<PAGE>
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
6 ST. JAMES AVENUE
BOSTON, MASSACHUSETTS 02116
(617) 423-0800
For initial purchase and existing account information, call (800) 909-1989
(From overseas, call (617) 557-1755)
For current prices and yield information, call (800) 861-3430
- --------------------------------------------------------------------------------
This Prospectus describes ten mutual funds offered to institutional
investors by Excelsior Institutional Trust (the 'Trust'), an open-end
diversified management investment company. The mutual funds, 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 and Excelsior Institutional International Equity Fund (each, a 'Fund';
collectively, the 'Funds'), are separate series of the Trust.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus carefully and retain it for future reference. A Statement of
Additional Information containing additional information about the Funds has
been filed with the Securities and Exchange Commission and is available upon
request without charge by writing to the Trust at its address shown above or by
calling (617) 423-0800. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference in its entirety into
this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, BANK INSURANCE FUND, FEDERAL RESERVE BOARD, OR
ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND IS SUBJECT TO RISK OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Continued
PROSPECTUS DATED OCTOBER 1, 1995, AS AMENDED OCTOBER 6, 1995
<PAGE>
Each Fund has its own investment objective, as follows:
The investment objective of EXCELSIOR INSTITUTIONAL EQUITY FUND (the
'Equity Fund') is to provide long-term capital appreciation.
The investment objective of EXCELSIOR INSTITUTIONAL INCOME FUND (the
'Income Fund') is to provide as high a level of current interest income as is
consistent with moderate risk of capital and maintenance of liquidity.
The investment objective of EXCELSIOR INSTITUTIONAL TOTAL RETURN BOND FUND
(the 'Total Return Bond Fund') is to maximize the total rate of return
consistent with moderate risk of capital and maintenance of liquidity.
The investment objective of EXCELSIOR INSTITUTIONAL EQUITY INDEX FUND (the
'Equity Index Fund') is to provide investment results that correspond to the
investment performance of the Standard & Poor's 500 Composite Stock Price Index
(the 'S&P 500 Index'), an index emphasizing large capitalization equity
securities.
The investment objective of EXCELSIOR INSTITUTIONAL BOND INDEX FUND (the
'Bond Index Fund') is to provide investment results that correspond to the
investment performance of the Lehman Brothers Aggregate Bond Index (the
'Aggregate Bond Index'), a broad market-weighted index which encompasses U.S.
Treasury and agency securities, corporate investment grade bonds, and
mortgage-backed securities.
The investment objective of EXCELSIOR INSTITUTIONAL SMALL CAPITALIZATION
FUND (the 'Small Cap Fund') is to provide a high total return from a diversified
portfolio of equity securities of small capitalization companies.
The investment objective of EXCELSIOR INSTITUTIONAL BALANCED FUND (the
'Balanced Fund') is to provide a high total return from a diversified portfolio
of equity and fixed income securities.
The investment objective of EXCELSIOR INSTITUTIONAL EQUITY GROWTH FUND (the
'Equity Growth Fund') is to provide a high level of capital appreciation through
investment in a diversified portfolio of common stocks with potential for
above-average growth in earnings and dividends.
The investment objective of EXCELSIOR INSTITUTIONAL VALUE EQUITY INCOME
FUND (the 'Value Equity Income Fund') is to provide capital appreciation and a
high level of current income by investing principally in a diversified portfolio
of securities selected for their potential to generate current income or
long-term growth of capital.
The investment objective of EXCELSIOR INSTITUTIONAL INTERNATIONAL EQUITY
FUND (the 'International Equity Fund') is to provide long-term capital
appreciation through investment in a diversified portfolio of marketable foreign
securities.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE TRUST SEEKS TO ACHIEVE EACH FUND'S INVESTMENT
OBJECTIVE BY INVESTING ALL OF THAT FUND'S INVESTABLE ASSETS IN A CORRESPONDING
PORTFOLIO OR SERIES OF ST. JAMES PORTFOLIOS (THE 'PORTFOLIO SERIES'), AN OPEN-
END MANAGEMENT INVESTMENT COMPANY (EACH SUCH SERIES IS REFERRED TO HEREIN AS A
'PORTFOLIO'; COLLECTIVELY, THE 'PORTFOLIOS'). EACH PORTFOLIO HAS THE SAME
INVESTMENT OBJECTIVE AND POLICIES AS ITS CORRESPONDING FUND. THE FUNDS INVEST IN
THE PORTFOLIOS THROUGH SIGNATURE FINANCIAL GROUP, INC.'S INVESTMENT FUND
STRUCTURE KNOWN AS HUB AND SPOKE'r'. HUB AND SPOKE'r' EMPLOYS A TWO-TIER
MASTER/FEEDER FUND STRUCTURE AND IS A REGISTERED SERVICE MARK OF SIGNATURE
FINANCIAL GROUP, INC. SEE 'SPECIAL INFORMATION CONCERNING HUB AND SPOKE'r'
STRUCTURE' AT PAGE 33.
Continued
<PAGE>
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. U.S. Trust Pacific has delegated the daily management of the security
holdings of the Portfolios for the following Funds to the investment managers
named below, acting as subadvisers.
<TABLE>
<S> <C>
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
International Equity Fund................. Harding, Loevner Management, L.P.
</TABLE>
U.S. Trust is the investment adviser for the Portfolios corresponding to
the Equity Fund, Income Fund and Total Return Bond Fund. U.S. Trust Pacific,
U.S. Trust and the subadvisers are referred to collectively as the 'investment
managers'.
For more information on the investment advisers and subadvisers of the
Portfolios, please refer below to the section entitled 'Management of the Trust
and Portfolio Series -- Investment Managers'. Signature Financial Services,
Inc. ('SFSI') is the servicing and fund accounting agent of the Funds and the
Portfolios.
Subject to shareholder approval, the Trustees of the Trust have voted to
approve a restructuring with respect to the Equity Fund, Income Fund, Total
Return Bond Fund, Bond Index Fund, Balanced Fund, Equity Growth Fund and
International Equity Fund (the 'Restructuring Funds'). Under the restructuring,
the Trust will withdraw the investment of each Restructuring Fund from its
corresponding Portfolio and thereafter operate each such Fund in a single-tier
mutual fund structure (temporarily, in the case of the Bond Index Fund).
Thereafter, the Trust will engage an investment adviser and, if applicable, an
investment subadviser to manage each Restructuring Fund's portfolio of
investments. Subject to shareholder approval, the Trustees have approved
investment advisory agreements between the Trust on behalf of each Restructuring
Fund and the investment adviser currently providing investment advisory services
to the Portfolio corresponding to such Fund. Subject to shareholder approval,
the Trustees have also approved investment subadvisory agreements between the
investment adviser for the Bond Index Fund, Balanced Fund, Equity Growth Fund
and International Equity Fund and the investment subadviser currently providing
investment subadvisory services to the Portfolios corresponding to such Funds.
In the case of the Bond Index Fund, and subject to shareholder approval, the
Trustees have voted to reinvest all of the investable assets of such Fund in the
Bond Index Portfolio, a series of Federated Investment Portfolios. Therefore, it
is contemplated that the Bond Index Fund will temporarily operate in a
single-tier mutual fund structure which will be replaced almost immediately
thereafter by a new Hub and Spoke'r' investment fund structure. Shareholders of
the Trust will be asked to approve the restructuring at a special meeting of
shareholders scheduled to be held on November 15, 1995. The restructuring is
expected to take place as soon as practicable after shareholder approval is
obtained, but in any event after December 1, 1995. In addition, the Trustees of
the Trust have voted to terminate the Equity Index, Small Capitalization and
Value Equity Income Funds. The termination of these Funds is expected to occur
on or after December 1, 1995. For more information regarding the restructuring,
please refer below to the section entitled 'Management of the Trust and
Portfolio Series -- Proposed Restructuring'.
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
SUMMARY OF EXPENSES
The following table provides (i) a summary of estimated expenses relating
to purchases and sales of shares of the Funds, and the aggregate annual
operating expenses for the Funds and their corresponding Portfolios, as a
percentage of average net assets of the Funds, and (ii) an example illustrating
the dollar cost of such estimated expenses on a $1,000 investment in each Fund.
The table illustrates that investors in the Funds incur no shareholder
transaction expenses imposed by the Trust, although in connection with purchases
and redemptions of shares of the Funds, some institutional investors
('Shareholder Organizations') may charge their customers account fees for
investment and other cash management services. See 'How to Purchase, Exchange
and Redeem Shares' below. Customers should contact their Shareholder
Organization directly for further information. Investments in a Fund are subject
to the operating expenses set forth below for each Fund and its corresponding
Portfolio, as a percentage of the average daily net assets of the Fund. The
Trustees of the Trust believe that the aggregate per share expenses of each Fund
and its corresponding Portfolio will be less than or approximately equal to the
expenses which that Fund would incur if the Trust retained the services of an
investment adviser and the assets of that Fund were invested directly in the
type of securities being held by its corresponding Portfolio. Expenses of the
Funds and Portfolios are discussed below under 'Management of the Trust and
Portfolio Series'. The annual operating expenses itemized below are expected to
take effect concurrently with the proposed restructuring. For more information
regarding the restructuring, please refer below to the section entitled
'Management of the Trust and Portfolio Series -- Proposed Restructuring'.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases.......................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................... None
Deferred Sales Load...................................................................................... None
Redemption Fees.......................................................................................... None
Exchange Fees............................................................................................ None
</TABLE>
EXPENSE TABLE
ANNUAL OPERATING EXPENSES
<TABLE>
<CAPTION>
TOTAL
RETURN EQUITY BOND
EQUITY INCOME BOND INDEX INDEX
FUND FUND FUND FUND FUND
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Advisory Fees (after waiver).................................... * * * * *
12b-1 Fees...................................................... None None None None None
Other Expenses
Administrative Fees........................................... 0.15% 0.15% 0.15% 0.07%** 0.08%**
Shareholder Servicing Fees (after waiver)..................... 0% 0% 0% 0% 0%
Other Operating Expenses (after waivers and reimbursement).... 0.55% 0.35% 0.35% 0.05% 0.22%
------ ------ ------ ------ -----
Total Operating Expenses (after waivers and reimbursements)..... 0.70% 0.50% 0.50% 0.12% 0.30%
------ ------ ------ ------ -----
------ ------ ------ ------ -----
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
VALUE
EQUITY EQUITY INTERNATIONAL
SMALL CAP BALANCED GROWTH INCOME EQUITY
FUND FUND FUND FUND FUND
--------- -------- ------ ------ -------------
<S> <C> <C> <C> <C> <C>
Advisory Fees (after waiver)........................... * * * * *
12b-1 Fees............................................. None None None None None
Other Expenses
Administrative Fees.................................. 0.07%** 0.15% 0.15% 0.07%** 0.15%
Shareholder Servicing Fees (after waiver)............ 0% 0% 0% 0% 0%
Other Operating Expenses (after waivers and
reimbursement).................................... 0.05% 0.55% 0.55% 0.05% 0.75%
----- ----- ----- ----- -----
Total Operating Expenses (after waivers and
reimbursements)...................................... 0.12% 0.70% 0.70% 0.12% 0.90%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
EXAMPLE
Investors would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption of the investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Fund, Balanced Fund and Equity Growth Fund..................... $7 $22 $39 $ 87
Income Fund and Total Return Bond Fund................................ $5 $16 $28 $ 63
Equity Index Fund, Small Cap Fund and Value Equity Income Fund........ $1 $ 4 $ 7 $ 15
Bond Index Fund....................................................... $3 $10 $17 $ 38
International Equity Fund............................................. $9 $29 $50 $111
</TABLE>
- ------------
* Each investment adviser has agreed to waive all investment advisory fees.
While no Portfolio pays any fee to its investment adviser, each institutional
investor enters into an asset management services agreement with U.S. Trust
Pacific and agrees to pay annual fees calculated as a specified percentage of
average net assets. In addition, Shareholder Organizations may charge their
customers account fees for investment and other cash management services. See
'How to Purchase, Exchange and Redeem Shares' below. Accordingly, the
examples do not reflect an amount for fees paid directly to U.S. Trust
Pacific by an institutional investor or its customers.
** After waiver.
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of the table is to assist investors in
understanding the various costs and expenses that shareholders of each of the
Funds will bear directly or indirectly. The expense table and example reflect
voluntary undertakings (i) by U.S. Trust, U.S. Trust Pacific and the shareholder
servicing agents to waive certain of their fees, and (ii) by U.S. Trust to
reimburse the Trust for certain administrative fees and other expenses. After
giving effect to such waivers and reimbursements, the aggregate operating
expenses (including amortization of organizational expenses but exclusive of
taxes, interest, brokerage commissions and extraordinary expenses) of each Fund
and its corresponding Portfolio will be as shown above. Without such waivers and
reimbursements, (a) the advisory fees paid would equal (x) 0.65% of the average
daily net assets of the Portfolios for the Equity, Income, Total Return Bond,
Small Cap, Balanced, Equity
2
<PAGE>
Growth and Value Equity Income Funds, (y) 0.25% of the average daily net assets
of the Portfolios for the Equity Index and Bond Index Funds, and (z) 1.00% of
the average daily net assets of the Portfolio for the International Equity Fund;
(b) the administrative services fees would equal 0.23% of the average daily net
assets of the Equity Index, Bond Index, Small Cap, Value Equity Income Funds;
(c) the shareholder servicing fees would equal 0.25% of the average daily net
assets of each Fund; (d) other expenses would equal the following percentages of
the average daily net assets of the Funds: Equity Fund, 1.62%, Income Fund,
0.60%, Total Return Bond Fund, 0.88%, Equity Index Fund, 0.58%, Bond Index Fund,
0.56%, Small Cap Fund, 0.89%, Balanced Fund, 0.30%, Equity Growth Fund, 0.31%,
Value Equity Income Fund, 0.62%, and International Equity Fund, 1.92%; and (e)
aggregate total operating expenses would equal the following percentages of the
average daily net assets of the Funds: Equity Fund, 2.67%, Income Fund, 1.65%,
Total Return Bond Fund, 1.93%, Equity Index Fund, 1.93%, Bond Index Fund, 1.29%,
Small Cap Fund, 2.02%, Balanced Fund, 1.32%, Equity Growth Fund, 1.36%, Value
Equity Income Fund, 1.75%, and International Equity Fund, 3.32%. Historical
information in the expense table regarding administrative fees and other
expenses has been restated to reflect the maximum potential increase in such
fees and expenses attributable to a modification in fee waivers and expense
reimbursements effective after completion of the proposed restructuring, but in
any event after December 1, 1995. For more information regarding the
restructuring, please refer below to the section entitled 'Management of the
Trust and Portfolio Series -- Proposed Restructuring'. For more information with
respect to the expenses of each of the Funds and its corresponding Portfolio,
see 'Management of the Trust and Portfolio Series'. Fee waivers and expense
reimbursements are terminable at any time in the sole discretion of the service
providers waiving fees or reimbursing expenses.
FINANCIAL HIGHLIGHTS
The following selected data for a share outstanding for the indicated
periods has been audited by Ernst & Young LLP. The Trust's Annual Report, which
includes the independent auditors' report and is incorporated by reference into
the Statement of Additional Information, includes a discussion of those factors,
strategies and techniques that materially affected its performance during the
period of the report, as well as certain related information. A copy of the
Trust's Annual Report will be made available without charge upon request.
3
<PAGE>
FINANCIAL HIGHLIGHTS
COMMENCEMENT OF OPERATIONS THROUGH MAY 31, 1995(A)
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
TOTAL
RETURN EQUITY BOND
EQUITY INCOME BOND INDEX INDEX
FUND FUND FUND FUND FUND
-------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 7.00 $ 7.00 $ 7.00 $ 7.00 $ 7.00
------- ------- ------- ------- -------
INVESTMENT OPERATIONS:
Net investment income................. 0.05 0.19 0.18 0.26 0.46
Net realized and unrealized gain from
Portfolio Series.................... 0.70 0.33 0.47 1.18 0.28
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS.... 0.75 0.52 0.65 1.44 0.74
------- ------- ------- ------- -------
DISTRIBUTIONS:
From net investment income............ (0.02) (0.19) (0.18) (0.13) (0.46)
From net realized gains............... -- -- -- (0.04) (0.02)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD.......... $ 7.73 $ 7.33 $ 7.47 $ 8.27 $ 7.26
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (B)(E)..................... 10.80% 7.51% 9.40% 20.96% 11.03%
RATIOS AND SUPPLEMENTAL DATA:
Ratios to Average Net Assets
Expenses (c)(d)....................... 0.12% 0.12% 0.12% 0.12% 0.12%
Net Investment Income (c)............. 2.44% 7.17% 7.09% 2.84% 7.33%
Net Assets at end of Period (000's
omitted).............................. $15,409 $33,230 $24,913 $13,107 $15,565
- ------------------------
(a) Commencement of operations: 01/16/95 01/16/95 01/19/95 07/11/94 07/11/94
(b) Not annualized
(c) Annualized
(d) Reflects the Fund's proportionate
share of its corresponding
Portfolio's expenses as well as
voluntary fee waivers and
reimbursements by agents of the
Portfolio Series and a voluntary fee
waiver and an expense reimbursement
by agents of the Trust. If the
voluntary waivers and expense
reimbursements had not been in
place, the ratios of expenses and
net investment income to average net
assets from commencement of
operations to May 31, 1995 would
have been as follows:
Expenses.......................... 2.67% 1.65% 1.93% 1.31% 1.23%
Net Investment Income (Loss)...... (0.12%) 5.65% 5.28% 1.65% 6.22%
(e) Each investment adviser has agreed
to waive all investment advisory
fees. While no Portfolio pays any
fee to its adviser, each
institutional investor enters into
an asset management services
agreement with U.S. Trust Pacific
and agrees to pay annual fees
calculated as a specific percentage
of average net assets.
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
COMMENCEMENT OF OPERATIONS THROUGH MAY 31, 1995(A)
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
VALUE
SMALL EQUITY EQUITY INTERNATIONAL
CAPITALIZATION BALANCED GROWTH INCOME EQUITY
FUND FUND FUND FUND FUND
-------------- -------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 7.00 $ 7.00 $ 7.00 $ 7.00 $ 7.00
-------- ------- ------- ------- -------
INVESTMENT OPERATIONS:
Net investment income................. 0.11 0.35 0.08 0.34 0.08
Net realized and unrealized gain from
Portfolio Series.................... 0.66 0.64 0.85 0.97 0.80
------- -------- ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS.... 0.77 0.99 0.93 1.31 0.88
------- -------- ------- ------- ------
DISTRIBUTIONS:
From net investment income............ (0.06) (0.26) (0.06) (0.26) --
From net realized gains............... (0.01) (0.03) -- (0.06) --
------- -------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD.......... $ 7.70 $ 7.70 $ 7.87 $ 7.99 $ 7.88
------- -------- ------- ------- ------
------- -------- ------- ------- ------
TOTAL RETURN (B)(E)..................... 11.10% 14.59% 13.38% 19.32% 12.57%
RATIOS AND SUPPLEMENTAL DATA:
Ratios to Average Net Assets
Expenses (c)(d)....................... 0.12% 0.12% 0.12% 0.12% 0.25%
Net Investment Income (c)............. 1.59% 5.55% 1.27% 5.03% 3.47%
Net Assets at end of Period (000's
omitted).............................. $ 13,329 $74,478 $52,347 $17,483 $ 8,804
- ------------------------
(a) Commencement of operations: 07/11/94 07/11/94 07/11/94 07/11/94 01/24/95
(b) Not annualized
(c) Annualized
(d) Reflects the Fund's proportionate
share of its corresponding
Portfolio's expenses as well as
voluntary fee waivers and
reimbursements by agents of the
Portfolio Series and a voluntary fee
waiver and an expense reimbursement
by agents of the Trust. If the
voluntary waivers and expense
reimbursements had not been in
place, the ratios of expenses and
net investment income to average net
assets from commencement of
operations to May 31, 1995 would
have been as follows:
Expenses.......................... 2.02% 1.32% 1.36% 1.75% 3.32%
Net Investment Income (Loss)...... (0.31%) 4.35% 0.03% 3.40% 0.40%
(e) Each investment adviser has agreed
to waive all investment advisory
fees. While no Portfolio pays any
fee to its adviser, each
institutional investor enters into
an asset management services
agreement with U.S. Trust Pacific
and agrees to pay annual fees
calculated as a specific percentage
of average net assets.
</TABLE>
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION
Excelsior Institutional Trust was organized as a business trust under the
laws of the State of Delaware, with the Funds established as separate series of
the Trust, on April 27, 1994. Shares of the Funds are continuously sold to
institutional investors. The Trust seeks to achieve the investment objective of
each of the Funds by investing all investable assets of that Fund in its
corresponding Portfolio, which has the same investment objective and policies as
that Fund.
Unless otherwise stated, all of the investment objectives, policies and
strategies discussed herein and in the Statement of Additional Information are
deemed 'non-fundamental', i.e., the approval of a Fund's shareholders is not
required to change its investment objective or any of its investment policies
and strategies. Likewise, the approval of a Fund and other investors in its
corresponding Portfolio is not required to change that Portfolio's investment
objective or any of the Portfolio's investment policies and strategies. Any
changes in a Fund's or a Portfolio's investment objective, policies or
strategies could result in the Fund having investment objectives, policies and
strategies different from those applicable at the time of a shareholder's
investment in such Fund.
INVESTMENT OBJECTIVES
The investment objective of EXCELSIOR INSTITUTIONAL EQUITY FUND (the
'Equity Fund') is to provide long-term capital appreciation. The Trust seeks to
achieve the investment objective of the Fund by investing all of the investable
assets of the Fund in Equity Portfolio, a diversified open-end investment
company with the same investment objective and policies as the Equity Fund.
Equity Portfolio seeks to achieve its investment objective by investing in
companies believed to represent good long-term values not currently recognized
in the market prices of their securities.
The investment objective of EXCELSIOR INSTITUTIONAL INCOME FUND (the
'Income Fund') is to provide as high a level of current interest income as is
consistent with moderate risk of capital and maintenance of liquidity. The Trust
seeks to achieve the investment objective of the Fund by investing all of the
investable assets of the Fund in Income Portfolio, a diversified open-end
investment company with the same investment objective and policies as the Income
Fund. Income Portfolio seeks to achieve its investment objective by investing
principally in a broad range of investment-grade fixed income securities,
including preferred stock, bonds, notes and debentures, as well as money market
instruments.
The investment objective of EXCELSIOR INSTITUTIONAL TOTAL RETURN BOND FUND
(the 'Total Return Bond Fund') is to maximize the total rate of return
consistent with moderate risk of capital and maintenance of liquidity. The Trust
seeks to achieve the investment objective of the Fund by investing all of the
investable assets of the Fund in Total Return Bond Portfolio, a diversified
open-end investment company with the same investment objective and policies as
the Total Return Bond Fund. Total Return Bond Portfolio seeks to achieve its
investment objective by investing principally in a broad range of investment
grade fixed income securities, including preferred stock, bonds, notes and
debentures, as well as money market instruments. In selecting investment
opportunities, Total Return Bond Portfolio will balance yield, average maturity
and risk in seeking to provide maximum preservation of purchase power.
6
<PAGE>
The investment objective of EXCELSIOR INSTITUTIONAL EQUITY INDEX FUND (the
'Equity Index Fund') is to provide investment results that correspond to the
investment performance of the Standard & Poor's 500 Composite Stock Price Index1
(the 'S&P 500 Index'), an index emphasizing large capitalization stocks. The
Trust seeks to achieve the investment objective of the Fund by investing all the
investable assets of the Fund in Equity Market Portfolio, a diversified open-end
management investment company with the same investment objective and policies as
the Equity Index Fund. Equity Market Portfolio seeks to achieve its investment
objective by replicating the yield and total return of the equity securities
composing the S&P 500 Index. The S&P 500 is a broad-based index of the common
stocks of 500 companies from several industrial sectors representing a
significant portion of the market value of all common stocks publicly traded in
the United States.
The investment objective of EXCELSIOR INSTITUTIONAL BOND INDEX FUND (the
'Bond Index Fund') is to provide investment results that correspond to the
investment performance of the Lehman Brothers Aggregate Bond Index (the
'Aggregate Bond Index'), a broad market-weighted index which encompasses U.S.
Treasury and agency securities, corporate investment grade bonds, and
mortgage-backed securities, each with maturities greater than one year. The
Trust seeks to achieve the investment objective of the Fund by investing all the
investable assets of the Fund in Bond Market Portfolio, a diversified open-end
management investment company with the same investment objective and policies as
the Bond Index Fund. Bond Market Portfolio seeks to achieve its investment
objective by replicating the yield and total return of the Aggregate Bond Index
through a statistically selected sample of fixed income securities. The
Aggregate Bond Index is a broad market-weighted index of U.S. investment grade
fixed income securities.
The investment objective of EXCELSIOR INSTITUTIONAL SMALL CAPITALIZATION
FUND (the 'Small Cap Fund') is to provide a high total return from a diversified
portfolio of equity securities of small capitalization companies. The Trust
seeks to achieve the investment objective of the Fund by investing all the
investable assets of the Fund in Small Cap Portfolio, a diversified open-end
management investment company with the same investment objective and policies as
the Small Cap Fund. Small Cap Portfolio seeks to achieve its investment
objective by investing in equity securities from the Russell 2000 Index. The
Portfolio invests in index securities whose risk characteristics and industry
group representation are similar to the universe of securities in the Russell
2000 Index; however, the Portfolio's security holdings, taken together, will
have a lower aggregate price/earnings ratio than index securities generally. The
Russell 2000 Index is a broad index of equity securities of U.S. companies with
common stock market capitalizations below $600 million.
The investment objective of EXCELSIOR INSTITUTIONAL BALANCED FUND (the
'Balanced Fund') is to provide a high total return from a diversified portfolio
of equity and fixed income securities. The Trust seeks to achieve the investment
objective of the Fund by investing all the investable assets of the Fund in
Balanced Portfolio, a diversified open-end management investment company with
the same investment objective and policies as the Balanced Fund. Balanced
Portfolio seeks to achieve this investment objective by investing in equity and
fixed income securities, as described more fully below.
The investment objective of EXCELSIOR INSTITUTIONAL EQUITY GROWTH FUND (the
'Equity Growth Fund') is to provide a high level of capital appreciation through
investment in a
- ------------
1'Standard & Poor's'r', 'S&P'r', and 'Standard & Poor's 500'r' are trademarks of
Standard & Poor's Corporation.
7
<PAGE>
diversified portfolio of common stocks with potential for above-average growth
in earnings and dividends. The Trust seeks to achieve the investment objective
of the Fund by investing all the investable assets of the Fund in Equity Growth
Portfolio, a diversified open-end management investment company with the same
investment objective and policies as the Equity Growth Fund. Equity Growth
Portfolio seeks to achieve this investment objective by investing primarily in
the common stocks of medium and large capitalization companies which, in the
opinion of its subadviser, will present an opportunity for significant increases
in earnings and/or value, without consideration for current income.
The investment objective of EXCELSIOR INSTITUTIONAL VALUE EQUITY INCOME
FUND (the 'Value Equity Income Fund') is to provide capital appreciation and a
high level of current income by investing principally in a diversified portfolio
of equity securities selected for their potential to generate current income or
long-term growth of capital. The Trust seeks to achieve the investment objective
of the Fund by investing all the investable assets of the Fund in Value Equity
Income Portfolio, a diversified open-end management investment company with the
same investment objective and policies as the Value Equity Income Fund. Value
Equity Income Portfolio seeks to achieve this investment objective by investing
primarily in equity securities which produce a current dividend yield which
generally exceeds the published composite yield of the securities comprising the
S&P 500. The published composite yield of the S&P 500 was 2.45% for the calendar
quarter ended June 30, 1995.
The investment objective of EXCELSIOR INSTITUTIONAL INTERNATIONAL EQUITY
FUND (the 'International Equity Fund') is to provide long-term capital
appreciation through investment in a diversified portfolio of marketable foreign
securities. The Trust seeks to achieve the investment objective of the Fund by
investing all of the investable assets of the Fund in International Equity
Portfolio, a diversified open-end investment company with the same investment
objective and policies as the International Equity Fund. International Equity
Portfolio seeks to achieve its investment objective by investing primarily in
foreign equity securities of issuers that the subadviser believes to have strong
balance sheets, sustainable internal growth, superior financial results, capable
and forthright management and enduring competitive advantages.
Since the investment policies and strategies of each Fund are the same as
those of its corresponding Portfolio, the following is a discussion of the
various investment policies and strategies employed by each Portfolio.
Additional information about the investment policies and strategies of each
Portfolio appears in the Statement of Additional Information. There can be no
assurance that the investment objective of any Fund or its corresponding
Portfolio will be achieved.
U.S. TRUST'S INVESTMENT PHILOSOPHY AND STRATEGIES
U.S. Trust, the adviser for the Equity, Income and Total Return Bond
Portfolios, and the subadviser for the Equity Market, Bond Market, and Small Cap
Portfolios, was founded in 1853, and offers a variety of specialized fiduciary
and financial services to high net worth individuals, institutions and
corporations. As one of the largest institutions of its type, U.S. Trust prides
itself in offering an attentive and high level of service to each of its
clients.
EQUITY PORTFOLIO
Investment Philosophy. In managing investments for the Equity Portfolio,
U.S. Trust follows a long-term investment philosophy which generally does not
change with the short-term variability of financial markets or fundamental
conditions. U.S. Trust's approach begins with the conviction that all
8
<PAGE>
worthwhile investments are grounded in value. U.S. Trust believes that an
investor can identify fundamental values that eventually should be reflected in
market prices. U.S. Trust believes that over time a disciplined search for
fundamental value will achieve better results than attempting to take advantage
of short-term price movements.
Implementation of this long-term value philosophy consists of searching
for, identifying and obtaining the benefits of present or future investment
values. For example, such values may be found in a company's future earnings
potential or in its existing resources and assets. Accordingly, U.S. Trust in
managing investments for the Equity Portfolio is constantly engaged in
assessing, comparing and judging the worth of companies, particularly in
comparison to the price the markets place on such companies' shares.
Strategies. In order to translate its investment philosophy into more
specific guidance for selection of investments, U.S. Trust uses three specific
strategies. These strategies, while identified separately, may overlap so that
more than one may be applied in an investment decision.
U.S. Trust's 'PROBLEM/OPPORTUNITY STRATEGY' seeks to identify industries
and companies with the capabilities to provide solutions to or benefit from
complex problems such as the changing demographics and aging of the U.S.
population or the need to enhance industrial productivity. U.S. Trust's second
strategy is a 'TRANSACTION VALUE' comparison of a company's real underlying
asset value with the market price of its shares and with the sale prices for
similar assets changing ownership in public market transactions. Differences
between a company's real asset value and the price of its shares often are
corrected over time by restructuring of the assets or by market recognition of
their value. U.S. Trust's third strategy involves identifying 'EARLY LIFE CYCLE'
companies whose products are in their earlier stages of development or that seek
to exploit new markets. Frequently such companies are smaller companies, but
early life cycle companies may also include larger established companies with
new products or new markets for existing products. U.S. Trust believes that over
time the value of such companies should be recognized in the market.
Themes. To complete U.S. Trust's investment philosophy, the three
portfolio strategies discussed above are applied in concert with several
'longer-term investment themes' to identify investment opportunities. U.S. Trust
believes these longer-term themes represent strong and inexorable trends. U.S.
Trust also believes that understanding the instigation, catalysts and effects of
these longer-term trends should help to identify companies that are
beneficiaries of these trends.
INCOME PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
Investment Philosophy. Generally, investors in fixed income securities are
best served in the long term by seeking to maximize total return. However, some
investors need to balance preservation of purchase power against the need for
current income.
As a result, the Trust is offering both objectives to investors. In the
Total Return Bond Portfolio, U.S. Trust will employ a total return strategy that
balances yield, average maturity and risk in seeking to provide maximum
preservation of purchase power. The Income Portfolio will seek to provide
investors with maximum current income commensurate with the credit quality of
the Portfolio and moderate risk of capital.
EQUITY MARKET PORTFOLIO AND BOND MARKET PORTFOLIO
Investment Philosophy. The Equity Market Portfolio and Bond Market
Portfolio (collectively, the 'Index Portfolios') are not managed pursuant to
traditional methods of active investment management, which involve the buying
and selling of securities based upon economic, financial, and market
9
<PAGE>
analyses and investment judgment. Instead, the Index Portfolios, utilizing a
passive or indexing investment approach, will attempt to duplicate the
investment performance of their respective indexes.
The Bond Market Portfolio seeks to duplicate the investment performance of
the Aggregate Bond Index through statistical sampling procedures, that is, the
Portfolio will invest in a selected group -- not the entire universe -- of
securities in its corresponding index. This group of securities, when taken
together, is expected to perform similarly to the index as a whole. This
sampling technique is expected to enable the Bond Market Portfolio to track the
price movements and performance of its index, while minimizing brokerage,
custodial and accounting costs.
The Equity Market Portfolio seeks to replicate the investment results of
the S&P 500 Index by holding all 500 stocks included in the index in
approximately the same proportions as they are represented in the S&P 500 Index.
This indexing technique is known as complete replication. The Equity Market
Portfolio will generally select index stocks by reference to their weighting in
the index, starting with the stocks that are most heavily weighted. Thus, the
Portfolio intends that the percentage of its assets invested in each index stock
will approximate the weighting of that stock in the S&P 500 Index. The Portfolio
may, however, be unable fully to implement the strategy outlined above when its
assets total less than $25 million. At such times, the Portfolio may attempt to
approximate the performance of the index by utilizing a sampling approach.
The Trust expects that there will be a close correlation between a
Portfolio's performance and that of its index in both rising and falling
markets. Each Index Portfolio will attempt to maximize the correlation between
its performance and that of its corresponding index. Over the long term, the
investment managers of the Index Portfolios seek a correlation of 0.95 or
better. In the event that a correlation of 0.95 or better is not achieved, the
Board of Trustees of the Portfolio Series will review with the investment
managers methods for increasing such correlation, such as through adjustments in
securities holdings of an Index Portfolio. A correlation of 1.0 would indicate a
perfect correlation, which would be achieved when a Portfolio's net asset value,
including the value of its dividend and capital gains distributions, increases
or decreases in exact proportion to changes in an index. The investment managers
of the Index Portfolios monitor the correlation between the performance of each
Index Portfolio and its corresponding index on a regular basis. Factors such as
the size of a Portfolio's securities holdings, transaction costs, management
fees and expenses, brokerage commissions and fees, the extent and timing of cash
flows into and out of a Portfolio, and changes in the securities markets and the
indexes themselves, are expected to account for any differences between each
Index Portfolio's performance and that of its corresponding index.
INVESTMENT POLICIES
EQUITY PORTFOLIO seeks to provide long-term capital appreciation by
investing in companies believed to represent good long-term values not currently
recognized in the market prices of their securities. U.S. Trust uses the
investment philosophy, strategies and themes discussed above to identify such
investment values and to diversify the Portfolio's investments over a variety of
industries and types of companies.
Under normal market and economic conditions, the Portfolio will invest at
least 65% of its total assets in common stock, preferred stock and securities
convertible into common stock. Normally, not more than 35% of the Portfolio's
total assets may be invested in other securities and instruments including,
e.g., investment-grade debt securities, warrants, options, and futures
instruments as described in more detail below. See 'Additional Investment
Strategies and Techniques; Risk Factors' below. The
10
<PAGE>
Portfolio may hold cash or invest without limitation in U.S. Government
securities, high quality money market instruments and repurchase agreements
collateralized by the foregoing obligations, if deemed appropriate by U.S. Trust
for temporary defensive purposes. For a description of these securities, see
'Bond Market Portfolio -- U.S. Government and Agency Securities' and
'Additional Investment Strategies and Techniques; Risk Factors -- Short Term
Instruments' below, and the Statement of Additional Information.
In managing the Portfolio, U.S. Trust seeks to purchase securities having
value currently not recognized in the market price of a security, consistent
with the strategies discussed above.
Portfolio holdings will include common stocks of companies having
capitalizations of varying amounts, and the Portfolio will invest in the
securities of high growth, small companies where U.S. Trust expects earnings and
the price of the securities to grow at an above-average rate. See 'Small Cap
Portfolio' below for a description of certain risks associated with the
securities of small companies. Certain securities owned by the Portfolio may be
traded only in the over-the-counter market or on a regional securities exchange,
may be listed only in the quotation service commonly known as the 'pink sheets',
or may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, there may be a greater fluctuation in the net
asset value of the Portfolio, and the Portfolio may be required, in order to
meet withdrawals by investors or for other reasons, to sell these securities at
a discount from market prices, to sell during periods when such disposition is
not desirable, or to make many small sales over a period of time.
Equity Portfolio may invest in the securities of foreign issuers directly,
or indirectly through sponsored and unsponsored American Depository Receipts.
See 'Additional Investment Strategies and Techniques; Risk Factors' below for
further information on foreign investments.
Because of the risks associated with common stock investments, the Equity
Fund is intended to be a long-term investment vehicle and is not designed to
provide investors with a means of speculating on short-term stock market
movements. Investors should not consider the Equity Fund a complete investment
program.
INCOME PORTFOLIO seeks as high a level of current interest income as is
consistent with moderate risk of capital and maintenance of liquidity. Income
Portfolio will implement this objective by lengthening the average maturity of
its holdings and purchasing higher-yielding (but relatively stable) corporate
bonds and government securities. The Portfolio invests principally in a broad
range of investment-grade income securities, including bonds, notes, debentures
and preferred stock, as well as money market instruments. See 'Total Return Bond
Portfolio' below for a description of these securities and a discussion of
certain investment policies of Income Portfolio.
TOTAL RETURN BOND PORTFOLIO seeks to maximize the total rate of return
consistent with moderate risk of capital and maintenance of liquidity. In
selecting investment opportunities, Total Return Bond Portfolio will balance
yield, average maturity and risk in seeking to provide maximum preservation of
purchase power. Total Return Bond Portfolio invests principally in a broad range
of investment-grade income securities, including bonds, notes, debentures and
preferred stock, as well as money market instruments.
The Income and the Total Return Bond Portfolios may invest in the following
types of securities: corporate debt obligations such as bonds, debentures,
obligations convertible into common stocks and money market instruments;
preferred stocks; and obligations issued or guaranteed by the U.S. Government
and its agencies or instrumentalities. The Income and the Total Return Bond
Portfolios
11
<PAGE>
are also permitted to enter into repurchase agreements, and may from time to
time invest in debt obligations exempt from Federal income tax and issued by or
on behalf of the states, territories or possessions of the United States, the
District of Columbia, and their authorities, agencies, instrumentalities and
political subdivisions ('Municipal Bonds').
The purchase of Municipal Bonds may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the performance of such
securities, on a pre-tax basis, is comparable to that of corporate or U.S.
Government debt obligations. The two principal classifications of Municipal
Bonds which may be held by the Income and the Total Return Bond Portfolios are
'general obligation' securities and 'revenue' securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit, and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Private
activity bonds held by the Portfolios are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of private activity revenue bonds is usually directly related to
the credit standing of the corporate user of the facility involved.
The Income and the Total Return Bond Portfolios may also purchase 'moral
obligation' securities, which are normally issued by special-purpose public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment, but not a legal obligation, of
the state or municipality which created the issuer. Subject to the quality and
diversification requirements specified below, there is no limitation on the
amount of moral obligation securities that may be held by the Income and the
Total Return Bond Portfolios. U.S. Trust will consider investments in Municipal
Bonds for the Income and the Total Return Bond Portfolios when U.S. Trust
believes that the total return on such securities is attractive relative to that
of taxable securities.
Under normal market conditions, at least 75% of the Income and the Total
Return Bond Portfolios' total assets will be invested in investment-grade debt
obligations rated within the four highest ratings of Moody's Investors Service,
Inc. ('Moody's') or Standard & Poor's Ratings Group ('S&P') (or in unrated
obligations considered to be of investment grade by U.S. Trust) and in U.S.
Government obligations and money market instruments of the types listed at 'Bond
Market Portfolio -- U.S. Government and Agency Securities' and 'Additional
Investment Strategies and Techniques; Risk Factors -- Short Term Instruments'
below. When, in the opinion of a Portfolio, a defensive investment posture is
warranted, each of these Portfolios may invest temporarily and without
limitation in high quality, short-term money market instruments.
Unrated securities will be considered of investment grade if deemed to be
comparable in quality to instruments so rated, as determined pursuant to
procedures established by the Board of Trustees of St. James Portfolios (the
'Portfolio Series'). With respect to securities rated Baa by Moody's or BBB by
S&P, interest and principal payments are regarded as adequate for the present;
however, securities with these rankings may have speculative characteristics,
and changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity to make interest and principal payments than is the
case with higher grade bonds. See the Appendix to the Statement of Additional
Information for a more detailed explanation of these ratings.
The Income and the Total Return Bond Portfolios may invest up to 25% of
their respective total assets in (a) obligations rated below the four highest
ratings of S&P or Moody's with no minimum
12
<PAGE>
rating required, (b) preferred stocks, and (c) U.S. dollar-denominated debt
obligations of (i) foreign issuers, including foreign corporations and foreign
governments, and (ii) U.S. companies issued outside the United States. See
'Additional Investment Strategies and Techniques; Risk Factors' below for
further information on these investments. The Income and the Total Return Bond
Portfolios will not invest in common stocks, and any common stocks received
through conversion of convertible debt obligations will be sold in an orderly
manner as soon as possible.
Each of the Income Fund and the Total Return Bond Fund is intended to be a
long-term investment vehicle and is not designed to provide investors with a
means of speculating on short-term bond market movements. Because of potential
share price fluctuations, these Funds may be inappropriate for investors who
have short-term objectives. Investors should not consider the Funds a complete
investment program.
EQUITY MARKET PORTFOLIO invests at least 80% of its assets in a portfolio
of equity securities consisting of all 500 common stocks in the S&P 500 Index of
large capitalization common stocks. The Portfolio intends to remain fully
invested, to the extent practicable, in a pool of securities which will match
the investment characteristics of the index. The inclusion of a stock in the S&P
500 Index in no way implies that Standard & Poor's Corporation ('S&P
Corporation') believes the stock to be an attractive investment.
S&P 500 INDEX. The S&P 500 Index is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all common stocks
publicly traded in the United States, in the following proportions: 400
industrials, 60 transportation and utility companies, and 40 financial services
companies. Stocks in the S&P 500 Index are weighted according to their market
capitalization (i.e., the number of shares outstanding multiplied by the stock's
current price), with the 51 largest stocks currently composing 50% of the
index's value. Typically, companies included in the S&P 500 Index are the
largest and most dominant firms in their respective industries. As of June 30,
1995, the five largest companies in the Index were: General Electric (2.39%),
Exxon Corporation (2.19%), American Telephone & Telegraph (2.52%), Coca-Cola
(2.02%), and Royal Dutch Petroleum (1.63%). As of the same date, the largest
industry categories were: international oil companies (6.8%), telephone
companies (4.9%), electric power companies (3.8%), diversified health care
companies (3.8%), and major regional banks (3.6%). The investment managers of
the Portfolio believe that the performance of the S&P 500 Index is
representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 Index is determined by S&P Corporation and is
based on such factors as the market capitalization and trading activity of each
stock and its representation of a particular industry group, and may be changed
from time to time.
The Equity Index Fund and the Equity Market Portfolio are not sponsored,
endorsed, sold or promoted by S&P Corporation. S&P Corporation makes no
representation or warranty, express or implied, to investors in the Equity Index
Fund and the Equity Market Portfolio or any member of the public regarding the
advisability of investing in securities generally or in the Fund and Portfolio
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P Corporation's only relationship to the Trust is the licensing
of certain trademarks and trade names of S&P Corporation and of the S&P 500
Index which is determined, composed and calculated by S&P Corporation without
regard to the Trust, the Equity Index Fund or the Equity Market Portfolio. S&P
Corporation has no obligation to take the needs of the Trust or the investors in
the Equity Index Fund and the Equity Market Portfolio into consideration in
determining, composing or calculating the S&P
13
<PAGE>
500 Index. S&P Corporation is not responsible for and has not participated in
the determination of the net asset value of shares of the Equity Index Fund or
the timing of the issuance or sale of shares of the Fund.
S&P CORPORATION DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P CORPORATION SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P CORPORATION
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST
OR INVESTORS IN THE EQUITY INDEX FUND AND THE EQUITY MARKET PORTFOLIO OR ANY
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P CORPORATION MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL S&P CORPORATION HAVE ANY LIABILITY FOR
ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Because of the risks associated with common stock investments, the Equity
Index Fund is intended to be a long-term investment vehicle and is not designed
to provide investors with a means of speculating on short-term stock market
movements. Investors should not consider the Equity Index Fund a complete
investment program.
BOND MARKET PORTFOLIO invests at least 80% of its assets in a portfolio of
securities consisting of a representative selection of fixed income securities
included in the Lehman Brothers Aggregate Bond Index. The Portfolio intends to
remain fully invested, to the extent practicable, in a pool of securities that
match the yield and total return of the index.
LEHMAN BROTHERS AGGREGATE BOND INDEX. The Aggregate Bond Index is a broad
market-weighted index which encompasses three major classes of United States
investment grade fixed income securities with maturities greater than one year:
U.S. Treasury and agency securities, corporate bonds, and mortgage-backed
securities. The Index measures the total investment return (capital change plus
income) provided by a universe of fixed income securities, weighted by the
market value outstanding of each security. The securities included in the Index
generally meet the following criteria, as defined by Lehman Brothers: an
outstanding market value of at least $100 million for U.S. Government and agency
issues and $50 million for all other securities issuers (this limit was raised
to $100 million for all issuers at the end of 1994); and investment grade
quality, rated a minimum of Baa by Moody's or BBB by S&P. The Bond Market
Portfolio is managed without regard to tax ramifications. As of June 30, 1995,
the following classes of fixed income securities represented the stated
proportions of the total market value of the Aggregate Bond Index:
<TABLE>
<S> <C>
U.S. Treasury and government agency securities........................... 54%
Corporate bonds.......................................................... 17%
Mortgage-backed securities............................................... 28%
Asset-backed securities.................................................. 1%
Option-adjusted duration: 4.6 years
</TABLE>
The Aggregate Bond Index is composed of the following kinds of securities:
public obligations of the U.S. Government; publicly issued debt of U.S.
Government agencies and quasi-federal corporations; corporate debt guaranteed by
the U.S. Government; fixed rate nonconvertible dollar-denominated corporate
debt; 15-and 30-year fixed rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC),
14
<PAGE>
and the Federal National Mortgage Association (FNMA); and asset-backed
pass-through securities representing pools of credit card receivables and auto
or home equity loans.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Bond Market Portfolio may
invest in U.S. Government securities and securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government. 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, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury;
other securities, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the Treasury. Securities issued by the
Federal National Mortgage Association are supported by discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality; other securities, such as those issued by the Student Loan
Marketing Association, are supported 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. The Bond
Index Fund and Bond Market Portfolio, and their respective net asset values and
yields, are not guaranteed by the U.S. Government or any federal agency or
instrumentality. For additional information on U.S. Government securities, see
the Statement of Additional Information.
The Bond Market Portfolio may, from time to time, substitute one type of
investment grade bond for another. For instance, the Bond Market Portfolio may
hold more short-term corporate bonds (and fewer short U.S. Treasury bonds) than
represented in the Aggregate Bond Index so as to increase income.
CORPORATE BONDS. The Bond Market Portfolio may purchase debt securities of
United States corporations only if they are deemed investment grade, that is,
carry a rating of at least Baa from Moody's or BBB from S&P or, if not rated by
these rating agencies, are judged by the investment managers of the Portfolio to
be of comparable quality. With respect to securities rated Baa by Moody's and
BBB by S&P, interest and principal payments are regarded as adequate for the
present; however, securities with these ratings may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make interest and principal
payments than is the case with higher grade bonds. The Portfolio intends to
dispose in an orderly manner of any security which is downgraded below
investment grade subsequent to its purchase. See the Appendix to the Statement
of Additional Information for a more detailed explanation of these ratings.
Corporate bonds are subject to call risk during periods of falling interest
rates. Securities with high stated interest rates may be prepaid (or called)
prior to maturity, requiring the Bond Market Portfolio to invest the proceeds at
generally lower interest rates. Call provisions, common in many corporate bonds,
allow bond issuers to redeem bonds prior to maturity (at a specific price). When
interest rates are falling, bond issuers often exercise these call provisions,
paying off bonds that carry high stated interest rates and often issuing new
bonds at lower rates. For the Bond Market Portfolio, the result would be that
bonds with high interest rates are called and must be replaced with
lower-yielding instruments. In these circumstances, the income of the Bond
Market Portfolio would decline.
15
<PAGE>
MORTGAGE PASS-THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS. The Bond
Market Portfolio may purchase mortgage and mortgage-related securities such as
pass-throughs and collateralized mortgage obligations that meet the Bond Market
Portfolio's selection criteria (collectively, 'Mortgage Securities'). Mortgage
pass-throughs are securities that pass through to investors an undivided
interest in a pool of underlying mortgages. These are issued or guaranteed by
U.S. government agencies such as GNMA, FNMA, and FHLMC. Other mortgage
pass-throughs consist of whole loans originated and issued by private limited
purpose corporations or conduits. Collateralized mortgage obligation bonds are
obligations of special purpose corporations that are collateralized or supported
by mortgages or mortgage securities such as pass-throughs.
As a result of its investments in Mortgage Securities, the mortgage-backed
securities in the Bond Market Portfolio may be subject to a greater degree of
market volatility as a result of unanticipated prepayments of principal. During
periods of declining interest rates, the principal invested in mortgage-backed
securities with high interest rates may be repaid earlier than scheduled, and
the Bond Market Portfolio will be forced to reinvest the unanticipated payments
at generally lower interest rates. When interest rates fall and principal
prepayments are reinvested at lower interest rates, the income that the Bond
Market Portfolio derives from mortgage-backed securities is reduced. In
addition, like other fixed income securities, Mortgage Securities generally
decline in price when interest rates rise.
Because the Bond Market Portfolio will seek to represent all major sectors
of the investment grade fixed income securities market, the Bond Index Fund may
be a suitable vehicle for those investors seeking ownership in the 'bond market'
as a whole, without regard to particular sectors. The Bond Index Fund is
intended to be a long-term investment vehicle and is not designed to provide
investors with a means of speculating on short-term bond market movements.
Because of potential share price fluctuations, the Fund may be inappropriate for
investors who have short-term objectives or who require stability of principal.
Investors should not consider the Fund a complete investment program.
SMALL CAP PORTFOLIO seeks to provide a high total return from a portfolio
of equity securities of small capitalization companies. Total return will
consist of income plus realized and unrealized capital gains and losses. The
Portfolio will invest at least 65% of its total assets in equity securities
consisting of a selection of the stocks included in the Russell 2000 Index of
small capitalization stocks. The Portfolio intends to remain fully invested, to
the extent practicable, in securities with risk characteristics and industry
group representation similar to the securities in the Russell 2000 Index, but it
is anticipated that the Portfolio's securities, taken together, would have a
lower aggregate price/earnings ratio than index securities generally. To reduce
the risk associated with investments in individual securities, the Portfolio's
investments will be spread over a range of industries and issuers as opposed to
being concentrated in a few individual securities. Stocks of small
capitalization issuers generally have greater illiquidity and price volatility
than stocks of larger capitalization issuers.
The Russell 2000 Index consists of the smallest 2,000 companies from the
Russell 3000 Index (a portfolio of 3,000 securities of U.S. companies
representing approximately 98% of the U.S. equity market). Only common stocks
issued by corporations domiciled in the United States and its territories are
eligible for inclusion in the Russell 2000 Index. As of June 30, 1995, the
market capitalization of stocks in the index ranged in size from $28 million
(smallest company) to $1.07 billion (largest company).
The Portfolio invests in common stocks and other equity securities, such as
preferred stocks, rights and warrants. Because the Portfolio invests in equity
securities of small capitalization issuers, its price volatility may be greater
than if the Portfolio invested exclusively in equity securities of issuers which
16
<PAGE>
have larger market capitalizations. Generally, equity securities of small
capitalization companies have historically been characterized by greater
volatility of returns, greater total returns, and lower dividend yields than
equity securities of large capitalization issuers. The greater price volatility
of equity securities of small capitalization issuers may result from the fact
that there may be less market liquidity, less publicly available information or
fewer investors who monitor the activities of these companies. In addition, the
market prices of these securities may exhibit more sensitivity to changes in
industry or general economic conditions.
The Small Cap Fund may be appropriate for a variety of investment programs.
While the Fund is not a substitute for an investment portfolio tailored to an
investor's particular investment needs and ability to tolerate risk, it may be
used to supplement and diversify an investment portfolio. Because of the risks
associated with investments in equity securities of small capitalization
companies, the Small Cap Fund is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of speculating on
short-term stock market movements. Investors should not consider the Small Cap
Fund a complete investment program.
BALANCED PORTFOLIO seeks to provide a high total return from a diversified
portfolio of equity and fixed income securities. Total return will consist of
income plus realized and unrealized capital gains and losses. The Portfolio
seeks to provide a total return that approaches that of the universe of equity
securities of large U.S. companies and that exceeds the return typical of a
portfolio of fixed income securities. The Portfolio attempts to achieve this
return by investing in equity and fixed income instruments, as described below.
The Balanced Fund is designed for investors who wish to invest for long
term objectives. The Balanced Fund may be appropriate for investors who seek to
attain appreciation in the market value of their investments over the long term,
but with somewhat less price fluctuation than a portfolio consisting only of
equity securities. The Balanced Fund may also be an attractive option for
investors who want professional investment managers to decide how their
investments should be allocated between equity and fixed income securities.
Investors should not consider the Balanced Fund a complete investment program.
The relative emphasis placed upon each asset class will vary based upon the
subadviser's assessment of their current attractiveness on a risk-adjusted
basis. The precise allocation will depend upon numerous factors, including the
Portfolio investment managers' evaluation of the economy and financial markets
as well as government fiscal and monetary policies. Normally, the commitment to
stocks will range between 35% and 65% of portfolio assets. Similarly, the bond
allocation will usually fall between 35% and 65% of portfolio assets. However,
at least 25% of the total assets of the Portfolio are always invested in fixed
income senior securities including debt securities and preferred stock. The
subadviser may allocate the Portfolio's investments between these asset classes
in a manner they believe consistent with the Portfolio's investment objective
and current market conditions. Stocks may be over-weighted over the long term
relative to bonds given that historically equity securities have provided
superior returns. Within a shorter time horizon, however, if stocks and bonds
appear equally attractive, fixed income securities may be favored given their
greater certainty of return and lower volatility.
The subadviser intends to manage the Portfolio actively in pursuit of its
investment objective. While the Portfolio has a long-term investment
perspective, it may take advantage of short-term trading opportunities that are
consistent with its objective. To the extent the Portfolio engages in short-term
trading, it may incur increased transaction costs. See 'Tax Matters' below.
17
<PAGE>
EQUITY INVESTMENTS. For the equity portion of the Portfolio, the
subadviser seeks to achieve a high total return through fundamental analysis,
systematic stock valuation and disciplined portfolio construction. The
Portfolio's equity investments will be primarily the common stock of large- and
medium-sized U.S. companies with market capitalizations above $1.5 billion,
including common stock of any class or series or any similar equity interest,
such as trust or limited partnership interests. The Portfolio's equity
investments may also include preferred stock, warrants and similar rights. The
Portfolio may also invest in the equity securities of small companies and of
foreign issuers. The small company holdings of the Portfolio are primarily
companies included in the Russell 2500 Index. The Russell 2500 Index consists of
the smallest 2,500 companies from the Russell 3000 Index. The Portfolio's equity
securities may or may not pay dividends and may or may not carry voting rights.
For a discussion of the risks of investments in small companies, see 'Small Cap
Portfolio' above.
FIXED INCOME INVESTMENTS. For the fixed income portion of the Portfolio,
the subadviser seeks to provide a high total return by actively managing the
duration of the Portfolio's fixed income securities, the allocation of
securities across market sectors, and the selection of securities within
sectors. Based on fundamental, economic and capital markets research, the
subadviser adjusts the duration of the Portfolio's fixed income investments in
light of market conditions. The subadviser also actively allocates the
Portfolio's fixed income investments among the broad sectors of the fixed income
market.
Duration is a measure of the weighted average time until receipt of the
payments expected to be generated by the fixed income securities held in the
Portfolio, and can be used as a measure of the sensitivity of the Portfolio's
market value to changes in interest rates. For example, and for illustrative
purposes only, a hypothetical fund with a duration of 10 years will decrease 10%
in value as a result of a 1% increase in interest rates. Under normal market
conditions, the duration of the fixed income portion of the Portfolio will range
between 80% and 120% of the Lehman Brothers Government/Corporate Bond Index,
which as of June 30, 1995, was approximately 5.1 years. The maturities of the
individual fixed income securities in the Portfolio may vary widely, however.
The Portfolio may purchase debt securities only if they are deemed
investment grade, that is, carry a rating of at least Baa from Moody's or BBB
from S&P or, if not rated by these rating agencies, are judged by the investment
managers to be of comparable quality. With respect to securities rated Baa by
Moody's and BBB by S&P, interest and principal payments are regarded as adequate
for the present; however, securities with these ratings may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make interest and principal
payments than is the case with higher grade bonds. The Portfolio intends to
dispose in an orderly manner of any security which is downgraded below
investment grade subsequent to its purchase. See the Appendix to the Statement
of Additional Information for a more detailed explanation of these ratings.
The Portfolio may invest in a broad range of debt securities of domestic
and foreign issuers. These include debt securities of various types and
maturities, e.g., debentures, notes, mortgage securities, equipment trust
certificates and other collateralized securities and zero coupon securities.
Collateralized securities are backed by a pool of assets such as loans or
receivables which generate cash flow to cover the payments due on the
securities. Collateralized securities are subject to certain risks, including a
decline in the value of the collateral backing the security, failure of the
collateral to generate the anticipated cash flow or in certain cases more rapid
prepayment because of events affecting the collateral, such as accelerated
prepayment of mortgages or other loans backing these securities or destruction
of equipment subject to equipment trust certificates. In the event of any such
prepayment
18
<PAGE>
the Portfolio will be required to reinvest the proceeds of prepayments at
interest rates prevailing at the time of reinvestment, which may be lower. In
addition, the value of zero coupon securities which do not pay interest is more
volatile than that of interest-bearing debt securities with the same maturity.
For more information on mortgage securities and associated risks, see 'Bond
Market Portfolio -- Mortgage Pass-Throughs and Collateralized Mortgage
Obligations' above.
The Portfolio may invest in U.S. Government securities and securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government.
For a description of these securities, see 'Bond Market Portfolio -- U.S.
Government and Agency Securities' above and the Statement of Additional
Information. The Portfolio may also invest in municipal obligations which may be
general obligations of the issuer or payable only from specific revenue sources.
However, the Portfolio will invest only in municipal obligations that have been
issued on a taxable basis or have an attractive total return potential excluding
tax considerations. In addition, the Portfolio may invest in debt securities of
foreign governments and governmental entities denominated, in all cases, in U.S.
dollars. See 'Additional Investment Strategies and Techniques; Risk Factors'
below for further information on foreign investments.
EQUITY GROWTH PORTFOLIO seeks to provide a high level of capital
appreciation through investment in a diversified portfolio of common stocks with
potential for above-average growth in earnings and dividends. Equity Growth
Portfolio seeks to achieve this investment objective by investing primarily in
the common stocks of medium and large capitalization U.S. companies (i.e.,
companies with stock market capitalizations of more than $1 billion) which, in
the opinion of the subadviser, will present an opportunity for significant
increases in earnings and/or value. Current dividend income is incidental to the
Equity Growth Portfolio's investment objective of increasing the value of a
shareholder's investment. Investments will be selected based on their potential
for above-average growth in earnings and dividends, with no consideration given
to current income.
Under normal market conditions, the Portfolio will invest at least 65% of
its total assets in common stocks. The remainder of the Portfolio's assets will
be invested in other types of securities including convertible and
nonconvertible bonds, warrants and short-term obligations, preferred stocks,
debt securities, and repurchase agreements collateralized by these securities.
The Portfolio may purchase debt securities only if they are deemed investment
grade, that is, carry a rating of at least Baa from Moody's or BBB from S&P or,
if not rated by these rating agencies, are judged by the investment managers to
be of comparable quality. With respect to securities rated Baa by Moody's and
BBB by S&P, interest and principal payments are regarded as adequate for the
present; however, securities with these ratings may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make interest and principal
payments than is the case with higher grade bonds. The Portfolio intends to
dispose in an orderly manner of any security which is downgraded below
investment grade subsequent to its purchase. See the Appendix to the Statement
of Additional Information for an explanation of these ratings. The Portfolio may
invest without limitation in high quality money market instruments if deemed
appropriate by the subadviser for temporary defensive purposes. See 'Short-Term
Instruments' below. While the Portfolio may invest in foreign securities, it
currently has no intention of purchasing foreign securities other than American
Depository Receipts. See 'Investment Strategies and Techniques; Risk
Factors -- Foreign Investments' below and 'Foreign Securities -- Equity
Portfolios' in the Statement of Additional Information. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance with
the subadviser's interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
19
<PAGE>
The subadviser intends to manage the Portfolio actively in pursuit of its
investment objective. While the Portfolio has a long-term investment
perspective, it may take advantage of any short-term trading opportunities that
are consistent with its objective. To the extent the Portfolio engages in
short-term trading, it may incur increased transaction costs. See 'Tax Matters'
below.
The Equity Growth Fund may be appropriate for a variety of investment
programs. While the Fund is not a substitute for an investment portfolio
tailored to an investor's particular investment needs and ability to tolerate
risk, it may be used to supplement and diversify an investment portfolio.
Securities which offer above-average potential for growth in earnings and
dividends may also involve greater volatility of market value. Investors should
not consider the Fund a complete investment program.
VALUE EQUITY INCOME PORTFOLIO seeks to provide capital appreciation and a
high level of current income by investing principally in a diversified portfolio
of equity securities selected for their potential to generate current income or
long-term growth of capital. Over the long term, the Portfolio will seek to
maintain its dividend and interest income levels close to those of the S&P 500
Index. In making portfolio selections, the subadviser follows a value
philosophy: to invest in companies with sound fundamentals the securities of
which are trading at low price-to-earnings ratios. In addition, the subadviser
follows an equity income philosophy: to invest principally in common stocks that
provide high current income and a low level of volatility relative to the market
while seeking to obtain long-term growth of capital. To implement the
Portfolio's investment objective, the subadviser will attempt to (a) build a
diversified portfolio with significantly lower-than-market volatility that
achieves superior return over time, (b) maintain consistent portfolio
characteristics, and (c) provide protection over a falling market cycle.
EQUITY INVESTMENTS. The Portfolio will invest primarily in equity
securities which produce a current dividend yield which generally exceeds the
published composite yield of the securities comprising the S&P 500 Index. The
published composite yield of the S&P 500 Index was 2.45% for the calendar
quarter ended June 30, 1995. The S&P 500 Index is a broad-based index of 500
companies listed on the New York Stock Exchange. The Portfolio invests primarily
in preferred stocks and common stocks listed on the New York Stock Exchange and
on other national securities exchanges and, to a lesser extent, in stocks that
are traded over-the-counter. Provided such securities meet the requirements set
forth below for fixed income investments, the Portfolio may also invest in
securities convertible into common or preferred stocks. The Portfolio allocates
its investments among different industries and companies, seeking to invest in
growing, financially stable and undervalued companies.
Under normal market conditions, the Portfolio will invest at least 65% of
its total assets in income producing equity securities. The remainder of the
Fund's assets may be invested in short-term instruments such as commercial
paper, bank obligations, U.S. government and agency securities maturing within
one year, notes and other debt securities of various maturities, and repurchase
agreements collateralized by these securities. The Portfolio may invest without
limitation *in high quality money market instruments if deemed appropriate by
the subadviser for temporary defensive purposes. See 'Short-Term Instruments'
below. While the Portfolio may invest in foreign securities, it currently has no
intention of purchasing foreign securities other than American Depository
Receipts. See 'Investment Strategies and Techniques; Risk Factors -- Foreign
Investments' below and 'Foreign Securities -- Equity Portfolios' in the
Statement of Additional Information.
FIXED INCOME INVESTMENTS. The Portfolio may invest in a broad range of
debt securities of domestic and foreign issuers. These include debt securities
of various types and maturities, e.g., debentures, notes, mortgage securities,
equipment trust certificates and other collateralized securities
20
<PAGE>
and zero coupon securities. For a more detailed description of these securities,
see 'Balanced Portfolio Fixed Income Investments' above. The Portfolio may
purchase debt securities only if they are deemed investment grade, that is,
carry a rating of at least Baa from Moody's or BBB from S&P or, if not rated by
these rating agencies, are judged by the investment managers to be of comparable
quality. With respect to securities rated Baa by Moody's and BBB by S&P,
interest and principal payments are regarded as adequate for the present;
however, securities with these ratings may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make interest and principal payments than is the case
with higher grade bonds. The Portfolio intends to dispose in an orderly manner
of any security which is downgraded below investment grade subsequent to its
purchase. See the Appendix to the Statement of Additional Information for an
explanation of these ratings.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Portfolio may invest in U.S.
Government securities and securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government. For a description of these securities,
see 'Bond Market Portfolio -- U.S. Government and Agency Securities' above and
'U.S. Government and Agency Securities' in the Statement of Additional
Information.
MORTGAGE PASS-THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS. The Value
Equity Income Portfolio may purchase mortgage-related securities such as
mortgage pass-throughs, collateralized mortgage obligations, and mortgage
derivatives that meet the Portfolio's selection criteria. For a description of
these securities and associated risks, see 'Bond Market Portfolio -- Mortgage
Pass-Throughs and Collateralized Mortgage Obligations' above.
The subadviser intends to manage the Portfolio actively in pursuit of its
investment objective. While the Portfolio has a long-term investment
perspective, it may take advantage of any short-term trading opportunities that
are consistent with its objective. To the extent the Portfolio engages in
short-term trading, it may incur increased transaction costs. See 'Tax Matters'
below.
The Value Equity Income Fund may be appropriate for investors seeking a
fund with greater potential for capital appreciation than an income fund and
less price volatility than a growth fund. Investors should not consider the Fund
a complete investment program.
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation through
investment in a diversified portfolio of marketable foreign securities. The
Portfolio ordinarily will invest primarily in foreign equity securities of
issuers that the subadviser believes to have strong balance sheets, sustainable
internal growth, superior financial returns, capable and forthright management,
and enduring competitive advantages.
When evaluating foreign securities, the subadviser will seek to identify
superior companies with excellent long-term growth prospects and to select from
among them those whose shares appear to offer attractive absolute returns. The
subadviser's investment criteria therefore include both growth and value
considerations. Growth stocks are those that the subadviser believes have the
potential for above-average growth in earnings. Value stocks are those that the
investment subadviser believes are undervalued by the market based on the
investment managers' assessment of the company's current value and future
earnings prospects.
In determining investment strategy and allocating investments, the
subadviser will continuously analyze a broad range of international equity
securities. Country and sector portfolio weightings are expected to reflect the
results of a 'bottom up' stock selection process, rather than the results of any
'top down' country or sector allocation process. The Portfolio generally will
sell securities if the
21
<PAGE>
subadviser believes that such securities have become substantially overvalued
relative to alternative investments or if the subadviser believes that there is
an unfavorable change in the issuer's long-term business forecast.
The Portfolio's investments generally will be diversified among geographic
regions and countries. While there are no prescribed limits on geographic
distributions, the Portfolio normally will hold securities of issuers
collectively having their principal place of business in no fewer than three
foreign countries. The subadviser expects that the Portfolio's assets ordinarily
will be invested in securities of issuers located in the Pacific Basin (e.g.,
Japan, Hong Kong, Singapore, Malaysia), Europe, Australia, Latin America and
South Africa. The Portfolio also may invest, from time to time, in other
regions, seeking to capitalize on investment opportunities emerging in other
parts of the world. In purchasing foreign equity securities, the Portfolio will
look generally to large and small companies in mature foreign markets as well as
well-established companies in emerging markets. Under unusual economic and
market conditions, the Portfolio may restrict the securities markets in which
its assets are invested.
Under normal market and economic conditions, at least 75% of the
Portfolio's assets will be invested in foreign equity securities. For cash
management purposes, the Portfolio may invest up to 25% of its assets on a
continuous basis in cash or short term instruments such as commercial paper,
bank obligations, U.S. Government and agency securities maturing within one
year, notes and other debt securities of various maturities, and repurchase
agreements collateralized by these securities. The Portfolio also may invest
without limitation in any combination of high quality domestic or foreign money
market instruments if deemed appropriate by the subadviser for temporary
defensive purposes in response to unusual market and economic conditions. See
'Short-Term Instruments' below. To the extent described below under 'Additional
Investment Strategies and Techniques; Risk Factors,' the Portfolio also may
purchase shares of other investment companies and may engage in other investment
practices, including repurchase agreements, securities lending, forward currency
contracts and futures contracts and options.
Foreign equity securities purchased by the Portfolio may include common
stock, preferred stock, securities convertible into common or preferred stock,
and warrants issued by companies domiciled outside of the United States
('foreign issuers'), and shares of U.S registered investment companies that
invest primarily in foreign securities. The Portfolio may purchase when-issued
securities otherwise eligible for purchase by the Portfolio and may invest
indirectly in the securities of foreign issuers through sponsored and
unsponsored American Depository Receipts ('ADRs'), European Depository Receipts
('EDRs') and similar securities of foreign issuers.
Convertible debt securities purchased by the Portfolio will be rated
investment grade by Moody's or S&P if such a rating is available. If unrated, as
is the case with most foreign securities, convertible debt securities purchased
by the Portfolio will be deemed to be comparable in quality to securities rated
investment grade pursuant to procedures established by the Board of Trustees of
the Portfolio Series. With respect to securities rated Baa by Moody's or BBB by
S&P (the lowest of the top four investment rankings), or deemed to be comparable
in quality to such securities, interest and principal payments are regarded as
adequate for the present; however, these securities may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make interest and principal
payments than is the case with higher grade bonds.
The Portfolio may purchase securities both on recognized stock exchanges
and in over-the-counter markets. Most portfolio transactions will be effected in
the primary trading market for the given security. The Portfolio also may invest
up to 5% of its total assets in gold bullion. Investments in gold
22
<PAGE>
will not produce dividends or interest income, and the Portfolio can look only
to price appreciation for a return on such investments.
The relative performance of foreign currencies is an important element in
the Portfolio's performance. Although the subadviser does not expect to hedge
foreign currency exposure on a routine basis, it may do so when it has a strong
view on the prospects for a particular currency. Certain currency hedging
techniques that may be employed by the subadviser are described below in
'Additional Investment Strategies and Techniques; Risk Factors: Foreign Currency
and Exchange Transactions.' Although such techniques may reduce the risk of loss
to the Portfolio from adverse movements in foreign exchange rates, they also may
limit possible gains from favorable movements in such rates.
The Portfolio is designed for investors who desire to achieve international
diversification of their investments by participating in foreign securities
markets. Because international investments generally involve risks in addition
to those associated with investments in the United States, the Portfolio should
be considered only as a vehicle for international diversification and not a
complete investment program. Before investing in the Portfolio, investors should
be familiar with the risks associated with foreign investments. These risks are
discussed below under 'Additional Investment Strategies and Techniques; Risk
Factors.'
ADDITIONAL INVESTMENT STRATEGIES AND TECHNIQUES; RISK FACTORS
The Equity, Income, Total Return Bond, Small Cap, Balanced, Equity Growth,
Value Equity Income and International Equity Portfolios (collectively, the
'Managed Portfolios'), and the Equity Market and Bond Market Portfolios
(collectively, the 'Index Portfolios'), may utilize the following investment
strategies and techniques, as described below.
SAMPLING AND TRADING IN THE INDEX PORTFOLIOS. The Bond Market Portfolio
does not expect to hold all of the individual issues which comprise the
Aggregate Bond Index because of the large number of securities involved.
Instead, the Portfolio will hold a representative sample of securities,
selecting one or two issues to represent entire classes or types of securities
in the index. This sampling technique is expected to be an effective means of
substantially duplicating the income and capital returns provided by the index.
To reduce transaction costs, the Index Portfolios' securities holdings will
not be automatically traded or re-balanced to reflect changes in an index. The
Index Portfolios will seek to buy round lots of stocks and may trade large
blocks of securities. These policies may cause a particular security to be over-
or under-represented in a Portfolio relative to its index weighing or result in
its continued ownership by a Portfolio after its deletion from the index,
thereby reducing the correlation between the Portfolio and the index. The Index
Portfolios are not required to buy or sell securities solely because the
percentage of their assets invested in index securities changes when their
market values increase or decrease. In addition, the Index Portfolios may omit
or remove index securities from their portfolios if the investment managers
believe the security to be insufficiently liquid or believe the merit of the
investment has been substantially impaired by extraordinary events or financial
conditions. Over the long term, the investment managers of the Index Portfolios
seek a correlation of 0.95 or better. See 'U.S. Trust's Investment Philosophy
and Strategies -- Equity Market Portfolio and Bond Market Portfolio' above.
23
<PAGE>
INVESTMENTS BELOW INVESTMENT GRADE. As discussed above, investments by the
Income and the Total Return Bond Portfolios in obligations rated below the four
highest ratings of S&P and Moody's (commonly called 'junk bonds') have different
risks than investments in securities that are rated investment grade. Risk of
loss upon default by the borrower is significantly greater because lower-rated
securities are generally unsecured and are often subordinated to other creditors
of the issuer, and because the issuers frequently have high levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recessions, individual corporate developments and increasing interest rates,
than are investment grade issuers. As a result, the market price of such
securities, and the net asset value of the Income and Total Return Bond Funds'
Shares, may be particularly volatile. Additional risks associated with
lower-rated fixed-income securities are (a) the relative youth and growth of the
market for such securities, (b) the sensitivity of such securities to interest
rate and economic changes, (c) the lower degree of protection of principal and
interest payments, (d) the relatively low trading market liquidity for the
securities, (e) the impact that legislation may have on the high yield bond
market (and, in turn, on the Portfolios' net asset value and investment
practices), (f) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates whereby a Portfolio may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities, and (g) the creditworthiness of the issuers of such securities.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress which would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. An economic downturn could also disrupt the market for lower-rated
bonds generally and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. If the issuer of a
lower-rated debt obligation held by a Portfolio defaulted, the Portfolio could
incur additional expenses to seek recovery. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower-rated securities, especially in a thinly traded
market. Finally, a Portfolio's trading in fixed-income securities to achieve
capital appreciation entails risks that capital losses rather than gains will
result.
Debt obligations rated 'BB', 'B' or 'CCC' by S&P are regarded, on balance,
as predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. 'BB' represents the
lowest degree of speculation and 'C' the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. The rating 'CC' is typically applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' debt rating. The rating 'C' is
applied to debt subordinated to a senior debt which is assigned an actual or
implied 'CCC' rating. The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
Debt obligations rated 'D' are in default, and payments of interest and/or
repayment of principal are in arrears. The ratings from 'AA' through 'CCC' are
sometimes modified by the addition of a plus or minus sign to show relative
standing within the major rating categories. Moody's has a similar
classification scheme for non-investment grade debt obligations. Debt
obligations rated 'Ba', 'B', 'Caa', 'Ca' and 'C' provide questionable protection
of interest and principal. The rating 'Ba' indicates that a debt obligation has
some speculative characteristics. The rating 'B' indicates a general lack of
characteristics of desirable investment. Debt obligations rated 'Caa' are of
poor quality, while debt obligations rated 'Ca' are considered highly
speculative. 'C' represents the lowest rated class of debt obligations. Moody's
applies numerical modifiers 1, 2 and 3 in each generic classification from 'Aa'
to 'B' in its bond rating system. The
24
<PAGE>
modifier '1' indicates that a security ranks in the higher end of its rating
category; the modifier '2' reflects a mid-range ranking; and the modifier '3'
indicates that the security ranks at the lower end of its generic rating
category. See the Appendix to the Statement of Additional Information for a more
detailed explanation of these ratings.
CONVERTIBLE SECURITIES. The Managed Portfolios may invest in investment
grade convertible securities of domestic and foreign issuers, although in the
current fiscal year the Small Cap Portfolio has no intention to invest in
convertible securities of foreign issuers. See 'Value Equity Income Portfolio
Fixed Income Investments' for an explanation of investment grade ratings of debt
securities, including convertible securities. The convertible securities in
which the Portfolios may invest include any debt securities or preferred stock
which may be converted into common stock or which carry the right to purchase
common stock. Convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock, usually of the same
company, at specified prices within a certain period of time.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a 'when-issued' basis and may purchase or sell securities on a
'forward commitment' basis in order to hedge against anticipated changes in
interest rates and prices. These transactions involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place in the future, beyond the normal settlement date, at a stated price
and yield. Securities purchased on a forward commitment or when-issued basis are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. When such transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. When-issued securities and forward commitments may be sold prior to
the settlement date, but a Portfolio will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. At the time the Portfolio enters into a
transaction on a when-issued or forward commitment basis, a segregated account
consisting of cash or high grade liquid debt securities equal to the value of
the when-issued or forward commitment securities will be established and
maintained. There is a risk that the securities may not be delivered and that
the Portfolio may incur a loss.
In addition, the Income and the Total Return Bond Portfolios may acquire
'stand-by commitments' with respect to Municipal Bonds held by them. Under a
stand-by commitment, a dealer agrees to purchase at a Portfolio's option
specified Municipal Bonds at a specified price. The Portfolios will acquire
stand-by commitments solely to facilitate portfolio liquidity and do not intend
to exercise their rights thereunder for speculative purposes. Stand-by
commitments acquired by a Portfolio will be valued at zero in determining the
Portfolio's net asset value.
REPURCHASE AGREEMENTS. Each of the Portfolios may engage in repurchase
agreement transactions with brokers, dealers or banks that meet the credit
guidelines established by the Trustees of the Portfolio Series. In a repurchase
agreement, a Portfolio buys a security from a seller that has agreed to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. The term of these agreements is
usually from overnight to one week. A repurchase agreement may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities as collateral with a market value at least equal to
the purchase price plus accrued interest, and this value is maintained during
the term of the agreement. If the seller defaults and the collateral value
declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
disposition of collateral may be delayed or limited. Investments in certain
repurchase agreements and certain other investments
25
<PAGE>
which may be considered illiquid are limited. See 'Illiquid Investments;
Privately Placed and other Unregistered Securities' below.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may borrow funds, in an
amount up to one-third of the value of its total assets, for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage. Each Portfolio may also agree to sell portfolio securities
to financial institutions such as banks and broker-dealers and to repurchase
them at a mutually agreed date and price (a 'reverse repurchase agreement'). The
SEC views reverse repurchase agreements as a form of borrowing. At the time a
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.
INVESTMENT COMPANY SECURITIES. In connection with the management of its
daily cash positions, each Portfolio may invest in securities issued by other
investment companies which invest in high quality, short-term debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method. The International Equity Portfolio may also purchase
shares of investment companies investing primarily in foreign securities,
including so-called 'country funds' which have portfolios consisting primarily
of securities of issuers located in one foreign country. In addition to the
advisory fees and other expenses a Portfolio bears directly in connection with
its own operations, as a shareholder of another investment company, a Portfolio
would bear its pro rata portion of the other investment company's advisory fees
and other expenses. As such, the corresponding Fund's shareholders would
indirectly bear the expenses of the other investment company, some or all of
which would be duplicated. Securities of other investment companies may be
acquired by the Portfolios to the extent permitted under the 1940 Act, that is,
a Portfolio may invest a maximum of up to 10% of its total assets in securities
of other investment companies so long as not more than 3% of the total
outstanding voting stock of any one investment company is held by any Portfolio.
In addition, not more than 5% of the Portfolio's total assets may be invested in
the securities of any one investment company.
FOREIGN INVESTMENTS. In accordance with their respective investment
objectives and policies, the Equity, Balanced, Equity Growth and Value Equity
Income Portfolios may invest, and the International Equity Portfolio will
invest, in common stocks of foreign corporations, and each of such Portfolios
and the Income and Total Return Bond Portfolios may invest in convertible
securities of foreign corporations as well as fixed income securities of foreign
government and corporate issuers. Other than the International Equity Portfolio,
which will invest under normal market and economic conditions at least 75% of
its total assets in foreign securities, none of the Portfolios expects to invest
more than 30% (25% in the case of the Income and Total Return Bond Portfolios)
of their respective total assets at the time of purchase in securities of
foreign issuers.
All investments, domestic or foreign, involve certain risks. Investment in
securities of foreign issuers, and in obligations of foreign branches or
subsidiaries of domestic or foreign banks, may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
Overall, there may be limited publicly available information with respect to
foreign issuers, and there may be less supervision of foreign stock exchanges
and market participants such as brokers and issuers. Moreover, available
information may not be as reliable as information regarding U.S. companies,
because foreign issuers often are not subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies.
26
<PAGE>
Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes. To the extent that such taxes are not
offset by credits or deductions allowed to investors under the Federal income
tax laws, they may reduce the net return to investors. See 'Tax Matters' below.
Investors should realize that the value of a Portfolio's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or changes in) exchange controls or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect a
Portfolio's operations. The economies of individual foreign nations may differ
from the U.S. economy in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by a Portfolio
must be made in compliance with U.S. and foreign currency restrictions and tax
laws restricting the amounts and types of foreign investments.
While the volume of transactions effected on foreign stock exchanges has
increased in recent years, in most cases it remains appreciably below that of
domestic security exchanges. Accordingly, a Portfolio's foreign investments may
be less liquid and their prices may be more volatile than comparable investments
in securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity.
The costs attributable to investing abroad are usually higher than those of
funds investing in domestic securities for several reasons, such as the higher
cost of investment research, higher cost of custody of foreign securities,
higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
The Portfolios may invest in securities of foreign issuers directly or in
the form of American Depository Receipts ('ADRs'), European Depository Receipts
('EDRs') or other similar securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities they
represent. ADRS are receipts typically issued by a U.S. bank or trust company
which evidence ownership of the underlying foreign securities. Certain such
institutions issue ADRs which may not be sponsored by the issuer of the
underlying foreign securities. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer of the underlying foreign
securities. EDRs are receipts issued by a European financial institution
evidencing a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets.
Changes in foreign exchange rates will affect the value in U.S. dollars of
all foreign currency-denominated securities held by the Portfolios. Exchange
rates are influenced generally by the forces of supply and demand in the foreign
currency markets and by numerous other political and economic events, many of
which may be difficult, if not impossible, to predict.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. In accordance with their
respective investment objectives and policies, the Equity, Income, Total Return
Bond, Balanced, Equity Growth and Value Equity Income Portfolios may buy and
sell, and the International Equity Portfolio will buy and sell, securities (and
receive interest and dividends proceeds) in currencies other than the U.S.
dollar. Therefore, these Portfolios may enter from time to time into foreign
currency exchange transactions.
27
<PAGE>
The Portfolios will 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. The cost of a
Portfolio's spot currency exchange transactions will generally be the difference
between the bid and offer spot rate of the currency being purchased or sold.
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 directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement, and is traded at a net
price without commission. The Portfolios will not enter into forward contracts
for speculative purposes. Neither spot transactions nor forward foreign currency
exchange contracts eliminate fluctuations in the prices of a 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 exchange transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or
anticipated securities transactions. The Portfolios may also enter into forward
contracts to hedge against a change in foreign currency exchange rates that
would cause a decline in the value of existing investments denominated or
principally traded in a foreign currency. To do this, a Portfolio would enter
into a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars or in exchange
for another foreign currency. A Portfolio will only enter into forward contracts
to sell a foreign currency in exchange for another foreign currency if its
respective subadviser expects the foreign currency purchased to appreciate
against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they limit
any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause a Portfolio to assume the risk
of fluctuations in the value of the currency purchased vis a vis the hedged
currency and the U.S. dollar. 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.
FUTURES CONTRACTS AND OPTIONS. Each Portfolio may purchase put and call
options on securities, indices of securities and futures contracts. The
Portfolios may also purchase and sell futures contracts. Futures contracts on
securities and securities indices will be used primarily to accommodate cash
flows or in anticipation of taking a market position when, in the opinion of the
investment managers, available cash balances do not permit economically
efficient purchases of securities. Moreover, a Portfolio may sell futures and
options to 'close out' futures and options it may have purchased or to protect
against a decrease in the price of securities it owns but intends to sell. The
Index Portfolios will not invest in futures or options as part of a defensive
strategy to protect against potential stock market declines. The Managed
Portfolios may use futures contracts and options for both hedging and risk
management purposes, although not for speculation. See 'Futures Contracts and
Options on Futures Contracts' in the Statement of Additional Information.
28
<PAGE>
The Portfolios may (a) purchase exchange traded and over the counter (OTC)
put and call options on securities and indexes of securities, (b) purchase and
sell futures contracts on securities and indexes of securities and (c) purchase
put and call options on futures contracts on securities and indexes of
securities. In addition, the Portfolios may sell (write) exchange traded and OTC
put and call options on securities and indexes of securities and on futures
contracts on securities and indexes of securities. The staff of the SEC has
taken the position that OTC options are illiquid and, therefore, together with
other illiquid securities held by a Portfolio, cannot exceed 15% of the
Portfolio's net assets. The Portfolios intend to comply with this limitation.
The Portfolios may use options and futures contracts to manage their
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge a Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of a Portfolio's overall strategy in a manner deemed appropriate
by the Portfolio's investment managers and consistent with its objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Portfolio's return. While the use of these techniques
by a Portfolio may reduce certain risks associated with owning its portfolio
securities, these investments entail certain other risks. If Portfolio
investment managers apply a strategy at an inappropriate time or judge market
conditions or trends incorrectly, options and futures strategies may lower a
Portfolio's return. Certain strategies limit a Portfolio's possibilities to
realize gains as well as limit its exposure to losses. A Portfolio could also
experience losses if the prices of its options and futures positions were poorly
correlated with its other investments, or if it could not close out its
positions because of an illiquid secondary market. In addition, a Portfolio will
incur transaction costs, including trading commissions and option premiums, in
connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate. For more information
on these investment techniques, see the Statement of Additional Information.
Each of the Portfolios may purchase and sell put and call options on
securities, indexes of securities and futures contracts, or purchase and sell
futures contracts, only if such options are written by other persons and if (i)
the aggregate premiums paid on all such options which are held at any time do
not exceed 20% of a Portfolio's total net assets, and (ii) the aggregate margin
deposits required on all such futures or options thereon held at any time do not
exceed 5% of a Portfolio's total assets. None of the Portfolios has any current
intention of purchasing futures contracts or investing in put and call options
on securities, indexes of securities, or futures contracts if more than 5% of
its net assets would be at risk from such transactions.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. Each Portfolio may acquire investments that are illiquid or have
limited liquidity, such as private placements or investments that are not
registered under the Securities Act of 1933, as amended (the '1933 Act'), and
cannot be offered for public sale in the United States without first being
registered under the 1933 Act. An illiquid investment is any investment that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Portfolio. The price a
Portfolio pays for illiquid securities or receives upon resale may be lower than
the price paid or received for similar
29
<PAGE>
securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.
Acquisitions of illiquid investments by the Portfolios are subject to the
following non-fundamental policies. Each Portfolio may not invest in additional
illiquid securities if, as a result, more than 15% of the market value of its
net assets would be invested in illiquid securities. Each of the Portfolios may
also purchase Rule 144A securities sold to institutional investors without
registration under the 1933 Act. These securities may be determined to be liquid
in accordance with guidelines established by the Portfolio investment managers
and approved by the Trustees. The Trustees of the Portfolio Series will monitor
the implementation of these guidelines on a periodic basis. Because Rule 144A is
relatively new, it is not possible to predict how markets in Rule 144A
securities will develop. If trading in Rule 144A securities were to decline,
these securities could become illiquid after being purchased, increasing the
level of illiquidity of a Portfolio. As a result, a Portfolio holding these
securities might not be able to sell these securities when the investment
manager wishes to do so, or might have to sell them at less than fair value.
SHORT-TERM INSTRUMENTS. Each Portfolio may invest in short-term income
securities in accordance with its investment objective and policies as described
above. The Portfolios may also make money market investments pending other
investments or settlement, or to maintain liquidity to meet shareholder
redemptions. Although the Index Portfolios normally seek to remain substantially
fully invested in securities selected to match their corresponding index
consistent with seeking a correlation of 0.95 or better between an Index
Portfolio's performance and that of its corresponding index, an Index Portfolio
may invest temporarily up to 20% of its assets in certain short-term fixed
income securities. The Index Portfolios will not invest in short-term
instruments as part of a defensive strategy to protect against potential stock
market declines. Each of the Managed Portfolios is permitted to invest in
short-term instruments, although each intends to stay invested in the equity and
fixed income instruments described above to the extent practical in light of its
respective objective and long-term investment perspective. In addition, in
adverse market conditions and for temporary defensive purposes only, the Managed
Portfolios may temporarily invest their respective assets without limitation in
short-term investments. These securities include: obligations of the U.S.
Government and its agencies or instrumentalities; commercial paper and other
debt securities; variable and floating rate securities; bank obligations;
repurchase agreements collateralized by these securities; shares of other
investment companies that primarily invest in any of the above-referenced
securities; and, in the case of the International Equity Portfolio, cash and
bank instruments denominated in foreign currencies. Commercial paper consists of
short-term, unsecured promissory notes issued to finance short-term credit
needs. Other corporate obligations in which the Portfolios may invest consist of
high quality, U.S. dollar-denominated short-term bonds and notes (including
variable amount master demand notes) issued by domestic and foreign
corporations. The Portfolios may invest in commercial paper issued by major
corporations in reliance on the exemption from registration afforded by Section
3(a)(3) of the 1933 Act. Such commercial paper may be issued only to finance
current transactions and must mature in nine months or less. Trading of such
commercial paper is conducted primarily by institutional investors through
investment dealers, and individual investor participation in the commercial
paper market is very limited.
Each Portfolio may invest in U.S. dollar-denominated certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
issued by domestic banks and domestic or foreign branches or subsidiaries of
foreign banks. Certificates of deposit are certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Such instruments
30
<PAGE>
include Yankee Certificates of Deposit ('Yankee CDs'), which are certificates of
deposit denominated in U.S. dollars and issued in the United States by the
domestic branch of a foreign bank. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Time deposits which may be held by the Portfolios are not insured
by the Federal Deposit Insurance Corporation or any other agency of the U.S.
Government. The Portfolios will not invest, respectively, more than 15% of the
value of their net assets in time deposits maturing in longer than seven days
and other instruments which are deemed illiquid or not readily marketable.
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations which have either fixed, floating or variable
interest rates.
The Portfolios will limit their short-term investments to those U.S.
dollar-denominated instruments which are determined by or on behalf of the Board
of Trustees of the Portfolio Series to present minimal credit risks and which
are of 'high quality' as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are deemed to be of comparable quality pursuant to procedures established by the
Board of Trustees of the Portfolio Series. The Portfolios may invest in
obligations of banks which at the date of investment have capital, surplus and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100 million. Investments in high quality short-term
instruments may, in many circumstances, result in a lower yield than would be
available from investments in instruments with a lower quality or longer term.
SECURITIES LENDING. The Portfolios may seek to increase their income by
lending securities to banks, brokers or dealers and other recognized
institutional investors. Such loans may not exceed 30% of the value of a
Portfolio's total assets. In connection with such loans, each Portfolio will
receive collateral consisting of cash, U.S. Government or other high quality
securities, irrevocable letters of credit issued by a bank, or any combination
thereof. Such collateral will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. A Portfolio
can increase its income through the investment of such collateral. Such
Portfolio continues to be entitled to payments in amounts equal to the interest
or dividends payable on the loaned security, and in addition receives interest
on the amount of the loan. Such loans will be terminable at any time upon
specified notice. A Portfolio might experience risk of loss if the institution
with which it has engaged in a portfolio loan transaction breaches its agreement
with the Portfolio.
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'. A Portfolio may make a short sale as a
hedge, when it believes that the value of a security owned by the Portfolio (or
a security convertible or exchangeable for such security) may decline, or when
the Portfolio wants to sell the security at an attractive current price but
wishes to defer recognition of gain or loss for tax purposes. Not more than 40%
of a Portfolio's total assets would be involved in short sales 'against the
box'.
CERTAIN OTHER OBLIGATIONS. Consistent with their respective investment
objectives, policies and restrictions, the Portfolios may also invest in
participation interests, guaranteed investment contracts and zero coupon
obligations. See the Statement of Additional Information. In order to allow for
investments in new instruments that may be created in the future, upon the Trust
supplementing this Prospectus, a Portfolio may invest in obligations other than
those listed previously, provided such
31
<PAGE>
investments are consistent with the Portfolio's and its corresponding Fund's
investment objective, policies and restrictions.
PORTFOLIO TURNOVER RATE. Although the Managed Portfolios generally seek to
invest for the long term, and the Index Portfolios are managed to reflect the
composition of their respective indexes, each Portfolio may sell securities
irrespective of how long such securities have been held. Ordinarily, securities
will be sold from an Index Portfolio only to reflect certain administrative
changes in its corresponding index (including mergers or changes in its
composition) or to accommodate cash flows into and out of an Index Portfolio
while maintaining the similarity of said Portfolio to its benchmark index. Each
Managed Portfolio may sell a portfolio investment immediately after its
acquisition if the investment managers believe that such a disposition is
consistent with the investment objective of the particular Portfolio. Portfolio
investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments.
The portfolio turnover rates for each Portfolio from commencement of
operations through May 31, 1995 were as follows: Equity Portfolio, 34%; Income
Portfolio, 34%; Total Return Bond Portfolio, 84%; Equity Market Portfolio, 98%;
Bond Market Portfolio, 67%; Small Cap Portfolio, 47%; Balanced Portfolio, 57%;
Equity Growth Portfolio, 122%; Value Equity Income Portfolio, 28%; and
International Equity Portfolio, 8%. A rate of 100% indicates that the equivalent
of all of a Portfolio's assets have been sold and reinvested in a calendar year.
A high rate of portfolio turnover may involve correspondingly greater brokerage
commission expenses and other transaction costs, which must be borne directly by
a Portfolio and ultimately by the corresponding Fund's shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains. To the extent net short-term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
Federal income tax purposes. See 'Tax Matters' below.
* * *
As diversified investment companies, 75% of the assets of each Portfolio
are represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities which
for purposes of this calculation are subject to the following fundamental
limitations: (a) the Portfolio may not invest more than 5% of its total assets
in the securities of any one issuer, and (b) the Portfolio may not own more than
10% of the outstanding voting securities of any one issuer. In addition, each
Portfolio may not invest 25% or more of its assets in the securities of issuers
in any one industry, unless, for each of the Index Portfolios, the securities in
a single industry were to comprise 25% or more of its corresponding index, in
which case the Index Portfolio will invest 25% or more of its assets in that
industry. These are fundamental investment policies of each Portfolio which may
not be changed without investor approval.
The Statement of Additional Information includes further discussion of
investment strategies and techniques, and a listing of other fundamental
investment restrictions and non-fundamental investment policies which govern the
investment policies of each Fund and its corresponding Portfolio. Fundamental
investment restrictions may not be changed, in the case of each Fund, without
the approval of that Fund's shareholders or, in the case of each Portfolio,
without the approval of the investors in that Portfolio. If a percentage
restriction (other than a restriction as to borrowing) 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 percentage resulting from
changes in the value of the securities held by a Portfolio or a later change in
the rating of a security held by a Portfolio is not considered a violation of
the policy.
32
<PAGE>
SPECIAL INFORMATION CONCERNING HUB AND SPOKE'r' STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolios of securities, the Trust seeks to achieve the investment objective of
each Fund by investing all of the investable assets of the Fund in its
corresponding Portfolio, a separate series of St. James Portfolios (the
'Portfolio Series'), a registered investment company. Each Fund has the same
investment objective and policies as its corresponding Portfolio. In addition to
selling a beneficial interest to a Fund, each Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors will
invest in that Portfolio on the same terms and conditions and will pay a
proportionate share of that Portfolio's expenses. However, the other investors
investing in a Portfolio are not required to issue their shares at the same
public offering price as the corresponding Fund due to variations in sales
commissions and other operating expenses. Investors in each Fund should be aware
that these differences may result in differences in returns experienced by
investors in the different funds that invest in a Portfolio. Such differences in
returns are also present in other mutual fund structures. Information concerning
other holders of interests in each Portfolio is available from SFSI at (617)
423-0800.
The investment objective of each Fund may be changed without the approval
of that Fund's shareholders, but not without written notice thereof to that
Fund's shareholders thirty days prior to implementing the change. If there were
a change in a Fund's investment objective, shareholders should consider whether
the Fund remains an appropriate investment in light of their then-current
financial position and needs. The investment objective of each Portfolio may be
changed without the approval of the investors in that Portfolio, but not without
written notice thereof to the investors in that Portfolio (and notice by the
Trust to shareholders of the corresponding Fund) thirty days prior to
implementing the change. There can, of course, be no assurance that the
investment objective of either a Fund or its corresponding Portfolio will be
achieved. See 'Investment Restrictions' in the Statement of Additional
Information for a description of the fundamental investment policies and
restrictions of each Portfolio and Fund that cannot be changed without approval
by the holders of a 'majority of the outstanding voting securities' (as defined
in the Investment Company Act of 1940, as amended (the '1940 Act')) of that
Portfolio or Fund. Except as stated otherwise, all investment objectives,
policies, strategies and restrictions described herein and in the Statement of
Additional Information are non-fundamental.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from a Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, a Portfolio
may become less diverse, resulting in increased portfolio risk. (However, this
possibility also exists for traditionally structured funds which have large or
institutional investors.) Also, funds with a greater pro rata ownership in a
Portfolio could have effective voting control of the operations of the
Portfolio. Whenever the Trust is requested to vote on matters pertaining to a
Portfolio (other than a vote by a Fund to continue the operation of its
corresponding Portfolio upon the withdrawal of another investor in such
Portfolio), the Trust will hold a meeting of shareholders of the corresponding
Fund and will cast all of its votes in the same proportion as the votes of the
Fund's shareholders. Fund shareholders who do not vote will not affect the
Trust's votes at the Portfolio meeting. The percentage of the Trust's votes
representing Fund shareholders not voting will be voted by the Trustees or
officers of the Trust in the same proportion as Fund shareholders who do, in
fact, vote. Certain changes in a Portfolio's investment objective, policies or
restrictions may require the Trust to withdraw the corresponding Fund's
investment in the Portfolio. Any such withdrawal could result in a distribution
in kind of portfolio securities (as opposed to a cash distribution from the
Portfolio). If securities are distributed, the Fund could incur brokerage, tax
or other charges in converting the securities to cash.
33
<PAGE>
In addition, the distribution in kind may result in a less diversified portfolio
of investments or adversely affect the liquidity of the Fund. Notwithstanding
the above, there are other means for meeting shareholder redemption requests,
such as borrowing.
The Trust may withdraw the investment of a Fund 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. Upon any such withdrawal, the
Board of Trustees of the Trust would consider what action might be taken,
including investing all of the investable assets of such Fund in another pooled
investment entity having the same investment objective and policies as the Fund
or retaining an investment adviser to manage the Fund's assets in accordance
with the investment policies described above with respect to the Portfolio.
For descriptions of the investment objectives, policies and restrictions of
the Portfolios, see 'Investment Objectives and Policies' herein and in the
Statement of Additional Information. For descriptions of the management of the
Portfolios, see 'Management of the Trust and Portfolio Series' herein and in the
Statement of Additional Information. For descriptions of the expenses of the
Portfolios, see 'Management of the Trust and Portfolio Series' and 'Expenses'
below.
PRICING OF SHARES
The net asset value of each Fund is determined and the shares of each Fund
(the 'Shares') are priced for purchases and redemptions at the close of regular
trading hours on the New York Stock Exchange (the 'NYSE'), currently 4:00 p.m.
(Eastern time). Net asset value and pricing for each Fund are determined on each
day the NYSE is open for trading ('Business Day'). Currently, the days on which
the Funds are closed (other than weekends) are New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Thanksgiving Day and Christmas. Net asset value per Share for purposes of
pricing sales and redemptions is calculated by dividing the value of all
securities and other assets belonging to a Fund, less the liabilities charged to
the Fund, by the number of its outstanding Shares.
Assets in the Portfolios which are traded on a recognized domestic stock
exchange are valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on a national
securities market. Securities traded only on over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the most recent bid and asked
prices. Restricted securities, securities for which market quotations are not
readily available, and other assets are valued at fair value, pursuant to
guidelines adopted by the Portfolio Series' Board of Trustees. Absent unusual
circumstances, debt securities maturing in 60 days or less are valued at
amortized cost.
Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an event subsequent
to the time when value was so established is likely to have changed such value,
then the fair value of those securities will be determined after consideration
of such events and other material factors, all under the direction and guidance
of the Board of Trustees of the Portfolio Series. A security which is listed or
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Absent unusual
circumstances, investments in foreign debt securities having a maturity of 60
days or less are valued based upon the amortized cost method. All other foreign
securities are valued at the last current bid quotation if market quotations are
available, or at fair value as determined in accordance with policies
established by the
34
<PAGE>
Board of Trustees. For valuation purposes, quotations of foreign securities in
foreign currency are converted to U.S. dollars equivalent at the prevailing
market rate on the day of conversion. Some of the securities acquired by the
Portfolios may be traded on foreign exchanges or over-the-counter markets on
days which are not Business Days. In such cases, the net asset value of the
Shares may be significantly affected on days when investors can neither purchase
nor redeem a Fund's Shares. The servicing agent has undertaken to price the
securities held by the Portfolios, and may use one or more independent pricing
services in connection with this service. The methods used by the pricing
services and the valuations so established will be reviewed by each Portfolio's
investment managers and servicing agent under the general supervision of the
Board of Trustees of the Portfolio Series.
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
PURCHASE OF SHARES
Shares of each Fund may be purchased without a sales charge on any Business
Day at the net asset value next determined after an order is transmitted to the
Trust's transfer agent, Chase Global Funds Services Company ('CGFSC'), and
accepted by the distributor, Edgewood Services, Inc. (the 'Distributor'). There
is no minimum amount for initial or subsequent investments. Purchase orders for
Shares received prior to the close of regular trading on the NYSE on any day
that a Fund's net asset value is calculated are priced according to the net
asset value determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time the net asset value per
share is next determined. The Distributor has established procedures for
purchasing Shares in order to accommodate different types of investors (see
'Purchase Procedures' below).
Shares of each Fund may be purchased only in those states where they may be
lawfully sold. The Trust reserves the right to cease offering Shares for sale at
any time and the Distributor and the Trust each reserve the right to reject any
order for the purchase of Shares.
Purchase Procedures
Shares may be purchased directly only by institutional investors
('Institutional Investors'). An Institutional Investor (a 'Shareholder
Organization') may elect to hold of record Shares for its customers
('Customers') and to record beneficial ownership of Shares on the account
statements provided to its Customers. In that case, it is each Shareholder
Organization's responsibility to transmit to the Distributor all purchase orders
for its Customers and to transmit, on a timely basis, payment for such orders to
CGFSC in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such purchases and
redemptions by Shareholder Organizations for the benefit of their customers will
be sent by CGFSC to the particular Shareholder Organization. In the alternative,
a Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization continues
to place its Customers' purchase and redemption orders with the Funds, CGFSC
will send confirmations of such transactions and periodic account statements
directly to the Customers.
Certificates will not be issued for Shares.
Customers may agree with a particular Shareholder Organization to make a
minimum purchase with respect to their accounts. Depending upon the terms of the
particular account, Shareholder Organizations may charge a Customer's account
fees for automatic investment and other cash
35
<PAGE>
management services provided. Customers should contact their Shareholder
Organization directly for further information.
Purchases by Wire
Institutional Investors may purchase Shares by wiring federal funds to
CGFSC. Prior to making an initial investment by wire, an investor must telephone
CGFSC at (800) 909-1989 (from overseas, please call (617) 557-1755) for
instructions, including a Wire Control Number (see below). Federal funds and
registration instructions should be wired through the Federal Reserve System to:
The Chase Manhattan Bank, N.A.
ABA #021000021
Excelsior Institutional Trust
Credit DDA #910-2-733046
[Account Registration]
[Account Number]
[Wire Control Number] *See Above*
Shares purchased by federal funds wire will be effected at the net asset
value per share next determined after acceptance of the order provided that the
federal funds wire has been received by the Fund's bank on that Business Day.
It is intended that each Fund and its corresponding Portfolio will be as
fully invested at all times as is reasonably practicable in order to enhance the
yield on their respective assets. Accordingly, in order to make investments
which will immediately generate income, a Fund must have federal funds
available. Purchase orders received and accepted after 4:00 p.m. Eastern time
will be effected at the net asset value next determined even if a Fund received
federal funds on that day.
Investors making initial investments by wire must promptly complete the
application accompanying this Prospectus and forward it to CGFSC. No account
application is required for subsequent purchases. Completed applications should
be directed to:
Excelsior Institutional Trust
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
The application may also be sent via facsimile. Please contact CGFSC at
(800) 909-1989 (from overseas, please call (617) 557-1755) for complete
instructions. Redemptions by investors will not be processed until the completed
application for purchase of Shares has been received and accepted by CGFSC.
Investors making subsequent investments by wire should follow the above
instructions.
Purchases by Telephone
For Institutional Investors who have previously selected the telephone
purchase option, a purchase order may be placed by calling CGFSC at (800)
909-1989 (from overseas, please call (617) 557-1755). The purchase by telephone
will be effected at the net asset value per share next determined after
acceptance of the order.
By establishing the telephone purchase option, the Institutional Investor
authorizes CGFSC and the Distributor to act upon telephone instructions believed
to be genuine. CGFSC and the Distributor will not be held liable for any loss,
liability, cost or expense for acting upon such instruction. Accordingly,
Institutional Investors bear the risk of loss. The Trust will employ reasonable
procedures to confirm that
36
<PAGE>
instructions communicated by telephone are genuine, including, without
limitation, recording telephonic instructions and/or requiring the caller to
provide some form of personal identification. Failure to employ reasonable
procedures may make the Trust liable for any losses due to unauthorized or
fraudulent telephone instructions.
This option may be changed, modified or terminated at any time. The Trust
currently does not charge a fee for this service, although some Service
Organizations may charge their customers fees. Customers should contact their
Service Organization directly for further information.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged without payment of any exchange fee for
shares of another Fund described herein at their respective net asset values. An
exchange of shares is treated for federal and state income tax purposes as a
redemption (sale) of shares given in exchange by the shareholder, and an
exchanging shareholder may, therefore, realize a taxable gain or loss in
connection with the exchange. Shareholders exchanging shares of a Fund for
shares of another Fund should review the disclosure provided herein relating to
the exchanged-for shares carefully prior to making an exchange. The exchange
privilege is available to shareholders residing in any state in which Trust
shares being acquired may be legally sold.
The exchange option may be changed, modified or terminated at any time. The
Trust currently does not charge a fee for this service, although some Service
Organizations may charge their customers fees. Customers should contact their
Service Organization directly for further information.
Exchanges by Telephone
For Institutional Investors who have previously selected the telephone
exchange option, an exchange order may be placed by calling CGFSC at (800)
909-1989 (from overseas, please call (617) 557-1755). The exchange by telephone
will be effected at the net asset value per share next determined after
acceptance of the order for each Fund.
By establishing the telephone exchange option, the Institutional Investor
authorizes CGFSC and the Distributor to act upon telephone instructions believed
to be genuine. CGFSC and the Distributor will not be held liable for any loss,
liability, cost or expense for acting upon such instruction. Accordingly,
Institutional Investors bear the risk of loss. The Trust will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
including, without limitation, recording telephonic instructions and/or
requiring the caller to provide some form of personal identification. Failure to
employ reasonable procedures may make the Trust liable for any losses due to
unauthorized or fraudulent telephone instructions.
REDEMPTION OF SHARES
Institutional Investors may redeem all or any portion of the Shares in
their account at the net asset value next determined after proper receipt in
good form and acceptance of an order for redemption. Proceeds from redemption
orders received and accepted by 4:00 p.m. Eastern time will normally be sent the
next Business Day; proceeds are sent in any event within five Business Days.
It is necessary for Institutional Investors and other entities to have on
file appropriate documentation authorizing redemptions by the institution or
entity before a redemption request is considered in proper form. In some cases,
additional documentation may be requested.
37
<PAGE>
Investment return and principal value of an investment in each Fund will
fluctuate, so that the value of shares redeemed may be more or less than the
shareholder's cost. Redemptions of shares are taxable events on which a
shareholder may realize a gain or loss.
Redemption Procedures
Customers of Shareholder Organizations holding Shares of record may redeem
all or part of their investments in the Funds in accordance with the procedures
governing their accounts at their Shareholder Organization. It is the
responsibility of the Shareholder Organizations to transmit redemption orders to
CGFSC and credit such Customer accounts with the redemption proceeds on a timely
basis.
Customers redeeming Shares through certain Shareholder Organizations or
certified financial planners may incur transaction charges in connection with
such redemptions. Such Customers should contact their Shareholder Organization
for further information on transaction fees.
Institutional Investors may redeem all or part of their Shares in
accordance with any of the procedures described below. These procedures only
apply to Customers of Shareholder Organizations for whom individual accounts
have been established with CGFSC. Customers whose individual accounts are
maintained by Shareholder Organizations must contact their Shareholder
Organization directly to redeem Trust shares.
If any portion of the Shares to be redeemed represents an investment made
by check, the Trust and CGFSC reserve the right not to honor the redemption
until CGFSC is reasonably satisfied that the check has been collected in
accordance with the applicable banking regulations; such collection process may
take up to 15 days. An Institutional Investor who anticipates the need for more
immediate access to its investment should purchase Shares by federal funds or
bank wire or by certified or cashier's check. Banks normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and Federal funds. If a check is not collected, the purchase will be
canceled and CGFSC will charge a fee of $25.00 to the Institutional Investor's
account.
Redemption by Wire or Telephone
Institutional Investors who maintain an account at CGFSC and have so
indicated on their application, or have subsequently arranged in writing to do
so, may redeem Shares by instructing CGFSC, by wire or telephone, to wire the
redemption proceeds directly to the investor's predesignated bank account at any
commercial bank in the United States. Institutional Investors may have their
Shares redeemed by wire by instructing CGFSC at (800) 909-1989 (from overseas,
please call (617) 557-1755). No charge is imposed by the Trust for wiring
redemption payments to Institutional Investors although Shareholder
Organizations may charge Customers for wiring or crediting such redemption
payments to their accounts. Information relating to such redemption services and
charges, if any, is available to Customers directly from their Shareholder
Organizations.
In order to arrange for redemption by wire or telephone after an account
has been opened or to change the bank account designated to receive redemption
proceeds, an Institutional Investor must send a written request to the Trust at
the address listed below under 'Redemption by Mail'. Such requests must be
signed by the investor, with signatures guaranteed (see 'Redemption by Mail'
below for details regarding signature guarantees). Further documentation may be
requested.
CGFSC and the Distributor reserve the right to refuse a wire or telephone
redemption. Procedures for redeeming Shares by wire or telephone may be modified
or terminated at any time by the Trust or the Distributor. CGFSC, the Trust and
the Distributor will not be liable for any loss, liability, cost or
38
<PAGE>
expense for acting upon telephone instructions believed to be genuine.
Accordingly, shareholders will bear the risk of loss. The Trust will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, including, without limitation, recording telephone instructions and/or
requiring the caller to provide some form of personal identification. Failure to
employ reasonable procedures may make the Trust liable for any losses due to
unauthorized or fraudulent telephone instructions.
Redemption by Mail
Shares may be redeemed by an Institutional Investor by submitting a written
request for redemption to:
Excelsior Institutional Trust
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to CGFSC must (i) state the number of Shares
to be redeemed, (ii) identify the shareholder account number and tax
identification number, and (iii) be signed for each registered owner by its
authorized officer exactly as the Shares are registered.
A redemption request for an amount in excess of $5,000, or for any amount
if the proceeds are to be sent elsewhere than the address of record, must be
accompanied by signature guarantees from any eligible guarantor institution
approved by CGFSC in accordance with its Standards, Procedures and Guidelines
for the Acceptance of Signature Guarantees ('Signature Guarantee Guidelines').
Eligible guarantor institutions generally include banks, broker-dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. All eligible guarantor institutions
must participate in the Securities Transfer Agents Medallion Program ('STAMP')
in order to be approved by CGFSC pursuant to the Signature Guarantee Guidelines.
Copies of the Signature Guarantee Guidelines and information on STAMP can be
obtained from CGFSC at (800) 909-1989 (from overseas, please call (617)
557-1755) or at the address given above. CGFSC may require additional supporting
documents. A redemption request will not be deemed to be properly received in
good form until CGFSC receives all required documents in proper form.
Questions with respect to the proper form for redemption requests should be
directed to CGFSC at (800) 909-1989 (from overseas, please call (617) 557-1755).
Other Redemption Information
Except as described in 'Investor Programs' below, Institutional Investors
may be required to redeem Shares in a Fund after 60 days' written notice if due
to investor redemptions the balance in the particular account with respect to
the Fund remains below $500. If a Customer has agreed with a particular
Shareholder Organization to maintain a minimum balance with respect to Shares of
a Fund and the balance in such account falls below that minimum, the Customer
may be obliged by the Shareholder Organization to redeem all or part of its
Shares to the extent necessary to maintain the required minimum balance.
39
<PAGE>
INVESTOR PROGRAMS
RETIREMENT PLANS
Shares are available for purchase by Institutional Investors in connection
with the following tax-deferred prototype retirement plans offered by United
States Trust Company of New York:
IRAs (including 'rollovers' from existing retirement plans) for
individuals and their eligible non-working spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and their
employees; and
Keogh Plans for self-employed individuals.
Institutional Investors or Customers of Shareholder Organizations investing
in Shares pursuant to a retirement plan are not subject to the minimum
investment and mandatory redemption provisions described above. Detailed
information concerning eligibility, service fees and other matters related to
these plans is available from the Trust by calling CGFSC at (800) 909-1989 (from
overseas, please call (617) 557-1755). Customers of Shareholder Organizations
may purchase Shares pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
TAX MATTERS
Each year the Trust intends to qualify each Fund and elect that each Fund
be treated as a separate 'regulated investment company' under Subchapter M of
the Internal Revenue Code of 1986, as amended (the 'Code'). Provided a Fund
meets all income, distribution and diversification requirements of the Code, and
distributes all of its net investment income and realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, no
federal income or excise taxes will be required to be paid from that Fund,
although foreign-source income of a Fund may be subject to foreign withholding
taxes. The Portfolios are also not expected to be required to pay any federal
income or excise taxes. If a Fund fails to qualify as a 'regulated investment
company' 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.
Shareholders of a Fund normally will have to pay federal income taxes and
any state or local taxes on the dividends and net capital gain distributions, if
any, they receive from a Fund. 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 are taxable to shareholders as long-term capital gains without regard to
the length of time the shareholders have held their Shares. Dividends and
distributions, if any, paid to shareholders will be treated in the same manner
for federal income tax purposes whether received in cash or reinvested in
additional Shares of a Fund.
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 Fund 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.
40
<PAGE>
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to have
been received by shareholders and paid by a Fund on December 31 of such year in
the event such dividends are actually paid during January of the following year.
At the end of each calendar year, each shareholder receives information for
tax purposes on the dividends and other distributions received during that
calendar year, including the portion thereof taxable as ordinary income, the
portion taxable as long-term capital gains, the portion (if any) which
constitutes a return of capital (which is generally free of tax but results in a
basis reduction), and the amount of dividends (if any) which may qualify for the
dividends-received deduction for corporations.
In general, any gain or loss realized upon a taxable disposition of Shares
of a Fund by a shareholder that holds such Shares as a capital asset will be
treated as long-term capital gain or loss if the Shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a redemption of Shares in a Fund held for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of net capital gain made with respect to those Shares. Any loss realized upon a
disposition of Shares may also be disallowed under rules relating to wash sales.
If more than 50% of the value of the International Equity Fund's total
assets at the close of any taxable year consists of stock or securities of
foreign corporations, the International Equity Fund may elect to 'pass through'
to shareholders foreign income taxes paid by that Fund. Under those
circumstances, the Fund will notify shareholders of their pro rata portion of
the foreign income taxes paid by the Fund; shareholders may be eligible for
foreign tax credits or deductions with respect to those taxes, but will be
required to treat the amount of the taxes as an amount distributed to them and
thus includable in their gross income for federal income tax purposes.
The Trust may be required to withhold federal income tax at the rate of 31%
from all taxable distributions and redemption proceeds payable to shareholders
who do not provide the Trust with their correct taxpayer identification number
or make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Such withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's federal income tax liability.
Under current law, neither the Trust, as a Delaware business trust, nor any
of the Funds are liable for any income or franchise tax in the State of Delaware
as long as the Funds continue to qualify as 'regulated investment companies'
under the Code.
The foregoing discussion is intended for general information only. An
investor should consult with its own tax advisor as to the tax consequences of
an investment in the Funds, including the status of distributions from the Funds
under applicable state and local laws.
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES
The Boards of Trustees of Excelsior Institutional Trust (the 'Trust') and
St. James Portfolios (the 'Portfolio Series') provide general supervision over
the affairs of the Trust and the Portfolio Series, respectively. The Trustees
decide upon matters of general policy and review the actions of service
providers such as the investment managers, service agent, distributor, and
others. None of the Trustees common to both the Trust and the Portfolio Series
are 'interested persons' (as defined in the 1940 Act) (the 'Independent
Trustees') of the Trust or the Portfolio Series.
41
<PAGE>
INVESTMENT MANAGERS
United States Trust Company of The Pacific Northwest ('U.S. Trust Pacific')
is responsible for the management of the assets of the Portfolios corresponding
to the Funds listed below, pursuant to an Investment Advisory Agreement (the
'Advisory Agreement') with St. James Portfolios on behalf of such Portfolios.
U.S. Trust Pacific has delegated the daily management of the security holdings
of these Portfolios to the investment managers named below, acting as
subadvisers (the 'Subadvisers'):
<TABLE>
<S> <C>
Equity Index Fund, Bond Index Fund and
Small Cap Fund.......................... United States Trust Company of New York
Balanced Fund............................. Becker Capital Management, Inc.
Equity Growth Fund........................ Luther King Capital Management
Value Equity Income Fund.................. Spare, Kaplan, Bischel & Associates
International Equity Fund................. Harding, Loevner Management, L.P.
</TABLE>
Subject to the general guidance and policies set by the Trustees of the
Portfolio Series, U.S. Trust Pacific provides general supervision over the
investment management functions performed by each of the Subadvisers. U.S. Trust
Pacific closely monitors the Subadvisers' application of these Portfolios'
investment policies and strategies, and regularly evaluates the Subadvisers'
investment results and trading practices.
For its services under the Advisory Agreement, U.S. Trust Pacific is
entitled to receive from the Portfolios, for the respective Portfolio's current
fiscal year, fees accrued daily and paid monthly at an annual rate equal to the
percentages specified below of the corresponding Portfolio's average daily net
assets: (a) 0.25% for the Equity Index Fund and Bond Index Fund; (b) 0.65% for
the Small Cap Fund, Balanced Fund, Equity Growth Fund and Value Equity Income
Fund; and (c) 1.00% for the International Equity Fund. U.S. Trust Pacific, which
has its principal offices at 4380 Southwest Macadam Avenue, Suite 450, Portland,
OR 97201, is a subsidiary of United States Trust Company of New York. Although
the advisory fee paid by the International Equity Portfolio is higher than
advisory fees currently being paid by most investment companies in general, the
advisory fee paid by the International Equity Portfolio is similar to fees
currently being paid by other investment companies which also invest primarily
in foreign issuers. U.S. Trust Pacific has agreed to waive all investment
advisory fees with respect to each Portfolio listed above. While no such
Portfolio pays investment advisory fees to U.S. Trust Pacific, each
institutional investor enters into an asset management services agreement with
U.S. Trust Pacific and agrees to pay annual fees calculated as a specified
percentage of average net assets.
Pursuant to separate subadvisory agreements, the Subadvisers make the
day-to-day investment decisions and portfolio selections for the Portfolios
corresponding to the Equity Index, Bond Index, Small Cap, Balanced, Equity
Growth, Value Equity Income and International Equity Funds, consistent with the
general guidelines and policies established by U.S. Trust Pacific and the Board
of Trustees of the Portfolio Series. For the investment management services they
provide to the corresponding Portfolios, the Subadvisers are compensated only by
U.S. Trust Pacific, and receive no fees directly from the Portfolio Series. 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 below of the corresponding Portfolio's average daily net assets: (a)
0.25% for the Equity Index Fund and Bond Index Fund, (b) 0.65% for the Small Cap
Fund, (c) 0.40% for the Value Equity Income Fund and Equity
42
<PAGE>
Growth Fund, (d) 0.425% for the Balanced Fund, and (e) 0.50% for the
International Equity Fund. The Subadvisers furnish at their own expense all
services, facilities and personnel necessary in connection with managing the
corresponding Portfolios' investments and effecting securities transactions for
the Portfolios.
BALANCED FUND, EQUITY GROWTH FUND, VALUE EQUITY INCOME FUND AND
INTERNATIONAL EQUITY FUND
U.S. Trust Pacific has entered into separate Investment Subadvisory
Agreements with Becker Capital Management, Inc. ('Becker') with respect to the
Portfolio for the Balanced Fund; Luther King Capital Management ('Luther King')
with respect to the Portfolio for the Equity Growth Fund; Spare, Kaplan, Bischel
& Associates ('Spare Kaplan') with respect to the Portfolio for the Value Equity
Income Fund; and Harding, Loevner Management, L.P. ('Harding Loevner') with
respect to the Portfolio for the International Equity Fund.
Becker maintains its principal offices at 2185 Pacwest Center, Portland, OR
97204. As of June 30, 1995, Becker had $1.1 billion in assets under management.
The person primarily responsible for the day-to-day management of the Balanced
Portfolio is Donald L. Wolcott, C.F.A., Vice President and Portfolio Manager of
Becker. Mr. Wolcott joined Becker in 1987 and brings 19 years of experience in
investment management to his position.
Luther King maintains its principal offices at 301 Commerce Street, Suite
1600, Forth Worth, TX 76102. As of June 30, 1995, Luther King had $4.8 billion
in assets under management. Emmett M. Murphy is primarily responsible for the
day-to-day management of Equity Growth Portfolio. Mr. Murphy has been an
investment manager with Luther King since 1981. He is also a Chartered Financial
Analyst.
Spare Kaplan maintains its principal offices at 44 Montgomery Street, San
Francisco, CA 94104. As of June 30, 1995, Spare Kaplan had $2.3 billion in
assets under management. The day-to-day management of Value Equity Income
Portfolio is performed by the Value Equity Income Strategy Team, which includes
Anthony E. Spare, Chief Executive Officer and Chief Investment Officer of Spare
Kaplan, and James G. McCluskey, Senior Portfolio Manager at Spare Kaplan. Mr.
Spare co-founded the Value Equity Income Strategy Team in 1975 and has served as
senior strategy team member since 1975; Mr. McCluskey has been with Spare Kaplan
since 1989.
Harding Loevner maintains its principal offices at 50 Division Street,
Suite 401, Somerville, NJ 08876. As of June 30, 1995, Harding Loevner had $512
million in assets under management. All investment management decisions of
Harding Loevner are made by an investment group and not by portfolio managers
individually.
EQUITY INDEX FUND, BOND INDEX FUND AND SMALL CAP FUND
U.S. Trust Pacific has entered into an Investment Subadvisory Agreement
with United States Trust Company of New York ('U.S. Trust') with respect to the
Portfolios corresponding to the Equity Index Fund, Bond Index Fund and Small Cap
Fund. U.S. Trust is a state-chartered bank and trust company created by Special
Act of the New York Legislature in 1853. U.S. Trust provides trust and banking
services to individuals, corporations and institutions, both nationally and
internationally, including investment management, estate and trust
administration, financial planning, corporate trust and agency, and personal and
corporate banking. U.S. Trust is a member bank of the Federal Reserve System and
the Federal Deposit Insurance Corporation and is one of the twelve members of
the New York Clearing House Association. On June 30, 1995, U.S. Trust's Asset
Management Group had approximately $41.2 billion in assets under management.
U.S. Trust, which has its principal offices at
43
<PAGE>
114 West 47th Street, New York, NY 10036, is a subsidiary of U.S. Trust
Corporation, a registered bank holding company.
Bruce Tavel, Senior Vice President, and Cyril M. Theccanat, Vice President
of U.S. Trust, Structured Investment Management Department, are primarily
responsible for the day-to-day management of the Portfolio corresponding to the
Bond Index Fund. Mr. Theccanat has been managing structured investment
portfolios at U.S. Trust since January, 1990. Prior to this, Mr. Theccanat was a
Vice President of Drexel Burnham Lambert, responsible for interest rate and
foreign exchange risk management. Mr. Tavel designs, develops and implements
analytic products and services utilizing quantitative and financial information.
He has over 17 years of experience in the execution of decision support systems
at U.S. Trust and previously at Lehman Asset Management, where he was Director
of Institutional Computer Services.
Peter Albanese, Financial Officer in the Structured Investments area of the
Institutional Investment Management Division, U.S. Trust, is primarily
responsible for the day-to-day management of the Portfolios corresponding to the
Equity Index Fund and Small Cap Fund. Mr. Albanese has been with U.S. Trust
since December 1994. Prior to joining U.S. Trust he worked for Kidder, Peabody &
Co., Inc. from March 1991 to December 1994, as a Quantitative Analyst in Equity
Research.
EQUITY FUND, INCOME FUND AND TOTAL RETURN BOND FUND
U.S. Trust is responsible for the management of the assets of the
Portfolios corresponding to the Equity Fund, Income Fund, and Total Return Bond
Fund, pursuant to an Investment Advisory Agreement (the 'Advisory Agreement')
with St. James Portfolios on behalf of such Portfolios. With respect to these
Portfolios, U.S. Trust makes decisions with respect to and places orders for all
purchases and sales of portfolio securities, and maintains records relating to
such purchases and sales.
The following persons are primarily responsible for the day-to-day
management of the Portfolios corresponding to the following Funds:
<TABLE>
<S> <C>
Equity Fund................... P. Ross Taylor III, Director of Institutional Investments (Equity) and Senior
Portfolio Manager, U.S. Trust (since 1987).
Income Fund................... Charles E. Rabus, Vice President and Senior Portfolio Manager, U.S. Trust (since
1987).
Total Return Bond Fund........ Henry M. Milkowicz, Senior Vice President and Senior Portfolio Manager, U.S.
Trust (since 1986).
</TABLE>
For its services under the Advisory Agreement, U.S. Trust receives from the
Portfolios corresponding to the Equity Fund, Income Fund and Total Return Bond
Fund, a fee accrued daily and paid monthly at an annual rate equal to 0.65% of
each Portfolio's average daily net assets. U.S. Trust has agreed to waive all
investment advisory fees under the Advisory Agreement. While no such Portfolio
pays investment advisory fees to U.S. Trust, each institutional investor enters
into an asset management services agreement with U.S. Trust Pacific and agrees
to pay annual fees calculated as a specified percentage of average net assets.
U.S. Trust also serves as investment adviser to UST Master Funds, Inc. and
UST Master Tax-Exempt Funds, Inc., registered investment companies consisting of
the following funds: Equity Fund; Income and Growth Fund; Long-Term Supply of
Energy Fund; Productivity Enhancers Fund; Environmentally-Related Products and
Services Fund; Aging of America Fund; Communication and Entertainment Fund;
Business and Industrial Restructuring Fund; Global Competitors Fund; Early Life
Cycle Fund;
44
<PAGE>
Money Fund; Government Money Fund; Treasury Money Fund; Short-Term Tax-Exempt
Fund; New York Intermediate-Term Tax-Exempt Fund; International Fund; Emerging
Americas Fund; Pacific/Asia Fund; Pan European Fund; Short-Term Tax-Exempt
Securities Fund; Intermediate-Term Tax-Exempt Fund; Long-Term Tax-Exempt Fund;
Short-Term Government Securities Fund; Intermediate-Term Managed Income Fund;
and Managed Income Fund.
INVESTMENTS IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK OR ANY OTHER BANK.
PROPOSED RESTRUCTURING
At meetings of the Trust's Board of Trustees held on August 29, 1995,
September 15, 1995, and October 6, 1995, the Trustees voted to approve a
restructuring (the 'Restructuring'), subject to shareholder approval, with
respect to the Equity Fund, Income Fund, Total Return Bond Fund, Bond Index
Fund, Balanced Fund, Equity Growth Fund and International Equity Fund (the
'Restructuring Funds'). Under the Restructuring, the Trust will withdraw the
investment of each Restructuring Fund from its corresponding Portfolio and
thereafter operate each such Fund in a traditional, single-tier mutual fund
structure. Thereafter, the Trust will engage an investment adviser and, if
applicable, an investment subadviser to manage each Restructuring Fund's
portfolio of investments. Subject to shareholder approval, the Trustees have
approved investment advisory agreements (each a 'New Advisory Agreement')
between the Trust on behalf of each Restructuring Fund and the investment
adviser currently providing investment advisory services to the Portfolio
corresponding to such Fund. Subject to shareholder approval, the Trustees have
also approved investment subadvisory agreements (each a 'New Subadvisory
Agreement') between the investment adviser for the Bond Index Fund, Balanced
Fund, Equity Growth Fund and International Equity Fund and the investment
subadviser currently providing investment subadvisory services to the Portfolios
corresponding to such Funds.
The rates of the advisory or subadvisory fees in the New Advisory
Agreements and the New Subadvisory Agreements are identical to the rates of the
advisory or subadvisory fees in the corresponding current advisory agreements or
current subadvisory agreements, as applicable. The terms and conditions of the
New Advisory Agreements and the New Subadvisory Agreements are identical in all
material respects to those of the corresponding current advisory or subadvisory
agreements, except that the new agreements will be dated as of the effective
date of the Restructuring, and except that the Trust will be a party to the New
Advisory Agreements.
As part of the Restructuring, and subject to shareholder approval, the
Trustees of the Trust have recommended that the Bond Index Fund withdraw its
investment in the Bond Market Portfolio. Unlike the other Funds that would also
be withdrawn from their corresponding Portfolio, the Trustees have determined
that in the case of the Bond Index Fund, the benefits of a two-tier structure
could potentially be realized by reinvesting the assets of the Fund in a series
(the 'Federated Bond Index Portfolio') of Federated Investment Portfolios and
operating in a Hub and Spoke'r' investment fund structure. Since it is expected
that there will be one or more additional Spokesm funds investing in the
Federated Bond Index Portfolio, it is anticipated that many of the expected
benefits of the two-tier structure will be realized. Therefore, the Trustees
have determined that it would be in the best interests of the shareholders of
the Bond Index Fund to replace the one-tier operating structure as soon as
practicable following the withdrawal from the Bond Market Portfolio with a Hub
and Spoke'r' investment fund structure, by investing all of the investable
assets of the Fund in the Federated Bond Index Portfolio, which has adopted the
same investment objective, restrictions and policies as the Fund,
45
<PAGE>
and terminating the New Advisory Agreement and New Subadvisory Agreement with
respect to the Fund.
Shareholders of the Trust will be asked to approve the Restructuring at a
special meeting of shareholders scheduled to be held on November 15, 1995. The
Restructuring is expected to take place as soon as practicable after shareholder
approval is obtained, but in any event after December 1, 1995.
At a meeting of the Board of Trustees held on October 6, 1995, the Trustees
voted to terminate the Equity Index, Small Capitalization and Value Equity
Income Funds, after having determined that the continuation of these Funds is
not in the best interests of the Funds or their respective shareholders. The
termination of the Equity Index, Small Capitalization and Value Equity Income
Funds is expected to occur on or after December 1, 1995.
SERVICING PLAN
The Trust has adopted a Servicing Plan which provides that the Trust may
obtain the services of a servicing and fund accounting agent, a transfer agent,
a custodian and one or more Shareholder Servicing Agents, and may enter into
agreements providing for the payment of fees for such services. Under the
Servicing Plan, the aggregate of the fees paid to the servicing and fund
accounting agent from a Fund and fees paid to Shareholder Servicing Agents from
a Fund may not exceed 0.40% of that Fund's average daily net assets on an
annualized basis for the Fund's then-current fiscal year.
SERVICING AGENT
Signature Financial Services, Inc. ('SFSI'), located at 89 South Street,
Boston, MA 02111, serves as servicing 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'). Pursuant to the
Servicing Agent Agreements, SFSI supervises the affairs of the Trust and the
Portfolio Series, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
various service providers of the Trust or the Portfolio Series; provides
equipment and clerical personnel necessary for maintaining the organization of
the Trust and the Portfolio Series; prepares and distributes all materials in
connection with meetings of Trustees and investors; prepares and files all
documents required for compliance by the Trust or the Portfolio Series with
applicable laws and regulations; and arranges for the maintenance of fund
accounting and record-keeping of the Trust and the Portfolio Series.
SFSI provides persons satisfactory to the respective Boards of Trustees to
serve as officers of the Trust or the Portfolio Series. Such officers, as well
as certain other employees and Trustees of the Trust or the Portfolio Series,
may be directors, officers or employees of SFSI or its affiliates. SFSI provides
similar services to other mutual funds unrelated to the Trust and the Portfolio
Series.
As compensation for providing these services (other than fund accounting
services) and facilities to the Trust and the Portfolio Series, SFSI receives a
fee from the Portfolio Series accrued daily and paid monthly at an annual rate
of up to 0.07% of the average daily net assets of the Portfolios. This fee is
reported in the Expense Table at pages 1-2 as the Administrative Fees. For its
fund accounting services, SFSI receives a per annum fee from each Fund and each
Portfolio equal to $12,000 and $50,000, respectively. SFSI is a subsidiary of
Signature Financial Group, Inc.
46
<PAGE>
DISTRIBUTOR
Pursuant to a Distribution Agreement, Edgewood Services, Inc. (the
'Distributor'), Federated Investors Tower, Pittsburgh, Pennsylvania 15222, acts
as principal underwriter for the Shares. Edgewood Services, Inc., a registered
broker-dealer and a wholly-owned subsidiary of Federated Investors, is
unaffiliated with U.S. Trust or any of its affiliates. The Distributor and its
affiliates acts as distributor and serves as administrator to twenty-four bank
related mutual fund complexes.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into shareholder servicing agreements with one or
more shareholder servicing agents, including U.S. Trust. Pursuant to these
agreements, a shareholder servicing agent, as agent for its customers who are
purchasing Shares, will perform the following services for these investors,
among other things: answer customer inquiries regarding account status and
history, the manner in which purchases, exchanges and redemptions of Shares of
each Fund may be effected and certain other matters pertaining to a Fund; assist
shareholders in designating and changing dividend options, account designations
and addresses; provide necessary personnel and facilities to establish and
maintain shareholder accounts and records; assist in processing purchase,
exchange and redemption transactions; arrange for the wiring of funds; transmit
and receive funds in connection with customer orders to purchase, exchange or
redeem Shares; verify and guarantee shareholder signatures in connection with
redemption orders and transfers and changes in shareholder-designated accounts;
provide periodic statements showing a customer's account balances and, to the
extent practicable, integrate such information with other client transactions
otherwise effected with or through the shareholder servicing agent; furnish
(either separately or on an integrated basis with other reports sent to the
customer by its shareholder servicing agent) monthly and year-end statements and
confirmations of purchases and redemptions; transmit, on behalf of the Trust,
prospectuses, proxy statements, annual reports, updating prospectuses, if any,
and other communications from the Trust to shareholders of each Fund; receive,
tabulate and transmit to the Trust proxies executed by shareholders with respect
to meetings of shareholders of the Funds; and provide such other related
services as the Trust or a shareholder may request. For these services, the
shareholder servicing agents will receive a fee accrued daily and paid monthly
for the respective Fund's current fiscal year at an annual rate of up to 0.25%
of the average daily net assets represented by shares owned during the period
for which payment is being made by customers of the shareholder servicing agent.
In addition, certain shareholder servicing agents will perform record keeping
and administrative functions for which they will receive a fee at an annual rate
of up to 0.15% of each Fund's average daily net assets. Shareholder servicing
agents are expected to waive a portion of their fees.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank, N.A. ('Chase') serves as custodian of the Funds'
and the Portfolios' assets. Communications to the custodian should be directed
to The Chase Manhattan Bank, N.A., Mutual Funds Service Division, 770 Broadway,
New York, NY 10003. Investors Bank & Trust Company, 79 Milk Street, Boston, MA
02205, has been retained to serve as domestic and foreign subcustodian of the
Funds' and the Portfolios' assets. Chase Global Funds Services Company
('CGFSC'), 73 Tremont Street, Boston, MA 02108, serves as the transfer agent for
the Funds, providing transfer agency, dividend disbursement and registrar
services. CGFSC is a subsidiary of Chase.
47
<PAGE>
EXPENSES
The respective expenses of the Trust and the Portfolio Series include the
compensation of their respective Trustees who are not affiliated with the
investment managers or SFSI; governmental fees; interest charges; taxes; fees
and expenses of independent auditors, of legal counsel and of any transfer
agent, custodian, registrar or dividend disbursing agent of the Trust or the
Portfolio Series; insurance premiums; and expenses of calculating the net asset
value of, and the net income on, interests in the Portfolios and shares of the
Funds.
Expenses of the Trust also include all fees under its Servicing Agent
Agreement; expenses of distributing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
reports, notices, proxy statements and reports to shareholders and to
governmental officers and commissions; expenses of shareholder and Trustee
meetings; expenses relating to the issuance, registration and qualification of
shares of each Fund and the preparation, printing and mailing of prospectuses
for such purposes; and membership dues in the Investment Company Institute
allocable to the Trust.
Expenses of the Portfolio Series also include all fees under the Portfolio
Series' Servicing Agent Agreement; the expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Portfolio Series' custodian for all services to the Portfolios, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of preparing and mailing reports to investors and to governmental
officers and commissions; expenses of meetings of investors and Trustees; and
the advisory fees, if any, payable to U.S. Trust Pacific under the Advisory
Agreement.
Bank Regulatory Matters. The Glass-Steagall Act and applicable banking
laws and regulations generally prohibit certain financial institutions such as
U.S. Trust from engaging in the business of underwriting securities of open-end
investment companies such as the Trust or the Portfolio Series. Based on advice
of its counsel, it is the position of U.S. Trust and U.S. Trust Pacific that the
investment advisory services performed by U.S. Trust Pacific or U.S. Trust under
the Advisory Agreements with St. James Portfolios, the activities performed by
U.S. Trust as shareholder servicing agent for the Funds and subadviser and
custodian for the Portfolios, and the transfer agency and dividend disbursement
activities performed by CGFSC for the Funds, do not constitute underwriting
activities and are consistent with the requirements of the Glass- Steagall Act.
In addition, counsel has advised that this combination of individually
permissible activities is consistent with the Glass-Steagall Act and other
federal or state legal and regulatory precedent. There is presently no
controlling precedent regarding the performance of a combination of investment
advisory, shareholder servicing, custodian and transfer agency activities by
banks. State laws on this issue may differ from the interpretations of relevant
federal law and banks and financial institutions may be required to register as
dealers pursuant to state securities law. Future changes in either federal
statutes or regulations relating to the permissible activities of banks, as well
as future judicial or administrative decisions and interpretations of present
and future statutes and regulations, could prevent a bank from continuing to
perform all or part of its servicing or investment management activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Funds might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust do
48
<PAGE>
not expect that shareholders of the Funds would suffer any adverse financial
consequences as a result of these occurrences.
Certain Relationships and Activities. U.S. Trust, U.S. Trust Pacific and
their affiliates may have deposit, loan and other commercial banking
relationships with the issuers of securities which may be purchased on behalf of
the Portfolios, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. U.S.
Trust and U.S. Trust Pacific have informed the Portfolios that, in making
investment decisions, they do not obtain or use material inside information in
their possession or in the possession of any of their affiliates. In making
investment recommendations for the Portfolios, U.S. Trust and U.S. Trust Pacific
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by a Portfolio is a customer of U.S. Trust or U.S.
Trust Pacific, their parents or their subsidiaries or affiliates. When dealing
with its customers, U.S. Trust, U.S. Trust Pacific, their parents, subsidiaries,
and affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by U.S. Trust, U.S. Trust Pacific or
any such affiliate.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends equal to all or substantially all of each Fund's net investment
income will be declared and paid as follows: For the Small Cap Fund, Equity
Index Fund and International Equity Fund, dividends will be declared and paid at
least once a year; for the Bond Index Fund, dividends will be declared daily and
paid at least each month; and for the Equity Fund, Income Fund, Total Return
Bond Fund, Balanced Fund, Equity Growth Fund and Value Equity Income Fund,
dividends will be declared and paid at least quarterly (four times a year).
Long-term capital gains, if any, for each Fund will be distributed once a
year, usually in December, if a Fund's profits during that year from the sale of
securities held for longer than the applicable period exceed losses during such
year from the sale of securities together with any net capital losses carried
forward from prior years (to the extent not used to offset short-term capital
gains). Net short-term capital gains realized during a Fund's fiscal year will
also be distributed during such year. Each Fund's net income for dividend
purposes consists of (i) all accrued income, whether taxable or tax-exempt, plus
discount earned on the Fund's assets, less (ii) amortization of premium on such
assets, accrued expenses directly attributable to the Fund, and the general
expenses or the expenses common to more than one Fund (e.g., legal,
administrative, accounting, and Trustees' fees) prorated to each Fund on the
basis of its relative net assets. Dividends and distributions will reduce the
net asset value of each of the Funds by the amount of the dividend or
distribution.
Additional distributions will also be made to shareholders to the extent
necessary to avoid the application of a 4% non-deductible federal excise tax on
certain undistributed income and net capital gains of mutual funds.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Trust Instrument permits the Trustees of the Trust to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.00001 per share) of each series and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in each Fund. The Trust reserves the right to create and
issue any number of series; investments in each series participate equally in
the earnings, dividends and assets of
49
<PAGE>
the particular series only and no other series. Currently, the Trust has ten
active and two inactive series. The active series include: 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 and Excelsior Institutional International Equity Fund. The ten active
series are offered through this Prospectus.
Each Share of a Fund represents an interest in that Fund that is
proportionate with the interest represented by each other Share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and nonassessable, except as set forth below. Shareholders are
entitled to one vote for each Share held on matters on which they are entitled
to vote. The Trust is not required to and has no current intention to hold
annual meetings of shareholders, although the Trust will hold special meetings
of shareholders when in the judgment of the Board of Trustees of the Trust it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have the right to remove one or more Trustees of the Trust at a shareholders
meeting by vote of two-thirds of the outstanding Shares of the Trust.
Shareholders also have the right to remove one or more Trustees of the Trust
without a meeting by a declaration in writing by a specified number of
shareholders. Upon liquidation or dissolution of a Fund, shareholders would be
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.
The Trust is a business trust organized under the laws of the State of
Delaware. Under Delaware law, shareholders of Delaware business trusts are
entitled to the same limitation on personal liability extended to shareholders
of private for profit corporations organized under the general corporation law
of the State of Delaware; the courts of other states may not apply Delaware law,
however, and shareholders may, under certain circumstances, be held personally
liable for the obligations of the Trust. 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 bond 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. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which
Delaware law did not apply, inadequate insurance existed and a Fund itself was
unable to meet its obligations.
Shareholders of all series of the Trust will vote together to elect
Trustees of the Trust and for certain other matters. Under certain
circumstances, the shareholders of one or more series of the Trust could control
the outcome of these votes.
Each Portfolio is a series of St. James Portfolios, which is organized as a
trust under the laws of the State of New York. The Portfolio Series' Declaration
of Trust provides that the Funds and other entities investing in the Portfolios
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
their corresponding Portfolios. However, the Trustees of the Trust believe that
the risk of the Funds incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance existed and a
Portfolio itself was unable to meet its obligations, and that neither the Funds
nor their shareholders
50
<PAGE>
will be exposed to a material risk of liability by reason of a Fund's investment
in its corresponding Portfolio. For more information regarding the Trustees of
the Trust and the Portfolio Series, see 'Management of the Trust and Portfolio
Series' in the Statement of Additional Information. The interests in the
Portfolio Series are divided into separate series. Investors in each series of
the Portfolio Series will vote separately or together in the same manner as
shareholders of the Trust's series.
PERFORMANCE INFORMATION
From time to time, in advertisements, reports to shareholders, or other
communications to shareholders or prospective investors, the performance of the
Funds may be quoted and compared to those of other mutual funds with similar
investment objectives and to stock or other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. Performance information includes
the Fund's investment results and/or comparisons of its investment results to
various unmanaged indices, or results of other mutual funds or investment or
savings vehicles. A Fund's investment results as used in such communications are
calculated on a 'yield' or 'total rate of return' basis in the manner set forth
below.
The Trust provides period and annualized 'total rates of return' and
non-standardized total return data for each Fund. The 'total rate of return'
refers to the change in the value of an investment in a Fund over a stated
period which reflects any change in net asset value per share and includes the
value of any shares purchased with any dividends or capital gains declared
during such period. Period total rates of return may be annualized. An
annualized total rate of return is a compounded total rate of return which
assumes that the period total rate of return is generated over a one-year
period, and that all dividends and capital gains distributions are reinvested.
The Trust provides annualized 'yield' quotations for each Fund. The 'yield'
of a Fund refers to the income generated by an investment in such Fund over a
thirty day or one month period. The dates of any such period are identified in
all advertisements or communications containing yield quotations. Income is then
annualized; that is, the amount of income generated by an investment in a Fund
over a period is assumed to be generated (or remain constant) over one year and
is shown as a percentage of the net asset value on the last day of that
year-long period. The Funds may also advertise the 'effective yields', which are
calculated similarly but, when annualized, income is assumed to be reinvested,
thereby making the effective yields slightly higher because of the compounding
effect of the assumed reinvestment. See 'Performance Information' in the
Statement of Additional Information. These methods of calculating 'yield' and
'total rate of return' are determined by regulations of the Securities and
Exchange Commission.
Since a Fund's yield and total rate of return quotations are based on
historical earnings and since such yields and total rates of return fluctuate
over time, such quotations should not be considered as an indication or
representation of the future performance of any Fund. Shareholders should
remember that performance is generally a function of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by Shareholder Organizations to Customers
that have invested in Shares and any charges to institutional investors for
asset management and related services will not be included in calculations of
performance. From time to time, fund rankings may be quoted from various
sources, such as Lipper Analytical Services, Inc.
51
<PAGE>
MISCELLANEOUS
Shareholders of record will receive unaudited semi-annual reports and
annual reports audited by the Funds' independent auditors.
The Funds' Statement of Additional Information bears the same date as this
Prospectus and contains more detailed information about the Funds and the
Portfolios, including information related to (i) investment policies and
restrictions of the Funds and the Portfolios, (ii) Trustees and officers of the
Trust and Portfolio Series, (iii) portfolio transactions and brokerage
commissions, (iv) rights and liabilities of shareholders of the Trust and
Portfolio Series, (v) additional performance information, including methods used
to calculate yield and total return, (vi) determination of the net asset value
of Shares of the Funds and (vii) the audited financial statements of the Funds
and the Portfolios at May 31, 1995.
52
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail (regular or overnight) to:
Excelsior Institutional Trust
c/o Chase Global Funds Services Company, P.O. Box 2798, Boston, MA 02208-2798
Please enclose with the Application(s) your check made payable to the
'Excelsior Institutional Trust' in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus
entitled 'How to Purchase and Redeem Shares -- Purchase Procedures'.
Minimum Investments:
Except as provided in the Prospectus, there is no minimum amount required
for an initial or subsequent investment.
Redemptions:
Shares can be redeemed in any amount and at any time in accordance with
procedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance with
applicable banking regulations.
Certain legal documents will be required from corporations or other
organizations, executors and trustees, or if redemption is requested by anyone
other than the shareholder of record. Written redemption requests of $5,000 or
more must be accompanied by signature guarantees.
Signatures:
Please be sure to sign the Application(s).
If the shares are registered in the name of:
-- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
-- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
-----------------
*A corporate resolution or appropriate certificate may be required.
Taxpayer Identification Number:
Institutional Investors and other entities must provide a tax
identification or social security number on the application. Investors who do
not supply this information or who have been notified by the Internal Revenue
Service that they are subject to backup withholding will be subject to a
withholding rate of 31% from all taxable distributions paid to the shareholder.
Questions:
If you have any questions regarding the Application or redemption
requirements, please contact your shareholder servicing agent.
53
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF EXPENSES.................................. 1
INVESTMENT OBJECTIVES AND
POLICIES........................................... 6
EQUITY PORTFOLIO................................... 10
INCOME PORTFOLIO................................... 11
TOTAL RETURN BOND PORTFOLIO........................ 11
EQUITY MARKET PORTFOLIO............................ 13
BOND MARKET PORTFOLIO.............................. 14
SMALL CAP PORTFOLIO................................ 16
BALANCED PORTFOLIO................................. 17
EQUITY GROWTH PORTFOLIO............................ 19
VALUE EQUITY INCOME PORTFOLIO...................... 20
INTERNATIONAL EQUITY PORTFOLIO..................... 21
SPECIAL INFORMATION CONCERNING HUB AND SPOKE'r'
STRUCTURE.......................................... 33
PRICING OF SHARES.................................... 34
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES.......... 35
INVESTOR PROGRAMS.................................... 40
TAX MATTERS.......................................... 40
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES......... 41
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............ 49
DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES........................................ 49
PERFORMANCE INFORMATION.............................. 51
MISCELLANEOUS........................................ 52
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION............. 53
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EXCELSIOR
INSTITUTIONAL TRUST OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER BY EXCELSIOR INSTITUTIONAL TRUST OR ITS DISTRIBUTOR IN ANY JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
UST206C
EXCELSIOR
INSTITUTIONAL
TRUST
EQUITY FUND
INCOME FUND
TOTAL RETURN BOND FUND
EQUITY INDEX FUND
BOND INDEX FUND
SMALL CAPITALIZATION FUND
BALANCED FUND
EQUITY GROWTH FUND
VALUE EQUITY INCOME FUND
INTERNATIONAL EQUITY FUND
PROSPECTUS
OCTOBER 1, 1995,
AS AMENDED OCTOBER 6, 1995
STATEMENT OF DIFFERENCES
The registration symbol shall be expressed as ......... 'r'