative Agent, and as set forth in Schedule II in the
-----------
case of the other parties hereto, or to such other address as may be hereafter
notified by the respective parties hereto:
The Funds and
the Borrowers: United States Trust Company of Connecticut
225 High Ridge Road
East Tower
Stamford, Connecticut 06905
Attention: Brian F. Schmidt
Facsimile: (203) 973-0465
The Administrative
Agent:
The Chase Manhattan Bank
Loan and Agency Services Group
One Chase Manhattan Plaza
Eighth Floor
New York, New York 10081
Attention: Ms. Laura Rebecca
Facsimile: (212) 552-7490
and
The Chase Manhattan Bank
270 Park Avenue
Thirty-sixth Floor
New York, New York 10017
Attention: Ms. Roberta Whittington
Facsimile: (212) 270-0670
provided that any notice, request or demand to or upon the Administrative Agent
- --------
or the Lenders pursuant to Section 2.2, 2.4, 2.6, or 2.8 shall not be effective
until received.
9.3 No Waiver; Cumulative Remedies. No failure to exercise and no
------------------------------
delay in exercising, on the part of any party hereto, any right, remedy, power
or privilege hereunder or under the other Loan Documents shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges herein provided are cumulative and not exclusive
of any rights, remedies, powers and privileges provided by law.
9.4 Survival of Representations and Warranties. All representations
------------------------------------------
and warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans hereunder.
<PAGE>
9.5 Payment of Expenses and Taxes; Indemnification. (a) Each Borrower
----------------------------------------------
agrees severally (ratably, in accordance with its Allocation) (a) to reimburse
the Administrative Agent for its reasonable out-of-pocket costs and expenses
incurred in connection with the development, preparation and execution of, and
any amendment, supplement or modification to, this Agreement and the other Loan
Documents and any other documents prepared in connection herewith or therewith,
and the consummation and administration of the transactions contemplated hereby
and thereby, including, without limitation, the reasonable fees and
disbursements of counsel to the Administrative Agent; provided, however, that
the fees and disbursements of counsel to the Administrative Agent incurred for
the preparation of this Agreement and the other Loan Documents shall be limited
as previously agreed to by the Borrowers and the Administrative Agent, (b) to
reimburse each Lender and the Administrative Agent for all its costs and
expenses incurred in connection with the enforcement or preservation of any
rights under this Agreement with respect to such Borrower, the other Loan
Documents and any such other documents, including, without limitation, the fees
and disbursements of counsel to each Lender and of counsel to the Administrative
Agent, (c) to indemnify and hold each Lender and the Administrative Agent
harmless, from, any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, which may be payable or reasonably determined to
be payable in connection with the execution and delivery of, or consummation or
administration of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
this Agreement, the other Loan Documents and any such other documents with
respect to such Borrower, and (d) to indemnify and hold each Lender and the
Administrative Agent (and their respective affiliates, directors, officers,
agents and employees (collectively with the Administrative Agent and the
Lenders, the "Indemnified Parties")) harmless from and against any and all other
-------------------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, out-of-pocket expenses or disbursements of any kind or nature whatsoever
arising from or in connection with the actual or proposed use of proceeds or the
execution, delivery, enforcement, performance and administration of this
Agreement, the other Loan Documents and any such other documents (all the
foregoing in this clause (d), collectively, the "indemnified liabilities"),
-----------------------
provided, that such Borrower shall have no obligation hereunder to the
- --------
Administrative Agent or any Lender with respect to indemnified liabilities
arising from (i) the gross negligence or willful misconduct of the
Administrative Agent or any such Lender, (ii) disputes arising between or among
the Lenders or (iii) the failure of the Administrative Agent (and its
Affiliates) or of any Lender to comply with any Requirement of Law. The
agreements in this Section shall survive repayment of the Loans and all other
amounts payable hereunder.
(b) Notwithstanding any other provision in this Agreement to the
contrary, to the extent any obligation to reimburse or indemnify any Indemnified
Party arises pursuant to Section 9.5(a) is not attributable to any particular
Borrower, then such reimbursement or indemnification shall be made by each
Borrower (ratably, in accordance with its Allocation). To the extent any such
obligation to reimburse or indemnify any Indemnified Party is attributable to
one or more Borrowers, then such reimbursement or indemnification shall be made
ratably by each such Borrower any by no other Borrower.
9.6 Successors and Assigns; Participations and Assignments. (a) This
------------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the Funds, the
Borrowers, the Lenders, the
<PAGE>
Administrative Agent and their respective successors and assigns, except that
neither any Fund nor any Borrower may assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of each
Lender; provided that such consent of the Administrative Agent shall not be
--------
required if such assignment or transfer is made in furtherance of a merger,
consolidation or amalgamation which, by the express terms of Section 6.5, is
permitted to occur without the prior written consent of the Administrative
Agent.
(b) Any Lender may, in the ordinary course of its commercial banking
business and in accordance with applicable laws, at any time sell to one or more
Eligible Lenders ("Participants") participating interests in any Loan owing to
------------
such Lender, any Commitment of such Lender or any other interest of such Lender
hereunder and under the other Loan Documents. In the event of any such sale by
a Lender of a participating interest to a Participant, such Lender's obligations
under this Agreement to the other parties to this Agreement shall remain
unchanged, such Lender shall remain solely responsible for the performance
thereof, such Lender shall remain the holder of any such Loan for all purposes
under this Agreement and the other Loan Documents, and the Borrowers and the
Administrative Agent shall continue to deal solely and directly with such Lender
in connection with such Lender's rights and obligations under this Agreement and
the other Loan Documents. Any agreement pursuant to which any Lender may grant
such a participating interest shall provide that such Lender shall retain the
sole right and responsibility to enforce the obligations of the Borrowers
hereunder including the right to approve any amendment, modification or waiver
of any provision of this Agreement; provided that such participation agreement
--------
may provide that (i) such Lender will not agree to any modification, amendment
or waiver of this Agreement described in clause (i) of the proviso in Section
9.1 without the consent of the Participant and (ii) the Participant may obtain
voting rights limited to changes in respect of the principal amount, interest
rates, fees and term of the Loans. Each Borrower agrees that if amounts
outstanding under this Agreement are due or unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall, to the maximum extent permitted by applicable laws, be
deemed to have the right of setoff in respect of its participating interest in
amounts owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement, provided that, in purchasing such participating interest, such
--------
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 9.7(a) as fully as if it were a Lender
hereunder. Each Borrower also agrees that each Participant shall be entitled to
the benefits of Sections 2.10 and 2.11 with respect to its participation in the
Commitments and the Loans outstanding from time to time as if it was a Lender;
provided that, in the case of Section 2.11, such Participant shall have complied
- --------
with the requirements of said Section and provided, further, that no Participant
--------
shall be entitled to receive any greater amount pursuant to any such Section
than the transferor Lender would have been entitled to receive in respect of the
amount of the participation transferred by such transferor Lender to such
Participant had no such transfer occurred.
(c) Any Lender may, in the ordinary course of its commercial banking
business and in accordance with applicable law, at any time and from time to
time assign to any Lender or any affiliate thereof that is an Eligible Lender
or, with the consent of the Funds (unless an Event of Default has occurred and
is continuing), to an additional Eligible Lender (an "Assignee") all or any part
--------
of its rights and obligations under this Agreement and the other Loan
<PAGE>
Documents pursuant to an Assignment and Acceptance, substantially in the form of
Exhibit 9.6(c), executed by such Assignee, such assigning Lender and the
- --------------
Administrative Agent and delivered to the Administrative Agent for its
acceptance and recording in the Register; provided, however, that assignments to
-------- -------
entities other than Lenders or Affiliates thereof must be in amounts of at least
$5,000,000. Upon such execution, delivery, acceptance and recording, from and
after the effective date determined pursuant to such Assignment and Acceptance,
(x) the Assignee thereunder shall be a party hereto and, to the extent provided
in such Assignment and Acceptance, have the rights and obligations of a Lender
hereunder with a Commitment as set forth therein, and (y) the assigning Lender
thereunder shall, to the extent provided in such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such assigning Lender
shall cease to be a party hereto).
(d) The Administrative Agent, on behalf of the Borrowers, shall
maintain at the address of the Administrative Agent referred to in Section 9.2 a
copy of each Assignment and Acceptance delivered to it and a register (the
"Register") for the recordation of the names and addresses of the Lenders and
--------
the Commitment of, and principal amount of the Loans owing to, each Lender from
time to time. The entries in the Register shall be conclusive, in the absence
of manifest error, and the Borrowers, the Administrative Agent and the Lenders
may (and, in the case of any Loan or other obligation hereunder not evidenced by
a Note, shall) treat each Person whose name is recorded in the Register as the
owner of a Loan or other obligation hereunder as the owner thereof for all
purposes of this Agreement and the other Loan Documents, notwithstanding any
notice to the contrary. Any assignment of any Loan or other obligation
hereunder not evidenced by a Note shall be effective only upon appropriate
entries with respect thereto being made in the Register. The Register shall be
available for inspection by the Borrowers or any Lender at any reasonable time
and from time to time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee, the Administrative Agent (and (i) in the case
such Assignee is not then a Lender or an Affiliate of a Lender to the extent and
(ii) no Event of Default has occurred and is continuing, by the Funds) together
with payment by the assigning Lender or Assignee to the Administrative Agent of
a registration and processing fee of $3,000 (for which no Borrower shall have an
obligation to reimburse), the Administrative Agent shall (i) promptly accept
such Assignment and Acceptance and (ii) on the effective date determined
pursuant thereto record the information contained therein in the Register and
give notice of such acceptance and recordation to the Lenders, the Funds and the
Borrowers.
(f) Each Fund and each Borrower authorize each Lender to disclose to
any Participant or Assignee (each, a "Transferee") and any prospective
----------
Transferee any and all financial information in such Lender's possession
concerning any Fund or any Borrower and their Affiliates which has been
delivered to such Lender by or on behalf of the Funds or the Borrowers pursuant
to this Agreement or which has been delivered to such Lender by or on behalf of
the Funds or the Borrowers in connection with such Lender's credit evaluation of
the Borrowers and their Affiliates prior to becoming a party to this Agreement.
<PAGE>
(g) For avoidance of doubt, the parties to this Agreement acknowledge
that the provisions of this Section concerning assignments of Loans and Notes
relate only to absolute assignments and that such provisions do not prohibit
assignments creating security interests, including, without limitation, any
pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank
in accordance with applicable law.
9.7 Adjustments; Set-off. (a) If any Lender (a "Benefited Lender") shall
-------------------- ----------------
at any time receive any payment of all or part of its Loans, or interest
thereon, or receive any collateral in respect thereof (whether voluntarily or
involuntarily, by set-off, pursuant to events or proceedings of the nature
referred to in Section 7(e), or otherwise), in a greater proportion than any
such payment to or collateral received by any other Lender, if any, in respect
of such other Lender's Loans, or interest thereon, such Benefited Lender shall
purchase for cash from the other Lenders a participating interest in such
portion of each such other Lender's Loan, or shall provide such other Lenders
with the benefits of any such collateral, or the proceeds thereof, as shall be
necessary to cause such Benefited Lender to share the excess payment or benefits
of such collateral or proceeds ratably with each of the Lenders; provided,
--------
however, that if all or any portion of such excess payment or benefits is
- -------
thereafter recovered from such Benefited Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest.
(b) In addition to any rights and remedies of the Lenders provided by
law, each Lender shall have the right, without prior notice to any Borrower, any
such notice being expressly waived by each Borrower to the extent permitted by
applicable law, upon any amount becoming due and payable by a Borrower hereunder
(whether at the stated maturity, by acceleration or otherwise) to set-off and
appropriate and apply against such amount any and all deposits (general or
special, time or demand, provisional or final), in any currency, and any other
credits, indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by such Lender or any branch or agency thereof to or for the credit or the
account of such Borrower. Each Lender agrees promptly to notify such Borrower
and the Administrative Agent after any such set-off and application made by such
Lender, provided that the failure to give such notice shall not affect the
--------
validity of such set-off and application.
9.8 Counterparts. This Agreement may be executed by one or more of the
------------
parties to this Agreement on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. A set of the copies of this
Agreement signed by all the parties shall be lodged with the Funds and the
Administrative Agent.
9.9 Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
<PAGE>
9.10 Integration. This Agreement and the other Loan Documents represent
-----------
the agreement of each Fund, each Borrower, the Administrative Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to subject matter hereof not expressly set forth or referred to
herein or in the other Loan Documents.
9.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
-------------
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9.12 Submission To Jurisdiction; Waivers. Each Fund and each Borrower
-----------------------------------
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which
it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the Courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding may
be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to such Fund or
such Borrower at its address set forth in Section 9.2 or at such other
address of which the Administrative Agent shall have been notified pursuant
thereto;
(d) agrees that nothing herein shall affect the right to effect service
of process in any other manner permitted by law or shall limit the right to
sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section any special, exemplary, punitive or consequential damages.
9.13 Acknowledgments. Each Fund and each Borrower hereby acknowledges that:
---------------
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Administrative Agent nor any Lender has any fiduciary
relationship with or duty to such Fund or such Borrower arising out of or
in connection
<PAGE>
with this Agreement or any of the other Loan Documents, and the
relationship between Administrative Agent and Lenders, on one hand, and
each Fund and each Borrower, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among
the Lenders or among the Funds, the Borrowers and the Lenders.
9.14 WAIVERS OF JURY TRIAL. EACH FUND, EACH BORROWER, THE ADMINISTRATIVE
---------------------
AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY
IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
9.15 Non-Recourse. The Administrative Agent and the Lenders hereby agree
------------
for the benefit of UST and each and every shareholder, trustee, director and
officer of the Funds and the Borrowers and any successor, assignee, heir,
estate, executor, administrator or personal representative of any such
shareholder, trustee, director and officer (a "Non-Recourse Person") that: (a)
-------------------
no Non-Recourse person shall have any personal liability for any obligation of
any Fund or Borrower under this Agreement or any Loan Document or any other
instrument or document delivered pursuant hereto or thereto (except, in the case
of any shareholder, to the extent of its investment in the Borrower); (b) no
claim against any Non-Recourse Person may be made for any obligation of any Fund
or Borrower under this Agreement or any Loan Document or other instrument or
document delivered pursuant hereto or thereto, whether for payment of principal
of, or interest on, the Loans or for any fees, expense, or other amounts payable
by any Fund or Borrower hereunder or thereunder, or otherwise; and (c) the
obligations of each Borrower under this Agreement or any Loan Document or other
instrument or document delivered pursuant hereto or thereto are enforceable
solely against such Borrower and its properties and assets.
9.16 Waiver of Conflicts; Confidentiality. (a) Each Fund, on its own
------------------------------------
behalf or on behalf of the investment portfolios thereof which are Borrowers,
acknowledges that each of the Administrative Agent and each Lender and their
respective affiliates (collectively, the "Bank Parties") may be providing debt
------------
financing, equity capital or other services (including financial advisory
services) to other companies in respect of which such Funds and Borrowers may
have conflicting interests regarding the transactions described herein and
otherwise. Except as may otherwise be permitted herein, the Bank Parties will
not disclose Confidential Information obtained from such Funds and/or Borrowers
by virtue of the transactions contemplated by this Agreement or their other
relationships with such Funds and/or Borrowers in connection with the
performance by each of the Bank Parties of services for other companies, and
each of the Bank Parties will not disclose any such Confidential Information to
other companies. Such Funds and Borrowers also acknowledge that no Bank Party
has any obligation to use in connection with the transactions contemplated by
this Agreement, or to furnish to any Fund or Borrower, confidential information
obtained from other companies. The provisions of this Section 9.16(a) shall
survive the termination of this Agreement.
(b) For purposes of this Section, "Confidential Information" shall mean
------------------------
all
<PAGE>
information received from any of the Funds, the Borrowers or UST relating to any
of them or their business, other than any such information that is available to
the Administrative Agent or any Lender on a nonconfidential basis other than as
a result of a breach of this Agreement. Each of the Administrative Agent and
each Lender agrees to maintain the confidentiality of, and not to use the
Confidential Information, except that Confidential Information may be disclosed
(i) to its and its Affiliates' directors, officers and employees including
without limitation accountants, legal counsel and other advisors for purposes
relating to the transactions contemplated by this Agreement or for conducting
legitimate audits (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Confidential
Information and will have agreed to keep such Confidential Information
confidential), (ii) to the extent requested by any legal or regulatory authority
having or claiming jurisdiction over such Person, (iii) to the extent required
by applicable laws or regulations or by any subpoena or similar legal process,
(iv) to any other party to this Agreement for purposes relating to the
transactions contemplated hereby, (v) in connection with the exercise of any
remedies hereunder or any suit, action or proceeding relating to this Agreement
or the enforcement of rights hereunder, (vi) subject to an agreement containing
provisions substantially the same as those of this subsection, to any Assignee
or Participant or any prospective Assignee or Participant which executes such
agreement, or (vii) with the written consent of the Borrowers. Any Person
required to maintain the confidentiality of Confidential Information as provided
in this Section shall be considered to have complied with its obligation to do
so if such Person has used its reasonable best efforts to maintain the
confidentiality of such Information. The provisions of this Section 9.16(b)
shall survive the termination of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first written above.
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By: /s/ Gail Weiss
----------------
Name: Gail Weiss
Title: Vice President
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
EXCELSIOR FUNDS, INC., on behalf of
Money Fund
Government Money Fund
Treasury Money Fund
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
Blended Equity Fund
Energy and Natural Resources Fund
Value and Restructuring Fund
Small Cap Fund
International Fund
Emerging Markets Fund
Pacific/Asia Fund
Pan European Fund
Latin America Fund
Large Cap Growth Fund
Real Estate Fund
By: /s/ Frederick S. Wonham
-----------------------
Name: Frederick S. Wonham
Title: President
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
EXCELSIOR TAX-EXEMPT FUNDS, INC., on behalf of
Tax-Exempt Money Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
New York Intermediate-Term Tax-Exempt Fund
California Tax-Exempt Income Fund
New York State Tax-Exempt Money Fund
By: /s/ Frederick S. Wonham
-----------------------
Name: Frederick S. Wonham
Title: President
EXCELSIOR INSTITUTIONAL TRUST, on behalf of
Equity Fund
Income Fund
Total Return Bond Fund
International Equity Fund
Optimum Growth Fund
Value Equity Fund
By: /s/ Frederick S. Wonham
-----------------------
Name: Frederick S. Wonham
Title: President
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
MELLON BANK, N.A.
By: /s/ John R. Cooper
-------------------
Name: John R. Cooper
Title: Vice President
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, New York Branch
By: /s/ Lillian T. Lum
------------------
Name: Lilliam T. Lum
Title: Director
By: /s/ Kenneth R. Crespo
---------------------
Name: Kenneth R. Crespo
Title: Vice President
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
THE BANK OF NOVA SCOTIA
By: /s/ James R. Trimble
--------------------
Name: James R. Trimble
Title: Managing Director
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
THE BANK OF NEW YORK
By: /s/ Robert F. Darmanin
----------------------
Name: Robert F. Darmanin
Title: Vice President
<PAGE>
1999 EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
AND EXCELSIOR INSTITUTIONAL TRUST
CREDIT AGREEMENT SIGNATURE PAGE
DEN DANSKE BANK
By: /s/ George Neoffercas
---------------------
Name: George Neoffercas
Title: Assistant Vice President
By: /s/ John A. O'Neill
-------------------
Name: John A. O'Neill
Title: Vice President
<PAGE>
SCHEDULE I
----------
BORROWERS & ALLOCATIONS
-----------------------
BORROWER PRO RATA ALLOCATION
- -------- -------------------
I. Excelsior Funds, Inc.
Money Fund 12.36%
Government Money Fund 10.09%
Treasury Money Fund 5.28%
Short-Term Government Securities Fund 0.76%
Intermediate-Term Managed Income Fund 1.77%
Managed Income Fund 2.65%
Blended Equity Fund 9.70%
Energy and Natural Resources 0.68%
Value and Restructuring Fund 8.73%
Small Cap Fund 0.60%
International Fund 2.84%
Emerging Markets Fund 0.10%
Pacific/Asia Fund 0.71%
Pan European Fund 1.59%
Latin America Fund 0.17%
Large Cap Growth Fund 3.50%
Real Estate Fund 0.44%
<PAGE>
II. Excelsior Tax-Exempt Funds, Inc.
Tax-Exempt Money Fund 16.23%
Short-Term Tax-Exempt Securities Fund 0.48%
Intermediate-Term Tax-Exempt Fund 3.81%
Long-Term Tax-Exempt Fund 2.05%
New York Intermediate-Term Tax-Exempt Fund 1.86%
California Tax-Exempt Income Fund 0.76%
New York Tax-Exempt Money Fund 3.53%
III. Excelsior Institutional Trust
Equity Fund 2.30%
Income Fund 0.93%
Total Return Bond Fund 3.18%
International Equity Fund 1.19%
Optimum Growth Fund 1.16%
Value Equity Fund 0.55%
<PAGE>
SCHEDULE II
-----------
COMMITMENTS, ADDRESSES, ETC.
----------------------------
Amount of
Name and Address of Lender Commitment
- -------------------------- ----------
THE CHASE MANHATTAN BANK $45,000,000
270 Park Avenue
New York, New York 10017
Attention: Christine Herrick
Telephone: (212) 270-9747
Fax: (212) 270-1789
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, New York Branch $45,000,000
1211 Avenue of the Americas
New York, NY 10036
Attention: Jay S. White
Telephone: (212) 852-6315
Fax: (212) 852-6156
THE BANK OF NOVA SCOTIA $45,000,000
One Liberty Plaza
New York, NY 10006
Attention: John Morale
Telephone: (212) 225-5062
Fax: (212) 225-5286
MELLON BANK, N.A. $45,000,000
One Mellon Bank Center, Room 4425
Pittsburgh, PA 15258
Attention: Marla De Yulis
Telephone: (412) 236-9141
Fax: (412) 234-9047
DEN DANSKE BANK $45,000,000
280 Park Avenue
New York, NY 10017
Attention: George Neofitidis
Telephone: (212) 984-8439
Fax: (212) 599-2493
<PAGE>
THE BANK OF NEW YORK $25,000,000
One Wall Street
New York, NY 10286
Attention: William Stanton
Telephone: (212) 635-6828
Fax: (212) 635-6348
<PAGE>
SCHEDULE III
------------
INVESTMENT MANAGEMENT AGREEMENTS
--------------------------------
<PAGE>
SCHEDULE IV
-----------
CUSTODIAN AGREEMENTS
--------------------
<PAGE>
SCHEDULE V
----------
DISTRIBUTION AGREEMENTS
-----------------------
<PAGE>
SCHEDULE VI
-----------
SHAREHOLDER SERVICES AGREEMENTS
-------------------------------
<PAGE>
EXHIBIT 2.5(e)
--------------
NON-NEGOTIABLE
FORM OF NOTE
$____________________________________ New York, New York
_______, ________,
FOR VALUE RECEIVED, the undersigned Fund, on behalf of the Series
designated below (the "Borrower"), hereby promises to pay to the order of
--------
__________________________, at the office of The Chase Manhattan Bank, as
administrative agent for the Lenders (the "Lenders") under the Credit Agreement,
-------
as hereinafter defined (in such capacity, the "Administrative Agent"), located
--------------------
at 270 Park Avenue, New York, New York 10017, in lawful money of the United
States of America and in immediately available funds, on the Maturity Date the
principal amount of (a) __________________ DOLLARS ($__________________), or, if
less (b) the aggregate unpaid principal amount of all Loans made by the Lenders
to the Borrower pursuant to subsection 2.1 of the Credit Agreement, as
hereinafter defined.
The Fund, on behalf of the Borrower, further agrees to pay interest in like
money at such office on the unpaid principal amount hereof from time to time
outstanding from the Closing Date at the applicable rates per annum set forth in
subsection 2.7 of the Credit Agreement referred to below until any such amount
shall become due and payable (whether at the stated maturity, by acceleration or
otherwise), and thereafter on such overdue amount at the rate per annum set
forth in subsection 2.7(c) of the Credit Agreement until paid in full (both
before and after judgment). Interest shall be payable in arrears on each
applicable Interest Payment Date, commencing on the first such date to occur
after the date hereof and terminating upon payment (including prepayment) in
full of the unpaid principal amount hereof; provided that interest accruing on
--------
any overdue amount shall be payable on demand.
Anything in this Note to the contrary notwithstanding, the Borrower shall
be liable hereunder only for Loans borrowed by it under the Credit Agreement and
shall not be liable for the borrowings of any other Borrower under the Credit
Agreement. The sole source of repayment of the principal of and interest on each
Loan hereunder and the other obligations with respect thereto made with respect
to the Borrower shall be the revenues and assets of such Borrower, and not the
revenue and assets of the Fund (as defined below) of which such Borrower is a
series.
As set forth in Sections 2.5(f) and 9.15 of the Credit Agreement, no Non-
Recourse person defined therein shall have any personal liability under or by
reason of this Note, the Credit Agreement or the Loan Documents, and all
obligations of the Borrower hereunder and thereunder are enforceable solely
against the Borrower and the Borrower's assets and properties.
The holder of this Note is authorized to endorse on the schedule annexed
hereto and made a part hereof the date and amount of each Loan made to the
Borrower pursuant to the Credit Agreement and the date and amount of each
payment or prepayment of principal thereof. Each
<PAGE>
such endorsement shall constitute prima facie evidence of the accuracy of the
----- -----
information endorsed. The failure to make any such endorsement shall not affect
the obligations of the Borrower in respect of such Loan.
This Note (a) is one of the Notes referred to in the Credit Agreement,
dated as of December 27, 1999 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"), among the each of the open-end
----------------
registered investment companies a party thereto (each, a "Fund"), on behalf of
one or more series or portfolios of such Fund, the Lenders and the
Administrative Agent, (b) is subject to the provisions of the Credit Agreement
and (c) is subject to optional and mandatory prepayment in whole or in part as
provided in the Credit Agreement.
<PAGE>
Upon the occurrence of one or more Events of Default, all amounts then
remaining unpaid on this Note shall become, or may be declared to be,
immediately due and payable, all as provided in the Credit Agreement.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit Agreement and
used herein shall have the meanings given to them in the Credit Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK.
[NAME OF FUND] on behalf
of [NAME OF BORROWER]
By:_________________
Name:
Title:
<PAGE>
Schedule A to Note
------------------
LOANS AND REPAYMENTS OF LOANS
================================================================================
AMOUNT OF UNPAID
PRINCIPAL PRINCIPAL
AMOUNT OF OF LOANS BALANCE OF NOTATION
DATE LOANS REPAID LOANS MADE BY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
EXHIBIT 2.16(a)
---------------
FORM FOR DESIGNATION OF NEW BORROWERS
_________ __, ____
The Chase Manhattan Bank, as Administrative Agent
[List Lenders]
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as of December 27,
1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") by and among each registered open-end management investment
----------------
company party thereto (each a "Fund") on behalf of the series or portfolios
----
thereof, which series and portfolios are listed on Schedule I (each such series
----------
or portfolio, a "Borrower" and, collectively, the "Borrowers"), (ii) the several
-------- ---------
banks and other financial institutions from time to time parties to this
Agreement (the "Lenders") and (iii) THE CHASE MANHATTAN BANK, as Administrative
-------
Agent. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Credit Agreement.
[NAME OF FUND](the "Fund") on behalf of [NAME OF NEW BORROWER] (the
"Series") hereby requests pursuant to Section 2.16 of the Credit Agreement that
------
the Series be admitted as an additional Borrower under the Credit Agreement.
Furthermore, the Fund on behalf of the New Borrower requests that Schedule I to
----------
the Credit Agreement be replaced with the form of Schedule I attached hereto.
----------
The Fund, on behalf of the New Borrower, hereby represents and warrants to
the Administrative Agent and each Lender that as of the date hereof and after
giving effect to the admission of the New Borrower as an additional Borrower
under the Credit Agreement: (i) the representations and warranties set forth in
Section 3 of the Credit Agreement are true and correct with respect to the New
Borrower; (ii) the New Borrower is in compliance in all material respects with
all the terms and provisions set forth in the Credit Agreement on its part to be
observed or performed as of the date hereof and after giving effect to the
admission; (iii) no Default or Event of Default with respect to the New
Borrower, nor any event which with the giving of notice or the expiration of any
applicable grace period or both would constitute such a Default or Event of
Default with respect to the New Borrower has occurred and is continuing.
The New Borrower agrees to be bound by the terms and conditions of the
Credit Agreement in all respects as a Borrower thereunder and hereby assumes all
of the obligations of a Borrower thereunder.
The New Borrower hereby gives the Administrative Agent and each Lender
notice that a copy of the relevant Trust's Agreement and Declaration of Trust
(including any amendments
<PAGE>
thereto) is on file with the Secretary of State of the Commonwealth of
Massachusetts. The Administrative Agent and each Lender hereby acknowledge that
this designation of a New Borrower, the Credit Agreement and the Loan Documents,
and any other document related hereto or thereto, are each executed by the
trustees of the relevant Trust as trustees, and not individually, and that the
obligations of or arising out of this designation, the Credit Agreement and the
Loan Documents, and any other document related hereto or thereto, are not
binding upon any of the trustees or officers or shareholders individually, but
are binding only upon the assets and property of the relevant Borrower
(including the New Borrower).
Please indicate your assent to the admission of each Series as an
additional Borrower under the Credit Agreement and the replacement of Schedule I
----------
to the Credit Agreement by signing below where indicated.
[FUND on behalf of New
Borrower]
By:________________________________
Name:
Title:
AGREED AND ACCEPTED:
THE CHASE MANHATTAN BANK
as Administrative Agent and as a Lender
By:____________________________
Name:
Title:
[Signature block for each Lender follows]
<PAGE>
EXHIBIT 9.6 (c)
---------------
FORM OF ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement dated as of December 27,
1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), by and among each registered open-end management investment
----------------
company parties thereto (each a "Fund" and collectively the "Funds") on behalf
-----
of the series or portfolios of such Fund, which series and portfolios are listed
on Schedule I thereto (each such series or portfolio, a "Borrower" and,
---------- --------
collectively, the "Borrowers"), (ii) the several banks and other financial
---------
institutions from time to time parties to this Agreement (the "Lenders") and
-------
(iii) THE CHASE MANHATTAN BANK, a New York banking corporation, as
administrative agent for the Lenders hereunder (in such capacity, the
"Administrative Agent"). Unless otherwise defined herein, terms defined in the
- ---------------------
Credit Agreement and used herein shall have the meanings ascribed to them in the
Credit Agreement.
_________ (the "Assignee") and __________ (the "Assignor") agree as
follows:
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date (as defined below) the interest described in Schedule 1 hereto
(the "Assigned Interest") in and to the Assignor's rights and obligations under
the Credit Agreement.
2. The Assignor (a) makes no representation or warranty and assumes no
responsibility with respect to or in any connection with the Credit Agreement or
with respect to the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Credit Agreement, any other Loan Document or any
other instrument or document furnished pursuant thereto, other than that the
Assignor has not created any adverse claim upon the interest being assigned by
it hereunder and that such interest is free and clear of any such adverse claim;
(b) makes no representation or warranty and assumes no responsibility with
respect to the financial condition of any Borrower, or any other obligor or the
performance or observance by any Borrower, or any other obligor of any of their
respective obligations under the Credit Agreement or any other Loan Document or
any other instrument or document furnished pursuant hereto or thereto; and (c)
attaches any Notes held by it evidencing the Assigned Interest and (i) requests
that the Administrative Agent, upon request by the Assignee, exchange the
attached Notes for a new Note or Notes payable to the Assignee and (ii) if the
Assignor has retained any interest in the Aggregate Commitment, requests that
the Administrative Agent exchange the attached Notes for a new Note or Notes
payable to the Assignor, in each case in amounts which reflect the assignment
being made hereby (and after giving effect to any other assignments which have
become effective on the Effective Date).
3. The Assignee (a) represents and warrants that it is legally authorized
to enter into this Assignment and Acceptance; (b) confirms that it has received
a copy of the Credit Agreement, together with copies of such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance; (c) agrees that it will,
independently and without reliance upon the Assignor, the Administrative Agent
or any other
<PAGE>
Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under the Credit Agreement, the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto; (d) appoints and
authorizes the Administrative Agent to take such action as agent on its behalf
and to exercise such powers and discretion under the Credit Agreement, the other
Loan Documents or any other instrument or document furnished pursuant hereto or
thereto as are delegated to the Administrative Agent by the terms thereof,
together with such powers as are incidental thereto; and (e) agrees that it will
perform in accordance with its terms all the obligations which by the terms of
the Credit Agreement are required to be performed by it as a Lender including,
if it is organized under the laws of a jurisdiction outside the United States,
its obligation pursuant to subsection 2.11(b) of the Credit Agreement.
4. The effective date of this Assignment and Acceptance shall be
________________ (the "Effective Date"). Following the execution of this
--------------
Assignment and Acceptance, it will be delivered to the Administrative Agent for
acceptance by it and recording by the Administrative Agent pursuant to the
Credit Agreement, effective as of the Effective Date (which shall not, unless
otherwise agreed to by the Administrative Agent, be earlier than five Business
Days after the date of such acceptance and recording by the Administrative
Agent).
5. Upon such acceptance and recording, from and after the Effective Date,
the Administrative Agent shall make all payments in respect of the Assigned
Interest (including payments of principal, interest, fees and other amounts) to
the Assignee whether such amounts have accrued prior to the Effective Date or
accrue subsequent to the Effective Date. The Assignor and the Assignee shall
make all appropriate adjustments in payments by the Administrative Agent for
periods prior to the Effective Date or with respect to the making of this
assignment directly between themselves.
6. From and after the Effective Date, (a) the Assignee shall be a party
to the Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder and under the
other Loan Documents and shall be bound by the provisions thereof and (b) the
Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement.
7. This Assignment and Acceptance shall be governed by and construed in
accordance with the substantive laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed as of the date first above written by their respective
duly authorized officers on Schedule 1 hereto.
<PAGE>
SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE
RELATING TO THE CREDIT AGREEMENT
DATED AS OF DECEMBER 27, 1999
Name of Assignor:
Name of Assignee:
Effective Date of Assignment:
Principal Commitment Percentage
Amount Assigned Assigned/1/
$__________. ____________ %
[NAME OF ASSIGNEE] [NAME OF ASSIGNOR]
By:__________________ By:____________________
Name: Name:
Title: Title:
Accepted and Consented To:
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:_________________
Name:
Title:
_________________________
Calculate the Commitment Percentage that is assigned to at least 15 decimal
places and show as a percentage of the aggregate commitments of all Lenders.
<PAGE>
EXHIBIT (h) (6)
WAIVER AND REIMBURSEMENT AGREEMENT
Agreement ("Agreement") dated as of the __ day of _________, ______ by
and among Excelsior Tax-Exempt Funds, Inc., a Maryland corporation and a
registered investment company under the Investment Company Act of 1940, as
amended ("Excelsior Tax-Exempt"), and United States Trust Company of New York, a
state-chartered bank and trust company ("United States Trust"), U.S. Trust
Company, a Connecticut state bank and trust company ("U.S. Trust" and together
with United States Trust, the "Advisers") and U.S. Trust Company, N.A., a
national bank ("U.S. Trust NA").
BACKGROUND
United States Trust and U.S. Trust serve as investment advisers to
each portfolio of Excelsior Tax-Exempt pursuant to an Investment Advisory
Agreement among the Advisers and Excelsior Tax-Exempt dated as of
____________________.
U.S. Trust NA serves as sub-adviser to the California Tax-Exempt
Income Fund.
The parties to this Agreement wish to provide for an undertaking by
the Adviser to limit investment advisory or other fees or reimburse expenses of
each of the portfolios of Excelsior Tax-Exempt in order to improve the
performance of each such portfolio.
AGREEMENT
THEREFORE, in consideration of the foregoing, the parties intending to
be legally bound, hereby agree as follows:
The Advisers shall, from the date of this Agreement until March 31,
2001, waive all or a portion of their investment advisory fees and/or reimburse
expenses in amounts necessary so that after such waivers and/or reimbursements,
the maximum total operating expense ratios of the portfolios of Excelsior Tax-
Exempt shall not exceed the amounts set forth on Exhibit A hereto.
[The Sub-Adviser shall, from the date of this Agreement until March
31, 2001, waive all or a portion of its investment sub-advisory fee and/or
reimburse expenses in amounts necessary so that after such waiver and/or
reimbursement, the maximum total operating expense ratio of the California Tax-
Exempt Income Fund shall not exceed the amounts set forth on Exhibit B hereto.]
The Advisers and Sub-Adviser acknowledges and agrees that they shall
not be entitled to collect on or make a claim for waived fees or reimbursed
expenses at any time in the future.
<PAGE>
This Agreement shall be governed by and construed under the laws of
the State of New York, without regard to its conflict of law provisions. This
Agreement may be signed in counterparts.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
EXCELSIOR TAX-EXEMPT UNITED STATES TRUST COMPANY
FUNDS, INC. OF NEW YORK
By:______________________________ By:_____________________________________
Name: Name:
Title: Title:
U.S. TRUST COMPANY
By:____________________________________
Name:
Title:
U.S. TRUST COMPANY, N.A.
By:____________________________________
Name:
Title:
-3-
<PAGE>
Exhibit A
Excelsior Tax-Exempt Funds, Inc.
--------------------------------
Name of Portfolio Total Annual Operating Expenses
- ----------------- -------------------------------
Tax-Exempt Money Fund
New York Tax-Exempt Money Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
California Tax-Exempt Income Fund
New York Intermediate-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
-4-
<PAGE>
Exhibit B
Excelsior Tax-Exempt Funds, Inc.
--------------------------------
Name of Portfolio Total Annual Operating Expenses
- ----------------- -------------------------------
California Tax-Exempt Income Fund
-5-
<PAGE>
Exhibit (j)(1)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statement of Additional Information that is
included in Post-Effective Amendment No. 28 and Amendment No. 30 to the
Registration Statement (Nos. 2-93068; 811-4101) on Form N-1A of Excelsior Tax-
Exempt Funds, Inc. under the Securities Act of 1933 and the Investment Company
Act of 1940, respectively. This consent does not constitute a consent under
Section 7 of the Securities Act of 1933, and in consenting to the use of our
name and the reference to our Firm under such caption we have not certified any
part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under Section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
May 26, 2000
<PAGE>
EXHIBIT (p)(1)
EXCELSIOR TAX-EXEMPT FUNDS, INC.
(the "Company")
CODE OF ETHICS
--------------
I. Legal Requirement.
-----------------
Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the
"1940 Act"), makes it unlawful for any officer or director of the Company in
connection with the purchase or sale by such person of a security "held or to be
acquired" by the Company:
1. To employ any device, scheme or artifice to defraud the Company;
2. To make to the Company any untrue statement of a material fact or
omit to state to the Company a material fact necessary in order
to make the statements made, in light of the circumstances under
which they are made, not misleading;
3. To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon the Company;
or
4. To engage in any manipulative practice with respect to the
Company's investment portfolios.
II. Purpose of the Code of Ethics.
-----------------------------
The Company expects that its officers and directors will conduct their
personal investment activities in accordance with (1) the duty at all times to
place the interests of the Company's shareholders first, (2) the requirement
that all personal securities transactions be conducted consistent with this Code
of Ethics and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of an individual's position of trust and responsibility,
and (3) the fundamental standard that investment company personnel should not
take inappropriate advantage of their positions.
In view of the foregoing, the provisions of Section 17(j) of the 1940 Act,
the Securities and Exchange Commission's 1940 Act Release No. 23958 "Personal
Investment Activities of Investment Company Personnel" (August 24, 1999), the
"Report of the Advisory Group on Personal Investing" issued by the Investment
Company Institute on May 9, 1994 and the Securities and Exchange Commission's
September 1994 Report on "Personal Investment
<PAGE>
Activities of Investment Company Personnel," the Company has determined to adopt
this Code of Ethics on behalf of the Company to specify a code of conduct for
certain types of personal securities transactions which might involve conflicts
of interest or an appearance of impropriety, and to establish reporting
requirements and enforcement procedures.
III. Definitions.
-----------
A. An "Access Person" means: (1) each director or officer of the Company;
(2) each employee (if any) of the Company (or of any company in a
control relationship to the Company) who, in connection with his or
her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by the
Company or whose functions relate to the making of any recommendations
with respect to such purchases or sales; and (3) any natural person in
a control relationship to the Company who obtains information
concerning recommendations made to the Company with regard to the
purchase or sale of a security.
For purposes of this Code of Ethics, an "Access Person" does not
include any person who is subject to the securities transaction pre-
clearance requirements and securities transaction reporting
requirements of the Codes of Ethics adopted by the Company's
investment adviser or principal underwriter in compliance with Rule
17j-1 of the 1940 Act and Rule 204-2(a)(12) of the Investment Advisers
Act of 1940 or Section 15(f) of the Securities Exchange Act of 1934,
as applicable.
B. "Restricted Director" or "Restricted Officer" means each director or
officer of the Company who is not also a director, officer, partner,
employee or controlling person of the Company's investment adviser,
sub-adviser, administrator, custodian, transfer agent or distributor.
C. An Access Person's "immediate family" includes a spouse, minor
children and adults living in the same household as the Access Person.
D. A security is "held or to be acquired" if within the most recent 15
days it (1) is or has been held by the Company, or (2) is being or has
been considered by the Company, its investment adviser or sub-adviser
for purchase by the Company. A purchase or sale includes the writing
of an option to purchase or sell and any security that is exchangeable
for, or convertible into, any security that is held or to be acquired
by a Fund.
E. An "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration,
2
<PAGE>
was not subject to the reporting requirements of Sections 13 or 15(d)
of the Securities Exchange Act of 1934.
F. "Investment Personnel" of the Company means:
(i) Any employee of the Company (or of any company in a control
relationship to the Company) who, in connection with his or her
regular functions or duties, makes or participates in making
recommendations regarding the purchase or sale of securities by
the Company.
(ii) Any natural person who controls the Company and who obtains
information concerning recommendations made to the Company
regarding the purchase or sale of securities by the Company.
G. A "Limited Offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2)
or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under
the Securities Act of 1933.
H. "Exempt Security" means:
1. Direct obligations of the Government of the United States;
banker's acceptances; bank certificates of deposit; commercial
paper; high quality short-term debt instruments, including
repurchase agreements; and shares of registered open-end
investment companies.
2. Securities purchased or sold in any account over which the
Access Person has no direct or indirect influence or control.
3. Securities purchased or sold in a transaction which is non-
volitional on the part of either the Access Person or the
Company.
4. Securities acquired as a part of an automatic dividend
reinvestment plan.
5. Securities acquired upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
--- ----
the extent such rights were acquired from such issuer, and
sales of such rights so acquired.
3
<PAGE>
6. Securities which the Company's investment portfolios are not
permitted to purchase under the investment objectives and
policies set forth in the Company's then current prospectus(es)
under the Securities Act of 1933 or the Company's registration
statement on Form N-1A.
IV. Policies of the Company Regarding Personal Securities Transactions.
------------------------------------------------------------------
A. General Policy.
--------------
No Access Person of the Company shall engage in any act, practice or
course of business that would violate the provisions of Rule 17j-1(b)
set forth above, or in connection with any personal investment
activity, engage in conduct inconsistent with this Code of Ethics.
B. Specific Policies.
-----------------
1. Restrictions on Personal Securities Transactions By Access
----------------------------------------------------------
Persons Other Than Restricted Directors and Restricted Officers.
----------------------------------------------------------------
a. No Access Person who is not a Restricted Director or
Restricted Officer may buy or sell securities other than
Exempt Securities for his or her personal portfolio or the
portfolio of a member of his or her immediate family without
obtaining oral authorization from the Compliance Officer of
the Company's administrator prior to effecting such security
-----
transaction.
A written authorization for such security transaction will
be provided by the administrator's Compliance Officer to the
person receiving the authorization (if granted).
Note: If an Access Person has questions as to whether
purchasing or selling a security for his or her personal
portfolio or the portfolio of a member of his or her
immediate family requires prior oral authorization, the
Access Person should consult the administrator's Compliance
Officer for clearance or denial of clearance to trade prior
-----
to effecting any securities transactions.
b. Pre-clearance approval under paragraph (a) will expire at
the close of business on the trading day after the date on
which oral authorization is received, and the Access Person
is required to
4
<PAGE>
renew clearance for the transaction if the trade is not
completed before the authority expires.
c. No clearance will be given to an Access Person other than a
Restricted Director or Restricted Officer to purchase or
sell any security (1) on a day when any portfolio of the
Company has a pending "buy" or "sell" order in that same
security until that order is executed or withdrawn or (2)
when the Compliance Officer has been advised by the
investment adviser or sub-adviser that the same security is
being considered for purchase or sale for any portfolio of
the Company.
d. The pre-clearance requirement contained in paragraph
IV.B.1.a, above, shall apply to all purchases of a
beneficial interest in any security, through an Initial
Public Offering or a Limited Offering by any Access Person
who is also classified as Investment Personnel. A record of
any decision and the reason supporting such decision to
approve the acquisition by Investment Personnel of Initial
Public Offerings or Limited Offerings shall be made.
2. Restrictions on Personal Securities Transactions by Restricted
--------------------------------------------------------------
Directors and Restricted Officers.
----------------------------------
The Company recognizes that a Restricted Director and a
Restricted Officer do not have on-going, day-to-day involvement
with the operations of the Company. In addition, it has been the
practice of the Company to give information about securities
purchased or sold by the Company or considered for purchase and
sale by the Company to Restricted Directors and Restricted
Officers in materials circulated more than 15 days after such
securities are purchased or sold by the Company or are considered
for purchase or sale by the Company. Accordingly, the Company
believes that less stringent controls are appropriate for
Restricted Directors and Restricted Officers, as follows:
a. The securities pre-clearance requirement contained in
paragraph IV.B.1.a. above shall only apply to a Restricted
Director or Restricted Officer if he or she knew or, in the
ordinary course of fulfilling his or her official duties as
a director or officer, should have known, that during the
fifteen day period before the transaction in a security
(other than an Exempt Security) or at the time of the
transaction that the security purchased or sold by
him or her other than an Exempt Security was also purchased
or sold by
5
<PAGE>
the Company or considered for the purchase or sale by the
Company.
b. If the pre-clearance provisions of the preceding paragraph
apply, no clearance will be given to a Restricted Director
or Restricted Officer to purchase or sell any security (1)
on a day when any portfolio of the Company has a pending
"buy" or "sell" order in that same security until that order
is executed or withdrawn or (2) when the Compliance Officer
has been advised by the investment adviser or sub-adviser
that the same security is being considered for purchase or
sale for any portfolio of the Company.
V. Procedures.
----------
A. In order to provide the Company with information to enable it to
determine with reasonable assurance whether the provisions of this
Code are being observed by its Access Persons:
1. Each Access Person of the Company, other than a director who is
not an "interested person" of the Company (as defined in the 1940
Act), shall submit to the administrator an Initial Holdings
Report in the form attached hereto as Exhibit A that lists all
securities other than Exempt Securities beneficially owned1 by
the Access Person. This report must be submitted within 10 days
of becoming an Access Person (or for persons already designated
as Access Persons within 10 days of the adoption of this Code of
Ethics), and must include the title of each security, the number
of shares held, and the principal amount of the security. The
Report must also include a list of any securities accounts
maintained with any broker, dealer or bank.
- ----------------------------
/1/ You will be treated as the "beneficial owner" of a security under this
policy only if you have a direct or indirect pecuniary interest in the security.
(a) A direct pecuniary interest is the opportunity, directly or
indirectly, to profit, or to share the profit, from the transaction.
(b) An indirect pecuniary interest is any nondirect financial interest,
but is specifically defined in the rules to include securities held by
members of your immediate family sharing the same household;
securities held by a partnership of which you are a general partner;
securities held by a trust of which you are the settlor if you can
revoke the trust without the consent of another person, or a
(continued...)
6
<PAGE>
2. Each Access Person of the Company other than a director who is
not an "interested person" of the Company (as defined in the 1940
Act) shall also submit to the administrator an Annual Holdings
Report attached hereto as Exhibit A no later than 30 days after
the end of the calendar year. The Annual Holdings Report must
list all securities other than Exempt Securities beneficially
owned by the Access Person, the title of each security, the
number of shares held, and the principal amount of the security,
as well as a list of any securities accounts maintained with any
broker, dealer or banks.
3. Each Access Person of the Company other than a Restricted
Director or Restricted Officer shall direct his or her broker to
supply to the Compliance Officer of the Company's administrator,
on a timely basis, duplicate copies of confirmations of all
securities transactions in which the person has, or by reason of
such transaction acquires any direct or indirect beneficial
ownership and copies of periodic statements for all securities
accounts.
4. Each Access Person of the Company, other than a director who is
not an "interested person" (as defined in the 1940 Act), shall
submit reports in the form attached hereto as Exhibit B to the
Company's administrator, showing all transactions in securities
other than Exempt Securities in which the person has, or by
reason of such transaction acquires, any direct or indirect
beneficial ownership, as well as all accounts established with
brokers, dealers or banks during the quarter in which any
securities were held for the direct or indirect beneficial
interest of the Access Person.2 Such reports shall be filed no
later than 10 days after the end of each calendar quarter. An
Access Person of the Company need not make a quarterly
transaction report under this paragraph if all of the information
required by this paragraph 4 is contained in the brokerage
confirmations or account statements required to be submitted
under paragraph 3.
- -------------------------
(..continued)
beneficiary if you have or share investment control with the trustee;
and equity securities which may be acquired upon exercise of an option
or other right, or through conversion.
For interpretive guidance on this test, you should consult counsel.
/2/ See footnote 1 above.
7
<PAGE>
5. Each director who is not an "interested person" of the Company
need not make an initial or annual holdings report but shall
submit the same quarterly report as required under paragraph 4 to
the Company's administrator, but only for a transaction in a
security other than an Exempt Security where he or she knew at
the time of the transaction or, in the ordinary course of
fulfilling his or her official duties as a director or officer,
should have known that during the 15-day period immediately
preceding or after the date of the transaction, such security is
or was purchased or sold, or considered for purchase or sale, by
the Company.
6. The Company's administrator shall notify each Access Person of
the Company who may be subject to the pre-clearance requirement
or required to make reports pursuant to this Code of Ethics that
such person is subject to the pre-clearance or reporting
requirements and shall deliver a copy of this Code of Ethics to
each such person.
7. The Company's administrator shall review the initial holdings
reports, annual holdings reports, and quarterly transaction
reports received, and as appropriate compare the reports with the
pre-clearance authorization received, and report to the Company's
Board of Directors:
a. with respect to any transaction that appears to evidence a
possible violation of this Code of Ethics; and
b. apparent violations of the reporting requirement stated
herein.
8. The Board shall consider reports made to it hereunder and shall
determine whether the policies established in Sections IV and V
of this Code of Ethics have been violated, and what sanctions, if
any, should be imposed on the violator, including but not limited
to a letter of censure, suspension or termination of the
employment of the violator, or the unwinding of the transaction
and disgorgement of any profits to the Company. The Board shall
review the operation of this Code of Ethics at least once a year.
9. The Company's investment adviser, sub-advisers and principal
underwriter shall adopt, maintain and enforce separate codes of
ethics with respect to their personnel in compliance with Rule
17j-1 and Rule 204-2(a)(12) of the Investment Advisers Act of
1940 or Section 15(f) of the Securities Exchange Act of 1934, as
applicable, and shall forward to the Company's administrator and
the Company's counsel copies of such codes
8
<PAGE>
and all future amendments and modifications thereto. The Board
shall review and approve such codes at least once a year.
Furthermore, any material changes to an investment adviser's or
principal underwriter's code will be approved by the Board at the
next scheduled quarterly board meeting and in no case more than
six months after such change.
10. At each quarterly Board of Directors' meeting, the administrator,
investment adviser, sub-advisers and principal underwriter of the
Company shall provide a written report to the Company's Board of
Directors stating:
a. any reported securities transaction that occurred during the
prior quarter that may have been inconsistent with the
provisions of the codes of ethics adopted by the Company's
investment adviser, sub-advisers or principal underwriter;
and
b. all disciplinary actions3 taken in response to such
violations.
11. At least once a year, the Company's investment adviser, sub-
advisers and principal underwriter shall provide to the Board a
written report which contains: (a) a summary of existing
procedures concerning personal investing by advisory persons and
any changes in the procedures during the past year; (b) an
evaluation of current compliance procedures and a report on any
recommended changes in existing restrictions or procedures based
upon the Company's experience under this Code of Ethics, industry
practices, or developments in applicable laws and regulations;
(c) a description of any issues arising under the Code of Ethics
or procedures since the last report, including but not limited
to, information about material violations of the code or
procedures and sanctions imposed in response to material
violations; and (d) a certification that the procedures which
have been adopted are those reasonably necessary to prevent
Access Persons from violating the respective Codes of Ethics.
12. This Code of Ethics, the codes of the investment adviser, sub-
advisers and principal underwriter, a copy of each report by an
Access Person, any written report hereunder by the Company's
administrator, investment
- -----------------------
/3/ Disciplinary action includes but is not limited to any action that has a
material financial effect upon the employee, such as fining, suspending, or
demoting the employee, imposing a substantial fine or requiring the disgorgement
of profits.
9
<PAGE>
adviser, sub-advisers or principal underwriter, records of
approvals relating to Initial Public Offerings and Limited
Offerings, lists of all persons required to make reports, and a
list of all persons responsible for reviewing such reports shall
be preserved with the Company's records for the period required
by Rule 17j-1.
VI. Certification.
-------------
Each Access Person will be required to certify annually that he or she has
read and understood this Code of Ethics, and will abide by it. Each Access
Person will further certify that he or she has disclosed or reported all
personal securities transactions required to be disclosed or reported under the
Code of Ethics. A form of such certification is attached hereto as Exhibit B.
The Board of Directors of
Excelsior Tax-Exempt Funds, Inc.
10
<PAGE>
Exhibit A
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Holdings Report
For the Year/Period Ended __________________________
(month/day/year)
[ ] Check Here if this is an Initial Holdings Report
To: Chase Global Funds Service Company, as Co-Administrator of the above listed
Company
As of the calendar year/period referred to above, I have a direct or
indirect beneficial ownership interest in the securities listed below which are
required to be reported pursuant to the Code of Ethics of the Company:
Title of Number of Principal
Security Shares Amount
-------- ------ ------
The name of any broker, dealer or bank with whom I maintain an account
in which my securities are held for my direct or indirect benefit are as
follows:
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct or indirect beneficial ownership in the securities listed above.
Signature: ______________________
Print Name: ______________________
A-1
<PAGE>
Exhibit B
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Securities Transaction Report
For the Calendar Quarter Ended ______________________________
(month/day/year)
To: Chase Global Funds Service Company, as Co-Administrator of the above listed
Company
During the quarter referred to above, the following transactions were
effect in securities of which I had, or by reason of such transaction acquired,
direct or indirect beneficial ownership, and which are required to be reported
pursuant to the Code of Ethics of the Company:
<TABLE>
<CAPTION>
Interest
Number of Rate and Nature of Broker/Dealer
Shares or Maturity Dollar Transaction or Bank
Title of Date of Principal Date (if Amount of (Purchase, Through Whom
Security Transaction Amount applicable) Transaction Sale, Other) Price Effected
-------- ----------- ------ ----------- ----------- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
For each Access Person of the Company, other than a director who is
not an "interested person" (as defined in the 1940 Act), provide the following
information with respect to any account established by you during the quarter
referred to above in which securities were held during the quarter for your
direct or indirect benefit:
1. The name of the broker, dealer or bank with whom you established
the account.
2. The date the account was established.
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct or indirect beneficial ownership in the securities listed above.
Signature: ____________________
Print Name: ____________________
B-1
<PAGE>
Exhibit C
EXCELSIOR TAX-EXEMPT FUNDS, INC.
ANNUAL CERTIFICATE
Pursuant to the requirements of the Code of Ethics of Excelsior Tax-
Exempt Funds, Inc. (the "Company"), the undersigned hereby certifies as follows:
1. I have read the Company's Code of Ethics.
2. I understand the Code of Ethics and acknowledge that I am subject
to it.
3. Since the date of the last Annual Certificate (if any) given
pursuant to the Code of Ethics, I have reported all personal
securities transactions required to be reported under the
requirements of the Code of Ethics.
Date: _________________ _______________________________
Print Name
_______________________________
Signature
C-1
<PAGE>
EXHIBIT (p)(2)
U.S. TRUST
INVESTMENT ADVISER
CODE OF ETHICS
Revised: August 18, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
I. INTRODUCTION................................................................... 1
II. RULE 17j-1 OF THE INVESTMENT COMPANY ACT & ACKNOWLEDGMENT...................... 1
III. PERSONS SUBJECT TO THIS CODE AND OTHER DEFINITIONS............................. 1
IV. RESTRICTIONS ON PERSONAL INVESTMENT ACTIVITIES................................. 3
(a) Prohibition against Acquiring Securities in an Initial Public Offering ("IPO")
Within 30 days of the Initial Offering......................................... 3
(b) Prior Approval of Private Placement Investments................................ 4
(c) Blackout Periods for Trading in the Same Security as a Client.................. 4
(d) Pre-Clearance of Personal Securities Transactions.............................. 5
(e) Delivery of Duplicate Trade Confirmations and Investment Account
Statements to Employer......................................................... 5
(f) Initial Disclosure of Personal Holdings & Quarterly Updates.................... 6
(g) Prohibition on Service as a Director........................................... 6
(h) Prohibition on Accepting or Giving Gifts....................................... 6
V. TRANSACTIONS AND HOLDINGS NOT SUBJECT TO THIS CODE............................. 6
VI. OVERSIGHT OF CODE OF ETHICS.................................................... 7
VII. CONFIDENTIALITY................................................................ 7
</TABLE>
-i-
<PAGE>
I. INTRODUCTION
------------
High ethical standards are essential not only to the success of U.S. Trust
Corporation and its affiliates ("U.S. Trust"), but to maintain the confidence of
investors. There is a long standing recognition of the conflicts of interest
that potentially arise in connection with the personal trading activities of
investment personnel. Because it provides investment advice to registered
investment company clients (each a "Mutual Fund Company"), U.S. Trust is
required under applicable federal law/1/ to adopt a code of ethics containing
provisions designed to detect and prevent improper activity by employees with
access to certain Mutual Fund Company investment-related information. The U.S.
Trust Code of Ethics (the "Code") applies to each "Covered Person" which is a
term defined in Section III. This includes employees who service personal and
institutional clients as well as those who service Mutual Fund Companies.
Because of the nature of our business, you may be exposed to material,
non-public information ("Inside Information"). Federal. securities law prohibits
your use of such information. U.S. Trust owes a fiduciary duty to its clients
that requires its employees to act solely for the benefit of its clients. Our
own long-term business interests are best served by adherence to the principle
that our clients' interests come first. All employees owe U.S. Trust a duty of
loyalty that bars them from engaging in any activity which may give rise to a
potential conflict of interest between U.S. Trust and its clients or the
appearance of such a conflict.
Our goal is to impose as few restrictions as possible consistent with protecting
U.S. Trust, its clients and you from the damage that could result from real or
apparent conflicts of interest or potential violations of law. While it is
impossible to define all situations that pose such a risk, this Code is designed
to address those circumstances in which such risk is likely to exist.
Adherence to this Code and its restrictions on personal investing is a basic
condition of your employment. If you have any doubt about how this Code applies
to any activity, you should consult your local Compliance Officer or a member of
the Corporate Compliance Division, which is responsible for administering this
Code.
II. RULE 17j-1 OF THE INVESTMENT COMPANY ACT & ACKNOWLEDGMENT
---------------------------------------------------------
This Code is adopted pursuant to SEC Rule 17j-1. A copy of the Rule is attached
as Exhibit A. All "Access Persons," which is a term defined in Section III, are
required to (a) be familiar with this Rule, (b) execute the attached
Acknowledgment Form and (c) return the signed form to the Corporate Compliance
Division at H-26.
III. PERSONS SUBJECT TO THIS CODE AND OTHER DEFINITIONS
--------------------------------------------------
(a) This Code applies to every "Covered Person." They are:
___________________
/1/ See SEC Rule 17j-1 promulgated under the Investment Company Act of 1940.
<PAGE>
(1) "Access Persons" - any U.S. Trust employee who, in
connection with his2 regular duties or function makes,
participates in, or obtains information regarding the
purchase or sale of a security by or for any U.S. Trust
client (including Mutual Fund Companies), or whose function
relates to the making of any recommendations with respect to
such purchases or sales (for example, portfolio managers,
analysts, traders and research personnel); and
(2) The following other individual entities:
(A) a member of an Access Person's immediate family (i.e.,
spouse and dependent children);
(B) a person who lives in an Access Person's household and
over whose purchases, sales, or other trading
activities an Access Person directly or indirectly
exercises influence;
(C) a relative whose financial affairs an Access Person
"controls," whether by contact (such as a Deed of
Trust) or by convention (such as a relative he
traditionally advises with regard to investment
choices, invests for or otherwise assists financially);
(D) an investment or trust account, other than one
maintained at U.S. Trust, over which an Access Person
has investment control or discretion;
(E) a trust or other arrangement that names an Access
Person as a beneficiary; and
(F) a non-public entity (partnership, corporation or
otherwise) of which an Access Person is a director,
officer, partner or employee, or in which he owns 10%
or more of the stock, a "controlling" interest as
generally defined by securities laws, or over which he
exercises effective control.
(b) "Investment Account" means any securities account:
(1) in which an Access Person holds a beneficial interest,
regardless of whether the account is managed by an
independent third party or self-directed; or
___________________
/2/ Terms in this Policy referring to gender apply to either gender and the
singular include the plural.
-2-
<PAGE>
(2) on which an Access Person, his spouse or dependent child is
named in the title of the account; or
(3) for which an Access Person acts as Guardian, Trustee,
Custodian, etc., other than those maintained at U.S. Trust;
or
(4) over which an Access Person exercises control, either
directly (e.g., by Power of Attorney) or indirectly (e.g.,
as an advisor).
A comprehensive list of all Access Persons will be compiled and maintained
by the Corporate Compliance Division with the assistance of those
supervising such employees.
(c) "Blackout Period" - see Section IV(c).
(d) "Code" - see Section I.
(e) "de minimus value" - see Section IV(h).
(f) "Front Running" - see Section IV(c).
(g) "Inside Information" - see Section I.
(h) "Investment Account Records" - see Section IV(e).
(i) "IPO" - see Section IV(a).
(j) "Mutual Fund Company" - see Section I.
(k) "Significant Block" - see Section IV(c).
(l) "U.S. Trust" - see Section I.
IV. RESTRICTIONS ON PERSONAL INVESTMENT ACTIVITIES
----------------------------------------------
Note: The following restrictions apply to all Covered Persons, not just Access
Persons.
(a) Prohibition against Acquiring Securities in an Initial Public
-------------------------------------------------------------
Offering ("IPO") Within 30 days of the Initial Offering. The
-------------------------------------------------------
opportunity to invest in an IPO can be highly sought after and these
opportunities are often available only to a limited number of
investors. Purchases of IPO's by Covered Persons pose various
potential conflicts of interest. First, an opportunity for Covered
Persons to participate in a "hot issue" or other attractive IPO is
not likely to be viewed as a random event. Second, it may create the
impression that future investment decisions for a client were not
pursued solely because they were in the best interests of such
client. Third, the realization of any short-term profits may create
at least the appearance that an investment opportunity that should
have been available to a client was diverted to a Covered Person's
personal benefit. U.S.
-3-
<PAGE>
Trust believes that prohibiting a Covered Person's purchase of a
security in an IPO until 30 days after the offering date will reduce
these potential conflicts.
(b) Prior Approval of Private Placement Investments. Companies may court
-----------------------------------------------
Covered Persons through private placements in order to encourage
Access Persons to have their clients invest in the company when it
later undertakes an IPO. If an Access Person invests his client's
assets in such a situation, a direct conflict of interest arises
because the client's investment may result in an increase in value
of the issuer's securities and thus increase the value of a Covered
Person's personal holdings.
U.S. Trust recognizes that most private placements will not raise
such conflicts and a complete ban on such investments would restrict
many legitimate investment opportunities. Therefore, an Access
Person must submit a written approval request for any Covered
Person's investment in private placement securities to, and obtain
prior approval from, his Direct Supervisor and the Head of the
Alternative Investment Suitability Committee. Furthermore, an Access
Person must disclose any Covered Person's holdings in private
placement securities to his Direct Supervisor and the Head of the
Alternative Investment Suitability Committee if that Access Person
plays a material role in U.S. Trust's subsequent investment decision
regarding the same issuer. Once this disclosure is made, an
independent review of U.S. Trust's investment decision must be made
by investment personnel with no personal interest in that particular
issuer. This process will accommodate personal investments for
Covered Persons and provide scrutiny where there is a potential
conflict of interest.
(c) Blackout Periods for Trading in the Same Security as a Client. All
-------------------------------------------------------------
Covered Persons are prohibited from trading in a security on a day
during which any Mutual Fund Company has a pending "buy" or "sell"
order in the same security until such company's order is executed or
withdrawn. In addition, all Covered Persons are prohibited from
buying or selling a security within seven (7) calendar days before
and after any Mutual Fund Company trades in that security. The
Blackout Period before a Mutual Fund Company trades is aimed at
preventing "Front Running." The Blackout Period after a Mutual Fund
Company trades is designed to allow sufficient time for the
dissipation of the market effect of the Mutual Fund Company's trade
before the Covered Person trades.
A "Blackout Period" is a period of time during which Covered Persons
may not trade in a given security. "Front Running" is trading in
advance of action on a client account trade order while knowing
about that order. This type of knowledge is considered Inside
Information. Using Inside Information to trade (other than for the
client account(s) subject to the trade order) violates securities
laws and the U.S. Trust Business Ethics Policy. Covered Persons are
prohibited from purchasing or selling securities about which an
Access Person has Inside Information.
-4-
<PAGE>
All Covered Persons are prohibited from trading a security within
three (3) business days before and after U.S. Trust purchases or
sells a "significant block" of that same security for any client
account. A "Significant Block" will be defined by evaluating the
individual issuer.
There may be some limited circumstances where exceptions to these
restrictions will be allowed. Exception requests must be discussed
with the Corporate Compliance Division and approval from the
appropriate officer obtained prior to executing any such
transaction.
(d) Pre-Clearance of Personal Securities Transactions. All Covered
-------------------------------------------------
Persons must pre-clear personal securities transactions through the
Corporate Compliance Division. To do so, they should contact the
Division a reasonable time before executing an intended securities
transaction. The proposed transaction will be promptly reviewed in
an attempt to determine if it would violate this Code.
The following transactions are exempt from this pre-clearance
requirement.
(1) Any equity securities transaction or related transactions
involving 500 shares or less in the aggregate if, at the
time of the transaction:
(A) the Access Person has no knowledge the security is
being considered for purchase or sale by, or is
actually being purchased or sold for, a Mutual Fund
Company in the mutual fund complex he services or by
U.S. Trust; and
(B) the issuer of the security being purchased or sold has
a market capitalization greater than $1 billion.
(2) Any fixed income securities transaction involving $100,000
principal amount or less if, at the time of the transaction,
the Access Person has no knowledge that the security is
being considered for purchase or sale by, or is actually
being purchased or sold for, a Mutual Fund Company in the
complex he services or by U.S. Trust.
(3) Transactions in securities not eligible for purchase or sale
by a Mutual Fund Company and the value of such securities is
not based upon, related to, or determined by, any security
eligible for purchase or sale by a Mutual Fund Company.
(e) Delivery of Duplicate Trade Confirmations and Investment Account
----------------------------------------------------------------
Statements to Employer. Every Access Person must disclose each
----------------------
existing Investment Account to the Corporate Compliance Division and
authorize that Division to direct his broker(s) to supply it with
duplicate copies of trade confirmations and monthly statements
reflecting transactions affecting such accounts ("Investment Account
Records"). Transactions reported on the
-5-
<PAGE>
Investment Account Records will be reviewed and compared against
Mutual Fund Company and U.S. Trust client transactions. The
Investment Account Records allow U.S. Trust to verify compliance
with this Code. Each Access Person must promptly notify the
Corporate Compliance Division when an Investment Account is opened,
closed or moved.
(f) Initial Disclosure of Personal Holdings & Quarterly Updates. Upon
-----------------------------------------------------------
commencement of employment, each Access Person is required to submit
to the Corporate Compliance Division a completed Disclosure of
Personal Holdings From (attached) listing all Investment Accounts
and securities otherwise held by persons having an interest in an
Investment Account. This Disclosure must be updated each calendar
quarter during his employment. The completed update must be
forwarded to the Corporate Compliance Division and will be used to
verify all Investment Account Records are being collected.
(g) Prohibition on Service as a Director. Each Access Person is
------------------------------------
prohibited from serving on the board of directors of any publicly
traded company absent prior approval from a member of the National
Operating Committee. Approval will be based upon a determination
that board service would be consistent with the U.S. Trust's
interests in servicing its clients. This restriction does not apply
to service on the board of any not-for-profit organization.
(h) Prohibition on Accepting or Giving Gifts. Each Covered Person is
----------------------------------------
prohibited from accepting or giving any gift or more than de minimus
value from or to any individual doing business with, or on behalf
of, any U.S. Trust client. For the purposes of this Code, "de
minimus value" means $250.00. Normal business courtesies such as
business meals and entertainment are excluded from the definition of
"gift."
V. TRANSACTIONS AND HOLDINGS NOT SUBJECT TO THIS CODE
--------------------------------------------------
The following transactions and holdings are not subject to this Code.
(a) Transactions in, and holdings of, securities issued by the United
States Government.
(b) Transactions in, and holdings of, shares of open-ended investment
companies (commonly known as mutual funds).
(c) Transactions involving, and holdings of, bank certificates of
deposit.
(d) Transactions and holdings in any account over which a Covered Person
has no direct or indirect influence or control (i.e., blind trust,
discretionary account or trust managed by a third party).
-6-
<PAGE>
(e) Transactions and holdings in Automatic Dividend Reinvestment Plans
(commonly referred to as "DRIPs").
VI. OVERSIGHT OF CODE OF ETHICS
---------------------------
Each Access Person must annually sign and deliver to the Corporate
Compliance Division a form (attached) acknowledging his familiarity with
this Code. In addition, any situation that may involve a conflict of
interest or other potential violation of this Code must be reported
promptly to the Corporate Compliance Division.
Investment Account Records will be reviewed on an ongoing basis by the
Corporate Compliance Division and compared to transactions entered into by
U.S. Trust for its customers. Any transactions believed to be a violation
of this Code will be reported promptly to U.S. Trust's Chief Investment
Officer.
The Chief Investment Officer shall consider reports made to him and, upon
determining a violation has occurred, may impose such sanctions or
remedial action as he deems appropriate or otherwise required by law.
These sanctions may include, among other things, disgorgement of profits,
suspension or termination of employment with U.S. Trust and civil or
criminal penalties.
VII. CONFIDENTIALITY
---------------
All information collected pursuant to this Code will be treated
confidentially to the extent required by law.
-7-
<PAGE>
U.S. TRUST INVESTMENT ADVISOR CODE OF ETHICS
ACKNOWLEDGMENT
I hereby acknowledge receipt of the U.S. Trust Investment Adviser Code of
Ethics and certify I have read and agree to abide by it.
I also confirm I have disclosed to the Corporate Compliance Division all
existing Investment Accounts (as defined in the Code) on the accompany form. I
authorize that Division to instruct all brokers maintaining an Investment
Account to supply duplicate copies of trade confirmations and monthly statements
for such accounts to the Corporate Compliance Division.
I certify I have never been found civilly liable for, nor criminally guilty
of, insider trading and that no legal proceedings alleging I violated insider
trading laws are now pending or, to the best of my knowledge, threatened by any
person or authority.
Date: __________________________ _____________________________
(Signature)
_____________________________
(Print Name)
-8-
<PAGE>
DISCLOSURE OF PERSONAL HOLDINGS
This form is to be completed by all Access Persons when hired and sent to the
Corporate Compliance Division.
CHECK ONE BOX
- -------------
[_] There are no Investment Accounts I must identify under the U.S. Trust
Investment Adviser Code of Ethics.
[_] The information listed below describes all Investment Accounts I must
disclose under the Code. There are no securities subject to the Code held
outside an Investment Account.
[_] The securities subject to the Code held OUTSIDE an Investment Account are
listed on Page 2. (Supply broker name, address, telephone number, account
number and title.)
Use this space to describe Investment Accounts (attach additional pages as
necessary). If you are reporting a new Investment Account for the first time,
also attach copies of all statements since it was opened.
Account Name: _________________________________________________
Account #: _________________________________________________
S.S. or Tax ID #: _________________________________________________
Firm Name: _________________________________________________
Address: _________________________________________________
_________________________________________________
Account Rep: _________________________________________________
Account Name: _________________________________________________
Account #: _________________________________________________
S.S. or Tax ID#: _________________________________________________
Firm Name: _________________________________________________
Address: _________________________________________________
_________________________________________________
Account Rep: _________________________________________________
(Use additional sheets as necessary)
------------------------------------
<PAGE>
LIST OF SECURITIES SUBJECT TO THE CODE HELD OUTSIDE AN INVESTMENT ACCOUNT
- --------------------------------------------------------------------------------
SECURITY DATE ACQUIRED PRICE # SHARES EXECUTING BROKER
- --------------------------------------------------------------------------------
SIGNATURE: _____________________________________________________________________
PRINTED NAME: ____________________________________________________
Dated: _______________________
-2-
<PAGE>
DISCLOSURE OF PERSONAL HOLDINGS & QUARTERLY UPDATE
--------------------------------------------------
This form is to be completed by all Access Persons quarterly and sent to the
Corporate Compliance Division.
CHECK ALL APPROPRIATE BOXES (provide details as necessary)
- ---------------------------
[_] There are no Investment Accounts I must identify under the U.S. Trust
Investment Adviser Code of Ethics.
[_] There has been no change in Investment Account information I must provide
under the Code since I last completed this disclosure.
[_] The Investment Accounts I have previously described in these disclosures
still exist and the additional Investment Accounts listed below have been
opened since I last completed this disclosure.
[_] The Investment Accounts listed below I previously described in my
disclosures and no longer exist.
[_] The Investment Accounts listed below have been established since I last
completed this disclosure.
[_] The previously undisclosed securities subject to the Code listed below are
held outside an Investment Account.
Use this space to describe Investment Accounts (attach additional pages as
necessary). If you are reporting a new Investment Account for the first time,
also attach copies of all statements since it was opened.
[_] New [_] Closed Investment Account
Account Name: ______________________________________________
Account #: ______________________________________________
S.S. or Tax ID#: ______________________________________________
Firm Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Account Rep: ______________________________________________
<PAGE>
DISCLOSURE OF PERSONAL HOLDINGS & QUARTERLY UPDATE
--------------------------------------------------
(continued)
[_] New [_] Closed Investment Account
Account Name: ______________________________________________
Account #: ______________________________________________
S.S. or Tax ID#: ______________________________________________
Firm Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Account Rep: ______________________________________________
[_] New [_] Closed Investment Account
Account Name: ______________________________________________
Account #: ______________________________________________
S.S. or Tax ID#: ______________________________________________
Firm Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Account Rep: ______________________________________________
-2-
<PAGE>
LIST OF SECURITIES SUBJECT TO THE CODE HELD OUTSIDE AN INVESTMENT ACCOUNT
- --------------------------------------------------------------------------------
SECURITY DATE ACQUIRED PRICE # SHARES EXECUTING BROKER
- --------------------------------------------------------------------------------
SIGNATURE AND DATE: ____________________________________________________________
PRINTED NAME: __________________________________________
DATE: __________________________
-3-
<PAGE>
Exhibit A
---------
Text of Rule 17j-1 of The Investment Company Act
------------------------------------------------
Rule 17j-1: Certain unlawful acts, practices, or courses of business and
------------------------------------------------------------
requirements relating to codes of ethics with respect to registered investment
- ------------------------------------------------------------------------------
companies.
- ---------
(a) It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company, or any affiliated
person of an investment adviser of or principal underwriter for a
registered investment company in connection with the purchase or sale,
directly or indirectly, by such person of a security held or to be
acquired, as defined in this section, by such registered investment
company.
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they
are made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
(b)
(1) Every registered investment company, and each investment adviser
of or principal underwriter for such investment company, shall
adopt a written code of ethics containing provisions reasonably
necessary to prevent its access persons from engaging in any act,
practice, or course of business prohibited by paragraph (a) of
this section and shall use reasonable diligence, and institute
procedures reasonably necessary, to prevent violations of such
code.
(2) The requirements of paragraph (b)(1) shall not apply to any
underwriter (i) which is not an affiliated person of the
registered investment company or its investment adviser, and (ii)
none of whose officers, directors or general partners serves as
an officer, director or general partner of such registered
investment company or investment adviser.
<PAGE>
(c)
(1) Every access person of a registered investment company or of an
investment adviser of or principal underwriter for such
investment company shall report to such investment company,
investment adviser or principal underwriter of which he or she is
an access person the information described in paragraph (c)(2)
with respect to transactions in any security in which such access
person has, or by reason of such transaction acquires, any direct
or indirect beneficial ownership in the security: Provided,
however, that any such report may contain a statement that the
report shall not be construed as an admission by the person
making such report that he or she has any direct or indirect
beneficial ownership in the security to which the report relates.
For purposes of this section, beneficial ownership shall be
interpreted in the same manner as it would be in determining
whether a person is subject to the provisions of section 16 of
the Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules
and regulations thereunder, except that the determination of
direct or indirect beneficial ownership shall apply to all
securities which the access person has or acquires.
(2) Every report required to be made pursuant to paragraph (c)(1)
shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each security
involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effect; and
(iv) The name of the broker, dealer or bank with or through
whom the transaction was effected.
(3) Notwithstanding the provision of paragraph (c)(1), no person
shall be required to make a report:
(i) With respect to transactions effected for any account over
which such person does not have any direct or indirect
influence or control;
(ii) If such person is not an "interested person" of a
registered investment company within the meaning of
section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)], and
would be required to make such
-2-
<PAGE>
a report solely by reason of being a director of such
investment company, except where such director knew or, in
the ordinary course of fulfilling his official duties as a
director of the registered investment company, should have
known that during the 15-day period immediately preceding
or after the date of the transaction in a security by the
director such security is or was purchased or sold by such
investment company or such purchase or sale by such
investment company is or was considered by the investment
company or its investment adviser;
(iii) Where the principal underwriter, as to which such person
is an access person, (A) is not an affiliated person of
the registered investment company or any investment
adviser of such investment company, and (B) has no
officers, directors, or general partners who serve as
officers, directors or general partners of such investment
company or any such investment adviser; or
(iv) Where a report made to an investment adviser would
duplicate information recorded pursuant to Rules 204-
2(a)(12) or 204-2(a)(13)[17 CFR 275.204-2(a)(12) and
275.204-2(a)(13)] under the Investment Advisers Act of
1940 [15 U.S.C. 80b-1, et. seq.].
(4) Each registered investment company, investment adviser and
principal underwriter to which reports are required to be made
pursuant to this section shall identify all access persons who
are under a duty to make such reports to it and shall inform such
persons of such duty.
(d) Each registered investment company, investment adviser and principal
underwriter which is required to adopt a code of ethics or to which
reports are required to be made by access persons shall, at its
principal place of business, maintain records in the manner and to the
extent set forth below, and make such records available to the
Commission or any representative thereof at any time and from time to
time for reasonable periodic, special or other examination.
(1) A copy of each such code of ethics which is, or at any time
within the past five years has been, in effect shall be preserved
in an easily accessible place;
(2) A record of any violation of such code of ethics, and of any
action taken as a result of such violation, shall be preserved in
an easily accessible place for a period of not less than five
years following the end of the fiscal year in which the violation
occurs;
(3) A copy of each report made by an access person pursuant to this
rule shall be preserved for a period of not less than five years
from the end of the
-3-
<PAGE>
fiscal year in which it is made, the first two years in an easily
accessible place; and
(4) A list of all persons who are, or within the past five years have
been, required to make reports pursuant to this section shall be
maintained in an easily accessible place.
(e) As used in this rule
(1) "Access Person" means:
(i) With respect to a registered investment company or an
investment adviser thereof, any director, officer, general
partner, or advisory person, as defined in this section,
of such investment company or investment adviser;
(ii) With respect to a principal underwriter, any director,
officer, or general partner of such principal underwriter
who in the ordinary course of his business makes,
participates in or obtains information regarding the
purchase or sale of securities for the registered
investment company for which the principal underwriter so
acts or whose functions or duties as part of the ordinary
course of his business relate to the making of any
recommendation to such investment company regarding the
purchase or sale of securities.
(iii) Notwithstanding the provisions of paragraph (e)(1)(i),
where the investment adviser is primarily engaged in a
business or businesses other than advising registered
investment companies or other advisory clients, the term
"access person" shall mean: any director, officer, general
partner, or advisory person of the investment adviser who,
with respect to any registered investment company, makes
any recommendation, participates in the determination of
which recommendation shall be made, or whose principal
function or duties relate to the determination of which
recommendation shall be made to any registered investment
company, or who, in connection with his duties, obtains
any information concerning securities recommendations
being made by such investment adviser to any registered
investment company.
(iv) An investment adviser is "primarily engaged in a business
or businesses other than advising registered investment
companies or other advisory clients" when, for each of its
most recent three fiscal years or for the period of time
since its organization, whichever is lesser, the
investment adviser derived, on an unconsolidated basis,
more than 50 percent of (A) its total sales and revenues,
and (B) its
-4-
<PAGE>
income (or loss) before income taxes and extraordinary
items from such other business or businesses.
(2) "Advisory person" of a registered investment company or an
investment adviser thereof means:
(i) Any employee of such company or investment adviser (or of
any company in a control relationship to such investment
company or investment adviser) who, in connection with his
regular functions or duties, makes, participates in or
obtains information regarding the purchase or sale of a
security by a registered investment company, or whose
functions relate to the making of any recommendations with
respect to such purchases or sales; and
(ii) Any natural person in a control relationship to such
company or investment adviser who obtains information
concerning recommendations made to such company with
regard to the purchase or sale of a security.
(3) "Control" shall have the same meaning as that set forth in
section 2(a)(9) of the Act [15 U.S.C. 80a-2(a)(9)].
(4) "Purchase or sale of a security" includes, inter alia, the
writing of an option to purchase or sell a security.
(5) "Security" shall have the meaning set forth in section 2(a)(36)
of the Act [15 U.S.C. 80a-2(a)(36)], except that it shall not
include securities issued by the Government of the United States,
bankers' acceptances, bank certificates of deposit, commercial
paper and shares of registered open-end investment companies.
(6) "Security held or to be acquired" by a registered investment
company means any security as defined in this rule which, within
the most recent 15 days, (i) is or has been held by such company,
or (ii) is being or has been considered by such company or its
investment adviser for purchase by such company.
-5-
<PAGE>
EXHIBIT (p)(3)
CODE OF ETHICS REGARDING PERSONAL SECURITIES TRADING
----------------------------------------------------
Pursuant to rule 17j-1 under the Investment Company Act of 1940, this Code of
Ethics has been adopted on behalf of the Adviser, the Underwriters, and each
investment company that is both advised and distributed by an Adviser and an
Underwriter.*
1. General Fiduciary Principles
----------------------------
a) Each Access Person:
i) must place the Funds' interests ahead of the Access Person's
personal interests;
ii) must avoid conflicts or apparent conflicts of interest with the
Funds; and
iii) must conduct his or her personal transactions in a manner which
neither interferes with Fund portfolio transactions nor
otherwise takes unfair or inappropriate advantage of the Access
Person's relationship to the Fund.
The failure to recommend or purchase a Covered Security for the
Fund may be considered a violation of this Code.
b) Every Access Person must adhere to these general fiduciary principles,
as well as comply with the specific provisions and Associated
Procedures of this Code. Technical compliance with the terms of this
-------------------------------------------
Code and the Associated Procedures may not be sufficient where the
------------------------------------------------------------------
transactions undertaken by an Access Person show a pattern of abuse of
----------------------------------------------------------------------
the Access Person's fiduciary duty.
----------------------------------
2. Definitions
-----------
a) The "1940 Act" means the Investment Company Act of 1940, as amended.
b) "Access Person" means any director, trustee, officer, managing general
partner, general partner, or Advisory Person of a Fund, of the
Underwriter, and of the Adviser and all family members permanently
residing in the same household. (If non-family members also reside in
the household, the Access Person must either declare that the Access
Person has no influence on the investment decisions of the other party
or the Access Person must report the party as an Access Person.)
c) "Adviser" means any registered investment adviser that is an affiliate
or subsidiary of Federated Investors, Inc.
- -------------------------
* As the context requires, references herein to the singular include the plural
and masculine pronouns include the feminine.
<PAGE>
d) "Advisory Person" means (i) any employee of the Underwriter, of the
Adviser or of any company in a control relationship to the Underwriter
(which would include any operating company that is an affiliate or a
subsidiary of Federated Investors, Inc.), who, in connection with the
employee's regular functions or duties, makes, participates in, or
obtains information regarding the purchases or sales of a Covered
Security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any
natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a Covered Security.
e) "Associated Procedures" means those policies, procedures and/or
statements that have been adopted by the Underwriter, the Adviser or
the Fund, and which are designed to supplement this Code and its
provisions.
f) "Beneficial ownership" will be attributed to an Access Person in all
instances where the Access Person (i) possesses the ability to
purchase or sell the Covered Securities (or the ability to direct the
disposition of the Covered Securities); (ii) possesses voting power
(including the power to vote or to direct the voting) over such
Covered Securities; or (iii) receives any benefits substantially
equivalent to those of ownership. Beneficial ownership shall be
interpreted in the same manner as it would be in determining whether a
person is subject to the provisions of Section 16a-l(a)(2) of the
Securities Exchange Act of 1934, and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership shall apply to all Covered Securities which an
Access Person has or acquires.
g) "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the 1940 Act.
h) Except as provided in this definition, "Covered Security" shall
include any Security, including without limitation: equity and debt
securities; derivative securities, including options on and warrants
to purchase equity or debt securities; shares of closed-end investment
companies; investments in unit investment trusts; and Related
Securities. "Related Securities" are instruments and securities that
are related to, but not the same as, a Covered Security. For example,
a Related Security may be convertible into a Covered Security, or give
its holder the right to purchase the Covered Security. For purposes of
reporting, "Covered Security" shall include futures, swaps and other
derivative contracts.
"Covered Security" shall not include: direct obligations of the
Government of the United States (regardless of their maturities);
bankers' acceptances; bank certificates of deposit; commercial paper;
high quality short-term debt instruments, including repurchase
agreements; and shares of registered open-end investment companies.
-2-
<PAGE>
i) "Disinterested director" means a director, trustee, or managing
general partner of the Fund who is not an "interested person" of the
Fund within the meaning of Section 2(a)(19) of the 1940 Act.
j) "Fund" means each investment company registered under the 1940 Act
(and any series or portfolios of such company) and any other account
advised by an Adviser.
k) "Initial Public Offering" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of sections 13 or 15(d) of the Securities Exchange Act of 1934.
l) "Investment Personnel" include: Access Persons with direct
responsibility and authority to make investment decisions affecting
the Fund (such as portfolio managers and chief investment officers);
Access Persons who provide information and advice to such portfolio
managers (such as securities analysts); and Access Persons who assist
in executing investment decisions for the Fund (such as traders).
m) "Private Placement" or "limited offering" means an offering that is
exempt from registration under Section 4(2) or Section 4(6) of the
Securities Act of 1933 or pursuant to rule 504, rule 505 or rule 506
under the Securities Act of 1933.
n) "Purchase or sale of a Covered Security" includes, inter alia the
----- ----
writing of an option, future or other derivative contract to purchase
or sell a Covered Security.
o) "Security" shall have the meaning set forth in Section 2(a)(36) of the
1940 Act.
p) "Underwriter" means Federated Securities Corp. and Edgewood Services,
Inc.
3. Exempt Transactions
-------------------
The prohibitions or requirements of Section 4 and Section 5 of this Code
shall not apply to:
a) Purchases or sale of the following Securities:
i) direct obligations of the Government of the United States
(regardless of their maturities). This exemption does not apply
to indirect obligations of the U.S. Government, including FNMAs,
GNMAs or FHLMCs;
ii) bankers' acceptances;
iii) bank certificates of deposit;
-3-
<PAGE>
iv) commercial paper;
v) high quality short-term debt instruments, including repurchase
agreements; and
vi) shares of registered open-end investment companies.
b) Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control.
4. Prohibited Transactions and Activities
--------------------------------------
a) Every Access Person is prohibited from acquiring any Security
distributed in an initial public offering; however, subject to
provisions of this Code and its Associated Procedures, an Access
Person may acquire the security in the secondary market.
b) Every Access Person is prohibited from acquiring any Security in a
private placement or other limited offering, without the express prior
approval of the Compliance Department. In instances where an
Investment Personnel, after receiving prior approval, acquires a
Security in a private placement, the Investment Personnel has an
affirmative obligation to disclose this investment to the Chief
Investment Officer (or his designee) if the Investment Personnel
participates in any subsequent consideration of any potential
investment by the Fund in the issuer of that Security. Following a
purchase by an Investment Personnel in an approved personal
transaction, any purchase by the Fund of Securities issued by the same
company (other than secondary market purchases of publicly traded
Securities) will be subject to an independent review by the Compliance
Department.
c) Every Access Person is prohibited from executing a personal
transaction in any Covered Security on a day during which the Fund has
a pending "buy" or "sell" order for that Covered Security, until the
Fund's orders are either executed or withdrawn.
All Investment Personnel are prohibited from purchasing or selling any
Covered Security within seven (7) calendar days after the Fund
-----
purchases or sells the same Covered Security. Members of an Investment
Personnel group, as defined by the Compliance Department, are
prohibited from purchasing or selling any Covered Security within
seven (7) days before any Fund advised by that group purchases or
-------
sells the Covered Security.
d) Every Access Person is prohibited from profiting in the purchase and
sale, or sale and purchase, of the same (or equivalent) Covered
Security within 60 calendar days. For purposes of this prohibition,
each personal transaction in the Covered
-4-
<PAGE>
Security will begin a new 60 calendar day period. As an illustration,
if an Access Person purchases 1000 shares of Omega Corporation on June
1st, 500 shares on July 1st, and 250 shares on August 1st, the profit
from the sale of the 1000 shares purchased on June 1st is prohibited
for any transaction prior to October 1st (i.e., 60 calendar days
following August 1st). In circumstances where a personal transaction
in a Covered Security within the proscribed period is involuntary (for
example, due to unforeseen corporate activity, such as a merger), the
Access Person must notify the Compliance Department.
In circumstances where an Access Person can document personal
exigencies, the Chief Compliance Officer may grant an exemption from
the prohibition of profiting in the purchase and sale, or sale and
purchase, of the same (or equivalent) Covered Security within 60
calendar days. Such an exemption is wholly within the discretion of
the Chief Compliance Officer, and any request for such an exemption
will be evaluated on the basis of the facts of the particular
situation.
e) All Investment Personnel are prohibited from serving on the boards of
directors of any issuer of a Covered Security, absent express prior
authorization from the Compliance Department. Authorization to serve
on the board of such a company may be granted in instances where
Compliance Department determines that such board service would be
consistent with the interests of the Investment Company and its
shareholders. If prior approval to serve as a director of a company is
granted, Investment Personnel have an affirmative duty to recuse
themselves from participating in any deliberations by the Fund
regarding possible investments in the securities issued by the company
on whose board the Investment Personnel sit. (This shall not limit or
restrict service on the Board of Federated Investors, Inc.)
f) Every Access Person is prohibited from purchasing or selling, directly
or indirectly, any Covered Security in which he or she has, or by
reason of such transaction acquires, a direct or indirect beneficial
ownership interest and which he or she knows, or should have known, at
the time of such purchase or sale:
i) is being considered for purchase or sale by the Fund; or
ii) is being purchased or sold by the Fund.
g) Every Access Person is prohibited, in connection with the purchase or
sale, directly or indirectly, by the Access Person of a Security Held
or to be Acquired by the Fund:
i) from employing any device, scheme or artifice to defraud the
Fund;
ii) from making any untrue statement of a material fact to the Fund
or omit to state a material fact necessary in order to make the
statements made to the
-5-
<PAGE>
Fund, in light of the circumstances under which they are made,
not misleading;
iii) from engaging in any act, practice or course of business that
operates or would operate as a fraud or deceit on the Fund; or
iv) from engaging in any manipulative practice with respect to the
Fund.
Examples of this would include causing the Fund to purchase a Covered
Security owned by the Access Person for the purpose of supporting or
driving up the price of the Covered Security, and causing the Fund to
refrain from selling a Covered Security in an attempt to protect the
value of the Access Person's investment, such as an outstanding
option. One test which will be applied in determining whether this
prohibition has been violated will be to review the Covered Securities
transactions of Access Persons for patterns. However, it is important
to note that a violation could result from a single transaction if the
circumstances warranted a finding that the provisions of Section 1 of
this Code have been violated.
h) Notwithstanding the other restrictions of this Code to which
Disinterested directors are subject, subparagraphs (a) through (d) of
this Section 4 shall not apply to Disinterested directors.
5. Pre-clearance Requirement and Exempted Transactions
---------------------------------------------------
a) Every Access Person is prohibited from executing a personal
transaction in any Covered Security (including transactions in pension
or profit-sharing plans in which the Access Person has a beneficial
interest), without express prior approval of the Compliance
Department, in accordance with the Associated Procedures governing
pre-clearance. A purchase or sale of Covered Securities not otherwise
approved pursuant to the Associated Procedures may, upon request made
prior to the personal transaction, nevertheless receive the approval
of the Compliance Department if such purchase or sale would be: only
remotely potentially harmful to the Fund; very unlikely to affect a
highly institutional market; or clearly not related economically to
the securities to be purchased, sold or held by the Fund.
Notwithstanding the receipt of express prior approval, any purchases
or sales by any Access Person undertaken in reliance on this provision
remain subject to the prohibitions enumerated in Section 4 of this
Code.
b) The pre-clearance requirement in Section 5(a) shall not apply to:
i) Purchases or sales which are non-volitional on the part of
either the Access Person or the Fund, subject to the provisions
of Section 4(g) of this Code.
ii) Purchases which are either made solely with the dividend
proceeds received in a dividend reinvestment plan; or part of an
automatic payroll
-6-
<PAGE>
deduction plan, whereby an employee purchases securities issued
by an employer.
iii) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Covered
--- ----
Securities, to the extent such rights were acquired from such
issuer, and any sales of such rights so acquired.
iv) Purchases and sales of a Security that represents an interest in
certain indices as determined by the Compliance Department.
v) Transactions in a Covered Security which involve the giving of
gifts or charitable donations.
vi) Purchases and sales of Covered Securities executed by a person
deemed to be an Access Person solely by reason of his position
------
as an Officer and/or Director or Trustee of the Fund. This
exemption does not apply to those persons who are Officers
and/or Directors of an Underwriter or Adviser.
c) Notwithstanding the other restrictions of this Code to which
Disinterested directors are subject, Section 5 shall not apply to
Disinterested directors.
6. Prohibition on the Receipt of Gifts
-----------------------------------
Every Access Person is prohibited from receiving any gift, favor,
preferential treatment, valuable consideration, or other thing of more than
a de minimis value in any year from any person or entity from, to or
----------
through whom the Fund purchases or sells Securities, or an issuer of
Securities. For purposes of this Code, "de minimis value" is equal to $100
----------
or less. This prohibition shall not apply to:
i) salaries, wages, fees or other compensation paid, or expenses
paid or reimbursed, in the usual scope of an Access Person's
employment responsibilities for the Access Person's employer;
ii) the acceptance of meals, refreshments or entertainment of
reasonable value in the course of a meeting or other occasion,
the purpose of which is to hold bona fide business discussions;
iii) the acceptance of advertising or promotional material of nominal
value, such as pens, pencils, note pads, key chains, calendars
and similar items;
iv) the acceptance of gifts, meals, refreshments, or entertainment
of reasonable value that are related to commonly recognized
events or occasions, such as a promotion, new job, Christmas, or
other recognized holiday; or
-7-
<PAGE>
v) the acceptance of awards, from an employer to an employee, for
recognition of service and accomplishment.
7. Reporting
---------
Every Access Person is required to submit reports of transactions in
Covered Securities to the Compliance Department as indicated below. Any
such report may contain a statement that the report shall not be construed
as an admission by the person making such report that he or she has any
direct or indirect beneficial ownership in the Covered Security to which
the report relates.
Initial Reporting Requirements
-----------------------------
a) Within 10 calendar days of commencement of employment as an Access
Person, the Access Person will provide a list including:
i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
ii) the name of any broker, dealer or bank maintaining an account in
which any Security was held for the direct or indirect benefit
of the Access Person as of the date of employment as an Access
Person; and
iii) the date the report is submitted to the Compliance Department.
b) Every Access Person is required to direct his broker to forward to the
Chief Compliance Officer (or his designee), on a timely basis,
duplicate copies of both confirmations of all personal transactions in
Covered Securities effected for any account in which such Access
Person has any direct or indirect beneficial ownership interest and
periodic statements relating to any such account.
Quarterly Reporting Requirements
--------------------------------
c) Every Access Person shall report the information described in Section
7(d) of this Code with respect to transactions in any Covered Security
(other than those personal transactions in Securities exempted under
Section 3 of this Code) in which such Access Person has, or by reason
of such transaction acquires, any direct or indirect beneficial
ownership.
d) Every report shall be made not later than 10 calendar days after the
end of the calendar quarter in which the transaction to which the
report relates was effected, shall be dated and signed by the Access
Person submitting the report, and shall contain the following
information:
i) the date of the transaction, the title and the number of shares,
the principal amount, the interest rate and maturity date, if
applicable of each Covered Security involved;
-8-
<PAGE>
ii) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
iii) the price at which the transaction was effected;
iv) the name of the broker, dealer or bank through whom the
transaction was effected; and
v) if there were no personal transactions in any Covered Security
during the period, either a statement to that effect or the word
"None" (or some similar designation).
e) Every Access Person shall report any new account established with a
broker, dealer or bank in which any Security was transacted or held
for the direct or indirect benefit of the Access Person during the
quarter. The report shall include the name of the entity with whom the
account was established and the date on which it was established.
Annual Reporting Requirements
-----------------------------
f) Every Access Person, on an annual basis or upon request of the Compliance
Department, will be required to furnish a list including the following
information (which information must be current as of a date no more than 30
days before the report is submitted) within 10 calendar days of the
request:
i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership;
ii) the name of any broker, dealer or bank maintaining an account in
which any Covered Security was held for the direct or indirect
benefit of the Access Person; and
iii) the date the report is submitted to the Compliance Department.
g) In addition, every Access Person is required, on an annual basis, to
certify that they have received, read, and understand the provisions of
this Code and its Associated Procedures, and that they recognize that they
are subject to its provisions. Such certification shall also include a
statement that the Access Person has complied with the requirements of this
Code and its Associated Procedures and that the Access Person has disclosed
or reported all personal transactions in Securities that are required to be
disclosed or reported pursuant to the requirements of this Code.
-9-
<PAGE>
Exemption for Disinterested Directors
-------------------------------------
h) A Disinterested director is exempt from the "initial reporting
requirements" and "annual reporting requirements" contained in Section
7.
i) A Disinterested director shall be exempt from the `quarterly reporting
requirements" contained in Section 7, so long as at the time of the
personal transaction in the Covered Security, the Disinterested
director neither knew, nor, in the ordinary course of fulfilling his
official duties as a director of the Fund, should have known that
during the 15-day period immediately preceding or after the date of
the transaction in the Covered Security by the Disinterested director
the Covered Security was purchased or sold by the Fund, or considered
for purchase or sale.
8. Sanctions
---------
a) Upon discovering a violation of this Code or its Associated
Procedures, the Compliance Department may take such actions or impose
such sanctions, if any, as it deems appropriate, including, but not
limited to:
i) a letter of censure;
ii) suspension;
iii) a fine;
iv) the unwinding of trades;
v) the disgorging of profits; or
vi) the termination of the employment of the violator.
(In instances where the violation is committed by a member of the
Access Person's household, any sanction would be imposed on the Access
Person.)
b) The filing of any false, incomplete or untimely reports, as required
by Section 7 of this Code, may be considered a violation of this Code.
c) All material violations of this Code and any sanctions imposed with
respect thereto shall be reported to the Board of Directors of the
Fund at least annually.
-10-
<PAGE>
PROCEDURES FOR PRIOR APPROVAL OF PERSONAL SECURITIES
----------------------------------------------------
TRANSACTIONS BY ACCESS PERSONS
------------------------------
Process
- -------
Preclearance Approval Using TradeComply
a) An Access Person (defined to include all members of the Access
Person's household) who wishes to effect a personal securities
transaction, whether a purchase, sale, or other disposition, must
preclear the Covered Security in TradeComply prior to engaging in the
transaction. [Because TradeComply does not include securities being
contemplated for purchase by the Federated Global Management portfolio
managers, Access Persons executing transactions in foreign securities
must complete additional preclearance steps. See "Preclearing Foreign
Securities."]
b) When trading options, the Access Person must preclear the underlying
security before entering into the option contract.
c) Based on established criteria, TradeComply determines whether the
contemplated transaction should be permitted. The primary criteria
applied is whether the Covered Security is on the Federated Equity
Watch List (which is updated weekly in TradeComply) or Open Order
lists, or whether the Covered Security was traded by any of the
Federated advised funds (fund trade information is updated nightly in
TradeComply).
d) Approval is either granted or denied immediately in TradeComply.
e) If approval is denied, the Access Person is given a specific reason
for the denial. The contemplated personal transaction in that Covered
Security is prohibited until prior approval is subsequently granted
upon request in TradeComply.
f) If approval is granted, the Access Person is free to effect the
personal transaction in that Covered Security during that trading day
only. In this regard, open orders for more than one trading day (good
till cancel) must be approved daily in TradeComply to comply with the
Code.
g) All trade requests and their dispositions are maintained in
TradeComply and reviewed by the Compliance Department in conjunction
with other information provided by Access Persons in accordance with
the Code.
h) The Compliance Department reviews all exceptions generated on
TradeComply due to a fund trade occurring after preclearance approval
has been granted. The Compliance Department determines the appropriate
action to be taken to resolve each exception.
-11-
<PAGE>
Preclearing Foreign Securities
- ------------------------------
i) All access persons wishing to execute a personal trade in a foreign
security must first preclear the security in TradeComply. TradeComply
will approve or deny the preclearance request based on its knowledge
of any fund activity in the security as well as the access person's
trading restrictions as defined by their assigned compliance group. If
the preclearance request in TradeComply is denied (Red Light), then
the personal trade may not be executed. If, however, the preclearance
request in TradeComply is approved (Green Light or Yellow Light), then
the access person must obtain a second preclearance approval from the
Federated Global trading desk prior to executing the personal trade.
j) The Head Trader or Senior Vice President in the New York office will
be responsible for granting or denying approval to the second
preclearance request. If approval is granted, then the personal trade
may be executed by the access person. If, however, approval is denied
then the personal trade may not be executed (even though the first
approval was granted in TradeComply).
k) If approval is granted, the following "Personal Transaction
Notification" form must be completed so that the Head Trader can
maintain a record of all preclearance requests.
j) The Head Trader sends a copy of any completed forms, whether approval
was granted or denied, to the Compliance Department.
If extraordinary circumstances exist, an appeal may be directed to the
Chief Compliance Officer Brian Bouda at (412) 288-8634. Appeals are solely
within the discretion of the Chief Compliance Officer.
Transactions Covered and Exemptions
- -----------------------------------
These procedures apply to Access Persons' personal transactions in "Covered
Security" as defined in Section 2 of the Code. A Covered Security includes:
equity and debt securities; options and warrants to purchase equity or debt
securities; shares of closed-end investment companies; and investments in
unit investment trusts.
These procedures do not apply to contemplated transactions in the following
---
instruments:
a) direct obligations of the Government of the United States (regardless
of their maturities). This exemption does not apply to indirect
obligations of the U.S. Government, including FNMAs, GNMAs or FBLMCs;
b) bankers' acceptances;
c) bank certificates of deposit;
d) commercial paper;
-12-
<PAGE>
e) high quality short-term debt instruments, including repurchase
agreements; and
f) shares of registered open-end investment companies;
In addition, these procedures do not apply to the following transactions:
g) Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control;
h) Purchases or sales which are non-volitional on the part of either the
Access Person or the Fund, subject to the provisions of the Code;
i) Purchases which are either: made solely with the dividend proceeds
received in a dividend reinvestment plan; or part of an automatic
payroll deduction plan, whereby an employee purchases securities
issued by an employer; and
j) Purchases effected upon the exercise of rights issued by an issuer pro
---
rata to all holders of a class of its Securities, to the extent such
----
rights were acquired from such issuer, and any sales of such rights so
acquired.
k) Purchases and sales of a Security that represents an interest in
certain indices as determined by the Compliance Department.
l) Transactions in a Covered Security which involve the giving of gifts
or charitable donations.
m) Purchases and sales of Covered Securities executed by a person deemed
to be an Access Person solely by reason of his position as an Officer
------
and/or Director or Trustee of the Fund. This exemption does not apply
to those persons who are Officers and/or Directors of an Underwriter
or Adviser.
Sanctions
- ---------
a) Failure to comply with the preclearance process may result in any of
the following sanctions being imposed as deemed appropriate by the
Compliance Department:
i) a letter of censure;
ii) suspension;
iii) a fine;
iv) the unwinding of trades;
v) the disgorging of profits; or
-13-
<PAGE>
vi) the termination of the employment of the violator.
b) (In instances where the violation is committed by a member of the
Access Person's household, any sanction would be imposed on the Access
Person.)
-14-
<PAGE>
PERSONAL TRANSACTION NOTIFICATION
I, _________________________ intend to buy/sell shares of _________________ for
my personal account or an account for which I have discretion. I am aware of no
conflict this transaction may pose with any mutual fund managed by Federated
Investors or Federated Global Research.
Signed by: _______________________
Date: ____________________________
Acknowledged by: _________________
(Head Trader or Sr. VP)
-15-
<PAGE>
Date
Broker-Dealer Name Address
RE: Your Name
Brokerage Account Number: 1234-5678
Dear Sir/Madam:
As a(n) [employee] [relative residing in the household of an employee] of
Federated Investors, I am subject to certain requirements applicable to my
personal securities transactions, in accordance with the Codes of Ethics
adopted by the various investment companies, investment advisers and
broker/dealers affiliated with Federated Investors. These requirements also
assist Federated Investors in carrying out its responsibilities under the
Insider Trading and Security Fraud Enforcement Act of 1988. Among these
requirements is my obligation to provide to Federated Investors duplicate
brokerage confirmations and account statements.
Therefore, I hereby request that you provide duplicate confirmations and
account statements with respect to securities in which I have any
beneficial ownership or interest, including securities held in street name
or in house, family, joint or partnership accounts. These duplicate account
memoranda should occur with respect to all transactions including, but not
limited to, those involving options, warrants, shares of closed end
investment companies and futures contracts. Please forward this information
to:
Brian P. Bouda
Chief Compliance Officer
Federated Investors, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Any questions concerning these matters can be directed to Lisa Ling at
(412) 288-6399. Your serious attention to this matter is greatly
appreciated.
Sincerely,
-16-
<PAGE>
PROCEDURES FOR THE REPORTING AND REVIEW OF PERSONAL
TRANSACTION ACTIVITY
Initial Reporting Process
- -------------------------
1. A member of the Compliance Department meets with each new Access Person and
reviews the Code of Ethics, the Insider Trading Policy and the procedures
for preclearing personal securities transactions through TradeComply.
2. The Access Person is required to complete the "Certification and
Acknowledgment Form" to acknowledge his/her understanding of the Code of
Ethics and return it to the designated Compliance Assistant within 10
calendar days.
3. In addition, the Access Person is required to complete the "Personal
Security Portfolio Form" which includes the following information:
a) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
b) the name and address of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Security was
held for the direct or indirect benefit of the Access Person as of the
date of employment as an Access Person; and
c) the date the report is submitted to the Compliance Department.
4. A separate form must be completed for the Access Person and all household
members as defined in Section 2(c) of the Code. The signed form(s) must be
returned to the Compliance Department within 10 calendar days.
5. A member of the Compliance Department inputs current portfolio holdings
information into TradeComply as "initial" holdings.
6. The Compliance Department notifies each broker, dealer or bank that
duplicate confirmations and statements for the Access Person and household
members, if applicable, must be sent to Brian P. Bouda, Chief Compliance
Officer, effective immediately.
Quarterly Reporting Process
- ---------------------------
1. On the first business day after each calendar quarter end, the Compliance
Assistant sends an e-mail to each Access Person giving step-by-step
instructions on how to complete the quarterly reporting requirements using
TradeComply.
-17-
<PAGE>
2. Within 10 calendar days of the quarter end, the Access Person is required
to:
a) review for accuracy all Covered Security transactions recorded during
the previous calendar quarter in all personal and household member
accounts;
b) review all open account information, including names of brokers, banks
and dealers, addresses and account numbers;
c) notify the Compliance Department of any new accounts established with
brokers, banks or dealers during the quarter and the date the account
was established;
d) resolve any discrepancies with the Compliance Department;
e) record an electronic signature on TradeComply.
3. Covered Security transactions executed by any Access Person during the
calendar quarter are reviewed by Lisa Ling, Compliance Officer,
periodically throughout the quarter using the Compliance Monitor function
in TradeComply.
4. The Compliance Department issues memos to each Access Person if any
transactions he or she has executed during the quarter have been deemed to
be either exceptions to or violations of the Code's requirements.
5. Based on the activity and the responses to the memos, the Compliance
Department may impose any of the sanctions identified in Section 8.
Annual Reporting Process
- ------------------------
1. At least annually, the Compliance Department requires that each Access
Person read the Code and certify and acknowledge his/her understanding of
the Code and its requirements.
2. This re-certification is required to be completed within 10 calendar days
of the request. The Compliance Department monitors compliance with this
requirement through the electronic signatures on TradeComply.
3. At the same time, the Compliance Department provides each Access Person
with a cur-rent list of securities held in the Access Person's account(s)
on TradeComply.
4. Within 10 calendar days of the request, the Access Person is required to:
a) review for accuracy all securities held in all personal and household
member accounts, including the title, number of shares and principal
amount of each Covered Security in which the Access Person had any
direct or indirect beneficial ownership;
-18-
<PAGE>
b) review all open account information, including names of brokers, banks
and dealers, addresses and account numbers;
c) notify the Compliance Department of any new accounts established with
brokers, banks or dealers;
d) resolve any discrepancies with the Compliance Department;
e) record an electronic signature on TradeComply.
Reporting to the Board of Directors
- -----------------------------------
1. Each quarter, the Compliance Department reports any violations of the Code
to the Board of Directors. Violations of the Code include:
a) failure to preclear a transaction;
b) failure to complete the initial, quarterly or annual reporting
requirements timely, regardless of whether the Access Person executed
any transactions;
c) recognition of a profit on the sale of a security held less than 60
days;
d) failure to comply with the receipt of gifts requirements; and
e) any trends or patterns of personal securities trading which are deemed
by the Compliance Department to be violations of the Code.
2. The Compliance Department provides the Board with the name of the Access
Person; the type of violation; the details of the transaction(s); and the
types of sanctions imposed, if any.
Recordkeeping Requirements
- --------------------------
The Compliance Department maintains the following books and records in
TradeComply for a period no less than 6 calendar years:
a) a copy of the Code of Ethics;
b) a record of any violation of the Code of Ethics and any action taken
as a result of the violation;
c) a copy of each report made by an Access Person, including initial,
quarterly and annual reporting;
d) a record of all Access Persons (current and for the past five years);
-19-
<PAGE>
e) a record of persons responsible for reviewing reports; and
f) a copy of any supporting documentation used in making decisions
regarding action taken by the Compliance Department with respect to
personal securities trading.
-20-
