UST058I
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 28, 1994
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL EQUITY FUND
EXCELSIOR INSTITUTIONAL INCOME FUND
EXCELSIOR INSTITUTIONAL TOTAL RETURN BOND FUND
EXCELSIOR INSTITUTIONAL EQUITY INDEX FUND
EXCELSIOR INSTITUTIONAL BOND INDEX FUND
EXCELSIOR INSTITUTIONAL SMALL CAPITALIZATION FUND
EXCELSIOR INSTITUTIONAL BALANCED FUND
EXCELSIOR INSTITUTIONAL EQUITY GROWTH FUND
EXCELSIOR INSTITUTIONAL VALUE EQUITY INCOME FUND
EXCELSIOR INSTITUTIONAL INTERNATIONAL EQUITY FUND
Excelsior Institutional Trust (the "Trust") is comprised of twelve
funds, ten active series and two inactive series. This Statement of Additional
Information describes the shares of ten funds - Excelsior Institutional Equity
Fund (the "Equity Fund"), Excelsior Institutional Income Fund (the "Income
Fund"), Excelsior Institutional Total Return Bond Fund (the "Total Return Bond
Fund"), Excelsior Institutional Equity Index Fund (the "Equity Index Fund"),
Excelsior Institutional Bond Index Fund (the "Bond Index Fund"), Excelsior
Institutional Small Capitalization Fund (the "Small Cap Fund"), Excelsior
Institutional Balanced Fund (the "Balanced Fund"), Excelsior Institutional
Equity Growth Fund (the "Equity Growth Fund"), Excelsior Institutional Value
Equity Income Fund (the "Value Equity Income Fund"), and Excelsior Institutional
International Equity Fund (the "International Equity Fund") (each, a "Fund";
collectively, the "Funds").
TABLE OF CONTENTS PAGE
Excelsior Institutional Trust . . . . . . . . . . . . . . . . . . 2
Investment Objectives, Policies and Restrictions . . . . . . . . . 3
Performance Information . . . . . . . . . . . . . . . . . . . . . 31
Determination of Net Asset Value; Valuation of Securities . . . . 35
Additional Purchase, Exchange, and Redemption Information . . . . 36
Management of the Trust and Portfolio Series . . . . . . . . . . . 37
Independent Accountants or Auditors . . . . . . . . . . . . . . . 44
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Description of the Trust; Fund Shares . . . . . . . . . . . . . . 47
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 48
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Excelsior Institutional Trust
6 St. James Avenue
Boston, Massachusetts 02116
(617) 423-0800
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Funds' Prospectus as it may be amended from time to time (the "Prospectus").
This Statement of Additional Information should be read only in conjunction with
the
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Prospectus, a copy of which may be obtained by an investor without charge by
contacting the Trust at its address shown above or by calling (617) 423-0800.
Terms used but not defined herein, which are defined in the Funds' Prospectus,
are used herein as defined in the Prospectus.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
EXCELSIOR INSTITUTIONAL TRUST
The Trust is an open-end diversified management investment company
which was organized as a business trust under the laws of the State of Delaware
on April 27, 1994. The shares of the Trust are continuously sold to
institutional investors. Shares of the Trust are divided into twelve separate
series, ten of which are described herein. Each such series or Fund seeks to
achieve its investment objective by investing all of its investable assets in a
corresponding Portfolio, as follows:
FUND NAME CORRESPONDING PORTFOLIO
Equity Fund Equity Portfolio
Income Fund Income Portfolio
Total Return Bond Fund Total Return Bond Portfolio
Equity Index Fund Equity Market Portfolio
Bond Index Fund Bond Market Portfolio
Small Capitalization Fund Small Cap Portfolio
Balanced Fund Balanced Portfolio
Equity Growth Fund Equity Growth Portfolio
Value Equity Income Fund Value Equity Income Portfolio
International Equity Fund International Equity Portfolio
As of the date hereof, there are two additional inactive series of the
Trust. Additional series may be added to the Trust from time to time. Each of
the Portfolios is a series of St. James Portfolios (the "Portfolio Series").
United States Trust Company of The Pacific Northwest ("U.S. Trust
Pacific") is the investment adviser for the Portfolios corresponding to the
Funds listed below. The daily management of the security holdings of the
Portfolios for the following Funds is supervised by the investment managers
named below, acting as subadvisers:
Equity Index Fund,
Bond Index Fund,
and Small Cap Fund. . . . United States Trust Company of New York
("U.S. Trust")
Balanced Fund . . . . . . . Becker Capital Management, Inc.
Equity Growth Fund . . . . Luther King Capital Management
Value Equity Income Fund. . Spare, Kaplan & Bischel Associates
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International Equity Fund . Harding, Loevner Management, L.P.
U.S. Trust is the investment adviser of the Portfolios corresponding to
the Equity Fund, Income Fund, Total Return Bond Fund, and International Equity
Fund. U.S. Trust makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for these Portfolios.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of each Fund and Portfolio is described in the
Funds' Prospectus. There can, of course, be no assurance that a Fund or its
corresponding Portfolio will achieve its investment objective.
INVESTMENT POLICIES
Each Fund seeks to achieve its investment objective by investing all of
its assets in its corresponding Portfolio, as shown above. The Trust may
withdraw a Fund's investment from its corresponding Portfolio at any time if the
Board of Trustees of the Trust determines that it is in the best interests of
the Fund to do so.
Since the investment characteristics of each Fund correspond directly
to those of its corresponding Portfolio, the following supplements the
discussions of the various investments of and techniques employed by the
Portfolios set forth in the Prospectus of the Funds.
OTHER INVESTMENT CONSIDERATIONS - EQUITY PORTFOLIO
Equity Portfolio invests primarily in common stocks but may purchase
both preferred stocks and securities convertible into common stock at the
discretion of U.S. Trust. While current income is secondary to the objective of
long-term capital appreciation, the Series Portfolio expects that the broad and
diversified strategies utilized by U.S. Trust will result in somewhat more
current income than would be generated if U.S. Trust utilized a single strategy
more narrowly focused on rapid growth of principal and involving exposure to
higher levels of risk.
U.S. Trust's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership. U.S. Trust employs the following three different but closely
interrelated portfolio strategies to focus and organize its search for
investment values.
1. PROBLEM/OPPORTUNITY COMPANIES. Important investment opportunities
often occur where companies develop solutions to large, complex, fundamental
problems, such as declining industrial productivity; rising costs and declining
sources of energy; the economic imbalances and value erosion caused by years of
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high inflation and interest rates; the soaring costs and competing priorities of
providing health care; and the accelerating interdependence and "shrinking size"
of the world.
Solutions or parts of solutions to large problems may be generated by
established companies or comparatively new companies of all sizes through the
development of new products, technologies or services, or through new
applications of older ones.
Investment in such companies represents a very wide range of investment
potential, current income return rates, and exposure to fundamental and market
risks. Income generated by Equity Portfolio's investments in these companies
would be expected to be moderate, characterized by lesser rates than those of a
fund whose sole objective is current income, and somewhat higher rates than
those of a higher-risk growth fund.
2. TRANSACTION VALUE COMPANIES. In the opinion of U.S. Trust, the stock
market frequently values the aggregate ownership of a company at a substantially
lower figure than its component assets would be worth if they were sold off
separately over time. Such assets may include intangible assets such as product
and market franchises, operating know-how, or distribution systems, as well as
such tangible properties as oil reserves, timber, real estate, or production
facilities. Investment opportunities in these companies are determined by the
magnitude of difference between economic worth and current market price.
Market undervaluations are very often corrected by purchase and sale,
restructuring of the company, or market recognition of a company's actual worth.
The recognition process may well occur over time, however, incurring a form of
time-exposure risk. Success from investing in these companies is often great,
but may well be achieved only after a waiting period of inactivity.
Income derived from investing in undervalued companies is expected to
be moderately greater than that derived from investments in either the
problem/opportunity or early life cycle companies.
3. EARLY LIFE CYCLE COMPANIES. Investments in early life cycle
companies tend to be narrowly focused on an objective of higher rates of capital
appreciation. They correspondingly will involve a significantly greater degree
of risk and the reduction of current income to a negligible level. Such
investments will not be limited to new, small companies engaged only in frontier
technology, but will seek opportunities for maximum appreciation through the
full spectrum of business operations, products, services, and asset values.
Consequently, Equity Portfolio's investments in early life cycle companies are
primarily in younger, small- to medium-sized companies in the early stages of
their development. Such companies are usually more flexible in trying new
approaches to problem-solving and in making new or different employment of
assets. Because of the high risk level involved, the ratio of success among such
companies is lower than the average, but for those companies which succeed, the
magnitude of investment reward is potentially higher.
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OTHER INVESTMENT CONSIDERATIONS - INTERNATIONAL EQUITY PORTFOLIO
The Portfolio may purchase gold bars primarily of standard weight
(approximately 400 troy ounces) at the best available prices in the New York
bullion market. However, the subadviser will have discretion to purchase or sell
gold bullion in other markets, including foreign markets, if better prices can
be obtained. Gold bullion is valued by the Portfolio at the mean between the
closing bid and asked prices in the New York bullion market as of the close of
the New York Stock Exchange each business day. When there is no readily
available market quotation for gold bullion, the bullion will be valued by such
method as determined by the Portfolio Series' Board of Trustees to best reflect
its fair value. For purpose of determining net asset value, gold will be valued
in U.S. dollars.
BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised
and examined by the Comptroller of the Currency and are required to be members
of the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
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In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an amount
equal to a specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches within the
state.
U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include U.S. Treasury securities, which differ only in
their interest rates, maturities and times of issuance. Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
The Portfolios may purchase three types of commercial paper, as
classified by exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"). The three types include open market, privately placed,
and letter of credit commercial paper. Trading of such commercial paper is
conducted primarily by institutional investors through investment dealers or
directly through the issuers. Individual investor participation in the
commercial paper market is very limited.
OPEN MARKET. "Open market" commercial paper refers to the commercial
paper of any industrial, commercial, or financial institution which is openly
traded, including directly issued paper. "Open market" paper's 1933 Act
exemption is under Section 3(a)(3) which limits the use of proceeds to current
transactions, limits maturities to 270 days and requires that the paper contain
no provision for automatic rollovers.
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PRIVATELY PLACED. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts transactions
by an issuer not involving any public offering. The commercial paper may only be
offered to a limited number of accredited investors. "Privately placed"
commercial paper has no maturity restriction and may be considered illiquid. See
"Illiquid Securities" below.
LETTER OF CREDIT. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for repayment
of the notes. Unlike "open market" and "privately placed" commercial paper,
"letter of credit" paper has no limitations on purchases.
LENDING OF PORTFOLIO SECURITIES
The Portfolios have the authority to lend portfolio securities to
brokers, dealers and other financial organizations. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Portfolio will adhere to the following conditions whenever
its securities are loaned: (i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the borrower must
increase this collateral whenever the market value of the loaned securities
including accrued interest exceeds the level of the collateral; (iii) the
Portfolio must be able to terminate the loan at any time; (iv) the Portfolio
must receive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities, and any increase in market
value; (v) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (vi) voting rights on the loaned securities may pass to the
borrower. However, if a material event adversely affecting the loaned securities
were to occur, the Portfolio would terminate the loan and regain the right to
vote the securities.
VARIABLE RATE AND FLOATING RATE SECURITIES
The Portfolios may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
397 days, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding 397 days, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes which are obligations that permit a Portfolio to invest fluctuating
amounts, which may change daily without penalty, pursuant to direct arrangements
between the Portfolio, as lender, and the borrower. The interest rates on these
notes fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
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rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
collateralized by letters of credit or other credit support arrangements
provided by banks. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, a Portfolio's right to redeem is dependent on the ability
of the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and a Portfolio may invest in
obligations which are not so rated only if its investment managers determine
that at the time of investment the obligations are of comparable quality to the
other obligations in which the Portfolio may invest. The respective subadvisers
of the Portfolios will consider on an ongoing basis the creditworthiness of the
issuers of the floating and variable rate demand obligations held by the
Portfolios. The Portfolios will not invest more than 15% of the value of their
net assets in floating or variable rate demand obligations as to which they
cannot exercise the demand feature on not more than seven days' notice if there
is no secondary market available for these obligations, and in other securities
that are not readily marketable. See "Investment Restrictions" below.
PARTICIPATION INTERESTS
A Portfolio may purchase from financial institutions participation
interests in securities in which such Portfolio may invest. A participation
interest gives a Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of 13 months or less. If
the participation interest is unrated, or has been given a rating below that
which is permissible for purchase by the Portfolio, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or the
payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the investment
managers of a Portfolio must have determined that the instrument is of
comparable quality to those instruments in which the Portfolio may invest. For
certain participation interests, a Portfolio will have the right to demand
payment, on not more than seven days' notice, for all or any part of the
Portfolio's participation interest in the security, plus accrued interest. As to
these instruments, the Portfolio intends to exercise its right to demand payment
only upon a default under the terms of the security, as needed to provide
liquidity to meet redemptions, or to maintain or improve the quality of its
investment portfolio. A Portfolio will not invest more than 15% of its net
assets in participation interests that do not have this demand feature, and in
other securities that are not readily marketable. Currently, no Portfolio
intends to invest more than 5% of its net assets in participation interests
during the current year. See "Investment Restrictions" below.
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ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them which,
if possible at all, would result in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers.
A Portfolio's investment managers will monitor the liquidity of Rule
144A securities for that Portfolio under the supervision of the Portfolio's
Board of Trustees. In reaching liquidity decisions, the investment managers will
consider, among other things, the following factors: (1) the frequency of trades
and quotes for the security, (2) the number of dealers and other potential
purchasers wishing to purchase or sell the security, (3) dealer undertakings to
make a market in the security and (4) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
UNSECURED PROMISSORY NOTES
A Portfolio also may purchase unsecured promissory notes ("Notes")
which are not readily marketable and have not been registered under the 1933
Act, provided such investments are consistent with the Portfolio's investment
objectives and policies. The Portfolio will invest no more than 15% of its net
assets in such Notes and in other securities that are not readily marketable
(which securities would include floating and variable rate demand obligations as
to which the Portfolio cannot exercise the demand feature described above and as
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to which there is no secondary market). Currently, no Portfolio intends to
invest any of its assets in unsecured promissory notes during the coming year.
See "Investment Restrictions" below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller (which
is usually a member bank of the Federal Reserve System or a member firm of the
New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon date within
a number of days (usually not more than seven) from the date of purchase. The
resale price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed-upon price, which obligation is in effect secured by the value of the
underlying security, usually U.S. Government or government agency issues. Under
the Investment Company Act of 1940, as amended (the "1940 Act"), repurchase
agreements may be considered to be loans by the buyer. A Portfolio's risk is
limited to the ability of the seller to pay the agreed upon amount on the
delivery date. If the seller defaults, the underlying security constitutes
collateral for the seller's obligation to pay although a Portfolio may incur
certain costs in liquidating this collateral and in certain cases may not be
permitted to liquidate this collateral. All repurchase agreements entered into
by the Portfolios are fully collateralized, with such collateral being marked to
market daily.
The Portfolios may borrow funds for temporary or emergency purposes,
such as meeting larger than anticipated redemption requests, and not for
leverage. One means of borrowing is by agreeing 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"). At the
time a Portfolio enters into a reverse repurchase agreement it will place in a
segregated custodial account cash, U.S. Government securities or high-grade debt
obligations 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 Portfolio may decline below the repurchase price
of those securities.
MUNICIPAL OBLIGATIONS - INCOME PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
Income Portfolio and Total Return Bond Portfolio may, when deemed
appropriate by U.S. Trust in light of the Portfolios' investment objective,
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 Income Portfolio and Total Return Bond
Portfolio that are derived from interest on municipal securities would be
taxable to the Portfolios' investors for federal income tax purposes.
Municipal obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
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of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "municipal obligations" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.
The two principal classifications of municipal obligations are "general
obligation" and "revenue" issues, but the Portfolios' securities holdings may
include "moral obligation" issues, which are normally issued by special-purpose
authorities. There are, of course, variations in the quality of municipal
obligations, both within a particular classification and between
classifications, and the yields on municipal obligations depend upon a variety
of factors, including general market conditions, the financial condition of the
issuer, conditions of the municipal bond market, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. The
ratings of Moody's and S&P described in the Prospectus and Appendix A hereto
represent the opinion of the respective rating agencies 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.
The payment of principal and interest on most municipal obligations
purchased by the Portfolios will depend upon the ability of the issuers to meet
their obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multistate
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information and in the Prospectus. The
non-governmental user of facilities financed by private activity bonds is also
considered to be an "issuer". An issuer's obligations are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal obligations may be materially
adversely affected by litigation or other conditions.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
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Among other instruments, the Portfolios 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 Portfolios 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 Portfolio
Series nor U.S. Trust will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.
STAND-BY COMMITMENTS - INCOME PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
Income Portfolio and Total Return Bond Portfolio 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 Portfolio, at
the Portfolio's option, specified municipal obligations at a specified price.
The amount payable to a Portfolio upon its exercise of a stand-by commitment is
normally (i) the Portfolio's acquisition cost of the municipal obligations
(excluding any accrued interest which the Portfolio paid on their acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Portfolio 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 Portfolio at any time
before the maturity of the underlying municipal obligations, and may be sold,
transferred or assigned by the Portfolio only with the underlying instruments.
Income Portfolio and Total Return Bond Portfolio expect that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, either Portfolio 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
Portfolio 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 Portfolio.
Income Portfolio and Total Return Bond Portfolio intend to enter into
stand-by commitments only with banks and broker/dealers which, in U.S. Trust's
opinion, present minimal credit risks. In evaluating the creditworthiness of the
issuer of a stand-by commitment, U.S. Trust will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
FOREIGN SECURITIES
If permitted pursuant to their investment objectives and policies, the
Portfolios may invest their assets in securities of foreign issuers. Investing
in securities issued by companies whose principal business activities are
outside the United States may involve significant risks not present in domestic
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investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing and financial reporting
requirements comparable to those applicable to domestic issuers. Investments in
foreign securities also involve the risk of possible adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, brokerage or other taxation, limitation on the removal of funds or
other assets of a Portfolio, political or financial instability or diplomatic
and other developments which would affect such investments. Further, economies
of particular countries or areas of the world may differ from the economy of the
United States.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
United States companies. Foreign security trading practices, including those
involving securities settlement where a Portfolio's assets may be released prior
to receipt of payment, may expose a Portfolio to increased risk in the event of
a failed trade or the insolvency of a foreign broker-dealer. In addition,
foreign brokerage commissions are generally higher than commissions on
securities traded in the United States and may be non-negotiable. In general,
there is less overall governmental supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
The Portfolios may invest in foreign securities that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than foreign securities of the same class that
are not subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Because the Portfolios, if consistent with their investment objectives
and policies, may buy and sell securities denominated in currencies other than
the U.S. dollar and receive interest, dividends and sale proceeds in currencies
other than the U.S. dollar, the Portfolios from time to time may enter into
foreign currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. The
Portfolios either enter into these transactions on a spot (I.E., cash) basis at
the spot rate prevailing in the foreign currency exchange market or use forward
contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
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currency exchange contract generally has no deposit requirement and is traded at
a net price without commission. A Portfolio maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Portfolios may enter into foreign currency hedging transactions in
an attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into the investment managers' long-term
investment decisions, the Portfolios will not routinely enter into foreign
currency hedging transactions with respect to security transactions; however,
the investment managers believe that it is important to have the flexibility to
enter into foreign currency hedging transactions when they determine that the
transactions would be in a Portfolio's best interest. Although these
transactions tend to minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit any potential gain that
might be realized should the value of the hedged currency increase. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
At or before the maturity of a forward foreign currency exchange
contract, a Portfolio 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
Portfolio will obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If the Portfolio retains the
portfolio security and engages in an offsetting transaction, the Portfolio, 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 Portfolio'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 Portfolio 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 Portfolio will suffer a loss to the extent of 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.
While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event a Portfolio's ability to utilize
forward contracts in the manner set forth in the Prospectus may be restricted.
Forward contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
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changes in currency prices may result in poorer overall performance for a
Portfolio than if it had not entered into such contracts. The use of foreign
currency forward contracts may not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the prices of or rates of return on a Portfolio's
foreign currency denominated portfolio securities and the use of such techniques
will subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar-equivalent value of the foreign currency-denominated
asset that is the subject of the hedge generally will not be precise. In
addition, a Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices and this will limit a Portfolio's ability
to use such contract to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
The Portfolios may invest in guaranteed investment contracts ("GICs")
issued by insurance companies. Pursuant to such contracts, a Portfolio makes
cash contributions to a deposit fund of the insurance company's general account.
The insurance company then credits to the fund guaranteed interest. The GICs
provide that this guaranteed interest will not be less than a certain minimum
rate. The insurance company may assess periodic charges against a GIC for
expenses and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. Because a Portfolio may not receive the
principal amount of a GIC from the insurance company on seven days' notice or
less, the GIC is considered an illiquid investment and, together with other
instruments in a Portfolio which are not readily marketable, will not exceed 15%
of the Portfolio's net assets. The term of a GIC will be 13 months or less. In
determining average weighted portfolio maturity, a GIC will be deemed to have a
maturity equal to the longer of the period of time remaining until the next
readjustment of the guaranteed interest rate or the period of time remaining
until the principal amount can be recovered from the issuer through demand.
Currently, each Portfolio intends to invest 5% or less of its respective net
assets in GICs during the current year.
WHEN-ISSUED SECURITIES
If permitted pursuant to their investment objectives and policies, the
Portfolios may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Portfolios would
take delivery of such securities. Prior to committing to the purchase of a
security on a when-issued or on a forward delivery basis, the Portfolios will
establish procedures consistent with the relevant policies of the SEC. Those
policies currently recommend that an amount of a Portfolio's assets equal to the
amount of the purchase commitment be held aside or segregated to be used to pay
for the commitment. Therefore, the Portfolios expect always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any purchase
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commitments or to limit any potential risk. Although the Portfolios do not
intend to make such purchases for speculative purposes and intend to adhere to
SEC policies, purchases of securities on a when issued or forward delivery basis
may involve additional risks than other types of securities purchases. For
example, a Portfolio may have to sell assets which have been set aside in order
to meet redemptions. Also, if a Portfolio determines it is advisable as a matter
of investment strategy to sell the when-issued or forward delivery securities,
the Portfolio would be required to meet its obligations from its then available
cash flow or the sale of securities, or, although it would not normally expect
to do so, from the sale of the when-issued or forward delivery securities
themselves (which may have a value greater or less than the Portfolio's payment
obligation).
When a Portfolio engages in when-issued or forward delivery
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Portfolio's 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
Portfolio starting on the day the Portfolio agrees to purchase the securities.
The Portfolio does not earn interest on the securities it has committed to
purchase until they are paid for and delivered on the settlement date.
ZERO COUPON OBLIGATIONS
A Portfolio may acquire zero coupon obligations when consistent with
its investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since dividend income is accrued throughout the term of the zero
coupon obligation but is not actually received until maturity, a Portfolio may
have to sell other securities to pay said accrued dividends prior to maturity of
the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments by a Portfolio may
depend in part upon its investment managers' skill and experience with respect
to such instruments. Should interest or exchange rates move in an unexpected
manner, the Portfolio may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and thus will be
in a worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
FUTURES CONTRACTS. If permitted pursuant to their investment objectives
and policies, the Portfolios may enter into contracts for the purchase or sale
for future delivery of fixed-income securities or foreign currencies, or
contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
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"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Portfolio may enter
into futures contracts which are based on debt securities that are backed by the
full faith and credit of the U.S. Government, such as long-term U.S. Treasury
Bonds, Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. A
Portfolio may also enter into futures contracts which are based on bonds issued
by entities other than the U.S. Government.
Purchases or sales of stock index futures contracts are used to attempt
to protect a Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Portfolio's securities. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the futures
position. When a Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or entirely,
offset increases in the cost of securities that the Portfolio intends to
purchase. As such purchases are made, the corresponding positions in stock index
futures contracts will be closed out. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position, but under unusual market conditions, a long futures
position may be terminated without a related purchase of securities.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
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The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase, a
Portfolio might enter into futures contracts for the sale of debt securities.
Such a sale would have much the same effect as selling an equivalent value of
the debt securities owned by the Portfolio. If interest rates did increase, the
value of the debt security in a Portfolio would decline, but the value of the
futures contracts to the Portfolio would increase at approximately the same
rate, thereby keeping the net asset value of the Portfolio from declining as
much as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an investment
technique allows a Portfolio to maintain a defensive position without having to
sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the investment managers may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the investment
managers believe that use of such contracts will benefit the Portfolios, if the
judgment of the investment managers about the general direction of interest
rates
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is incorrect, a Portfolio's overall performance would be poorer than if it had
not entered into any such contract. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of debt securities held by it and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. A Portfolio
may have to sell securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. If permitted pursuant to their investment
objectives and policies, the Portfolios may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
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The Board of Trustees of the Portfolio Series has adopted the
requirement that futures contracts and options on futures contracts be used
either (i) as a hedge without regard to any quantitative limitation, or (ii) for
other purposes to the extent that immediately thereafter the aggregate amount of
margin deposits on all (non-hedge) futures contracts of the Portfolio and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be changed
by the Portfolio's Board of Trustees without considering the policies and
concerns of the various applicable federal and state regulatory agencies.
OPTIONS ON FOREIGN CURRENCIES. If permitted pursuant to their
investment objectives and policies, the Portfolios may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
A Portfolio may write options on foreign currencies for the same types
of hedging purposes. For example, where a Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
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rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
The Portfolios may write covered call options on foreign currencies. A
call option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held by it. A call option is also covered if the Portfolio has a call on the
same foreign currency and in the same principal amount as the call written where
the exercise price of the call held (a) is equal to or less than the exercise
price of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash, U.S.
Government securities and other high quality liquid debt securities in a
segregated account with its custodian.
The Portfolios may write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or U.S. Government securities or
other high quality liquid debt securities in an amount not less than the value
of the underlying foreign currency in U.S. dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by a Portfolio
in futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
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exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in a Portfolio's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
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<PAGE>
OPTIONS ON SECURITIES
If permitted pursuant to their investment objectives and policies, the
Portfolios may write (sell) covered call and put options to a limited extent on
its portfolio securities ("covered options"). However, a Portfolio may forgo the
benefits of appreciation on securities sold or may pay more than the market
price on securities acquired pursuant to call and put options written by the
Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which a Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise
price. By writing a covered call option, a Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which a Portfolio has no control, the Portfolio must purchase the
underlying security from the option holder at the exercise price. By writing a
covered put option, a Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. A Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." Where a Portfolio cannot effect a closing purchase transaction, it
may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount
of the deferred credit will be subsequently marked to market to reflect the
current market value of the option written. The current market value of a traded
option is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the
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<PAGE>
proceeds of the sale will be increased by the premium originally received. The
writing of covered call options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
call options are written will be segregated on the books of the custodian for
the Portfolio.
A Portfolio may purchase call and put options on any securities in
which it may invest. A Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The purchase
of a call option would entitle the Portfolio, in exchange for the premium paid,
to purchase a security at a specified price during the option period. A
Portfolio would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a loss
if the value of the securities remained at or below the exercise price during
the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Portfolio, in exchange for the premium paid, to sell
a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by a
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. A Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolios have adopted certain other non-fundamental policies
concerning option transactions which are discussed below. A Portfolio's
activities in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for its corresponding Fund's
qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
The Portfolios may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such
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<PAGE>
transactions will not fulfill their obligations. To reduce this risk, the
Portfolios will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The investment managers
will monitor the creditworthiness of dealers with whom the Portfolios enter into
such options transactions, under the general supervision of the Portfolio
Series' Trustees.
OPTIONS ON SECURITIES INDICES
In addition to options on securities, and if permitted pursuant to
their investment objectives and policies, the Portfolios may also purchase and
write (sell) call and put options on securities indices. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the index.
Such options will be used for the purposes described above under "Options on
Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although a
Portfolio generally will only purchase or write such an option if its investment
managers believe the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. A Portfolio will not purchase such options unless its
investment managers believe the market is sufficiently developed such that the
risk of trading in such options is no greater than the risk of trading in
options on securities.
Price movements in the Portfolios' securities may not correlate
precisely with movements in the level of an index and, therefore, the use of
options on indices cannot serve as a complete hedge. Because options on
securities indices require settlement in cash, the investment managers may be
forced to liquidate portfolio securities to meet a Portfolio's settlement
obligations.
SHORT SALES "AGAINST THE BOX"
In a short sale, a Portfolio sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. A
Portfolio may engage in short sales only if at the time of the short sale it
owns or has the right to obtain, at no additional cost, an equal amount of the
security being sold short. This investment technique is known as a short sale
"against the box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
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of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.
The Portfolios will not engage in short sales against the box for
investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security (or a security convertible or exchangeable for such
security), or when a Portfolio wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for federal
income tax purposes or for purposes of satisfying certain tests applicable to
regulated investment companies under the Code. In such case, any future losses
in a Portfolio's long position should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a loss
in the short position. The extent to which such gains or losses are reduced
depends upon the amount of the security sold short relative to the amount a
Portfolio owns. There are certain additional transaction costs associated with
short sales against the box, but the Portfolios endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.
As a non-fundamental operating policy, not more than 40% of a
Portfolio's total assets would be involved in short sales against the box.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be
created in the future, upon the Trust supplementing the Funds' Prospectus, a
Portfolio or Portfolios may invest in obligations other than those listed
previously, provided such investments are consistent with a Fund's and its
corresponding Portfolio's investment objective, policies and restrictions.
RATING SERVICES
Ratings represent the opinions of rating services as to the quality of
the securities that they undertake to rate. It should be emphasized, however,
that ratings are relative and subjective and are not absolute standards of
quality. Although these ratings are an initial criterion for selection of
portfolio investments, the investment managers also make their own evaluations
of these securities, subject to review by the Board of Trustees of the Portfolio
Series. After purchase by a Portfolio, an obligation may cease to be rated or
its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event would require a Portfolio to dispose of the obligation,
but its subadviser will consider such an event in its determination of whether
the Portfolio should continue to hold the obligation. A description of the
ratings used herein and in the Funds' Prospectus is set forth in the Appendix to
this Statement of Additional Information.
Except as stated otherwise, all investment policies and restrictions
described herein are non-fundamental, and may be changed without prior
shareholder approval.
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INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of
each Fund and each Portfolio and may not be changed with respect to a Fund or
Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of the
outstanding voting securities" under the 1940 Act and as used in this Statement
of Additional Information and the Prospectus means, with respect to the Fund (or
the Portfolio), the lesser of (i) 67% or more of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Portfolio)
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Portfolio)
are present or represented by proxy, or (ii) more than 50% of the outstanding
voting securities of the Fund (or of the total beneficial interests of the
Portfolio). Whenever the Trust is requested to vote on a fundamental policy of a
Portfolio, the Trust will hold a meeting of the corresponding Fund's
shareholders and will cast its vote as instructed by that Fund's shareholders.
With respect to each fundamental investment restriction and each
non-fundamental investment policy listed below, if a percentage or a rating
restriction on investment or utilization of assets is adhered to at the time an
investment is made or assets are so utilized, a later change in such percentage
resulting from changes in a Portfolio's total assets or the value of a
Portfolio's securities, or a later change in the rating of a portfolio security,
will not be considered a violation of the relevant restriction or policy.
As a matter of fundamental policy, each Portfolio (or Fund) may not
(except that no investment restriction of a Fund shall prevent a Fund from
investing all of its investable assets in an open-end management investment
company with substantially the same investment objective and policies as the
Fund):
(1) borrow money or mortgage or hypothecate assets of the Portfolio (or
Fund), except that in an amount not to exceed 1/3 of the current value of the
Portfolio's (or Fund's) assets (including such borrowing) less liabilities (not
including such borrowing), it may borrow money, enter into reverse repurchase
agreements, and purchase when-issued securities, and except that it may pledge,
mortgage or hypothecate its assets to secure such borrowings, reverse repurchase
agreements, or when-issued securities, provided that collateral arrangements
with respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction, and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute. The Portfolio (or Fund) will not purchase
securities while borrowings exceed 5% of the Portfolio's (or Fund's) total
assets.
(2) underwrite securities issued by other persons except insofar as the
Portfolio Series or the Portfolio (or the Trust or the Fund) may technically be
deemed an underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except (a) through the lending of the
Portfolio's (or Fund's) portfolio securities and provided that any such loans
not exceed 30% of the Portfolio's (or Fund's) total assets (taken at market
value),
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<PAGE>
(b) through the use of repurchase agreements or the purchase of short-term
obligations, or (c) by purchasing debt securities of types distributed publicly
or privately;
(4) purchase or sell real estate (including limited partnership
interests in partnerships substantially all of whose assets consist of real
estate but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (the
Portfolio Series (or Trust) may hold and sell, for the Portfolio's (or Fund's)
portfolio, real estate acquired as a result of the Portfolio's (or Fund's)
ownership of securities);
(5) invest 25% or more of its assets in any one industry (excluding
U.S. Government securities), unless the stocks in a single industry were to
comprise 25% or more of the S&P 500 Index (in the case of the Equity Index Fund
or Equity Market Portfolio) or the Lehman Brothers Aggregate Bond Index (in the
case of the Bond Index Fund or Bond Market Portfolio), in which case the
corresponding Portfolio (or that Fund) will invest 25% or more of its assets in
that industry; or
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain state
and federal statutes and policies each Portfolio (or the Trust, on behalf of
each Fund) will not as a matter of operating policy (except that no operating
policy shall prevent a Fund from investing all of its investable assets in an
open-end investment company with substantially the same investment objective and
policies as the Fund):
(i) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or management;
(iii) purchase securities issued by any other investment company
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that
securities of any investment company will not be purchased for
the Portfolio (or Fund) if such purchase at the time thereof
would cause (a) more than 10% of the Portfolio's (or Fund's)
total assets (taken at the greater of cost
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<PAGE>
or market value) to be invested in the securities of such
issuers; (b) more that 5% of the Portfolio's (or Fund's) total
assets (taken at the greater of cost or market value) to be
invested in any one investment company; or (c) more than 3% of
the outstanding voting securities of any such issuer to be
held for the Portfolio (or Fund);
(iv) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio (or Fund) to hold more than
10% of any class of securities of such issuer, for which
purposes all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts
shall not be subject to this restriction;
(v) purchase or retain in the Portfolio's (or Fund's) portfolio
any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or
Trustee of the Portfolio (Trust), or is an officer or partner
of the investment adviser or subadviser of the Portfolio, if
after the purchase of the securities of such issuer for the
Portfolio (or Fund) one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(vi) invest more than 5% of the Portfolio's (or Fund's) net assets
in warrants (valued at the lower of cost or market), but not
more than 2% of the Portfolio's (or Fund's) net assets may be
invested in warrants not listed on the New York Stock Exchange
or the American Stock Exchange;
(vii) make short sales of securities or maintain a short position
(excluding short sales if the Portfolio (or Fund) owns an
equal amount of such securities or securities convertible into
or exchangeable for, without payment of any further
consideration, securities of equivalent kind and amount) if
such short sales represent more than 25% of the Portfolio's
(or Fund's) net assets (taken at market value); provided,
however, that the value of the Portfolio's (or Fund's) short
sales of securities (excluding U.S. Government securities) of
any one issuer may not be greater than 2% of the value (taken
at market value) of the Portfolio's (or Fund's) net assets or
more than 2% of the securities of any class of any issuer;
(viii) enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase securities
which are not readily marketable, if, in the aggregate, more
than 15% of its net assets would be so invested; or
(ix) purchase puts, calls, straddles, spreads or any combination
thereof, if by reason of such purchase the value of its
aggregate investment
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<PAGE>
in such securities would exceed 5% of the Portfolio's (or Fund's)
total assets.
Policies (i) through (ix) may be changed by the Board of Trustees of
the Portfolio Series or the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or loss. Each
Portfolio may engage in short-term trading to achieve its investment
objective(s). Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Income Portfolio's and Total
Return Bond Portfolio's turnover rates may remain higher than those of many
other investment companies with similar investment objectives and policies;
however, since brokerage commissions are not normally paid on instruments
purchased by these Portfolios, portfolio turnover is not expected to have a
material effect on the net asset value of either Portfolio. Each Portfolio's
portfolio turnover rate may also be affected by cash requirements for
redemptions of shares and by regulatory provisions which enable a Portfolio to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. Portfolio trading is engaged in
for a Portfolio if its investment managers believe that a transaction net of
costs (including custodian charges) will help achieve the Portfolio's investment
objective.
A Portfolio's purchase and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Portfolios do
not anticipate paying brokerage commissions in such transactions. Purchases and
sales of the Bond Market Portfolio's, Income Portfolio's and Total Return Bond
Portfolio's portfolio securities will usually be principal transactions without
brokerage commissions. Any transactions for which a Portfolio pays a brokerage
commission will be effected at the best price and execution available. Purchases
from underwriters of securities include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
include the spread between the bid and the asked price.
Allocations of transactions, including their frequency, to various
dealers is determined by the investment managers in their best judgement and in
a manner deemed to be in the best interest of the investors in the applicable
Portfolio rather than by any formula. The primary consideration is prompt
execution of orders in an effective manner at the most favorable price.
The Advisory and Subadvisory Agreements provide that, in executing
portfolio transactions and selecting brokers or dealers, the investment managers
will seek to obtain the best net price and the most favorable execution. The
investment managers 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 the
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<PAGE>
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Advisory and Subadvisory Agreements authorize the
investment managers, to the extent permitted by law and subject to the review of
the Portfolio Series' Board of Trustees, to cause the Portfolios to pay a broker
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker for effecting the same transaction,
provided that the investment managers determine in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the overall responsibilities of the investment managers 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. Such services
might also include reports on global, regional, and country-by-country prospects
for economic growth, anticipated levels of inflation, prevailing and expected
interest rates, and the outlook for currency relationships.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the investment managers and
does not reduce the investment advisory fees payable by the Portfolios. Such
informa-tion may be useful to the investment managers in serving the Portfolios
and other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the investment managers
in carrying out their obligations to the Portfolios.
Investment decisions for a Portfolio will be made independently from
those for any other account or investment company that is or may in the future
become managed by its investment managers or any of their affiliates. If,
however, a Portfolio and other investment companies or accounts managed by the
same investment manager are contemporaneously engaged in the purchase or sale of
the same security, the transactions may be averaged as to price and allocated
equitably to each account. In some cases, this policy might adversely affect the
price paid or received by a Portfolio or the size of the position obtainable for
the Portfolio. In addition, when purchases or sales of the same security for a
Portfolio and for other investment companies managed by the same investment
manager occur contemporaneously, the purchase or sale orders may be aggregated
in order to obtain any price advantages available to large denomination
purchases or sales. Furthermore, in certain circumstances affiliates of the
investment managers whose investment portfolios are managed internally, rather
than by the investment managers, might seek to purchase or sell the same type of
investments at the same time as a Portfolio. Such an event might also adversely
affect that Portfolio.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
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YIELD. The Bond Index, Income and Total Return Bond Funds may quote the
standardized effective 30-day (or one month) yield for their respective shares,
calculated in accordance with the method prescribed by the Securities and
Exchange Commission for mutual funds. Such yield will be calculated for such
Fund's shares according to the following formula:
a-b 6
Yield = 2 [(--- + 1) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement)
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 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. Each 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 a Fund to all shareholder accounts 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).
The Balanced Fund may quote standardized effective 30-day (or one
month) yield for the fixed income portion of its corresponding Portfolio,
calculated in the same manner as specified above.
TOTAL RETURN. Each Funds' "average annual total return" may be quoted,
and such return is computed by determining the average annual compounded rate of
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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
gains 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.
DISTRIBUTION RATE. Each Fund may also quote its distribution rate.
Distribution rate is calculated by annualizing the per share distribution for
the most recent calendar month and dividing such annualized distribution by the
net asset value per share on the last day of such month. The distribution rate
of a Fund will not be used in advertising unless accompanied by standard
performance measures.
PERFORMANCE RESULTS. Any yield or total return quotation provided for a
Fund should not be considered as representative of the performance of that Fund
in the future since the net asset value of shares of that Fund will vary based
not only on the type, quality and maturities of the securities held in its
corresponding Portfolio, but also on changes in the current value of such
securities and on changes in the expenses of the Fund and the Portfolio. These
factors and possible differences in the methods used to calculate yields and
total return should be considered when comparing the yield and total return of a
Fund to yields and total rates of return published for other investment
companies or other investment vehicles. Total return reflects the performance of
both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparisons of non-standardized performance measures of various
investments are valid only if performance is calculated in the same manner for
each measure in the comparison. Since there are different methods of calculating
performance, investors should consider the effect of the methods used to
calculate performance when comparing the performance of a Fund with performance
quoted with respect to other investment companies or types of investments.
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In connection with communicating its performance to current or
prospective shareholders, each Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs. Some Portfolios
may invest in some instruments not eligible for inclusion in such an index, and
may be prohibited from investing in some instruments included in this index.
Evaluations of a Fund's performance made by independent sources may also be used
in advertisements concerning such Fund. Sources for a Fund's performance
information may include, but are not limited to, the following:
ASIAN WALL STREET JOURNAL, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CHANGING TIMES, THE KIPLINGER MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
CONSUMER DIGEST, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
DONOGHUE'S MONEY FUND REPORT, a weekly publication of the Donoghue Organization,
Inc., of Holliston, Massachusetts, reporting on the performance of the nation's
money market funds, summarizing money market fund activity, and including
certain averages as performance benchmarks, specifically "Donoghue's Money Fund
Average" and "Donoghue's Government Money Fund Average."
FINANCIAL TIMES, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
FINANCIAL WORLD, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
FORBES, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the performance
of a variety of mutual funds.
INVESTOR'S DAILY, a daily newspaper that features financial, economic and
business news.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly
publication of industry-wide mutual fund averages by type of fund.
MONEY, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
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NEW YORK TIMES, a nationally distributed newspaper which regularly covers
financial news.
PERSONAL INVESTING NEWS, a monthly news publication that often reports on
investment opportunities and market conditions.
PERSONAL INVESTOR, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SUCCESS, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports
mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
WEISENBERGER INVESTMENT COMPANIES SERVICES, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
WORKING WOMEN, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
WORLD INVESTOR, a European publication that periodically reviews the performance
of U.S. mutual funds investing internationally.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The Trust determines the net asset value of the shares of each Fund
each day that the New York Stock Exchange (the "NYSE") is open for business. As
a result, each Fund will normally determine its net asset value every weekday
except for the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day and
Christmas. Daily determinations of net asset value for each Fund are made at
4:00 p.m. (Eastern time) by dividing the total assets of a Fund less all of its
liabilities, by the total number of shares of the Fund outstanding at the time
the determination is made. Purchases and redemptions will be effected at the
time of determination of net asset value next following the receipt of any
purchase or redemption order deemed to be in good order. See "How To Purchase,
Exchange and Redeem Shares" in the Prospectus.
Portfolio securities are valued on the basis of market quotations when
they are readily available. Each Portfolio values mortgage-backed and other debt
securities for which market quotations are not readily available at their fair
value as determined in good faith, utilizing procedures approved by the Board of
Trustees of the Portfolio Series, on the basis of valuations provided either by
dealers or a pricing service. Absent unusual circumstances, debt securities
having a remaining maturity of sixty days or less when purchased, and debt
securities originally purchased with maturities in excess of sixty days but
which
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currently have maturities of sixty days or less, are valued at cost adjusted for
amortization of premiums and accretion of discounts.
Interest rate futures contracts held by a Portfolio are valued on the
basis of closing market quotations, which are normally available daily. When
market quotations are not readily available, the fair value of these contracts
will be determined in good faith utilizing procedures approved by the Board of
Trustees of the Portfolio Series.
A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by the
Portfolio Series's Board of Trustees. While no single standard for determining
fair value exists, as a general rule, the current fair value of a security would
appear to be the amount which a Portfolio could expect to receive upon its
current sale. Some, but not necessarily all, of the general factors which may be
considered in determining fair value include: (i) the fundamental analytical
data relating to the investment; (ii) the nature and duration of restrictions on
disposition of the securities; and (iii) an evaluation of the forces which
influence the market in which these securities are purchased and sold. Without
limiting or including all of the specific factors which may be considered in
determining fair value, some of the specific factors include: type of security,
financial statements of the issuer, cost at date of purchase, size of holding,
discount from market value, value of unrestricted securities of the same class
at the time of purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
Each investor in the Portfolio Series, including the Trust, may add to
or reduce its investment in a Portfolio on each day that the NYSE is open for
business ("Portfolio Business Day"). As of 4:00 p.m. (Eastern time) on each such
day, the value of each investor's interest in a Portfolio will be determined by
multiplying the net asset value of that Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in a
Portfolio will then be recomputed as the percentage equal to the fraction (i)
the numerator of which is the value of such investor's investment in that
Portfolio as of 4:00 p.m. on such day plus or minus, as the case may be, the
amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m. on such day plus or
minus, as the case may be, the amount of the net additions to or reductions in
the aggregate investments in the Portfolio by all investors in the Portfolio.
The percentage so determined will then be applied to determine the value of the
investor's interest in that Portfolio as of 4:00 p.m. on the following Portfolio
Business Day.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
Shares are continuously offered for sale by UST Distributors, Inc. (the
"Distributor"). As described in the Prospectus, Shares are offered for sale
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directly only to institutional investors ("Institutional Investors"). Different
types of Customer accounts at certain Institutional Investors (a "Shareholder
Organization") may be used to purchase Shares, including eligible agency and
trust accounts. Investors purchasing Shares may include officers, directors, or
employees of the particular Shareholder Organization.
As stated in the Prospectus, no sales charge is imposed by the Trust on
the purchase of Shares or reinvestment of dividends or distributions.
Additionally, the Trust does not currently charge any fees for the exchange of
shares of one Fund for another Fund.
Shareholders should be aware, however, that certain Shareholder
Organizations may charge a Customer's account fees for exchange orders and other
cash management services provided. Customers should contact their Shareholder
Organization directly for further information.
The Trust 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 NYSE is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the NYSE is closed for other than customary weekend and
holiday closings; (c) the Securities and Exchange Commission has by order
permitted such suspension; or (d) an emergency exists as determined by the
Securities and Exchange Commission.
In the event that Shares are redeemed in cash at their net asset value,
a shareholder may receive in payment for such Shares an amount that is more or
less than his original investment due to changes in the market prices of that
Fund's portfolio securities.
OTHER INVESTOR PROGRAMS
As described in the Prospectus, Shares of the Funds may be purchased in
connection with certain Retirement Programs. Customers of Shareholder
Organizations should contact their Shareholder Organization directly to
determine their participation in certain services and programs.
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES
The respective Trustees and officers of the Trust and Portfolio Series
and their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate those
Trustees who are "interested persons" (as defined in the 1940 Act) of the Trust
or Portfolio Series, as the case may be. Unless otherwise indicated, the address
of each Trustee and officer of the Trust and Portfolio Series is 6 St. James
Avenue, Boston, Massachusetts 02116.
TRUSTEES AND OFFICERS OF THE TRUST
RODMAN L. DRAKE -- Trustee; Director, Mueller Industries, Inc.;
President, Drake & Co. Inc. (investment and consulting firm) (since 1993);
Trustee, Hyperion Total Return Fund, Inc., Hyperion Government Mortgage Trust
II, and other funds for which Hyperion Capital Management, Inc. is the
investment
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adviser; President and Co-Chairman, KMR Power Corporation (power plants) (since
1993); Managing Director and Chief Executive Officer, Cresap, McCormick & Paget,
Inc. (subsequently, Cresap, a Towers Perrin Company) (from 1980 to 1990);
Director, Alex. Brown & Sons Inc. (1989 to 1991). His address is 66 East 91st
Street, New York, New York 10128.
W. WALLACE MCDOWELL -- Trustee; Managing Director, Morgan Lewis Githens
& Ahn (since 1991); Chairman and Chief Executive Officer, The Prospect Group,
Inc. (1983-1990) and Director, U.S. Homecare Corporation, Grossmans, Inc.,
Children's Discovery Centers, Interactive Technologies, Inc. and Jack Morton
Productions (1983 to 1990). His address is c/o MLGAL Partners, Two Greenwich
Plaza, Greenwich, Connecticut 06830.
JONATHAN PIEL -- Trustee; Editor, Scientific American; Vice President,
Scientific American, Inc.; Director, Group for The South Fork, Bridgehampton,
New York (since October 1993); Member, Rockefeller Council, Rockefeller
University (since 1988). His address is c/o Scientific American, 415 Madison
Avenue, New York, New York 10017.
PHILIP W. COOLIDGE* -- President of the Trust and Trustee and
Co-Chairman of the Board of Trustees of the Portfolio Series; Chairman, Chief
Executive Officer and President, Signature Financial Group, Inc. ("SFG") (since
December 1988); Chairman, Chief Executive Officer and President, SFSI (since May
1993).
JAMES B. CRAVER -- Treasurer; Senior Vice President and General
Counsel, SFG (since January 1991); Senior Vice President and Secretary, SFSI
(since May 1993); Partner, Baker & Hostetler (law firm) (September 1984 to
January 1991).
LINDA T. GIBSON -- Assistant Secretary; Legal Counsel, SFG (since June
1991); Assistant Secretary, SFSI (since May 1993); law student, Boston
University School of Law (from September 1989 to May 1992); Product Manager, SFG
(January 1989 to September 1989).
THOMAS M. LENZ -- Secretary; Vice President and Associate General
Counsel, SFG (since November 1989); Assistant Secretary, SFSI (since May 1993);
Attorney, Ropes & Gray (September 1984 to November 1989).
MOLLY S. MUGLER -- Assistant Secretary; Legal Counsel, SFG (since
December 1988); Assistant Secretary, SFSI (since May 1993).
BARBARA M. O'DETTE -- Assistant Treasurer; Assistant Treasurer, SFG
(since December 1988) and SFSI (since May 1993).
DONALD S. RUMERY -- Assistant Treasurer; Vice President, SFG (since
March 1990); Assistant Treasurer, SFSI (since May 1993); Vice President, Putnam
Investor Services (August 1980 to March 1990).
ANDRES E. SALDANA -- Assistant Secretary; Legal Counsel, SFG (since
November 1992); Assistant Secretary, SFSI (since May 1993); Attorney, Ropes &
Gray (law firm) (September 1990 to November 1992); law student, Yale Law School
(September 1987 to May 1990).
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TRUSTEES OF THE PORTFOLIO SERIES
In addition to Mr. Coolidge, the following persons serve as Trustees of
the Portfolio Series:
STEPHEN D. BARRETT -- Director, President and Chief Operating Officer,
H.C. Wainwright & Co., Inc. (broker-dealer) (since 1990); Director, Alex Brown &
Sons, Inc. (from 1976 to 1989). His address is 33 Marlborough Street, Boston,
Massachusetts 02116.
WILLIAM B. BLUNDIN* -- Co-Chairman of the Board of Trustees; Vice
Chairman, Concord Holding Corporation (since 1987).
DAVID H. CARTER -- Trustee, 1784 Funds (since 1993); Managing Director,
Bearbull (UK) Ltd. (investment advisor) (from 1988 to 1993). His address is
Vasterne Manor, Wootton Bassett, Wiltshire, England SN4 7PB.
RAYMOND L. COLOTTI -- Retired; Executive Vice President, The Equitable
Companies (financial services) (1990-1993); Executive Vice President, Equitable
Investment Corporation (1985-1990). His address is 13 Summit Road, Verone, New
Jersey 07044.
JOHN H. FORSGREN -- Executive Vice President, Sun International
Investments, Ltd. (resort and hotel properties) (since 1994); Senior Vice
President and Senior Financial Officer, Euro Disneyland, S.A. (from 1990 to
1993); Vice President and Treasurer, The Walt Disney Co. (from 1986 to 1990).
His address is c/o Mary Mugurdichian, Concord Holding Co., 125 West 55th Street,
11th Floor, New York, New York 10019.
OFFICERS OF THE PORTFOLIO SERIES
In addition to the officers listed above for the Trust, the following
person serves as an officer of the Portfolio Series:
JAMES L. GRAY -- Executive Vice President; First Vice President,
Concord Holding Corporation (since 1994); Chief Operating Officer, Maria Fiorini
Ramirez, Inc. (economic consultancy and asset management firm) (from 1992 to
1994); Senior Vice President and Manager of the Trust Division, First National
Bank in Albuquerque (from 1988 to 1992).
Mss. Gibson, Mugler and O'Dette and Messrs. Coolidge, Craver, Lenz,
Rumery and Saldana may also hold similar positions for other investment
companies for which SBDS or an affiliate serves as the principal underwriter.
Mr. Gray may also hold similar positions for other investment companies for
which UST Distributors, Inc. or an affiliate serves as the principal
underwriter.
The Trust Instrument of the Trust provides that it will indemnify its
trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust unless it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless it is finally adjudicated that they did not act in good
faith
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in the reasonable belief that their actions were in the best interests of the
Trust. In the case of settlement, such indemnification will not be provided
unless it has been determined by a court or other body approving the settlement
or other disposition, or by a reasonable determination, based upon a review of
readily available facts, by vote of a majority of disinterested trustees, or in
a written opinion of independent counsel, that such officers or trustees have
not engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
As of November 25, 1994, U.S. Trust held of record substantially all of
the outstanding shares in the Equity Index Fund, Bond Index Fund, Small Cap
Fund, Balanced Fund, Equity Growth Fund and Value Equity Income Fund, but did
not own such shares beneficially because it did not have discretion to vote or
invest such shares.
As of November 25, 1994, the following were the name, address and
percentage ownership of each person that beneficially owned 5% or more of the
outstanding shares of (i) the Equity Index Fund, Bond Index Fund and Small Cap
Fund: Steve Doring, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 16.54%, 17.49% and 19.27%, respectively; (ii)
the Balanced Fund and Equity Growth Fund: Washington Water Power, c/o United
States Trust Company of New York, 114 West 47th Street, New York, New York
10036, 17.95% and 17.67%, respectively; and (iii) the Value Equity Income Fund:
Cascade General, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 5.04%. As of the same date, the officers and
Trustees as a group owned less than 1% of the shares of each Fund. Shareholders
owning 25% or more of the outstanding shares of a Fund may take actions without
the approval of any other investor in that Fund.
INVESTMENT ADVISORY SERVICES
U.S. Trust Pacific is responsible for the management of the assets of
the Bond Market, Equity Market, Small Cap, Balanced, Equity Growth, Value Equity
Income and International Equity Portfolios pursuant to an Investment Advisory
Agreement with the Portfolio Series on behalf of said Portfolios, subject to the
general supervision and guidance of the Board of Trustees of the Portfolio
Series. U.S. Trust is responsible for the management of the assets of the
Equity, Income, and Total Return Bond Portfolios pursuant to an Investment
Advisory Agreement with the Portfolio Series on behalf of said Portfolios,
subject to the general supervision and guidance of the Board of Trustees of the
Portfolio Series.
Each Advisory Agreement will continue in effect with respect to each
Portfolio as long as such continuance is specifically approved at least annually
by the Portfolio Series Board of Trustees or by a majority vote of the investors
in the applicable Portfolio (with the vote of each being in proportion to the
respective values of their investments), and, in either case, by a majority of
the Portfolio Series' Trustees who are not parties to the Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement. Each Advisory Agreement was approved by the
Portfolio Series' Board of Trustees on June 30, 1994 or (in the case of the
Equity, Income, Total Return Bond, and International Equity Portfolios) on
September 13, 1994.
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Each Advisory Agreement provides that the investment adviser may render
services to others, and each Agreement is terminable with respect to one or more
Portfolios by the Portfolio Series without penalty on not more than 60 days' nor
less than 30 days' written notice when authorized either by majority vote of the
Portfolio's corresponding Fund and of the other investors in the Portfolio (with
the vote of each being in proportion to the amount of its investment) or by a
vote of a majority of the Portfolio Series' Board of Trustees, or by the
respective investment adviser on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its assignment.
Each Advisory Agreement provides that neither the investment adviser nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment, or for any act or omission in the execution
of security transactions for a Portfolio, except for willful misfeasance, bad
faith, gross negligence or reckless disregard of its or their obligations and
duties under the Advisory Agreement.
The Prospectus contains a description of the fees payable to the
investment advisers under the Advisory Agreements. Each investment adviser, if
required by applicable state law, shall reimburse a Fund or waive all or part of
its fees up to, but not exceeding, its investment advisory fees from the
corresponding Portfolio. Such reimbursement, if required, will be equal to the
combined aggregate annual expenses of the appropriate Fund and its corresponding
Portfolio which exceed that expense limitation with the lowest threshold
prescribed by any state in which such Fund is qualified for offer or sale.
Management of each of the Trust and the Portfolio Series has been advised that
the lowest such threshold currently in effect is 2 1/2% of net assets up to
$30,000,000, 2% of the next $70,000,000 of net assets and 1 1/2% of net assets
in excess of that amount.
With respect to the Bond Market, Equity Market, Small Cap, Balanced,
Equity Growth, Value Equity Income and International Equity Portfolios, U.S.
Trust Pacific has entered into an Investment Subadvisory Agreement (each a
"Subadvisory Agreement") with the subadviser listed below opposite the name of
the Fund corresponding to that Portfolio. For their services under the
Subadvisory Agreements, the subadvisers receive from U.S. Trust Pacific, fees at
a maximum annual rate equal to the percentages specified in the table below of
the corresponding Portfolio's average daily net assets.
PORTFOLIO COMPENSATION RATE
FUND NAME SUBADVISER FOR SUBADVISER (%)
Equity Index Fund U.S. Trust 0.25%
Bond Index Fund U.S. Trust 0.25%
Small Capitalization Fund U.S. Trust 0.65%
Balanced Fund Becker 0.425%
Equity Growth Fund Luther King 0.40%
Value Equity Income Fund Spare Kaplan 0.40%
International Equity Fund Harding Loevner 0.45%
It is the responsibility of the subadvisers to make the day-to-day
investment decisions for their corresponding Portfolio or Portfolios, and to
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place the purchase and sales orders for securities transactions of such
Portfolios, subject in all cases to the general supervision of U.S. Trust
Pacific. Each subadviser furnishes at its own expense all services, facilities
and personnel necessary in connection with managing the corresponding
Portfolio's investments and effecting securities transactions for the Portfolio.
SERVICING AGENT
Signature Financial Services, Inc. ("SFSI") serves as servicing agent
and fund accounting agent to the Trust and the Portfolio Series pursuant to
agreements between SFSI and each of the Trust and the Portfolio Series (the
"Servicing Agent Agreements"). For its services under the Servicing Agent
Agreement with the Portfolio Series, SFSI receives a servicing agent fee which
is computed daily and may be paid monthly at the following annual rates of the
average daily net assets of the Portfolios: 0.05% of the first $2 billion in
assets; 0.08% of the next $500 million; 0.07% of the next $500 million; 0.06% of
the next $1 billion; and 0.05% thereafter. The Prospectus contains a description
of the fund accounting fees payable to SFSI under the Servicing Agent
Agreements. SFSI is a wholly-owned subsidiary of Signature Financial Group, Inc.
Pursuant to the Servicing Agent Agreements, SFSI may render fund
accounting and other services to others. The Agreements terminate automatically
if assigned and may be terminated without penalty by vote of a majority of the
outstanding voting securities of the Trust or the Portfolio Series, or by either
party on not more than 60 days' nor less than 30 days' written notice. The
Servicing and Fund Accounting Agreements also provide that neither SFSI nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the administration or management of the Trust or the
Portfolio Series, except for willful misfeasance, bad faith or gross negligence
in the performance of its or their duties, or by reason of reckless disregard of
its or their obligations and duties under said agreement.
TRANSFER AGENT AND CUSTODIAN
U.S. Trust serves as custodian of the Funds' and the Portfolios' assets
pursuant to separate Custody Agreements between U.S. Trust and the Trust or the
Portfolio Series.
Under such agreements and acting as the Funds' and the Portfolios'
custodian, U.S. Trust has agreed to (i) maintain a separate account or accounts
for each of the Funds and the Portfolios; (ii) make receipts and disbursements
of money on behalf of the Funds and the Portfolios; (iii) collect and receive
income and other payments and distributions on account of the Portfolios'
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 Trust concerning the Funds' operations, and to
the Portfolio Series concerning the Portfolios' operations. For the services
provided by U.S. Trust under the Custody Agreements, the Trust and the Portfolio
Series have agreed to pay U.S. Trust a fee as agreed upon from time to time.
U.S. Trust may, at its own expense, open and maintain custody accounts
with respect to the Funds or the Portfolios with other banks or trust companies,
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provided that U.S. Trust shall remain liable under the applicable Custody
Agreement for the performance of all of its duties under such agreement,
notwithstanding any such delegation. Pursuant to its delegation authority under
the Custody Agreements, U.S. Trust has entered into sub-custody arrangements
with Investors Bank & Trust Company ("IBT") with respect to the Trust and the
Portfolio Series. For the services provided thereunder by IBT, U.S. Trust has
agreed to pay IBT a fee as agreed upon from time to time. IBT receives no fee
directly from the Trust or the Portfolio Series for any of its sub-custody
services.
Mutual Funds Service Company ("MFSC") serves as transfer agent for the
Funds pursuant to a Transfer Agency Agreement. Under this agreement, MFSC will
perform the following functions, among others: (i) issue and redeem shares of
the Funds; (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 the Trust
concerning the Funds' operations. For its transfer agency and dividend
disbursement services, MFSC is entitled to receive from the Trust such
compensation as may be agreed upon from time to time between the Trust and MFSC.
In addition, MFSC 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.
MFSC may delegate its transfer agency obligations to another transfer
agent registered or qualified under applicable law, provided that MFSC shall
remain liable for the performance of all of its transfer agency duties under the
Transfer Agency Agreement, notwithstanding any delegation.
SERVICING PLANS
The Trust and the Portfolio Series have each adopted separate Servicing
Plans (each, a "Plan") which provide that the Trust or the Portfolio Series may
obtain the services of a servicing and fund accounting agent, a transfer agent,
a custodian, and (in the case of the Trust) one or more shareholder servicing
organizations, and may enter into agreements providing for the payment of fees
for such services. Each Plan will continue in effect indefinitely if such
continuance is specifically approved at least annually by a vote of both a
majority of the Trust's or the Portfolio Series' Trustees, as appropriate, and a
majority of the Trustees who are not "interested persons" of the Trust or of the
Portfolio Series, as appropriate, and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to such Plan
(the "Qualified Trustees"). Each Plan requires that the Trust or Portfolio
Series shall provide to the appropriate Board of Trustees, and said Board of
Trustees shall review, at least quarterly, a written report of the amounts
expended (and the purposes therefor) under the Plan. Each Plan may be terminated
at any time (i) by a vote of a majority of the Qualified Trustees or (ii) by a
majority vote of the shareholders of the Trust or the holders of beneficial
interests of the Portfolio Series, as appropriate. Each Plan may not be amended
to increase materially the amount of permitted expenses thereunder without the
approval of a majority of the shareholders of the Trust or the
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holders of beneficial interests of the Portfolio Series, as appropriate, and may
not be materially amended in any case without a vote of the majority of both the
Trustees and the Qualified Trustees of the Trust or the Portfolio Series, as
appropriate.
INDEPENDENT ACCOUNTANTS OR AUDITORS
Price Waterhouse LLP are the independent certified public accountants
for St. James Portfolios. The U.S. Firm of Price Waterhouse has registered as a
Registered Limited Liability Partnership under the laws of the State of Delaware
and from August 1, 1994, will continue its practice under the name Price
Waterhouse LLP. Ernst & Young LLP are the independent auditors for Excelsior
Institutional Trust. Each provides audit services and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission.
TAXATION
TAXATION OF THE FUNDS
Each series of the Trust is treated as a separate entity for federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund has elected to be treated and intends to qualify each year as
a "regulated investment company" under Subchapter M of the Code (a "RIC") by
meeting all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of the Fund's
distributions, and the composition and holding period of the Fund's portfolio
assets. Because each Fund intends to distribute all of its net investment income
and net realized capital gains to its shareholders in accordance with the timing
requirements imposed by the Code, it is not expected that the Fund will be
required to pay any federal income or excise taxes, although a Fund's foreign
source income may be subject to foreign withholding taxes. If a Fund fails to
qualify as a RIC in any year, the Fund would incur a regular corporate federal
income tax upon its taxable income, and the Fund's distributions would generally
be taxable as ordinary dividend income to shareholders.
Under interpretations of the Internal Revenue Service, (1) each
Portfolio will be treated for federal income tax purposes as a partnership and
(2) for purposes of determining whether each Fund satisfies the income and
diversification requirements to maintain its status as a RIC, each Fund, as an
investor in its corresponding Portfolio, will be deemed to own a proportionate
share of that Portfolio's assets and will be deemed to be entitled to that
Portfolio's income or loss attributable to that share. Each Portfolio has
advised its corresponding Fund that it intends to conduct its operations so as
to enable its investors, including the Fund, to satisfy those requirements.
Any Fund distribution (or, in the case of the Bond Index Fund, any
distribution of net capital gains or net short-term capital gains) will have the
effect of reducing the per share net asset value of shares in the Fund by the
amount of the distribution. Shareholders purchasing shares shortly before the
record date of any distribution may thus pay the full price for the shares and
44
<PAGE>
then effectively receive a portion of the purchase price back as a taxable
distribution.
Any investment by the Portfolios in zero coupon bonds, certain
securities purchased at a market discount, and similar instruments will cause a
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, a Portfolio may be required to liquidate portfolio securities that it
might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund.
While certain of the Portfolios might invest in municipal securities,
the interest on which might otherwise be exempt from tax, it is generally not
expected that any Fund will satisfy the requirements under the Code to
pass-through such exempt income to shareholders as tax-exempt dividends.
Any Portfolio's transactions in options, futures contracts, and forward
currency exchange contracts will be subject to special tax rules that may affect
the amount, timing, and character of Fund income and distributions to
shareholders. In addition, foreign exchange gains or losses realized by any Fund
will generally be treated as ordinary income or loss by the Fund. Investment by
a Portfolio in certain "passive foreign investment companies" may also have to
be limited in order to avoid a tax on the Fund. Such a Portfolio may elect (if
such election is available) to mark to market any investments in "passive
investment companies" on the last day of each year. This election may cause a
Fund to recognize income prior to the receipt of cash payments with respect to
those investments; in order to distribute this income and avoid tax on the Fund,
the Portfolio may be required to liquidate portfolio securities that it might
otherwise have continued to hold.
Investment income of a Fund from foreign securities may be subject to
foreign income tax withheld at the source. No Fund (other than the International
Equity Fund, as discussed below) expects to be able to pass through to
shareholders foreign tax credits with respect to such foreign taxes. The United
States has entered into tax treaties with many foreign countries that may
entitle a Portfolio to a reduced rate of tax or an exemption from tax on such
income; the Portfolios intend to qualify for treaty-reduced rates where
available. It is not possible, however, to determine a Fund's effective rate of
foreign tax in advance since the amount of the corresponding Portfolio's assets
invested within various countries is not known.
TAXATION OF THE PORTFOLIOS
The Trust anticipates that the Portfolios will be treated as
partnerships for federal income tax purposes. As such, the Portfolios are not
subject to federal income taxation. Instead, a Fund must take into account, in
computing its federal income tax liability, its share of its corresponding
Portfolio's income, gains, losses, deductions, credits and tax preference items,
without regard to whether it has received any cash distributions from that
Portfolio.
45
<PAGE>
TAXATION OF DISTRIBUTIONS
Dividends from ordinary income and any distributions from net
short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses), if any, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held their shares. A portion of the ordinary
income dividends of a Fund invested in stock of domestic corporations may
qualify for the dividends-received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Shares.
Availability of the deduction for particular shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and result in certain basis adjustments. Distributions are taxable as described
above whether paid in cash or reinvested in additional shares. Shareholders will
be notified annually as to the federal tax status of distributions.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, each Fund must, and intends to, distribute
during each calendar year substantially all of its ordinary income for that year
and substantially all of its capital gain in excess of its capital losses for
that year, plus any undistributed ordinary income and capital gains from
previous years. For this and other purposes, a Fund dividend will be treated as
paid on December 31 if it is declared by a Fund in October, November or December
with a record date in such a month and paid by the Fund during January of the
following calendar year. Accordingly, those distributions will be taxable to
shareholders for the taxable year in which that December 31 falls.
If the International Equity Fund holds more than 50% of its assets in
foreign stock and securities at the close of its taxable year, the Fund may
elect to "pass through" to the Fund's shareholders foreign income taxes paid. If
the Fund so elects, shareholders will be required to treat their pro rata
portion of the foreign income taxes paid by the corresponding Portfolio as part
of the amounts distributed to them by the Fund and thus includable in their
gross income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not both)
on their federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to such
limitations) be able to claim a credit but not a deduction. No deduction will be
permitted to individuals in computing their alternative minimum tax liability.
If the International Equity Fund does not qualify or elect to "pass through" to
the Fund's shareholders foreign income taxes paid, shareholders will not be able
to claim any deduction or credit for any part of the foreign taxes paid by the
Fund's corresponding Portfolio.
Withdrawals by a Fund from its corresponding Portfolio generally will
not result in that Fund recognizing any gain or loss for federal income tax
purposes, except that (1) gain will be recognized to the extent that any cash
distributed exceeds the basis of a Fund's interest in its corresponding
Portfolio prior to the distribution, (2) income or gain will be realized if the
withdrawal is in liquidation of a Fund's entire interest in its corresponding
Portfolio and
46
<PAGE>
includes a disproportionate share of any unrealized receivables held by that
Portfolio, and (3) loss will be recognized if the distribution is in liquidation
of that entire interest and consists solely of cash and/or unrealized
receivables. The basis of a Fund's interest in its corresponding Portfolio
generally equals the amount of cash and the basis of any property that the Fund
invests in its corresponding Portfolio, increased by the Fund's share of income
from that Portfolio and decreased by the Fund's share of losses from that
Portfolio and the amount of any cash distributions and the basis of any property
distributed from that Portfolio.
OTHER TAXATION
The Trust is organized as a Delaware business trust and, under current
law, neither the Trust nor the Funds are liable for any income or franchise tax
in the State of Delaware, provided that the Funds continue to qualify as RICs
for federal income tax purposes. The investment by a Fund in its corresponding
Portfolio does not cause the Fund to be liable for any income or franchise tax
in the State of New York.
The Portfolios are organized as series of a New York trust, the
Portfolio Series. The Portfolios are not subject to any income or franchise tax
in the State of New York or the State of Delaware.
Fund shareholders may be subject to state and local taxes on Fund
distributions to them by a Fund. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
DESCRIPTION OF THE TRUST; FUND SHARES
The Trust is a Delaware business trust established under a Trust
Instrument dated April 27, 1994. Its authorized capital consists of an unlimited
number of shares of beneficial interest of $0.00001 par value, which may be
issued in separate series. Currently, the Trust has ten active and two inactive
series, although additional series may be established from time to time. Each
share of each series represents an equal proportionate interest in that series
with each other share in that series.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with such a share of the general
liabilities of the Trust. Expenses with respect to any two or more series are to
be allocated in proportion to the asset value of the respective series except
where allocations of direct expenses can otherwise be fairly made. The officers
of the Trust, subject to the general supervision of the Trustees, have the power
to determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
47
<PAGE>
are entitled to receive as a class the value of the underlying assets of such
shares available for distribution to shareholders.
The Trustees may amend the Trust Instrument without shareholder
approval, except shareholder approval is required for any amendment (a) which
affects the voting rights of shareholders under the Trust Instrument, (b) which
affects shareholders' rights to approve certain amendments to the Trust
Instrument, (c) required to be approved by shareholders by law or the
Registration Statement, or (d) submitted to shareholders for their approval by
the Trustees in their discretion. Pursuant to Delaware business trust law and
the Trust Instrument, the Trustees may, without shareholder approval, (x) cause
the Trust to merge or consolidate with one or more entities, if the surviving or
resulting entity is the Trust or another open-end management investment company
registered under the 1940 Act, or a series thereof, that will succeed to or
assume the Trust's registration under the 1940 Act, or (y) cause the Trust to
incorporate under the laws of the State of Delaware.
Shares of a Fund entitle their holder to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon only by shareholders of the series involved.
The Trust Instrument provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust unless it
is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or unless it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees, or in a
written opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation on personal liability which is extended to
shareholders of private for profit corporations organized under the General
Corporation Law of the State of Delaware. The Trust Instrument contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Fund
property for any shareholder held personally liable for the obligations of a
Fund solely by reason of his being or having been a shareholder. The Trust
Instrument also provides for the maintenance, by or on behalf of the Trust and
each Fund, of appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the Trust and each Fund, their
shareholders, Trustees, officers, employees and agents, covering possible tort
and other liabilities.
48
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for the Trust and the Portfolio Series at June 20,
1994, now follow.
49
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL EQUITY INDEX FUND
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Investment in Equity Market Portfolio. . . . . . . . . $16,667
Deferred Organization Expenses . . . . . . . . . . . . 14,455
Total Assets . . . . . . . . . . . . . . . . . 31,122
LIABILITIES:
Organization Expenses Payable . . . . . . . . . . . . 14,455
Net Assets . . . . . . . . . . . . . . . . . . $16,667
NET ASSET VALUE PER SHARE (2,380.953 SHARES OF
BENEFICIAL INTEREST OUTSTANDING; UNLIMITED
AUTHORIZED SHARES OF BENEFICIAL INTEREST
OF $0.00001 PAR VALUE) . . . . . . . . . . . . . . . . . . . . $7.00
=====
NOTES:
(1) Excelsior Institutional Equity Index Fund, (the "Fund") is a series of
Excelsior Institutional Trust (the "Trust"), organized as a Delaware
business trust on April 27, 1994, and has been inactive since that date
except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the
sale of 2,380.953 shares (the "initial shares") of the Fund to UST
Distributors, Inc. The Trust will invest the Fund's assets in the
Equity Market Portfolio, as series of St. James Portfolios, an
investment company registered under the Investment Company Act of 1940.
Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years beginning
with the commencement of operations of the Fund. The amount paid by the
Fund on any redemption by UST Distributors, Inc., or any other current
holder of the Fund's initial shares, will be reduced by the pro rata
portion of any unamortized organization expenses of the Fund and the
Portfolio which the number of initial shares redeemed bears to the
total number of initial shares outstanding immediately prior to such
redemption, and the amount of such reduction in excess of the
unamortized organization expenses of the Fund shall be contributed by
the Trust to the Portfolio.
UST058I
50
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UST058I
EQUITY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Cash............................................... $16,767
Deferred organization expenses..................... 40,242
Total assets................................. 57,009
LIABILITIES:
Accrued expenses................................... 40,242
Net assets.................................. $16,767
NOTES:
(1) The Equity Market Portfolio (the "Portfolio") is a series of St. James
Portfolios, organized as a New York trust on April 27, 1994, and has
been inactive since that date except for matters relating to its
organization and registration as an investment company under the
Investment Company Act of 1940, the sale of a beneficial interest (the
"Initial Interest") therein at the respective purchase prices of
$16,667 to Excelsior Institutional Equity Index Fund (the "Fund"), and
$100 to UST Distributors, Inc. (the "initial beneficial interests").
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years beginning with the commencement of operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by UST Distributors, Inc. will be applied so as to reduce
the amount of unamortized organization expenses. The amount paid by St.
James Portfolios on behalf of the Portfolio on any withdrawal from the
Portfolio of the initial beneficial interest of UST Distributors, Inc.
will be reduced by a pro rata portion of any unamortized organization
expenses. This reduction will be determined with respect to each
withdrawal of an initial beneficial interest by calculating the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests then outstanding. The service
providers to the Portfolio have agreed to contribute to the Portfolio
at the time of the termination, liquidation, or dissolution of the
Portfolio, an amount equal to the unamortized organizational expenses
at such time.
(3) At the close of each business day of the Portfolio, the value of an
investor's beneficial interest in the Portfolio is equal to the product
of (i) the aggregate net asset value of the Portfolio, multiplied by
(ii) the percentage representing that investor's share of the aggregate
beneficial interest in the Portfolio effective for that day.
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<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL BOND INDEX FUND
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Investment in Bond Market Portfolio. . . . . . . . . . $16,667
Deferred Organization Expenses . . . . . . . . . . . . 14,455
Total Assets . . . . . . . . . . . . . . . . . 31,122
LIABILITIES:
Organization Expenses Payable . . . . . . . . . . . . 14,455
Net Assets . . . . . . . . . . . . . . . . . . $16,667
NET ASSET VALUE PER SHARE (2,380.953 SHARES OF
BENEFICIAL INTEREST OUTSTANDING; UNLIMITED
AUTHORIZED SHARES OF BENEFICIAL INTEREST
OF $0.00001 PAR VALUE) . . . . . . . . . . . . . . . . . . . $7.00
=====
NOTES:
(1) Excelsior Institutional Bond Index Fund, (the "Fund") is a series of
Excelsior Institutional Trust (the "Trust"), organized as a Delaware
business trust on April 27, 1994, and has been inactive since that date
except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the
sale of 2,380.953 shares (the "initial shares") of the Fund to UST
Distributors, Inc. The Trust will invest the Fund's assets in the Bond
Market Portfolio, as series of St. James Portfolios, an investment
company registered under the Investment Company Act of 1940.
Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years beginning
with the commencement of operations of the Fund. The amount paid by the
Fund on any redemption by UST Distributors, Inc., or any other current
holder of the Fund's initial shares, will be reduced by the pro rata
portion of any unamortized organization expenses of the Fund and the
Portfolio which the number of initial shares redeemed bears to the
total number of initial shares outstanding immediately prior to such
redemption, and the amount of such reduction in excess of the
unamortized organization expenses of the Fund shall be contributed by
the Trust to the Portfolio.
UST058I
52
<PAGE>
UST058I
BOND MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Cash............................................... $16,767
Deferred organization expenses..................... 40,242
Total assets................................. 57,009
LIABILITIES:
Accrued expenses................................... 42,242
Net assets................................... $16,767
NOTES:
(1) The Bond Market Portfolio (the "Portfolio") is a series of St. James
Portfolios, organized as a New York trust on April 27, 1994, and has
been inactive since that date except for matters relating to its
organization and registration as an investment company under the
Investment Company Act of 1940, the sale of a beneficial interest (the
"Initial Interest") therein at the respective purchase prices of
$16,667 to Excelsior Institutional Bond Index Fund (the "Fund"), and
$100 to UST Distributors, Inc. (the "initial beneficial interests").
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years beginning with the commencement of operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by UST Distributors, Inc. will be applied so as to reduce
the amount of unamortized organization expenses. The amount paid by St.
James Portfolios on behalf of the Portfolio on any withdrawal from the
Portfolio of the initial beneficial interest of UST Distributors, Inc.
will be reduced by a pro rata portion of any unamortized organization
expenses. This reduction will be determined with respect to each
withdrawal of an initial beneficial interest by calculating the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests then outstanding. The service
providers to the Portfolio have agreed to contribute to the Portfolio
at the time of the termination, liquidation, or dissolution of the
Portfolio, an amount equal to the unamortized organizational expenses
at such time.
(3) At the close of each business day of the Portfolio, the value of an
investor's beneficial interest in the Portfolio is equal to the product
of (i) the aggregate net asset value of the Portfolio, multiplied by
(ii) the percentage representing that investor's share of the aggregate
beneficial interest in the Portfolio effective for that day.
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<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL SMALL CAPITALIZATION FUND
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Investment in Small Cap Portfolio. . . . . . . . . . . $16,667
Deferred Organization Expenses . . . . . . . . . . . . 14,455
Total Assets . . . . . . . . . . . . . . . . . 31,122
LIABILITIES:
Organization Expenses Payable . . . . . . . . . . . . 14,455
Net Assets . . . . . . . . . . . . . . . . . . $16,667
NET ASSET VALUE PER SHARE (2,380.951 SHARES OF
BENEFICIAL INTEREST OUTSTANDING; UNLIMITED
AUTHORIZED SHARES OF BENEFICIAL INTEREST
OF $0.00001 PAR VALUE) . . . . . . . . . . . . . . . . . . . $7.00
=====
NOTES:
(1) Excelsior Institutional Small Capitalization Fund, (the "Fund") is a
series of Excelsior Institutional Trust (the "Trust"), organized as a
Delaware business trust on April 27, 1994, and has been inactive since
that date except for matters relating to its organization and
registration as an investment company under the Investment Company Act
of 1940 and the sale of 2,380.951 shares (the "initial shares") of the
Fund to UST Distributors, Inc. The Trust will invest the Fund's assets
in the Small Cap Portfolio, as series of St. James Portfolios, an
investment company registered under the Investment Company Act of 1940.
Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years beginning
with the commencement of operations of the Fund. The amount paid by the
Fund on any redemption by UST Distributors, Inc., or any other current
holder of the Fund's initial shares, will be reduced by the pro rata
portion of any unamortized organization expenses of the Fund and the
Portfolio which the number of initial shares redeemed bears to the
total number of initial shares outstanding immediately prior to such
redemption, and the amount of such reduction in excess of the
unamortized organization expenses of the Fund shall be contributed by
the Trust to the Portfolio.
UST058I
54
<PAGE>
UST058I
SMALL CAP PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Cash............................................... $16,767
Deferred organization expenses..................... 40,242
Total assets................................. 57,009
LIABILITIES:
Accrued expenses................................... 40,242
Net assets................................... $16,767
NOTES:
(1) The Small Cap Portfolio (the "Portfolio") is a series of St. James
Portfolios, organized as a New York trust on April 27, 1994, and has
been inactive since that date except for matters relating to its
organization and registration as an investment company under the
Investment Company Act of 1940, the sale of a beneficial interest (the
"Initial Interest") therein at the respective purchase prices of
$16,667 to Excelsior Institutional Small Capitalization Fund (the
"Fund"), and $100 to UST Distributors, Inc. (the "initial beneficial
interests").
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years beginning with the commencement of operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by UST Distributors, Inc. will be applied so as to reduce
the amount of unamortized organization expenses. The amount paid by St.
James Portfolios on behalf of the Portfolio on any withdrawal from the
Portfolio of the initial beneficial interest of UST Distributors, Inc.
will be reduced by a pro rata portion of any unamortized organization
expenses. This reduction will be determined with respect to each
withdrawal of an initial beneficial interest by calculating the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests then outstanding. The service
providers to the Portfolio have agreed to contribute to the Portfolio
at the time of the termination, liquidation, or dissolution of the
Portfolio, an amount equal to the unamortized organizational expenses
at such time.
(3) At the close of each business day of the Portfolio, the value of an
investor's beneficial interest in the Portfolio is equal to the product
of (i) the aggregate net asset value of the Portfolio, multiplied by
(ii) the percentage representing that investor's share of the aggregate
beneficial interest in the Portfolio effective for that day.
55
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Investment in Balanced Portfolio . . . . . . . . . . . $16,667
Deferred Organization Expenses . . . . . . . . . . . . 14,455
Total Assets . . . . . . . . . . . . . . . . . 31,122
LIABILITIES:
Organization Expenses Payable . . . . . . . . . . . . 14,455
Net Assets . . . . . . . . . . . . . . . . . . $16,667
NET ASSET VALUE PER SHARE (2,380.951 SHARES OF
BENEFICIAL INTEREST OUTSTANDING; UNLIMITED
AUTHORIZED SHARES OF BENEFICIAL INTEREST
OF $0.00001 PAR VALUE) . . . . . . . . . . . . . . . . . . . $7.00
=====
NOTES:
(1) Excelsior Institutional Balanced Fund, (the "Fund") is a series of
Excelsior Institutional Trust (the "Trust"), organized as a Delaware
business trust on April 27, 1994, and has been inactive since that date
except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the
respective sales of 2,830.951 shares (the "initial shares") of the Fund
to UST Distributors, Inc. The Trust will invest the Fund's assets in
the Balanced Portfolio, as series of St. James Portfolios, an
investment company registered under the Investment Company Act of 1940.
Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years beginning
with the commencement of operations of the Fund. The amount paid by the
Fund on any redemption by UST Distributors, Inc., or any other current
holder of the Fund's initial shares, will be reduced by the pro rata
portion of any unamortized organization expenses of the Fund and the
Portfolio which the number of initial shares redeemed bears to the
total number of initial shares outstanding immediately prior to such
redemption, and the amount of such reduction in excess of the
unamortized organization expenses of the Fund shall be contributed by
the Trust to the Portfolio.
56
<PAGE>
UST058I
BALANCED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Cash............................................... $16,767
Deferred organization expenses..................... 40,242
Total assets................................. 57,009
LIABILITIES:
Accrued expenses................................... 40,242
Net assets .................................. $16,767
NOTES:
(1) The Balanced Portfolio (the "Portfolio") is a series of St. James
Portfolios, organized as a New York trust on April 27, 1994, and has
been inactive since that date except for matters relating to its
organization and registration as an investment company under the
Investment Company Act of 1940, the sale of a beneficial interest (the
"Initial Interest") therein at the respective purchase prices of
$16,667 to Excelsior Institutional Balanced Fund (the "Fund"), and $100
to UST Distributors, Inc. (the "initial beneficial interests").
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years beginning with the commencement of operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by UST Distributors, Inc. will be applied so as to reduce
the amount of unamortized organization expenses. The amount paid by St.
James Portfolios on behalf of the Portfolio on any withdrawal from the
Portfolio of the initial beneficial interest of UST Distributors, Inc.
will be reduced by a pro rata portion of any unamortized organization
expenses. This reduction will be determined with respect to each
withdrawal of an initial beneficial interest by calculating the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests then outstanding. The service
providers to the Portfolio have agreed to contribute to the Portfolio
at the time of the termination, liquidation, or dissolution of the
Portfolio, an amount equal to the unamortized organizational expenses
at such time.
(3) At the close of each business day of the Portfolio, the value of an
investor's beneficial interest in the Portfolio is equal to the product
of (i) the aggregate net asset value of the Portfolio, multiplied by
(ii) the percentage representing that investor's share of the aggregate
beneficial interest in the Portfolio effective for that day.
57
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EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL EQUITY GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Investment in Equity Growth Portfolio. . . . . . . . . $16,667
Deferred Organization Expenses . . . . . . . . . . . . 14,455
Total Assets . . . . . . . . . . . . . . . . . 31,122
LIABILITIES:
Organization Expenses Payable . . . . . . . . . . . . 14,455
Net Assets . . . . . . . . . . . . . . . . . . $16,667
NET ASSET VALUE PER SHARE (2,380.951 SHARES OF
BENEFICIAL INTEREST OUTSTANDING; UNLIMITED
AUTHORIZED SHARES OF BENEFICIAL INTEREST
OF $0.00001 PAR VALUE) . . . . . . . . . . . . . . . . . . . $7.00
=====
NOTES:
(1) Excelsior Institutional Equity Growth Fund, (the "Fund") is a series of
Excelsior Institutional Trust (the "Trust"), organized as a Delaware
business trust on April 27, 1994, and has been inactive since that date
except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the
sale of 2,380.951 shares (the "initial shares") of the Fund to UST
Distributors, Inc. The Trust will invest the Fund's assets in the
Equity Growth Portfolio, as series of St. James Portfolios, an
investment company registered under the Investment Company Act of 1940.
Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years beginning
with the commencement of operations of the Fund. The amount paid by the
Fund on any redemption by UST Distributors, Inc., or any other current
holder of the Fund's initial shares, will be reduced by the pro rata
portion of any unamortized organization expenses of the Fund and the
Portfolio which the number of initial shares redeemed bears to the
total number of initial shares outstanding immediately prior to such
redemption, and the amount of such reduction in excess of the
unamortized organization expenses of the Fund shall be contributed by
the Trust to the Portfolio.
UST058I
58
<PAGE>
UST058I
EQUITY GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Cash............................................... $16,767
Deferred organization expenses..................... 40,242
Total assets................................. 57,009
LIABILITIES:
Accrued expenses................................... 40,242
Net assets................................... $16,766
NOTES:
(1) The Equity Growth Portfolio (the "Portfolio") is a series of St. James
Portfolios, organized as a New York trust on April 27, 1994, and has
been inactive since that date except for matters relating to its
organization and registration as an investment company under the
Investment Company Act of 1940, the sale of a beneficial interest (the
"Initial Interest") therein at the respective purchase prices of
$16,667 to Excelsior Institutional Equity Growth Fund (the "Fund"), and
$100 to UST Distributors, Inc. (the "initial beneficial interests").
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years beginning with the commencement of operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by UST Distributors, Inc. will be applied so as to reduce
the amount of unamortized organization expenses. The amount paid by St.
James Portfolios on behalf of the Portfolio on any withdrawal from the
Portfolio of the initial beneficial interest of UST Distributors, Inc.
will be reduced by a pro rata portion of any unamortized organization
expenses. This reduction will be determined with respect to each
withdrawal of an initial beneficial interest by calculating the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests then outstanding. The service
providers to the Portfolio have agreed to contribute to the Portfolio
at the time of the termination, liquidation, or dissolution of the
Portfolio, an amount equal to the unamortized organizational expenses
at such time.
(3) At the close of each business day of the Portfolio, the value of an
investor's beneficial interest in the Portfolio is equal to the product
of (i) the aggregate net asset value of the Portfolio, multiplied by
(ii) the percentage representing that investor's share of the aggregate
beneficial interest in the Portfolio effective for that day.
59
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL VALUE EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Investment in Value Equity Income Portfolio. . . . . . $16,667
Deferred Organization Expenses . . . . . . . . . . . . 14,455
Total Assets . . . . . . . . . . . . . . . . . 31,122
LIABILITIES:
Organization Expenses Payable . . . . . . . . . . . . 14,455
Net Assets . . . . . . . . . . . . . . . . . . $16,667
NET ASSET VALUE PER SHARE (2,380.951 SHARES OF
BENEFICIAL INTEREST OUTSTANDING; UNLIMITED
AUTHORIZED SHARES OF BENEFICIAL INTEREST
OF $0.00001 PAR VALUE) . . . . . . . . . . . . . . . . . . . $7.00
=====
NOTES:
(1) Excelsior Institutional Value Equity Income Fund, (the "Fund") is a
series of Excelsior Institutional Trust (the "Trust"), organized as a
Delaware business trust on April 27, 1994, and has been inactive since
that date except for matters relating to its organization and
registration as an investment company under the Investment Company Act
of 1940 and the sale of 2,380.951 shares (the "initial shares") of the
Fund to UST Distributors, Inc. The Trust will invest the Fund's assets
in the Value Equity Income Portfolio, as series of St. James
Portfolios, an investment company registered under the Investment
Company Act of 1940.
Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years beginning
with the commencement of operations of the Fund. The amount paid by the
Fund on any redemption by UST Distributors, Inc., or any other current
holder of the Fund's initial shares, will be reduced by the pro rata
portion of any unamortized organization expenses of the Fund and the
Portfolio which the number of initial shares redeemed bears to the
total number of initial shares outstanding immediately prior to such
redemption, and the amount of such reduction in excess of the
unamortized organization expenses of the Fund shall be contributed by
the Trust to the Portfolio.
UST058I
60
<PAGE>
UST058I
VALUE EQUITY INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 20, 1994
ASSETS:
Cash............................................... $16,767
Deferred organization expenses..................... 40,242
Total assets................................. 57,009
LIABILITIES:
Accrued expenses................................... 40,242
Net assets................................... $16,766
NOTES:
(1) The Value Equity Income Portfolio (the "Portfolio") is a series of St.
James Portfolios, organized as a New York trust on April 27, 1994, and
has been inactive since that date except for matters relating to its
organization and registration as an investment company under the
Investment Company Act of 1940, the sale of a beneficial interest (the
"Initial Interest") therein at the respective purchase prices of
$16,667 to Excelsior Institutional Value Equity Income Fund (the
"Fund"), and $100 to UST Distributors, Inc. (the "initial beneficial
interests").
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years beginning with the commencement of operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by UST Distributors, Inc. will be applied so as to reduce
the amount of unamortized organization expenses. The amount paid by St.
James Portfolios on behalf of the Portfolio on any withdrawal from the
Portfolio of the initial beneficial interest of UST Distributors, Inc.
will be reduced by a pro rata portion of any unamortized organization
expenses. This reduction will be determined with respect to each
withdrawal of an initial beneficial interest by calculating the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests then outstanding. The service
providers to the Portfolio have agreed to contribute to the Portfolio
at the time of the termination, liquidation, or dissolution of the
Portfolio, an amount equal to the unamortized organizational expenses
at such time.
(3) At the close of each business day of the Portfolio, the value of an
investor's beneficial interest in the Portfolio is equal to the product
of (i) the aggregate net asset value of the Portfolio, multiplied by
(ii) the percentage representing that investor's share of the aggregate
beneficial interest in the Portfolio effective for that day.
61
<PAGE>
APPENDIX
Description of Security Ratings
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated "AAA" has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
Plus(+) or Minus(-) - The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
A-1
<PAGE>
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa - Bonds which are rated Aaa 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 which are rated Aa 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 Aaa securities.
A - Bonds which are rated A 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 which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Note - Moody's applies numerical modifiers, 1,2, and 3 in each generic rating
classification from Aa through Bb in its corporate bond rating system. The
modifier 1 indicates that the security rates in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category. Those municipal bonds within the Aa, A, Baa, and Ba categories that
Moody's believes possess the strongest credit attributes within those categories
are designated by the symbols Aa1, A1, Baa1, and Ba1.
COMMERCIAL PAPER
Prime-1 - Issuers rated P-1 (or supporting institutions) have a superior ability
for repayment of 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.
A-2
<PAGE>
- 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. - Well established access to a range of financial
markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (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 rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime - Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
FITCH INVESTORS SERVICE
CORPORATE BOND RATINGS
AAA - Securities of this rating are regarded as strictly high-grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions, and
liable to but slight market fluctuation other than through changes in the money
rate. The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong companies, and are
most numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Other features may enter in, such as a wide margin
of protection through collateral security or direct lien on specific property as
in the case of high class equipment certificates or bonds that are first
mortgages on valuable real estate. Sinking funds or voluntary reduction of the
debt by call or purchase are often factors, while guarantee or assumption by
parties other than the original debtor may also influence the rating.
AA - Securities in this group are of safety virtually beyond question, and as a
class are readily salable while many are highly active. Their merits are not
greatly unlike those of the AAA class, but a security so rated may be of junior
though strong lien - in many cases directly following an AAA security - or the
margin of safety is less strikingly broad. The issue may be the obligation of a
small company, strongly secured but influenced as to ratings by the lesser
financial power of the enterprise and more local type of market.
A - Securities of this rating are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
A-3
<PAGE>
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Securities of this rating are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus(+) or Minus(-) - Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
COMMERCIAL PAPER RATINGS
F-1+ - Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 - Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issue.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned "F-1+" and F-1" ratings.
F-3 - Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
DUFF & PHELPS RATINGS
CORPORATE BOND RATINGS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
AA+, AA, AA- - High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- - Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- - Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
COMMERCIAL PAPER RATINGS
Duff 1+ - Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
A-4
<PAGE>
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.
Duff 1 - Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- - High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2 - 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.
Duff 3 - Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
A-5
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
SERVICING AGENT EXCELSIOR INSTITUTIONAL EQUITY FUND
SIGNATURE FINANCIAL EXCELSIOR INSTITUTIONAL INCOME FUND
SERVICES, INC. EXCELSIOR INSTITUTIONAL TOTAL RETURN BOND FUND
6 St. James Avenue EXCELSIOR INSTITUTIONAL EQUITY INDEX FUND
Boston, MA 02116 EXCELSIOR INSTITUTIONAL BOND INDEX FUND
(617) 423-0800 EXCELSIOR INSTITUTIONAL SMALL CAPITALIZATION FUND
EXCELSIOR INSTITUTIONAL BALANCED FUND
INVESTMENT MANAGERS EXCELSIOR INSTITUTIONAL EQUITY GROWTH FUND
UNITED STATES TRUST EXCELSIOR INSTITUTIONAL VALUE EQUITY INCOME FUND
COMPANY OF NEW YORK EXCELSIOR INSTITUTIONAL INTERNATIONAL EQUITY FUND
114 West 47th Street
New York, NY 10036
UNITED STATES TRUST COMPANY OF
THE PACIFIC NORTHWEST
4380 Southwest Macadam Avenue, Suite 450
Portland, OR 97201
SPARE, KAPLAN & BISCHEL ASSOCIATES
44 Montgomery Street
San Francisco, CA 94104
BECKER CAPITAL MANAGEMENT, INC.
2185 Pacwest Center
Portland, OR 97204
LUTHER KING CAPITAL MANAGEMENT
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
HARDING, LOEVNER MANAGEMENT, L.P.
50 Division Street, Suite 401
Somerville, NJ 08876
TRANSFER AGENT STATEMENT OF ADDITIONAL INFORMATION
MUTUAL FUNDS SERVICE COMPANY NOVEMBER 28, 1994
73 Tremont Street
Boston, MA 02108
INDEPENDENT ACCOUNTANTS/AUDITORS
TO ST. JAMES PORTFOLIOS:
PRICE WATERHOUSE LLP
160 Federal Street
Boston, MA 02110
TO THE FUNDS:
ERNST & YOUNG LLP
200 Clarendon Street
Boston, MA 02116
DISTRIBUTOR
UST DISTRIBUTORS, INC.
125 West 55th Street
New York, NY 10022 UST058I
<PAGE>
