<PAGE>
Excelsior Institutional [LOGO] EXCELSIOR
Optimum Growth Fund INSTITUTIONAL FUNDS
Excelsior Institutional Value
Equity Fund
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Excelsior Institutional Trust For initial purchase and existing account
73 Tremont Street information, call (800) 909-1989.
Boston, Massachusetts 02108-3913 (From overseas, call (617) 557-1755)
(617) 557-8000 For current prices and performance
information, call (800) 861-3430.
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This Prospectus describes two mutual funds offered by Excelsior Institutional
Trust (the "Trust"), an open-end diversified management investment company. The
mutual funds, Excelsior Institutional Optimum Growth Fund and Excelsior Insti-
tutional Value Equity Fund (each, a "Fund"; collectively, the "Funds"), are
separate series of the Trust. As described in this Prospectus, the shares of
each Fund are classified into two separate classes of shares representing Trust
Shares and Institutional Shares.
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 (800) 909-1989. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference in its entirety into
this Prospectus.
Each Fund has its own investment objective, as follows:
The investment objective of EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND (the
"Optimum Growth Fund") is to seek superior, risk-adjusted total return.
The investment objective of EXCELSIOR INSTITUTIONAL VALUE EQUITY FUND (the
"Value Equity Fund") is to seek long-term capital appreciation.
United States Trust Company of New York ("U.S. Trust") is the investment ad-
viser for the Optimum Growth and Value Equity Funds. For more information on
the investment adviser of the Funds, please refer below to the section entitled
"Management of the Trust--Investment Adviser."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED
BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND IS SUBJECT TO
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated November 8, 1996
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EXCELSIOR INSTITUTIONAL TRUST
SUMMARY OF EXPENSES
The following table provides (i) a summary of estimated expenses relating to
purchases and sales of Trust Shares and Institutional Shares of the Funds and
the estimated aggregate annual operating expenses for Trust Shares and Institu-
tional Shares of the Funds, expressed as a percentage of average daily net as-
sets of the Funds, and (ii) an example illustrating the dollar cost of such es-
timated expenses on a $1,000 investment in Trust Shares and Institutional
Shares of each Fund.
The table illustrates that investors in the Funds incur no shareholder trans-
action expenses imposed by the Trust, although some institutional investors
("Shareholder Organizations") may charge their customers account fees for in-
vestment and other cash management services in connection with purchases and
redemptions of shares of the Funds. See "How to Purchase, Exchange and Redeem
Shares" below. Customers should contact their Shareholder Organization directly
for further information. Investments in Trust Shares and Institutional Shares
of a Fund are subject to the operating expenses set forth below. Expenses of
the Funds are discussed below under "Management of the Trust."
EXPENSE TABLE
<TABLE>
<CAPTION>
OPTIMUM GROWTH FUND VALUE EQUITY FUND
-------------------- --------------------
INSTITUTIONAL TRUST INSTITUTIONAL TRUST
SHARES SHARES SHARES SHARES
------------- ------ ------------- ------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases...... None None None None
Sales Load Imposed on Reinvested
Dividends........................... None None None None
Deferred Sales Load.................. None None None None
Redemption Fees(/1/)................. None None None None
Exchange Fees........................ None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Advisory Fees (after fee
waivers)(/2/)....................... .37% .37% .37% .37%
12b-1 Fees(/3/)...................... None .35 None .35
Other Operating Expenses............. .33 .33 .33 .33
---- ---- ---- ----
Administration Fees ................ .15 .15 .15 .15
Administrative Servicing Fees(/2/).. .03 .03 .03 .03
Other Expenses...................... .15 .15 .15 .15
---- ---- ---- ----
Total Fund Operating Expenses (after
fee waivers)(/2/)................... .70% 1.05% .70% 1.05%
==== ==== ==== ====
</TABLE>
2
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Example: Investors would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption of the investment at the
end of the following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Optimum Growth Fund (Institutional Shares)....................... $ 7 $22
Optimum Growth Fund (Trust Shares)............................... $11 $33
Value Equity Fund (Institutional Shares)......................... $ 7 $22
Value Equity Fund (Trust Shares)................................. $11 $33
</TABLE>
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(1) The Trust's transfer agent imposes a direct $8.00 charge on each wire re-
demption by noninstitutional (i.e. individual) investors, which is not re-
flected in the expense ratios presented herein. Shareholder Organizations
may charge their customers transactions fees in connection with redemp-
tions. See "How to Purchase, Exchange and Redeem Shares--Redemption of
Shares."
(2) The investment adviser has agreed to voluntarily waive a portion of its
fees, which waiver may be terminated at any time. Until further notice,
the investment adviser intends to voluntarily waive fees in an amount
equal to the administrative servicing fees and to further waive fees and
reimburse expenses during the remainder of the current fiscal year as nec-
essary to maintain the Funds' total operating expenses at the levels set
forth in the table. Without fee waivers, advisory fees would be .65% for
each class of each Fund, and "Total Fund Operating Expenses" would be:
(i) .98% and .98% for Institutional Shares of the Optimum Growth and Value
Equity Funds, respectively; and (ii) 1.33% and 1.33% for Trust Shares of
the Optimum Growth and Value Equity Funds, respectively. Shareholder Orga-
nizations may charge their customers account fees for investment and other
cash management services. See "How to Purchase, Exchange and Redeem
Shares" below. Accordingly, the Expense Table and the Example do not re-
flect an amount for any such fees paid directly to a Shareholder Organiza-
tion by its customers.
(3) As a result of the payment of distribution fees, long-term shareholders
may pay more than the economic equivalent of the maximum front-end sales
charges permitted by the National Association of Securities Dealers, Inc.
("NASD").
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FU-
TURE 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 un-
derstanding the various costs and expenses that shareholders of each Fund will
bear directly or indirectly. The Expense Table and Example reflect voluntary
undertakings by U.S. Trust to waive certain of its fees. The estimated aggre-
gate operating expenses (including amortization of organizational expenses but
exclusive of taxes, interest, brokerage commissions and extraordinary ex-
penses) of each class of each Fund are shown above after giving effect to such
waivers. For more information with respect to the expenses of each Fund, see
"Management of the Trust." Fee waivers are terminable at any time in the sole
discretion of the service providers waiving fees.
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FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the unaudited finan-
cial statements included in the Trust's Semi-Annual Report to Shareholders for
the period from commencement of operations through September 30, 1996 (the "Fi-
nancial Statements"). The following table should be read in conjunction with
the Financial Statements and notes thereto. Institutional and Trust Shares of
each Fund represent equal pro rata interests in such Fund, except that Trust
Shares of each Fund bear the expense of distribution fees at the maximum annual
rate of .75% of the average daily net asset value of the Fund's outstanding
Trust Shares. See "Management of the Trust--Distributor" and "Description of
Shares, Voting Rights and Liabilities." More information about the performance
of each Fund is also contained in the Semi-Annual Report to Shareholders which
may be obtained from the Trust without charge by calling the number on the
front cover of this Prospectus.
<TABLE>
<CAPTION>
OPTIMUM GROWTH FUND VALUE EQUITY FUND
----------------------------------- --------------------
INSTITUTIONAL SHARES TRUST SHARES INSTITUTIONAL SHARES
-------------------- ------------- --------------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996(/1/) 1996(/2/) 1996(/1/)
-------------------- ------------- --------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $ 10.00 $ 9.87 $ 10.00
---------- ------------ ----------
INVESTMENT OPERATIONS:
Net investment income......................................... 0.02 0.01 0.03
Net realized and unrealized gain (loss)....................... (0.02) 0.11 0.23
---------- ------------ ----------
TOTAL FROM INVESTMENT OPERATIONS........................... 0.00 0.12 0.26
---------- ------------ ----------
DISTRIBUTIONS:
From net investment income.................................... (0.01) (0.01) (0.02)
---------- ------------ ----------
NET ASSET VALUE, END OF PERIOD................................. $ 9.99 $ 9.98 $ 10.24
========== ============ ==========
TOTAL RETURN................................................... 0.04%(/3/) 1.21%(/3/) 2.61%(/3/)
========== ============ ==========
RATIOS AND SUPPLEMENTAL DATA:
Ratios to Average Net Assets
Expenses(/5/)................................................. 0.70%(/4/) 1.05%(/4/) 0.70%(/4/)
Net Investment Income(/5/).................................... 0.68%(/4/) 0.33%(/4/) 1.02%(/4/)
Portfolio Turnover(/6/)....................................... 6% 6% 48%
Net Assets at end of Period (000's omitted).................... $ 20,762 $ 856 $ 20,680
Average Commission Rate........................................ $ 0.0277 $ 0.0277 $ 0.0842
</TABLE>
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(1)From June 1, 1996 (Commencement of operations) to September 30, 1996.
(2)From July 3, 1996 (Commencement of operations) to September 30, 1996.
(3)Not annualized.
(4)Annualized.
(5) Reflects a voluntary expense waiver and reimbursement of expenses by the
investment adviser and administrators. Without these waivers and
reimbursements, the ratio of expenses to average net assets and net
investment income to average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses.................................................... 1.06%(/4/) 1.58%(/4/) 1.06%(/4/)
Net Investment Income (Loss)................................ 0.32%(/4/) (0.21)%(/4/) 0.66%(/4/)
</TABLE>
(6) Portfolio Turnover calculation excludes in-kind transfers of securities
(See Notes to Financial Statements incorporated by reference into the
Statement of Additional Information).
4
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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
individuals and to institutional investors.
Unless otherwise stated, each 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. You will be notified of any material changes. Any changes in a
Fund's investment objective, policies or strategies could result in such Fund
having investment objectives, policies and strategies different from those ap-
plicable at the time of a shareholder's investment in such Fund.
INVESTMENT OBJECTIVES
The investment objective of EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND (the
"Optimum Growth Fund") is to seek superior, risk-adjusted total return. The
Optimum Growth Fund invests in a diversified portfolio of equity securities
whose growth prospects, in the opinion of the investment adviser, appear to
exceed that of the overall market .
The investment objective of EXCELSIOR INSTITUTIONAL VALUE EQUITY FUND (the
"Value Equity Fund") is to seek long-term capital appreciation. The Value Eq-
uity Fund seeks to achieve this objective by investing in a diversified port-
folio of equity securities whose market value, in the opinion of the invest-
ment adviser, appears to be undervalued relative to the marketplace.
The following is a discussion of the various investment policies and strate-
gies employed by each Fund. Additional information about the investment poli-
cies and strategies of each Fund appears in the Statement of Additional Infor-
mation. There can be no assurance that the investment objective of either Fund
will be achieved.
U.S. TRUST'S INVESTMENT PHILOSOPHY AND STRATEGIES
U.S. Trust, the adviser for the Optimum Growth and Value Equity Funds, 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. Excelsior Institutional Trust Funds offer
investors access to U.S. Trust's services.
OPTIMUM GROWTH AND VALUE EQUITY FUNDS
Investment Philosophy. The Optimum Growth Fund is managed by the Campbell
Cowperthwait division of U.S. Trust ("Campbell Cowperthwait"). Campbell
Cowperthwait follows a long-term investment philosophy of buying and holding
equity securities of companies which they believe to be of high quality and of
high growth potential. Typically, these companies are industry leaders with
the potential to dominate their markets by being the low cost, high quality
producers of products or services. The investment adviser believes that earn-
ings growth is the primary determinant of stock prices and that efficient fi-
nancial markets will reward consistently above-average earnings growth with
greater than average capital appreciation over the long term.
In managing investments for the Value Equity Fund, 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 ap-
proach begins with the conviction that all 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 re-
sults 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
5
<PAGE>
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, in managing investments for the Value Equity Fund,
U.S. Trust 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. 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 "problem/opportunity strategy" seeks to identify industries and
companies with the capabilities to provide solutions to or benefit from com-
plex problems such as the changing demographics and aging of the U.S. popula-
tion 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. U.S. Trust's
third strategy involves identifying "early life cycle" companies whose prod-
ucts 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.
INVESTMENT POLICIES
OPTIMUM GROWTH FUND seeks superior, risk-adjusted total return by investing
in a diversified portfolio of equity securities whose growth prospects, in the
opinion of the investment adviser, appear to exceed that of the overall mar-
ket.
The investment adviser will utilize a two-tiered approach to select appropri-
ate securities. A "core" portfolio will consist primarily (i.e. from 65% to
80% under ordinary market conditions) of mid- to large-capitaliza-tion growth
stocks. These investments will be complemented with a structured segment of
the portfolio developed through the use of quantitative analysis to further
diversify investment selections among stocks included within the Russell
1000(R) Growth Index. The Russell 1000(R) Growth Index contains stocks from
the Russell 1000(R) Index with a greater than average growth orientation. The
Russell 1000(R) Index is composed of the 1,000 largest companies in the Rus-
sell 3000(R) Index. The Russell 3000(R) Index is composed of 3,000 large U.S.
companies by market capitalization, representing approximately 98% of the U.S.
equity market. This "structured" segment of the portfolio is chosen by analyz-
ing the risk characteristics (i.e. profit to earnings ratio, return on equity,
capitalization, earnings per share, industry sector, etc.) of the "core" port-
folio. Based upon these factors, securities are systematically selected which
possess financial characteristics which complement those of the core portfo-
lio. These portfolio selections result in a broader diversification of the
"core" portfolio holdings.
The Optimum Growth Fund 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 se-
curities, see "U.S. Government and Agency Securities" and "Short-Term Instru-
ments" below under "Additional Investment Strategies and Techniques; Risk Fac-
tors," and the Statement of Additional Information.
The Optimum Growth Fund may invest in the securities of foreign issuers di-
rectly or indirectly through sponsored and unsponsored American Depository Re-
ceipts. See "Additional Investment Strategies and Techniques; Risk Factors--
Foreign Investments" below for further information on foreign investments.
Because of the risks associated with common stock investments, the Optimum
Growth Fund is intended to be a long-term investment vehicle and is not de-
signed to provide investors with a means of speculating on short-term stock
market movements. Investors should
6
<PAGE>
not consider the Optimum Growth Fund a complete investment program.
VALUE EQUITY FUND seeks long-term capital appreciation by investing in a di-
versified portfolio of equity securities whose market value, in the opinion of
the investment adviser, appears to be undervalued relative to the marketplace.
U.S. Trust uses the investment philosophy, strategies and themes discussed
above to identify such investment values and to diversify the Fund's invest-
ments over a variety of industries and types of companies.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in common stock, preferred stock and securities con-
vertible into common stock. Normally, not more than 35% of the Fund'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 Fund may hold cash or invest without lim-
itation 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 de-
scription of these securities, see "U.S. Government and Agency Securities" and
"Short-Term Instruments" below under "Additional Investment Strategies and
Techniques; Risk Factors," and the Statement of Additional Information.
In managing the Fund, 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.
Value Equity Fund holdings will include common stocks of companies having
capitalizations of varying amounts, and the Fund may invest a portion of its
assets in the securities of high growth, small capitalization issuers when
U.S. Trust expects the earnings and the price of such issuers' securities to
grow at an above-average rate. The equity securities of small capitalization
issuers have historically been characterized by greater volatility of returns,
greater total returns, and lower dividend yields than equity securities of
large capitalization issuers. As a result, there may be a greater fluctuation
in the net asset value of the Fund, and the Fund 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.
The Value Equity Fund may invest in the securities of foreign issuers di-
rectly or indirectly through sponsored and unsponsored American Depository Re-
ceipts. See "Additional Investment Strategies and Techniques; Risk Factors--
Foreign Investments" below for further information on foreign investments.
Because of the risks associated with common stock investments, the Value Eq-
uity 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 Value Equity Fund a complete in-
vestment program.
ADDITIONAL INVESTMENT STRATEGIES AND TECHNIQUES; RISK FACTORS
The Funds may invest in the investments and utilize the investment strategies
and techniques described below.
U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities include U.S. Treasury se-
curities, 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 gener-
ally have initial maturities of greater than ten years. Some obligations is-
sued or guaranteed by U.S. Government agencies and instrumentalities, such as
Government National Mortgage Association pass-through certificates, are sup-
ported by the full faith and credit of the U.S. Treasury; other securities,
such as
7
<PAGE>
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 Mort-
gage Association are supported by discretionary authority of the U.S. Govern-
ment 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. For additional information on U.S.
Government securities, see the Statement of Additional Information.
DEBT SECURITIES AND CONVERTIBLE SECURITIES. Each of the Funds may invest in
investment grade debt and convertible securities of domestic and foreign is-
suers. See "Investment Grade Ratings" for an explanation of investment grade
ratings of debt securities, including convertible securities. The convertible
securities in which the Funds may invest include any debt securities or pre-
ferred stock which may be converted into common stock or which carry the right
to purchase common stock. Convertible securities entitle the holder to ex-
change the securities for a specified number of shares of common stock, usu-
ally of the same company, at specified prices within a certain period of time.
INVESTMENT GRADE RATINGS. The Funds may purchase debt and convertible securi-
ties only if they are deemed investment grade, that is, carry a rating of at
least Baa from Moody's Investors Service, Inc. ("Moody's") or BBB from Stan-
dard & Poor's Ratings Group ("S&P") or, if not rated by these rating agencies,
are judged by the investment adviser to be of comparable quality. With respect
to securities rated Baa by Moody's and BBB by S&P, interest and principal pay-
ments are regarded as adequate for the present; however, securities with these
ratings may have speculative characteristics, and changes in economic condi-
tions 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 Funds intend 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Funds may purchase securi-
ties on a "when-issued" basis and may purchase or sell securities on a "for-
ward commitment" basis in order to hedge against anticipated changes in inter-
est rates and prices. These transactions involve a commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place
in the future, beyond the normal settlement date, at a stated price and yield.
Securities purchased on a forward commitment or when-issued basis are recorded
as an asset and are subject to changes in value based upon changes in the gen-
eral 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 the Funds 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 a Fund 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 relevant
Fund may incur a loss.
REPURCHASE AGREEMENTS. Each of the Funds may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Trustees of the Trust. In a repurchase agreement, a Fund
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
8
<PAGE>
agreements is usually from overnight to one week. A repurchase agreement may be
viewed as a fully collateralized loan of money by the Fund to the seller. The
Fund 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 Fund might incur a loss. If bankruptcy proceedings are com-
menced with respect to the seller, the Fund's realization upon the disposition
of collateral may be delayed or limited. Investments in certain repurchase
agreements and certain other investments which may be considered illiquid are
limited. See "Illiquid Investments; Privately Placed and Other Unregistered Se-
curities" below.
BORROWING AND REVERSE PURCHASE AGREEMENT. Each of the Funds 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 re-
quests, but not for leverage. Each Fund may also agree to sell portfolio secu-
rities to financial institutions such as banks and broker-dealers and to repur-
chase them at a mutually agreed date and price (a "reverse repurchase agree-
ment"). The Securities and Exchange Commission (the "SEC") views reverse repur-
chase agreements as a form of borrowing. At the time a Fund enters into a re-
verse 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
Fund may decline below the repurchase price of those securities.
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash positions, each Fund 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. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of an-
other investment company, such Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses. As such, the cor-
responding Fund's shareholders would indirectly bear the expenses of the other
investment company, some or all of which would be duplicative. Securities of
other investment companies may be acquired by the Funds to the extent permitted
under the Investment Company Act of 1940, as amended (the "1940 Act"), that is,
a Fund 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 such Fund. In addition,
not more than 5% of the total assets of a Fund may be invested in the securi-
ties of any one investment company.
FOREIGN INVESTMENTS. In accordance with their respective investment objectives
and policies, each Fund may invest in common stocks of foreign corporations,
and each Fund may invest in convertible securities of foreign corporations as
well as fixed income securities of foreign government and corporate issuers.
Neither Fund expects to invest more than 30% of its respective total assets at
the time of purchase in securities of foreign issuers.
All investments, domestic or foreign, involve certain risks. Investment in se-
curities of foreign issuers, and in obligations of foreign branches or subsidi-
aries of domestic or foreign banks, may involve risks in addition to those nor-
mally associated with investments in the securities of U.S. issuers. Overall,
there may be limited publicly available information with respect to foreign is-
suers, 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 is-
suers often are not subject to uniform accounting, auditing and financial stan-
dards and requirements comparable to those applicable to U.S. companies.
9
<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 cred-
its 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 Fund's investments in foreign
securities may be adversely affected by changes in political or social condi-
tions, diplomatic relations, confiscatory taxation, expropriation, national-
ization, 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 depre-
ciation of Fund securities and could favorably or unfavorably affect a Fund'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 infla-
tion, 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 Fund must be made
in compliance with U.S. and foreign currency restrictions and tax laws re-
stricting the amounts and types of foreign investments.
While the volume of transactions effected on foreign stock exchanges has in-
creased in recent years, in most cases it remains appreciably below that of
domestic security exchanges. Accordingly, a Fund'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 Fund 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 in foreign markets and ad-
ditional costs arising from delays in settlements of transactions involving
foreign securities.
The Funds 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 under-
lying foreign securities. A non-sponsored depository may not provide the same
shareholder information that a sponsored depository is required to provide un-
der its contractual arrangements with the issuer of the underlying foreign se-
curities. EDRs are receipts issued by a European financial institution evi-
dencing a similar arrangement. Generally, ADRs, in registered form, are de-
signed 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 Funds. 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 Funds may buy and sell securities (and
receive interest and dividends proceeds) in currencies other than the U.S.
dollar. Therefore, these Funds may enter from time to time into foreign cur-
rency exchange transactions. The Funds will either enter into these transac-
tions 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 Fund's spot
10
<PAGE>
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 Fund 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 ex-
change 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 cur-
rency exchange contract generally has no deposit requirement, and is traded at
a net price without commission. The Funds will not enter into forward con-
tracts for speculative purposes. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of a Fund's
securities or in foreign exchange rates, or prevent loss if the prices of
these securities should decline.
The Funds 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 Funds 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 Fund would enter into a forward contract
to sell the foreign currency in which the investment is denominated or princi-
pally traded in exchange for U.S. dollars or in exchange for another foreign
currency. A Fund will only enter into forward contracts to sell a foreign cur-
rency in exchange for another foreign currency if the investment adviser ex-
pects 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 Fund to assume the risk of fluctuations
in the value of the currency purchased relative to 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 conse-
quence 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 execu-
tion of a hedging strategy is highly uncertain.
FUTURES CONTRACTS AND OPTIONS. Each Fund may purchase put and call options on
securities, indices of securities and futures contracts. The Funds may also
purchase and sell futures contracts. Futures contracts on securities and secu-
rities indices will be used primarily to accommodate cash flows or in antici-
pation of taking a market position when, in the opinion of the investment ad-
viser, available cash balances do not permit economically efficient purchases
of securities. Moreover, a Fund 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 Funds 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.
The Funds may (a) purchase exchange-traded and over the counter (OTC) put and
call options on securities and indices of securities, (b) purchase and sell
futures contracts on securities and indices of securities and (c) purchase put
and call options on futures contracts on securities and indices of securities.
In addition, the Funds may sell (write) exchange-traded and OTC put and call
options on securities and indices of securities and on futures contracts on
securities and
11
<PAGE>
indices 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 Fund, cannot exceed 15% of such Fund's net assets. The Funds intend
to comply with this limitation.
The Funds 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 Fund'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 Fund's overall strategy in a manner deemed appropriate by
the Fund's investment adviser 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 in-
volves 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 Fund's return. While the use of these techniques by
a Fund may reduce certain risks associated with owning its portfolio securi-
ties, these investments entail certain other risks. If a Fund's investment ad-
viser applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower such Fund's
return. Certain strategies limit a Fund's possibilities to realize gains as
well as limit its exposure to losses. A Fund 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 Fund will incur transaction
costs, including trading commissions and option premiums, in connection with
its futures and options transactions and these transactions could signifi-
cantly increase the Fund's turnover rate. For more information on these in-
vestment techniques, see the Statement of Additional Information.
Each of the Funds may purchase and sell put and call options on securities,
indices of securities and futures contracts, or purchase and sell futures con-
tracts, only if such options are written by other persons and if (i) the ag-
gregate premiums paid on all such options which are held at any time do not
exceed 20% of such Fund's total net assets, and (ii) the aggregate margin de-
posits required on all such futures and premium on options thereon held at any
time do not exceed 5% of such Fund's total assets. The Funds may also be sub-
ject to certain limitations pursuant to the regulations of the Commodity
Futures Trading Commission. Neither Fund has any current intention of purchas-
ing futures contracts or investing in put and call options on securities, in-
dices 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 Fund may acquire investments that are illiquid or have lim-
ited liquidity, such as private placements or investments that are not regis-
tered under the Securities Act of 1933, as amended (the "1933 Act"), and can-
not be offered for public sale in the United States without first being regis-
tered 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 approxi-
mately the amount at which it is valued by the Fund. The price a Fund pays for
illiquid securities or receives upon resale may be lower than the price paid
or received for similar 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 Funds are subject to the follow-
ing non-fundamental policies. Each Fund may not invest in additional illiquid
securities if, as a result, more than 15% of the market value of its net as-
sets would be invested in illiquid securities. Each of the Funds may also pur-
chase Rule 144A secu-
12
<PAGE>
rities sold to institutional investors without registration under the 1933
Act. These securities may be determined to be liquid in accordance with guide-
lines established by the investment adviser and approved by the Board of
Trustees. The Board of Trustees of the Trust 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 illiquid-
ity of a Fund. As a result, a Fund holding these securities might not be able
to sell these securities when the investment adviser wishes to do so, or might
have to sell them at less than fair value.
SHORT-TERM INSTRUMENTS. Each Fund may invest in short-term debt securities in
accordance with its investment objective and policies as described above. The
Funds may also make money market investments pending other investments or set-
tlement, or to maintain liquidity to meet shareholder redemptions. In adverse
market conditions and for temporary defensive purposes only, each of the Funds
may temporarily invest their respective assets without limitation in short-
term investments. Short-term investments include: obligations of the U.S. Gov-
ernment and its agencies or instrumentalities; commercial paper and other debt
securities; variable and floating rate securities; bank obligations; repur-
chase agreements collateralized by these securities; and shares of other in-
vestment companies that primarily invest in any of the above-referenced secu-
rities. Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. Other corporate obligations in
which the Funds may invest consist of high quality, U.S. dollar-denominated
short-term bonds and notes (including variable amount master demand notes) is-
sued by domestic and foreign corporations. The Funds may invest in commercial
paper issued by major corporations in reliance on the exemption from registra-
tion 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 Fund may invest in U.S. dollar-denominated certificates of deposit, time
deposits, bankers' accept-ances and other short-term obligations issued by do-
mestic 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 in-
struments 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-nego-
tiable 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 Funds
are not insured by the Federal Deposit Insurance Corporation or any other
agency of the U.S. Government. Each Fund will not invest more than 15% of the
value of its 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 in which the Funds
may invest include uninsured, direct obligations which have either fixed,
floating or variable interest rates.
The Funds will limit their short-term investments to those U.S. dollar-denom-
inated instruments which are determined by or on behalf of the Board of Trust-
ees of the Trust to present minimal credit risks and which are of "high quali-
ty" 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 Trust. The Funds may invest in obligations of banks
13
<PAGE>
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 Funds may seek to increase their income by lending se-
curities to banks, brokers or dealers and other recognized institutional in-
vestors. Such loans may not exceed 30% of the value of a Fund's total assets.
In connection with such loans, each Fund 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 mar-
ket value of the loaned securities. A Fund can increase its income through the
investment of any such collateral consisting of cash. Such Fund continues to be
entitled to payments in amounts equal to the interest or dividends payable on
the loaned security. Such loans will be terminable at any time upon specified
notice. A Fund might experience risk of loss if the institution with which it
has engaged in a portfolio loan transaction breaches its agreement with the
Fund.
SHORT SALES "AGAINST THE BOX." In a short sale, a Fund sells a borrowed secu-
rity and has a corresponding obligation to the lender to return the identical
security. A Fund 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 Fund may make a short sale as a hedge, when it be-
lieves that the value of a security owned by it (or a security convertible or
exchangeable for such security) may decline, or when a Fund 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 Fund's total assets would be
involved in short sales "against the box."
CERTAIN OTHER OBLIGATIONS. Consistent with their respective investment objec-
tives, policies and restrictions, the Funds 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
instru-ments that may be created in the future, upon the Trust supplementing
this Prospectus, a Fund may invest in obligations other than those listed pre-
viously, provided such investments are consistent with the Fund's investment
objective, policies and restrictions.
PORTFOLIO TURNOVER RATE. Although the Funds generally seek to invest for the
long term, each Fund may sell securities irrespective of how long such securi-
ties have been held. Each Fund may sell a portfolio investment immediately af-
ter its acquisition if the investment adviser believes that such a disposition
is consistent with the investment objective of the particular Fund. Portfolio
investments may be sold for a variety of reasons, such as a more favorable in-
vestment opportunity or other circumstances bearing on the desirability of con-
tinuing to hold such investments.
The annual portfolio turnover rate for each Fund is not expected to exceed
100%. A rate of 100% indicates that the equivalent of all of a Fund'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 the Fund and ulti-
mately by the shareholders of such Fund. 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 Fund are repre-
sented by cash and cash items (including receivables), government securities,
securities of other investment companies, and other
14
<PAGE>
securities which for purposes of this calculation are subject to the following
fundamental limitations: (a) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer, and (b) the Fund may not own more
than 10% of the outstanding voting securities of any one issuer. In addition,
each Fund may not invest 25% or more of its assets in the securities of issuers
in any one industry. These are fundamental investment policies of each Fund
which may not be changed without investor approval.
The Statement of Additional Information includes further discussion of invest-
ment strategies and techniques, and a listing of other fundamental investment
restrictions and non-fundamental investment policies which govern the invest-
ment policies of each Fund. Fundamental investment restrictions may not be
changed, in the case of each Fund, without the approval of that Fund's share-
holders. 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 Fund
or a later change in the rating of a security held by a Fund is not considered
a violation of the policy.
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 fi-
nancial position and needs. There can, of course, be no assurance that the in-
vestment objective of a Fund will be achieved. See "Investment Restrictions" in
the Statement of Additional Information for a description of the fundamental
investment policies and restrictions of each Fund that cannot be changed with-
out approval by the holders of a "majority of the outstanding voting securi-
ties" (as defined in the 1940 Act) of that Fund. Except as stated otherwise,
all investment objectives, policies, strategies and restrictions described
herein and in the Statement of Additional Information are non-fundamental.
PRICING OF SHARES
The net asset value of each Fund is determined and the Institutional Shares
and Trust Shares of each Fund (the "Shares") are priced separately for pur-
chases 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 and U.S.
Trust are open for trading ("Business Day"). Net asset value is calculated sep-
arately for each class of Shares by dividing the value of all securities and
other assets belonging to a Fund that are allocated to that particular class of
Shares, less the liabilities charged to that class, by the number of outstand-
ing Shares of that class.
Assets in the Funds which are traded on a recognized domestic stock exchange
or are quoted on a national securities market 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 such national securities market. Securities in the Funds
which are traded only on over-the-counter markets are valued on the basis of
closing over-the-counter bid prices, and securities in such Funds 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 Board of Trustees of the Trust. Absent unusual cir-
cumstances, debt securities maturing in 60 days or less are valued at amortized
cost.
Securities of the Funds which are primarily traded on foreign securities ex-
changes are generally valued at the preceding closing values of such securities
on their respective exchanges, except that when an event sub-
15
<PAGE>
sequent 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 direc-
tion and guidance of the Board of Trustees of the Trust. 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 es-
tablished by the Board of Trustees of the Trust. For valuation purposes, quota-
tions of foreign securities in foreign currency are converted to U.S. dollars
equivalent at the prevailing market rate on the day of conversion. Some of the
securities acquired by the Funds may be traded on foreign exchanges or over-
the-counter markets on days which are not Business Days. In such cases, the net
asset value of the Shares may be significantly affected on days when investors
can neither purchase nor redeem a Fund's Shares. The administrators have under-
taken to price the securities held by the Funds, and may use one or more inde-
pendent pricing services in connection with this service. The methods used by
the pricing services and the valuations so established will be reviewed by the
Funds' investment adviser and the administrators under the general supervision
of the Board of Trustees of the Trust.
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
Introduction. Edgewood Services, Inc. (the "Distributor") has established sev-
eral procedures for purchasing and redeeming Shares in order to accommodate
different types of investors.
Trust Shares may be purchased by individuals ("Individual Investors") and In-
stitutional Shares may be purchased by institutions ("Institutional Investors"
and, collectively with Individual Investors, "Investors"). Both Institutional
Shares and Trust Shares may be purchased directly from the Distributor or
through Shareholder Organizations.
A Shareholder Organization may elect to hold of record Shares for its custom-
ers ("Customers") and to record beneficial ownership of Shares on the account
statements provided to its Customers. In that case, it is the Shareholder Orga-
nization's responsibility to transmit to the Distributor all purchase and re-
demption orders for its Customers and to transmit, on a timely basis, payment
for purchase orders to Chase Global Funds Services Company ("CGFSC") and re-
demption proceeds to Customers in accordance with the procedures agreed to by
the Shareholder Organization, the Distributor and Customers. 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 Organi-
zation. In the alternative, a Shareholder Organization may elect to establish
its Customers' accounts of record with CGFSC. In this event, even if the Share-
holder Organization continues to place its Customers' purchase and redemption
orders with the Distributor, CGFSC will send confirmations of such transactions
and periodic account statements directly to the Customers.
Customers may agree with a particular Shareholder Organization to make minimum
purchases and maintain minimum balances with respect to their accounts. Depend-
ing upon the terms of the particular account, Shareholder Organizations may
charge a Customer's account fees for automatic investment and other cash man-
agement services provided. Customers should contact their Shareholder Organiza-
tions directly for further information on purchase and redemption procedures
and account fees.
The Trust enters into shareholder servicing agreements with Shareholder Orga-
nizations which agree to provide their Customers various shareholder adminis-
trative services with respect to their Shares (hereinafter
16
<PAGE>
referred to as "Service Organizations"). Shares in the Funds bear the expense
of fees payable to Service Organizations for such services. See "Management of
the Trust--Service Organizations."
PURCHASE OF SHARES
Institutional Shares and Trust Shares of each Fund may be purchased without a
sales charge on any Business Day at the applicable net asset value per share
next determined after an order is transmitted to the Trust's transfer agent,
CGFSC, and accepted by 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 on which 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 deter-
mined.
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
Institutional Investors and Individual Investors may purchase Institutional
Shares and Trust Shares, respectively, in accordance with the procedures de-
scribed below. These procedures only apply to Customers of Shareholder Organi-
zations for whom individual accounts have been established with CGFSC. Custom-
ers whose individual accounts are maintained by Shareholder Organizations must
contact their Shareholder Organizations directly to purchase Shares. Certifi-
cates will not be issued for Shares.
General
Individual Investors may purchase Trust Shares by completing the New Account
Application (the "Application") accompanying this Prospectus and mailing it,
together with a check payable to Excelsior Institutional Trust, to:
Excelsior Institutional Trust
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in a Fund may be made at any
time by sending to the above address a check payable to Excelsior Institu-
tional Trust along with: (a) the detachable form that regularly accompanies
the confirmation of a prior transaction; (b) a subsequent order form which may
be obtained from CGFSC or a Shareholder Organization; or (c) a letter stating
the amount of the investment, the name of the Fund, and the account number in
which the investment is to be made.
Purchases by Wire
Institutional Investors and Individual Investors may purchase Institutional
Shares and Trust Shares, respectively, 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. 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]
Purchases of Shares by Federal funds wire will be effected at the applicable
net asset value per Share next determined after acceptance of the order pro-
vided that the Federal funds wire has been received by the Fund's custodian on
that Business Day.
17
<PAGE>
It is intended that each Fund will be as fully invested at all times as is
reasonably practicable in order to enhance the return on its assets. According-
ly, in order to make investments immediately, a Fund must have Federal funds
available. Purchase orders received and accepted after 4:00 p.m. (Eastern time)
will be effected at the applicable 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 Appli-
cation accompanying this Prospectus and forward it to CGFSC. No 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
has been received and accepted by CGFSC. Investors making subsequent invest-
ments by wire should follow the above instructions.
Purchases by Telephone
For Institutional Investors who have previously selected the telephone pur-
chase 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 applicable net asset value per Share next determined after ac-
ceptance of the order.
By establishing the telephone purchase option, the Institutional Investor au-
thorizes 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 instructions. Accordingly, In-
stitutional 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 requir-
ing the caller to provide some form of personal identification. Failure to em-
ploy reasonable procedures may make the Trust liable for any losses due to un-
authorized or fraudulent telephone instructions.
This option may be changed, modified or terminated at any time. The Trust cur-
rently does not charge a fee for this service, although some Shareholder Orga-
nizations may charge their Customers fees. Customers should contact their
Shareholder Organizations directly for further information.
REDEMPTION OF SHARES
Investors may redeem all or any portion of the Shares in their account at the
applicable net asset value per Share next determined after CGFSC receives and
accepts a redemption order in proper form. Proceeds from redemption orders re-
ceived and accepted by 4:00 p.m. (Eastern time) will normally be sent the next
Business Day; redemption proceeds are sent in any event within seven 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 to be in proper form. In some cases,
additional documentation may be requested. Questions with respect to the proper
form for redemption requests should be directed to CGFSC at (800) 909-1989
(from overseas, call (617) 557-1755).
Because the investment return and principal value of an investment in each
Fund will fluctuate, the value of Shares redeemed may be more or less than the
shareholder's cost. Redemptions of Shares are taxable events on which a share-
holder may realize a gain or loss.
18
<PAGE>
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 Organizations. It is the respon-
sibility of the Shareholder Organizations to transmit their Customers' redemp-
tion orders to CGFSC and to credit such Customer accounts with the redemption
proceeds on a timely basis.
Customers redeeming Shares through certain Shareholder Organizations or certi-
fied financial planners may incur transaction charges in connection with such
redemptions. Customers should contact their Shareholder Organization for fur-
ther information on transaction fees.
REDEMPTION PROCEDURES
General
Institutional Investors and Individual 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 indi-
vidual accounts have been established with CGFSC. Customers whose individual
accounts are maintained by Shareholder Organizations must contact their Share-
holder Organization directly to redeem 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; this collection process may take up to
15 days. Investors who anticipate the need for more immediate access to their
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 Investor's account.
Redemption by Wire or Telephone
Investors who maintain an account at CGFSC and have so indicated on their Ap-
plication, or have subsequently arranged in writing to do so, may redeem Shares
by instructing CGFSC, by wire or telephone, to wire the redemption proceeds di-
rectly to the Investor's predesignated bank account at any commercial bank in
the United States. Investors may have their Shares redeemed by wire by in-
structing CGFSC at (800) 909-1989 (from overseas, please call (617) 557-1755).
Only redemptions of $500 or more will be wired to an Individual Investor's ac-
count. No charge is imposed by the Trust for wiring redemption payments to In-
stitutional Investors. However, an $8.00 fee for each wire redemption by an In-
dividual Investor is deducted by CGFSC from the proceeds of the redemption, and
Shareholder Organizations may charge Customers for wiring or crediting such re-
demption 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 pro-
ceeds, an 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 de-
tails regarding signature guarantees). Further documentation may be requested.
CGFSC and the Distributor reserve the right to re-fuse a wire or telephone re-
demption. 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 expense for
acting upon telephone instructions believed to be genuine. Accordingly, Invest-
ors 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 tele-
19
<PAGE>
phone instructions and/or requiring the caller to provide some form of per-
sonal identification. Failure to employ reasonable procedures may make the
Trust liable for any losses due to unauthorized or fraudulent telephone in-
structions.
During periods of substantial economic or market change, telephone redemp-
tions may be difficult to complete. If an Investor is unable to contact CGFSC
by telephone, the Investor may also deliver the redemption request to CGFSC in
writing at the address noted below under "Redemption by Mail."
Redemption by Mail
Shares may be redeemed by an Investor by submitting a written request for re-
demption 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 identifica-
tion number, and (iii) be signed for each registered owner or by its autho-
rized 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 ac-
companied by signature guarantees from any eligible guarantor institution ap-
proved 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 associa-
tions, clearing agencies and savings associations. All eligible guarantor in-
stitutions must participate in the Securities Transfer Agents Medallion Pro-
gram ("STAMP") in order to be approved by CGFSC pursuant to the Signature
Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and infor-
mation 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, Investors may be required
to redeem Shares in a Fund after 60 days' written notice if due to investor
redemptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Or-
ganization to maintain a minimum balance with respect to Shares of a Fund and
the balance in such account falls below that minimum, the Customer may be
obliged by the Shareholder Organization to redeem all or part of his Shares to
the extent necessary to maintain the required minimum balance.
INVESTOR PROGRAMS
The investor programs described below are currently offered by the Trust to
Investors generally. Customers should contact their Shareholder Organizations
for information on the availability of, and the procedures and account charges
applicable to, these investor programs.
INSTITUTIONAL SHARES AND TRUST SHARES
Exchange Privilege
Trust Shares of a Fund may be exchanged without payment of any exchange fee
or sales charge for Trust
20
<PAGE>
Shares of any other investment portfolio offered by the Trust and for non-
Trust Shares of any investment portfolio offered by Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. at their respective net asset values. Insti-
tutional Shares of a Fund may be exchanged without payment of any exchange fee
or sales charge for Institutional Shares of any other investment portfolio of-
fered by the Trust and for shares of any investment portfolio offered by Ex-
celsior Funds 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 ex-
changing shareholder may, therefore, realize a taxable gain or loss in connec-
tion with the exchange. Shareholders exchanging Shares of an investment port-
folio for shares of another Fund should carefully review the prospectus relat-
ing to the acquired shares prior to making an exchange. The exchange privilege
is available to shareholders residing in any state in which the shares being
acquired may be legally sold.
In order to prevent abuse of this privilege to the disadvantage of other
shareholders, the Trust reserves the right to limit the number of exchange re-
quests of Investors to no more than six per year. 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 Shareholder Organizations may
charge their Customers fees. Customers should contact their Shareholder Orga-
nizations directly for further information.
Exchanges by Telephone
For Investors who have previously selected the telephone exchange option, an
exchange order may be placed by calling CGFSC at (800) 909-1989 (from over-
seas, please call (617) 557-1755). The exchange by telephone will be effected
at the applicable net asset value per share for each portfolio next determined
after acceptance of the order.
By establishing the telephone exchange option, the 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 instructions. Accordingly, Investors bear
the risk of loss. The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, including, without limita-
tion, 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.
During periods of substantial economic or market change, telephone exchanges
may be difficult to complete. If an Investor is unable to contact CGFSC by
telephone, the Investor may also deliver the exchange request to CGFSC in
writing at the address noted above under "Redemption by Mail."
Retirement Plans
Shares are available for purchase by Investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by United States Trust
Company of New York and other Shareholder Organizations:
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.
Investors 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
21
<PAGE>
available from the Trust by calling CGFSC at (800) 909-1989 (from overseas,
please call (617) 557-1755).
TRUST SHARES
Automatic Investment Program
The Automatic Investment Program permits Individual Investors to purchase
Trust Shares (minimum of $50 per Fund per transaction) at regular intervals se-
lected by the Individual Investor. Provided the Individual Investor's financial
institution allows automatic withdrawals, Trust Shares are purchased by trans-
ferring funds from a checking, bank money market or NOW account designated by
the Individual Investor. At the Individual Investor's option, the account des-
ignated will be debited in the specified amount, and Trust Shares will be pur-
chased once a month, on either the first or fifteenth day, or twice a month, on
both days.
The Automatic Withdrawal Program is one means by which an Individual Investor
may use "Dollar Cost Averaging" in making investments. Instead of trying to
time market performance, a fixed dollar amount is invested in Shares at prede-
termined intervals. This may help Individual Investors to reduce their average
cost per Share because the agreed upon fixed investment amount allows more
Shares to be purchased during periods of lower Share prices and fewer Shares
during periods of higher prices. In order to be effective, Dollar Cost Averag-
ing should usually be followed on a sustained, consistent basis. Individual In-
vestors should be aware, however, that Shares bought using Dollar Cost Averag-
ing are purchased without regard to their price on the day of investment or to
market trends. In addition, while Individual Investors may find Dollar Cost Av-
eraging to be beneficial, it will not prevent a loss if an Individual Investor
ultimately redeems his Shares at a price which is lower than their purchase
price.
To establish an Automatic Investment account permitting Individual Investors
to use the Dollar Cost Averaging investment method described above, an Individ-
ual Investor must complete the Supplemental Application contained in the Pro-
spectus and mail it to CGFSC at the address given above. Shareholder Organiza-
tions may, at their discretion, establish similar programs with respect to the
Shares held by their Customers. Information concerning the availability of, and
the procedures and fees relating to, Automatic Investment accounts may be ob-
tained by Customers directly from their Shareholder Organizations.
SYSTEMATIC WITHDRAWAL PLAN
Individual Investors who own Trust Shares of a Fund with a value of $10,000 or
more may establish a Systematic Withdrawal Plan. The Individual Investor may
request a declining-balance withdrawal, a fixed-dollar withdrawal, a fixed-
share withdrawal, or a fixed-percentage withdrawal (based on the current value
of Shares in the account) on a monthly, quarterly, semi-annual or annual basis.
To initiate the Systematic Withdrawal Plan, an Individual Investor must com-
plete the Supplemental Application contained in the Prospectus and mail it to
CGFSC. Shareholder Organizations may, at their discretion, establish similar
systematic withdrawal plans with respect to the Shares held by their Customers.
Information concerning the availability of, and the procedures and fees relat-
ing to, such plans may be obtained by Customers directly from their Shareholder
Organizations.
TAX MATTERS
Each year, the Trust intends to qualify each Fund and to 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 generally will be required to be paid from that
Fund, although foreign-source income of a Fund may be subject to foreign
22
<PAGE>
withholding taxes. If a Fund fails to qualify as a "regulated investment compa-
ny" in any year, the Fund would incur a regular corporate federal income tax
upon its taxable income and the Fund's distributions generally would be taxable
as ordinary dividend income to shareholders.
To satisfy various requirements in the Code, each Fund expects to distribute
virtually all of its net income each year. 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 do-
mestic corporations may qualify for the dividends-received deduction for corpo-
rations if the recipient otherwise qualifies for that deduction with respect to
its holding of Fund Shares. Availability of the deduction for particular share-
holders is subject to certain limitations, and deducted amounts may be subject
to the alternative minimum tax and may result in certain basis adjustments.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
At the end of each calendar year, each shareholder receives information for
tax purposes on the dividends and other distributions received during that cal-
endar year, including the portion thereof taxable as ordinary income, the por-
tion 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 re-
duction), and the amount of dividends if any which may qualify for the divi-
dends-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.
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 Rev-
enue Service that they are subject to backup withholding. Such withholding is
not an additional tax. Any amounts withheld may be credited against the share-
holder's federal income tax liability.
Under current law, neither the Trust, as a Delaware business trust, nor the
Funds is 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 in-
vestment in the Funds, including the status of distributions from the Funds un-
der applicable state and local tax laws.
23
<PAGE>
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust provides general supervision over the af-
fairs of the Trust. The trustees decide upon matters of general policy and re-
view the actions of service providers such as the investment adviser, the ad-
ministrators, the Distributor, and others.
INVESTMENT ADVISER
Optimum Growth Fund and Value Equity Fund
U.S. Trust is responsible for the management of the assets of each Fund pur-
suant to an investment advisory agreement (the "Advisory Agreement") with the
Trust. As investment adviser to the Funds, U.S. Trust makes decisions with re-
spect to and places orders for all purchases and sales of portfolio securi-
ties, and maintains records relating to such purchases and sales.
All investment decisions for the Optimum Growth Fund are made by a committee
of investment professionals within the Campbell Cowperthwait division of U.S.
Trust and no persons are primarily responsible for making recommendations to
that committee.
David J. Williams is the person primarily responsible for the day-to-day man-
agement of the Value Equity Fund's investment portfolio. Mr. Williams, Senior
Vice President, Department Manager and Senior Portfolio Manager of the Per-
sonal Equity and Balanced Investment Division of U.S. Trust, has been with
U.S. Trust since 1987, and has managed the Optimum Growth Fund since its in-
ception.
For its services under the Advisory Agreement, U.S. Trust is entitled to re-
ceive a fee, accrued daily and paid monthly, at an annual rate equal to 0.65%
of each Fund's average daily net assets. U.S. Trust has agreed to waive a por-
tion of its investment advisory fees under the Advisory Agreement, which
waiver may be terminated at any time.
U.S. Trust is a state-chartered bank and trust company which provides trust
and banking services to individuals, corporations and institutions, both na-
tionally and internationally, including investment manage-ment, estate and
trust administration, financial planning, corporate trust and agency services,
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 December 31,
1995, U.S. Trust's Asset Management Group had approximately $46.5 billion in
assets under management. U.S. Trust, which has its principal offices at 114
West 47th Street, New York, NY 10036, is a subsidiary of U.S. Trust Corpora-
tion, a registered bank holding company. U.S. Trust also serves as investment
adviser to Excelsior Funds, Inc. (formerly known as UST Master Funds, Inc.)
and Excelsior Tax-Exempt Funds, Inc. (formerly known as UST Master Tax-Exempt
Funds, Inc.), which are registered investment companies consisting of the fol-
lowing funds: Excelsior Funds, Inc.--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 Compet-
itors Fund; Early Life Cycle Fund; International Fund; Emerging Americas Fund;
Pan European Fund; Pacific/Asia Fund; Money Fund; Government Money Fund; Trea-
sury Money Fund; Short-Term Government Securities Fund; Intermediate-Term Man-
aged Income Fund; and Managed Income Fund; Excelsior Tax-Exempt Funds, Inc.--
Tax-Exempt Money Fund; Short-Term Tax- Exempt Securities Fund; New York Inter-
mediate-Term Tax-Exempt Fund; Intermediate-Term Tax-Exempt Fund; and Long-Term
Tax-Exempt Fund. U.S. Trust also serves as investment adviser to the Trust's
Equity Fund, Income Fund and Total Return Bond 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.
24
<PAGE>
ADMINISTRATORS
U.S. Trust, located at 114 West 47th Street, New York, NY 10036, Chase Global
Funds Services Company ("CGFSC"), located at 73 Tremont Street, Boston, Massa-
chusetts 02108, and Federated Administrative Services ("FAS"), a wholly-owned
subsidiary of Federated Investors located at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, Pennsylvania, 15222-3779, serve as the Funds' ad-
ministrators (the "Administrators"). The Administrators supervise the affairs
of the Trust, including, among other responsibilities, negotiating contracts
and fees with, and the monitoring of performance and billings of, the various
service providers of the Trust; providing equipment and clerical personnel
necessary for maintaining the organization of the Trust; preparing and dis-
tributing all materials in connection with meetings of trustees and Investors;
preparing and filing all documents required for compliance by the Trust with
applicable laws and regulations; and arranging for the maintenance of Fund ac-
counting and record-keeping of the Trust.
As compensation for providing these services and facilities to the Trust, the
Administrators are jointly entitled to an annual fee, computed daily and paid
monthly from each of the Funds, based on the combined average daily net assets
of the Funds, the other investment portfolios of the Trust, Excelsior Funds,
Inc. (excluding the International, Emerging Americas, Pacific/Asia and Pan Eu-
ropean Funds) and Excelsior Tax-Exempt Funds, Inc. (collectively the "Fund
Complex") as follows:
<TABLE>
<CAPTION>
ANNUAL
COMBINED AVERAGE DAILY NET ASSETS OF THE FUND COMPLEX FEE
- ----------------------------------------------------- ------
<S> <C>
first $200 million....................................................... 0.200%
next $200 million........................................................ 0.175%
Over $400 million........................................................ 0.150%
</TABLE>
Administrative fees payable to the Administrators by each of the above Funds
are determined in proportion to their pro rata share of the total average
daily net assets of all of the investment portfolios included in the Fund Com-
plex at the time of determination. From time to time one or more of the Admin-
istrators may waive all or a portion of the administrative fee payable by the
Funds, which waiver may be terminated at any time.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Edgewood Services, Inc. (the "Distribu-
tor"), Clearing Operations, P.O. Box 897, Pittsburgh, Pennsylvania 15230-0897,
acts as principal underwriter for the Shares. Edgewood Services, Inc., a reg-
istered 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 act as distributor and serve as administrator to over twenty bank
related mutual fund complexes.
Under the Funds' Distribution Plan, adopted pursuant to Rule 12b-1 under the
1940 Act, the Trust Shares of each Fund may bear the expense of distribution
fees at the maximum annual rate of .75% of the average daily net asset value
of the Fund's outstanding Trust Shares. Trust Shares of each Fund currently
bear the expense of such distribution fees at the annual rate of .35% of the
average daily net asset value of the Fund's outstanding Trust Shares. Distri-
bution fees paid by Trust Shares under the Distribution Plan will be used pri-
marily to compensate the Distributor for distribution and sales support serv-
ices provided in connection with the offering and sale of Trust Shares. The
Distributor may use distribution fees received from the Funds to defray its
marketing expenses with respect to Trust Shares such as: (i) the expense of
preparing, printing and distributing promotional materials and prospectuses
(other than prospectuses used for regulatory purposes or for distribution to
existing shareholders); (ii) the expense of other advertising via radio, tele-
vision or other print or electronic media; and (iii) the expense of payments
to financial institutions ("Distribution Organizations") for distribution as-
sistance (including sales incentives).
The NASD has adopted rules which generally limit the payments under the
Trust's Distribution Plan to a certain percentage of total new gross Share
sales, plus interest. The Trust would stop accruing Distribution
25
<PAGE>
Plan fees if, to the extent, and for as long as such limit would otherwise be
exceeded.
SERVICE ORGANIZATIONS
The Trust will enter into an agreement ("Servicing Agreement") with each
Service Organization requiring it to provide administrative support services
to its Customers beneficially owning Shares. As a consideration for the admin-
istrative services provided to Customers, a Fund will pay the Service Organi-
zation an administrative service fee at an annual rate of up to .40% of the
average daily net asset value of its Shares held by the Service Organization's
Customers. Such services may include assisting in processing purchase, ex-
change and redemption requests; transmitting and receiving funds in connection
with Customer orders to purchase, exchange or redeem Shares; and providing pe-
riodic statements. Under the terms of the Servicing Agreement, Service Organi-
zations will be required to provide to Customers a schedule of any fees that
they may charge in connection with a Customer's investment. Until further no-
tice, the Investment Adviser and Administrators have voluntarily agreed to
waive fees payable by a Fund in an amount equal to administrative service fees
payable by that Fund.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank, N.A. ("Chase") serves as custodian of the Funds'
assets. Communications to the custodian should be directed to The Chase Man-
hattan Bank, N.A., Mutual Funds Service Division, 770 Broadway, New York, NY
10003. CGFSC, 73 Tremont Street, Boston, Massachusetts 02108, serves as the
transfer agent for the Funds, providing transfer agency, dividend disbursement
and registrar services. CGFSC is a subsidiary of Chase.
EXPENSES
The expenses of the Trust include the compensation of its trustees who are
not affiliated with the investment adviser; governmental fees; interest
charges; tax-
es; fees and expenses of the Administrators, of independent auditors, of legal
counsel and of any transfer agent, custodian, registrar or dividend disbursing
agent of the Trust; insurance premiums; and expenses of calculating the net
asset value of, and the net income on shares of, the Funds.
Expenses of the Trust also include expenses of distributing and redeeming
Shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, reports, notices, proxy statements and reports to share-
holders and to governmental offices 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 Com-
pany Institute allocable to the Trust.
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 in-
vestment companies such as the Trust. Based on advice of its counsel, it is
the position of U.S. Trust that the investment advisory services performed by
U.S. Trust under the Advisory Agreements with the Trust and the activities
performed by U.S. Trust as one of the administrators for the Funds do not con-
stitute underwriting activities and are consistent with the requirements of
the Glass-Steagall Act. In addition, U.S. Trust believes 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 pres-
ently no controlling precedent regarding the performance of a combination of
investment advisory, administrative and/or shareholder servicing activities by
banks. State laws on this issue may differ from the interpretations of rele-
vant federal law and banks and financial institutions may be required to reg-
ister as dealers pursuant to state securities law. Future changes in either
federal statutes or regulations relating to the permissible activities of
26
<PAGE>
banks, as well as future judicial or administrative decisions and interpreta-
tions of present and future statutes and regulations, could prevent a bank
from continuing to perform all or part of its servicing or investment manage-
ment 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 auto-
matic investment or other services then being provided by such bank. The
Trustees of the Trust do not expect that shareholders of the Funds would suf-
fer any adverse financial consequences as a result of these occurrences.
Certain Relationships and Activities. U.S. Trust and its affiliates may have
deposit, loan and other commercial banking relationships with the issuers of
securities which may be purchased on behalf of the Funds, including outstand-
ing loans to such issuers which could be repaid in whole or in part with the
proceeds of securities so purchased. U.S. Trust has informed the Trust that,
in making investment decisions, it does not obtain or use material inside in-
formation in its possession or in the possession of any of its affiliates. In
making investment recommendations U.S. Trust will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by
a Fund is a customer of U.S. Trust, its parents or its subsidiaries or affili-
ates. When dealing with its customers, U.S. Trust, its 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 or any such af-
filiate.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends equal to all or substantially all of each Fund's net investment in-
come will be declared and paid at least quarterly.
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 class
of each Fund on the basis of its relative net assets. A Fund's net investment
income available for distribution to the holders of a particular class of
Shares will also be reduced by the amount of other expenses allocable to such
class. 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 nec-
essary to avoid the application of non-deductible federal excise taxes on cer-
tain undistributed income and net capital gains of mutual funds.
Investors will receive dividends and distributions in additional Shares of
the Fund on which the dividend or distribution is paid (or determined on the
payable date), unless they have requested in writing (received by CGFSC prior
to the payment date) to receive dividends and distributions in cash.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Trust Instrument permits its Board of Trustees to issue an unlim-
ited number of full and fractional Shares of beneficial interest (par value
$0.00001
27
<PAGE>
per share) of each class of each Fund and to divide or combine the Shares into
a greater or lesser number of Shares without thereby changing the proportion-
ate beneficial interests in each Fund. The Trust reserves the right to create
and issue any number of series or classes; investments in each series partici-
pate equally in the earnings, dividends and assets of the particular series
only and no other series. Currently, the Trust has nine series. The series in-
clude: Excelsior Institutional Equity Fund, Excelsior Institutional Income
Fund, Excelsior Institutional Total Return Bond Fund, Excelsior Institutional
Bond Index Fund, Excelsior Institutional Balanced Fund, Excelsior Institu-
tional Equity Growth Fund, Excelsior Institutional International Equity Fund,
Excelsior Institutional Value Equity Fund and Excelsior Institutional Optimum
Growth Fund. Two series are offered through this Prospectus.
The shares of each Fund are classified into two separate classes of Shares
representing Trust Shares and Institutional Shares. Trust Shares have differ-
ent expenses than Institutional Shares which may affect performance.
Each Share (irrespective of class designation) of a Fund represents an inter-
est 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 mat-
ters on which they are entitled to vote and will vote in the aggregate and not
by class or series, except as otherwise expressly required by law. 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 liqui-
dation or dissolution of a Fund, shareholders would be entitled to share pro
rata in the net assets of such Fund available for distribution to sharehold-
ers.
The Trust is a business trust organized under the laws of the State of Dela-
ware. Under Delaware law, shareholders of Delaware business trusts are enti-
tled 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 ex-
press 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 In-
strument also provides for the maintenance, by or onbehalf 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 does not apply, inadequate insurance exists and a Fund itself is
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.
As of November 4, 1996, U.S. Trust and its affiliates held of record, but not
beneficially, substantially all of the outstanding shares in the Funds. U.S.
Trust is a wholly-owned subsidiary of U.S. Trust Corporation.
28
<PAGE>
For more information regarding the Board of Trustees of the Trust, see "Man-
agement of the Trust" in the Statement of Additional Information.
PERFORMANCE INFORMATION
From time to time, in advertisements, reports to shareholders, or other com-
munications to shareholders or prospective investors, the performance of In-
stitutional Shares and Trust Shares 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 mu-
tual 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 in-
vestment results as used in such communications are calculated on a "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 class of each Fund. The "total rate of
return" refers to the change in the value of an investment in Shares of a par-
ticular class of 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. See "Performance Information" in the Statement
of Additional Information. These methods of calculating "total rate of return"
are determined by regulations of the SEC.
Since the total rate of return quotations for each class of each Fund are
based on historical earnings and since such total rates of return fluctuate
over time, such quotations should not be considered as an indication or repre-
sentation of the future performance of either Fund. Shareholders should remem-
ber that performance is generally a function of the kind and quality of the
instruments held in a Fund, portfolio maturity, operating expenses, and market
conditions. Any fees charged by Shareholder Organizations to Customers that
have invested in Shares and any fees charged by 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.
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, including
information related to (i) investment policies and restrictions of the Funds,
(ii) trustees and officers of the Trust, (iii) portfolio transactions and bro-
kerage commissions, (iv) rights and liabilities of shareholders of the Trust,
(v) additional performance information, including methods used to calculate
total return, and (vi) determination of the net asset value of Shares of the
Funds.
29
<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 "Ex-
celsior Institutional Trust" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus en-
titled "How to Purchase, Exchange 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 pro-
cedures described in the Prospectus. In the case of Shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organi-
zations, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests of $5,000 or more
must be accompanied by signature guarantees. See "How to Purchase, Exchange
and Redeem Shares--Redemption Procedures."
SIGNATURES: Please be sure to sign the Application(s).
If the Shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
Taxpayer Identification Number:
Investors and other entities must provide a tax identification or social se-
curity number on the application. Investors who do not supply this information
or who have been notified by the Internal Revenue Service that they are sub-
ject 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 require-
ments, please contact your Service Organization.
30
<PAGE>
[LOGO] EXCELSIOR CHASE GLOBAL FUNDS NEW
INSTITUTIONAL TRUST SERVICES COMPANY ACCOUNT
CLIENT SERVICES APPLICATION
P.O. Box 2798
Boston, MA 02208-2798
(800) 909-1989
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
ACCOUNT REGISTRATION
- ---------------------------------------------------------------------------
[_] Individual [_] Trust [_] Other
------------------------
Note: Trust registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
- ------------------------------ ----------------------------------------------
Name(s) (please print) Social Security # or Taxpayer Identification #
( )
- ------------------------------ ----------------------------------------------
Name Telephone #
- ------------------------------
Address
- ------------------------------ [_] U.S. Citizen [_] Other (specify)----------
City/State/Zip
- -------------------------------------------------------------------------------
FUND SELECTION (MAKE CHECKS PAYABLE TO "EXCELSIOR INSTITUTIONAL TRUST.")
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FUND INITIAL INVESTMENT
[_] Optimum Growth Fund (Institutional Shares) $ ___________ 3123
[_] Optimum Growth Fund (Trust Shares) $ ___________ 8823
[_] Value Equity Fund (Institutional Shares) $ ___________ 3122
[_] Value Equity Fund (Trust Shares) $ ___________ 8822
</TABLE>
NOTE: If investing by wire, A. BY MAIL: Enclosed is a check in the amount
you must obtain a Bank Wire of $ _____ payable to "Excelsior
Control Number. To do so, Institutional Trust."
please call (800) 909-1989 and B. BY WIRE: A bank wire in the amount of
ask for the Wire Desk. $ ----- has been sent to the
((017) 337-1755 from Overseas) Fund from
---------------------
Name of Bank
---------------------
Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate boxes
below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
- --------------------------------------------------------------------------------
ACCOUNT PRIVILEGES
- --------------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION AUTHORITY TO TRANSMIT REDEMPTION
[_] I/We appoint CGFSC as my/our PROCEEDS TO PRE-DESIGNATED ACCOUNT.
agent to act upon instructions I/We hereby authorize CGFSC to act
received by telephone in order to upon instructions received by
effect the telephone exchange and telephone to withdraw from my/our
redemption privileges. I/We hereby account in the Excelsior
ratify any instructions given Institutional Trust and to wire the
pursuant to this authorization and amount withdrawn to the following
agree that Excelsior Institutional commercial bank account.
Trust, CGFSC and their directors,
trustees, officers and employees will Title on Bank Account*_______________
not be liable for any loss, liability, Name of Bank_________________________
cost or expense for acting upon Bank A.B.A. Number Account
instructions believed to be genuine Number ______________________________
and in accordance with the procedures Bank Address ________________________
described in the then current City/State/Zip ______________________
prospectus. To the extent that (attach voided check here)
Excelsior Institutional Trust fails
to use reasonable procedures as A corporation, trust or partnership
a basis for its belief, it or its must also submit a "Corporate
service contractors may be liable Resolution" (or "Certificate of
for instructions that prove to Partnership") indicating the names
be fraudulent or unauthorized. and titles of officers authorized
to act on its behalf.
I/We further acknowledge that it
is my/our responsibility to read * TITLE ON BANK AND FUND ACCOUNT
a copy of the Fund's current MUST BE IDENTICAL.
Prospectus.
[_] I/We do not wish to have the
ability to exercise telephone
redemption and exchange privileges.
I/We further understand that all
exchange and redemption requests
must be in writing.
<PAGE>
- --------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
- --------------------------------------------------------------------------------
By signing this application, I/we hereby certify under penalty of perjury that
the information on this application is complete and correct and that as required
by Federal law:
[_] I/We certify that (1) the number(s) shown on this form is/are the correct
taxpayer identification number(s) and (2) I/we are not subject to backup
withholding either because I/we have not been notified by the Internal Revenue
Service that I/we are subject to backup withholding, or the IRS has notified
me/us that I am/we are no longer subject to backup withholding. (NOTE: IF ANY OR
ALL OF PART 2 IS NOT TRUE, PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has been provided above,
I/we have applied, or intend to apply, to the IRS or the Social Security
Administration for a TIN or a SSN, and I/we understand that if I/we do not
provide this number to CGFSC within 60 days of the date of this application, or
if I/we fail to furnish my/our correct SSN or TIN, I/we may be subject to a
penalty and a 31% backup withholding on distributions and redemption proceeds.
(Please provide this number on Form W-9. You may request the form by calling
CGFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to purchase shares
indicated of the Excelsior Institutional Trust. I/We have received, read and
carefully reviewed a copy of the Trust's current Prospectus and agree to its
terms and by signing below I/we acknowledge that neither the Trust nor the
Distributor is a bank and that shares of the Trust are not deposits or
obligations of, or guaranteed or endorsed by United States Trust Company of New
York, its parent and affiliates and the Shares are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
governmental agency; and that an investment in the Funds involves investment
risks, including possible loss of principal amount invested.
X ______________________________________________ Date __________________________
Owner Signature
X ______________________________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above (including legal
title if signing for a corporation, trust custodial account, etc.).
- --------------------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
- --------------------------------------------------------------------------------
We hereby submit this application for the purchase of shares in accordance with
the terms of our selling agreement with Edgewood Services, Inc., and with the
Prospectus and Statement of Additional Information of the Trust.
- --------------------------------------- -------------------------------------
Investment Dealer's Name Source of Business Code
- --------------------------------------- -------------------------------------
Main Office Address Branch Number
- --------------------------------------- -------------------------------------
Representative's Number Representative's Name
- --------------------------------------- -------------------------------------
Branch Address Telephone
- --------------------------------------- -------------------------------------
Investment Dealer's Authorized Signature Title
<PAGE>
[LOGO] EXCELSIOR CHASE GLOBAL FUNDS SUPPLEMENTAL
INSTITUTIONAL TRUST SERVICE COMPANY APPLICATION
CLIENT SERVICES SPECIAL INVESTMENT AND
P.O. Box 2798 WITHDRAWAL OPTIONS
Boston, MA 02208-2798
(800) 909-1989
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
- --------------------------------------------------------------------------------
Fund Name ____________________________ Account Number _________________________
Owner Name ___________________________ Social Security or Taxpayer ID
Number _________________________________
Street Address _______________________ City, State, Zip Code __________________
Resident of [_] U.S. [_] Other ____ [_] Check here if this is a change of
address
- --------------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED UNLESS
OTHERWISE INDICATED)
- --------------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate boxes
below are checked: All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
- --------------------------------------------------------------------------------
(TRUST SHARES ONLY)
I/We hereby authorize CGFSC to debit my/our personal checking account on the
designated dates in order to purchase shares in the Fund indicated at the top of
this application at the applicable public offering price determined on that day.
[_] Monthly on the 1st day
[_] Monthly on the 15th day
[_] Monthly on both the 1st and 15th days
Amount of each debit (minimum $50 per Fund) $ ________________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
- --------------------------------------------------------------------------------
EXCELSIOR INSTITUTIONAL TRUST AUTOMATIC INVESTMENT PLAN
CLIENT SERVICES
- --------------------------------------------------------------------------------
BANK AUTHORIZATION
- --------------------------------------------------------------------------------
- --------------------------- --------------------------- ------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our account for amounts
drawn by CGFSC, acting as my agent for the purchase of Fund shares. I/We agree
that your rights in respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority shall remain in effect
until revoked in writing and received by you. I/We agree that you shall incur no
liability when honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no liability to me if
you dishonor any such withdrawal. This will be so even though such dishonor
results in the cancellation of that purchase.
- -------------------------------------- ----------------------------------------
Account Holder's Name Joint Account Holder's Name
X______________________ _____________ X___________________ ___________________
Signature Date Signature Date
<PAGE>
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
- --------------------------------------------------------------------------------
(TRUST SHARES ONLY)
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize CGFSC to redeem the necessary number of shares from my/our
Excelsior Institutional Trust Account on the designated dates in order to make
the following periodic payments:
[_] Monthly on the 24th day
[_] Quarterly on the 24th day of January, April, July and October
[_] Other_____________________
(This request for participation in the Plan must be received by the 18th day of
the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $_______________________
Please make check payable Recipient ________________________________
to: (To be completed only
if redemption proceeds to Street Address ___________________________
be paid to other than
account holder of record City, State, Zip Code ____________________
or mailed to address other
than address of record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
below must be guaranteed. A corporation, trust or partnership must also submit a
"Corporate Resolution" (or "Certification of Partnership") indicating the names
and titles of officers authorized to act on its behalf.
- --------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
- --------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until CGFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
- ------------------------------------ ------------------------------------
Signature Signature
- ------------------------------------ ------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
- ------------------------------------ ------------------------------------
Signature Signature
- ------------------------------------ ------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF EXPENSES........................................................ 2
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES AND POLICIES......................................... 5
PRICING OF SHARES.......................................................... 15
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES................................ 16
INVESTOR PROGRAMS.......................................................... 20
TAX MATTERS................................................................ 22
MANAGEMENT OF THE TRUST.................................................... 24
DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS............................................................. 27
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES....................... 27
PERFORMANCE INFORMATION.................................................... 29
MISCELLANEOUS.............................................................. 29
INSTRUCTIONS FOR NEW ACCOUNT
APPLICATION............................................................... 30
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OF-
FERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EXCELSIOR IN-
STITUTIONAL 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.
EITP1196
[LOGO] EXCELSIOR
INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND
EXCELSIOR INSTITUTIONAL VALUE EQUITY FUND
Prospectus
November 8, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 8, 1996
Excelsior Institutional Trust
73 Tremont Street
Boston, Massachusetts 02108-3913
(617) 557-8000
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND
EXCELSIOR INSTITUTIONAL VALUE EQUITY FUND
Excelsior Institutional Trust (the "Trust") is comprised of nine
funds. This Statement of Additional Information describes the Trust Shares and
Institutional Shares (collectively, the "Shares") of the Excelsior Institutional
Optimum Growth Fund and Excelsior Institutional Value Equity Fund (each, a
"Fund"; collectively, the "Funds").
Table of Contents Page
----------------- ----
Excelsior Institutional Trust 2
Investment Objectives, Policies and Restrictions 2
Performance Information 27
Determination of Net Asset Value; Valuation of Securities 31
Additional Purchase, Exchange, and Redemption Information 32
Management of the Trust 33
Counsel 39
Independent Auditors 39
Taxation 39
Description of the Trust; Fund Shares 41
Miscellaneous 42
Financial Statements 42
Appendix A A-1
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Funds'
Prospectus as it may be amended from time to time (the "Prospectus"). This
Statement of Additional Information should be read only in conjunction with the
Prospectus, a copy of which may be obtained by an investor without charge by
contacting the Trust at its address shown above or by calling (800) 909-1989.
Terms used but not defined herein, which are defined in the Prospectus, are used
herein as defined in the Prospectus.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE
<PAGE>
PROSPECTUS.
EXCELSIOR INSTITUTIONAL TRUST
The Trust is an open-end diversified management investment company which
was organized as a business trust under the laws of the State of Delaware on
April 27, 1994. The Shares of the Trust are continuously sold to investors.
Shares of the Trust are divided into nine separate series, two of which are
described herein. Additional series may be added to the Trust from time to
time. The Trust offers two classes of Shares in each Fund -- Institutional
Shares, which are offered to institutions, and Trust Shares, which are offered
to individuals.
United States Trust Company of New York ("U.S. Trust") is the investment
adviser to the Funds. U.S. Trust makes decisions with respect to and places
orders for all purchases and sales of portfolio securities for the Funds.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of each Fund is described in the Prospectus.
There can, of course, be no assurance that a Fund will achieve its investment
objective.
INVESTMENT POLICIES
The following supplements the discussions of the various investments of and
techniques employed by the Funds set forth in the Prospectus.
OTHER INVESTMENT CONSIDERATIONS
The Funds invest primarily in common stocks but may purchase both preferred
stocks and securities convertible into common stock at the discretion of U.S.
Trust. While current income is secondary to each Fund's objective, the Trust
expects that the broad and diversified strategies utilized by U.S. Trust will
result in somewhat more current income than would be generated if U.S. Trust
utilized a single strategy more narrowly focused on rapid growth of principal
and involving exposure to higher levels of risk.
U.S. Trust's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership. U.S. Trust employs the following three different but closely
interrelated portfolio strategies to focus and organize its search for
investment values.
-2-
<PAGE>
1. Problem/Opportunity Companies. Important investment opportunities
-----------------------------
often occur where companies develop solutions to large, complex, fundamental
problems, such as declining industrial productivity; rising costs and declining
sources of energy; the economic imbalances and value erosion caused by years of
high inflation and interest rates; the soaring costs and competing priorities of
providing health care; and the accelerating interdependence and "shrinking size"
of the world.
Solutions or parts of solutions to large problems may be generated by
established companies or comparatively new companies of all sizes through the
development of new products, technologies or services, or through new
applications of older ones.
Investment in such companies represents a wide range of investment
potential, current income return rates, and exposure to fundamental and market
risks. Income generated by the Funds' investments in these companies would be
expected to be moderate, characterized by lesser rates than those of a fund
whose sole objective is current income, and somewhat higher rates than those of
a higher-risk growth fund.
2. Transaction Value Companies. In the opinion of U.S. Trust, the stock
---------------------------
market frequently values the aggregate ownership of a company at a substantially
lower figure than its component assets would be worth if they were sold off
separately over time. Such assets may include intangible assets such as product
and market franchises, operating know-how, or distribution systems, as well as
such tangible properties as oil reserves, timber, real estate, or production
facilities. Investment opportunities in these companies are determined by the
magnitude of difference between economic worth and current market price.
Market undervaluations are often corrected by purchase and sale,
restructuring of the company, or market recognition of a company's actual worth.
The recognition process may well occur over time, however, incurring a form of
time-exposure risk. Success from investing in these companies is often great,
but may well be achieved only after a waiting period of inactivity.
Income derived from investing in undervalued companies is expected to be
moderately greater than that derived from investments in either the
problem/opportunity or early life cycle companies.
3. Early Life Cycle Companies. Investments in early life cycle companies
--------------------------
tend to be narrowly focused on an objective of higher rates of capital
appreciation. They correspondingly will involve a significantly greater degree
of risk and the reduction of current income to a negligible level. Such
investments will not be limited to new, small companies engaged only in frontier
technology, but will seek opportunities for maximum appreciation through the
full spectrum of business operations, products, services, and asset values.
Consequently, the Funds' investments in early life cycle companies are primarily
in younger, small to medium-sized companies in the early stages of their
development. Such companies are usually more flexible in trying new approaches
to problem-solving and in making new or different employment of
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assets. Because of the high risk level involved, the ratio of success among such
companies is lower than the average, but for those companies which succeed, the
magnitude of investment reward is potentially higher.
INVESTMENTS AND INVESTMENT TECHNIQUES
BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject
to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. Foreign branches and subsidiaries are not necessarily subject to the
same or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an amount
equal to a specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches within the
state.
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U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one to
ten years; and Treasury Bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association pass-
through certificates, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Federal Home Loan Banks, by the right of
the issuer to borrow from the Treasury; others, such as those issued by the
Federal National Mortgage Association, by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality; and
others, such as those issued by the Student Loan Marketing Association, only by
the credit of the agency or instrumentality. While the U.S. Government provides
financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Each Fund may purchase three types of commercial paper, as classified by
exemption from registration under the Securities Act of 1933, as amended (the
"1933 Act"). The three types include open market, privately placed, and letter
of credit commercial paper. Trading of such commercial paper is conducted
primarily by institutional investors through investment dealers or directly
through the issuers. Individual investor participation in the commercial paper
market is very limited.
OPEN MARKET. "Open market" commercial paper refers to the commercial paper
of any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market" paper's 1933 Act exemption is
under Section 3(a)(3) which limits the use of proceeds to current transactions,
limits maturities to 270 days and requires that the paper contain no provision
for automatic rollovers.
PRIVATELY PLACED. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2) of the 1933 Act, which
exempts transactions by an issuer not involving any public offering. The
commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity restriction and
may be considered illiquid. See "Illiquid Securities" below.
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LETTER OF CREDIT. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for repayment
of the notes. Unlike "open market" and "privately placed" commercial paper,
"letter of credit" paper has no limitations on purchases.
LENDING OF PORTFOLIO SECURITIES
Each Fund has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, a Fund
can increase its income by continuing to receive income on the loaned securities
as well as by investing the cash collateral in short-term securities subject to
payment of a rebate fee to the borrower. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Fund will adhere to the following conditions whenever its
securities are loaned: (i) the Fund must receive at least 100% cash collateral
or equivalent securities from the borrower; (ii) the borrower must increase this
collateral whenever the market value of the loaned securities including accrued
interest exceeds the level of the collateral; (iii) each securities loan entered
into on behalf of the Funds shall either provide for termination within five
business days after notice by the Fund, or shall have a term not exceeding 60
days; (iv) the Fund must receive a reasonable return on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower. However, if a material event adversely affecting the
loaned securities were to occur, the Fund would terminate the loan and regain
the right to vote the securities.
VARIABLE RATE AND FLOATING RATE SECURITIES
Each Fund may purchase floating and variable rate demand notes and bonds,
which are obligations ordinarily having stated maturities in excess of 397 days,
but which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 397 days, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit a Fund to invest fluctuating amounts, which may change
daily without penalty, pursuant to direct arrangements between the Fund, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations. The interest rate on a floating rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest
rate on a variable rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are collateralized by letters of credit
or other credit support arrangements provided by banks. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, a Fund's
right to redeem is dependent on the ability of the borrower to pay
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principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and a Fund may invest in obligations which are not so
rated only if its investment adviser determines that at the time of investment
the obligations are of comparable quality to the other obligations in which the
Fund may invest. The adviser of the Funds will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Funds. Each Fund will not invest more than 15% of the
value of its net assets in floating or variable rate demand obligations as to
which it cannot exercise the demand feature on not more than seven days' notice
if there is no secondary market available for these obligations, and in other
securities that are not readily marketable. See "Investment Restrictions" below.
PARTICIPATION INTERESTS
Each Fund may purchase from financial institutions participation interests
in securities in which such Fund may invest. A participation interest gives a
Fund an undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security.
These instruments may have fixed, floating or variable rates of interest, with
remaining maturities of 13 months or less. If the participation interest is
unrated, or has been given a rating below that which is permissible for purchase
by the Fund, the participation interest will be backed by an irrevocable letter
of credit or guarantee of a bank, or the payment obligation otherwise will be
collateralized by U.S. Government securities, or, in the case of unrated
participation interests, the investment adviser of a Fund must have determined
that the instrument is of comparable quality to those instruments in which the
Fund may invest. For certain participation interests, a Fund will have the
right to demand payment, on not more than seven days' notice, for all or any
part of the Fund's participation interest in the security, plus accrued
interest. As to these instruments, the Fund intends to exercise its right to
demand payment only upon a default under the terms of the security, as needed to
provide liquidity to meet redemptions, or to maintain or improve the quality of
its investment portfolio. Each Fund will not invest more than 15% of its net
assets in participation interests that do not have this demand feature, and in
other securities that are not readily marketable. Currently, neither Fund
intends to invest more than 5% of its net assets in participation interests
during the current year. See "Investment Restrictions" below.
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid
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securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them which, if possible at all, would result in additional expense
and delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.
Each Fund's investment adviser will monitor the liquidity of Rule 144A
securities for that Fund under the supervision of the Trust's Board of Trustees.
In reaching liquidity decisions, the investment adviser will consider, among
other things, the following factors: (1) the frequency of trades and quotes for
the security, (2) the number of dealers and other potential purchasers wishing
to purchase or sell the security, (3) dealer undertakings to make a market in
the security and (4) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
UNSECURED PROMISSORY NOTES
Each Fund may also purchase unsecured promissory notes ("Notes") which are
not readily marketable and have not been registered under the 1933 Act, provided
such investments are consistent with such Fund's investment objectives and
policies. Each Fund will invest no more than 15% of its net assets in such
Notes and in other securities that are not readily marketable (which securities
would include floating and variable rate demand obligations as to which the Fund
cannot exercise the demand feature described above and as to which there is no
secondary market). Currently, neither Fund intends to invest any of its assets
in unsecured promissory notes during the coming year. See "Investment
Restrictions" below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person purchases a security
and simultaneously commits to resell that security to the seller (which is
usually a member bank of the Federal Reserve System or a member firm of the New
York Stock Exchange (or a subsidiary thereof)) at an agreed-upon date within a
number of days (usually not more than seven) from the date of purchase. The
resale price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed-upon price, which
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obligation is in effect secured by the value of the underlying security, usually
U.S. Government or government agency issues. Under the Investment Company Act of
1940, as amended (the "1940 Act"), repurchase agreements may be considered to be
loans by the buyer. A Fund's risk is limited to the ability of the seller to pay
the agreed upon amount on the delivery date. If the seller defaults, the
underlying security constitutes collateral for the seller's obligation to pay
although a Fund may incur certain costs in liquidating this collateral and in
certain cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by the Funds are fully collateralized, with such
collateral being marked to market daily.
Each Fund may borrow funds for temporary or emergency purposes, such as
meeting larger than anticipated redemption requests, and not for leverage. One
means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
a Fund 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 Fund may decline below the repurchase price of
those securities.
FOREIGN SECURITIES
Each Fund may invest its assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal of
funds or other assets of a Fund, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ from the
economy of the United States.
It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in over-the-counter markets located outside
the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
United States companies. Foreign security trading practices, including those
involving securities settlement where a Fund's assets may be released prior to
receipt of payment, may expose a Fund to increased risk in the event of a failed
trade or the insolvency of a foreign broker-dealer. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the United States and may be non-negotiable. In general, there is less
overall
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governmental supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the United States.
Each Fund may invest in foreign securities that impose restrictions on
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Because each Fund may buy and sell securities denominated in currencies
other than the U.S. dollar and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, each such Fund from time to time may
enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar. The Funds either enter into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded at
a net price without commission. A Fund maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
Each Fund may enter into forward foreign currency exchange contracts for
hedging purposes in an attempt to protect against changes in foreign currency
exchange rates between the trade and settlement dates of specific securities
transactions or changes in foreign currency exchange rates that would adversely
affect a portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated into
the investment adviser's long-term investment decisions, the Funds will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the investment adviser believes that it is
important to have the flexibility to enter into foreign currency hedging
transactions when it determines that the transactions would be in a Fund's best
interest. Although these transactions tend to minimize the risk of loss due to
a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the value of the hedged
currency increase. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of such securities between the date
the forward contract is entered into and the date it matures. The projection of
currency market movements is extremely
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difficult, and the successful execution of a hedging strategy is highly
uncertain.
At or before the maturity of a forward foreign currency exchange contract
when a Fund has agreed to deliver a foreign currency, the Fund may sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If the Fund
retains the portfolio security and engages in an offsetting transaction, the
Fund, at the time of execution of the offsetting transaction, will incur a gain
or a loss to the extent that movement has occurred in forward contract prices.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of a currency, and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Fund will suffer a loss to the extent of the price of the currency it has
agreed to sell is less than the price of the currency it has agreed to purchase
in the offsetting contract.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event a Fund's ability to utilize forward
contracts in the manner set forth in the Prospectus may be restricted. Forward
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a Fund
than if it had not entered into such contracts. The use of foreign currency
forward contracts may not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices of or rates of return on a Fund's foreign
currency denominated portfolio securities and the use of such techniques will
subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar-equivalent value of the foreign currency-denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Fund may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit a Fund's ability to use such contracts to
hedge or cross-hedge its assets. Also, with regard to a Fund's use of cross-
hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Fund's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Fund's assets that are the subject of such cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
Each Fund may invest in guaranteed investment contracts ("GICs") issued by
insurance companies. Pursuant to such contracts, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund
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guaranteed interest. The GICs provide that this guaranteed interest will not be
less than a certain minimum rate. The insurance company may assess periodic
charges against a GIC for expenses and service costs allocable to it, and the
charges will be deducted from the value of the deposit fund. Because a Fund may
not receive the principal amount of a GIC from the insurance company on seven
days' notice or less, the GIC is considered an illiquid investment and, together
with other instruments in a Fund which are not readily marketable, will not
exceed 15% of the Fund's net assets. The term of a GIC will be 13 months or
less. In determining average weighted portfolio maturity, a GIC will be deemed
to have a maturity equal to the longer of the period of time remaining until the
next readjustment of the guaranteed interest rate or the period of time
remaining until the principal amount can be recovered from the issuer through
demand. Currently, each Fund intends to invest 5% or less of its respective net
assets in GICs during the current year.
WHEN-ISSUED SECURITIES
The Funds may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, such Fund
would take delivery of such securities. Prior to committing to the purchase of
a security on a when-issued or on a forward delivery basis, the Funds will
establish procedures consistent with the relevant policies of the SEC. Those
policies currently recommend that an amount of a Fund's assets equal to the
amount of the purchase commitment be held aside or segregated to be used to pay
for the commitment. Therefore, the Funds expect always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any purchase
commitments or to limit any potential risk. Although the Funds do not intend to
make such purchases for speculative purposes and intend to adhere to SEC
policies, purchases of securities on a when-issued or forward delivery basis may
involve additional risks than other types of securities purchases. For example,
a Fund may have to sell assets which have been set aside in order to meet
redemptions. Also, if a Fund determines it is advisable as a matter of
investment strategy to sell the when-issued or forward delivery securities, the
Fund would be required to meet its obligations from its then available cash flow
or the sale of securities, or, although it would not normally expect to do so,
from the sale of the when-issued or forward delivery securities themselves
(which may have a value greater or less than the Fund's payment obligation).
When a Fund engages in when-issued or forward delivery transactions, it
relies on the other party to consummate the trade. Failure of such other party
to do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities and any subsequent fluctuations in
their market value are taken into account when determining the market value of a
Fund starting on the day the Fund agrees to purchase the securities. The Fund
does not earn interest on the securities it has committed to purchase until they
are paid for and delivered on the settlement date.
ZERO COUPON OBLIGATIONS
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The Funds may acquire zero coupon obligations when consistent with their
respective investment objective and policies. Such obligations have greater
price volatility than coupon obligations and will not result in payment of
interest until maturity. Since interest income is accrued throughout the term
of the zero coupon obligation but is not actually received until maturity, a
Fund, which is required for tax purposes to distribute to its shareholders a
certain percentage of its income, may have to sell other securities to
distribute the income prior to maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
General. The successful use of such instruments by a Fund may depend in
-------
part upon its investment adviser's skill and experience with respect to such
instruments. Should interest or exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize losses and thus will be in a worse position
than if such strategies had not been used. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
Futures Contracts. Each Fund may enter into contracts for the purchase or
-----------------
sale for future delivery of securities or foreign currencies, or contracts based
on financial indices. U.S. futures contracts have been designed by exchanges
which have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange. A
Fund may enter into futures contracts which are based on debt securities that
are backed by the full faith and credit of the U.S. Government, such as long-
term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. A Fund may also enter into futures contracts which are
based on fixed income securities issued by entities other than the U.S.
Government, including foreign government securities, corporate debt securities,
or contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities.
Purchases or sales of stock index futures contracts are used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, the Fund may sell stock index futures contracts
in anticipation of or during a decline in the market value of the Fund's
securities. If such decline occurs, the loss in value of portfolio securities
may be offset, in whole or part, by gains on the futures position. When a Fund
is not fully invested in the securities market and anticipates a significant
market advance, it may purchase stock index futures contracts in order to gain
rapid market exposure that may, in part or entirely, offset increases in the
cost of securities that the Fund intends to purchase. As such purchases are
made, the corresponding positions in stock index futures contracts will be
closed out. In a
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substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, a Fund will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of a Fund which holds or intends to acquire fixed income securities, is to
attempt to protect the Fund from fluctuations in interest or foreign exchange
rates without actually buying or selling fixed income securities or foreign
currencies. For example, if interest rates were expected to increase, a Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the debt
securities owned by the Fund. If interest rates did increase, the value of the
debt security in a Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling debt securities and investing
in bonds with short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash market, the use
of futures contracts as an investment technique allows a Fund to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, a Fund could
take advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on the
cash market. To the extent a Fund enters into futures contracts for this
purpose, the assets in the segregated asset
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account maintained to cover the Fund's obligations with respect to such futures
contracts will consist of cash, cash equivalents or high quality liquid debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the investment adviser may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the investment
adviser believes that use of such contracts will benefit the Funds, if the
judgment of the investment adviser about the general direction of interest rates
is incorrect, a Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if a Fund has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held by it and interest rates decrease instead, the
Fund will lose part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if a Fund has insufficient
cash, it may have to sell debt securities to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. Each Fund may purchase and write options on
----------------------------
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Fund is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a
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<PAGE>
Fund will retain the full amount of the option premium which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or foreign currency
which is deliverable upon exercise of the futures contract. If the futures price
at expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of the Trust has adopted the requirement that futures
contracts and options on futures contracts be used either (i) as a hedge without
regard to any quantitative limitation, or (ii) for other purposes to the extent
that immediately thereafter the aggregate amount of initial margin deposits on
all (non-hedge) futures contracts of the Fund and premiums paid on outstanding
(non-hedge) options on futures contracts owned by the Fund does not exceed 5% of
the market value of the net assets of the Fund. In addition, the aggregate
market value of the outstanding futures contracts purchased by the Fund may not
exceed 50% of the market value of the total assets of the Fund. Neither of
these restrictions will be changed by the Trust's Board of Trustees without
considering the policies and concerns of the various applicable federal and
state regulatory agencies.
Options on Foreign Currencies. Each Fund may purchase and write options on
-----------------------------
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, a Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially,
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<PAGE>
the effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Funds may write options on foreign currencies for the same types of
hedging purposes. For example, where a Fund anticipates a decline in the dollar
value of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the options will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Each Fund may write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held by it. A call option
is also covered if the Fund has a call on the same foreign currency and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government securities and other high
quality liquid debt securities in a segregated account with its custodian.
Each Fund may write call options on foreign currencies that are not covered
for cross-hedging purposes. A call option on a foreign currency is for cross-
hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances,
the Fund collateralizes the option by maintaining in a segregated account with
its custodian, cash or U.S. Government securities or other high quality liquid
debt securities in
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an amount not less than the value of the underlying foreign currency in U.S.
dollars marked to market daily.
Additional Risks of Options on Futures Contracts, Forward Contracts and
-----------------------------------------------------------------------
Options on Foreign Currencies. Unlike transactions entered into by a Fund in
- -----------------------------
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of
the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. A Fund's ability to
terminate over-the-counter options will
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be more limited than with exchange-traded options. It is also possible that
broker-dealers participating in over-the-counter options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes its
position, each Fund will treat purchased over-the-counter options and assets
used to cover written over-the-counter options as illiquid securities. With
respect to options written with primary dealers in U.S. Government securities
pursuant to an agreement requiring a closing purchase transaction at a formula
price, the amount of illiquid securities may be calculated with reference to the
repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in a Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
OPTIONS ON SECURITIES
Each Fund may write (sell) covered call and put options to a limited extent
on its portfolio securities ("covered options"). However, a Fund may forgo the
benefits of appreciation on securities sold or may pay more than the market
price on securities acquired pursuant to call and put options written by the
Fund.
When a Fund writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Fund will realize income
in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which a Fund has no control, the Fund must
sell the underlying security to the option holder at the exercise price. By
writing a covered call option, a Fund forgoes, in exchange for the premium less
the commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security above the
exercise price.
When a Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Fund will realize income in the amount of the premium received
for writing the option. If the put option is exercised, a decision over which a
Fund has no control, the Fund must purchase the underlying security from the
option holder at the exercise price. By writing a covered put option, a Fund,
in exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. A Fund will
only write put options involving securities for which a determination is made at
the time the option is written that the Fund wishes to acquire the
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securities at the exercise price.
A Fund may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." Where a Fund cannot effect a closing purchase transaction, it may
be forced to incur brokerage commissions or dealer spreads in selling securities
it receives or it may be forced to hold underlying securities until an option is
exercised or expires.
When a Fund writes an option, an amount equal to the net premium received
by the Fund is included in the liability section of the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of the deferred credit
will be subsequently marked to market to reflect the current market value of the
option written. The current market value of a traded option is the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price. If an option expires on its stipulated expiration date or if the Fund
enters into a closing purchase transaction, the Fund will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such option will
be eliminated. If a call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security and the proceeds of the sale will
be increased by the premium originally received. The writing of covered call
options may be deemed to involve the pledge of the securities against which the
option is being written. Securities against which call options are written will
be segregated on the books of the custodian for the Fund.
A Fund may purchase call and put options on any securities in which it may
invest. A Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. A Fund would ordinarily have a
gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund's portfolio, at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
portfolio securities. Put options also may be purchased by a Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. A Fund would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
Each Fund has adopted certain other non-fundamental policies concerning
option
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transactions which are discussed below. A Fund's activities in options
may also be restricted by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), for its qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
Each Fund may engage in over-the-counter options transactions with broker-
dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate over-the-
counter option positions is more limited than with exchange-traded option
positions because the predominant market is the issuing broker rather than an
exchange, and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. To reduce this risk, a Fund
will purchase such options only from broker-dealers who are primary government
securities dealers recognized by the Federal Reserve Bank of New York and who
agree to (and are expected to be capable of) entering into closing transactions,
although there can be no guarantee that any such option will be liquidated at a
favorable price prior to expiration. The investment adviser will monitor the
creditworthiness of dealers with whom a Fund enters into such options
transactions, under the general supervision of the Trust's Board of Trustees.
OPTIONS ON SECURITIES INDICES
In addition to options on securities, a Fund may also purchase and write
(sell) call and put options on securities indices. Such options give the holder
the right to receive a cash settlement during the term of the option based upon
the difference between the exercise price and the value of the index. Such
options will be used for the purposes described above under "Options on
Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although a Fund
generally will only purchase or write such an option if its investment adviser
believes the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. A Fund will not purchase such options unless its
investment adviser believes the market is sufficiently developed such that the
risk of trading in such options is no greater than the risk of trading in
options on securities.
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Price movements in the Fund's securities may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the investment adviser may be forced to liquidate portfolio
securities to meet a Fund's settlement obligations.
SHORT SALES "AGAINST THE BOX"
In a short sale, a Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Fund may engage in
short sales only if at the time of the short sale it owns or has the right to
obtain, at no additional cost, an equal amount of the security being sold short.
This investment technique is known as a short sale "against the box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Fund engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Fund maintains in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position.
Neither Fund will engage in short sales against the box for investment
purposes. A Fund may, however, make a short sale as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security (or a security convertible or exchangeable for such security), or when
a Fund wants to sell the security at an attractive current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes or
for purposes of satisfying certain tests applicable to regulated investment
companies under the Code. In such case, any future losses in a Fund's long
position should be reduced by a gain in the short position. Conversely, any
gain in the long position should be reduced by a loss in the short position.
The extent to which such gains or losses are reduced depends upon the amount of
the security sold short relative to the amount a Fund owns. There are certain
additional transaction costs associated with short sales against the box, but a
Fund will endeavor to offset these costs with the income from the investment of
the cash proceeds of short sales.
As a non-fundamental operating policy, not more than 40% of a Fund's total
assets would be involved in short sales against the box.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created in
the future, upon the Trust supplementing the Funds' Prospectus or Statement of
Additional Information (as appropriate), a Fund may invest in obligations other
than those listed previously, provided such investments are consistent with such
Fund's investment objective, policies and restrictions.
RATING SERVICES
Ratings represent the opinions of rating services as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and
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subjective and are not absolute standards of quality. Although these ratings are
an initial criterion for selection of portfolio investments, the investment
adviser also makes its own evaluations of these securities, subject to review by
the Board of Trustees of the Trust. After purchase by a Fund, an obligation may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event would require a Fund to dispose of the
obligation, but its adviser will consider such an event in its determination of
whether the Fund should continue to hold the obligation. A description of the
ratings used herein and in the Funds' Prospectus is set forth in the Appendix to
this Statement of Additional Information.
Except as stated otherwise, all investment policies and restrictions
described herein are non-fundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each
Fund and may not be changed with respect to a Fund without the approval of a
"majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the 1940 Act and as used in this Statement
of Additional Information and the Prospectus means, with respect to a Fund, the
lesser of (i) 67% or more of the outstanding voting securities of the Fund
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy, or (ii) more than
50% of the outstanding voting securities of the Fund.
With respect to each fundamental investment restriction and each non-
fundamental investment policy listed below, 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 such percentage resulting from changes in a
Fund's total assets or the value of a Fund's securities, or a later change in
the rating of a portfolio security, will not be considered a violation of the
relevant restriction or policy.
As a matter of fundamental policy, each Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund, except that
in an amount not to exceed 1/3 of the current value of the Fund's assets
(including such borrowing) less liabilities (not including such borrowing), it
may borrow money, enter into reverse repurchase agreements, and purchase when-
issued securities, and except that it may pledge, mortgage or hypothecate its
assets to secure such borrowings, reverse repurchase agreements, or when-issued
securities, provided that collateral arrangements with respect to options and
futures, including deposits of initial margin and variation margin, are not
considered a pledge of assets for purposes of this restriction, and except that
assets may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment Company
Institute;
(2) underwrite securities issued by other persons except insofar as the
Trust or a Fund
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may technically be deemed an underwriter under the 1933 Act in selling a
portfolio security;
(3) make loans to other persons except (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or the purchase of short-term obligations, or (c) by
purchasing debt securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests
in partnerships substantially all of whose assets consist of real estate but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (the Trust may hold and
sell, for a Fund's portfolio, real estate acquired as a result of the Fund's
ownership of securities);
(5) invest 25% or more of its assets in any one industry (excluding U.S.
Government securities); or
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
State and Federal Restrictions. In order to comply with certain state and
------------------------------
federal statutes and policies, each Fund will not as a matter of operating
policy:
(i) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or management;
(iii) purchase securities issued by any other investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Fund if such purchase at the time thereof would cause
(a) more than 10% of the Fund's total assets (taken at the greater of
cost or market value) to be invested in the securities of such issuers;
(b) more than 5% of the Fund's total assets (taken at the greater of
cost or market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such
issuer to be held for the Fund;
-24-
<PAGE>
(iv) purchase securities of any issuer if such purchase at the time thereof
would cause the Fund to hold more than 10% of any class of securities
of such issuer, for which purposes all indebtedness of an issuer shall
be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall
not be subject to this restriction;
(v) purchase or retain in the Fund's portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders
is an officer or Trustee of the Trust, or is an officer or partner of
the investment adviser of the Fund, if after the purchase of the
securities of such issuer for the Fund one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both,
all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at market
value;
(vi) invest more than 5% of the Fund's net assets in warrants (valued at
the lower of cost or market), but not more than 2% of the Fund's net
assets may be invested in warrants not listed on the New York Stock
Exchange or the American Stock Exchange;
(vii) make short sales of securities or maintain a short position
(excluding short sales if the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of equivalent kind and
amount) if such short sales represent more than 25% of the Fund's net
assets (taken at market value); provided, however, that the value of
the Fund's short sales of securities (excluding U.S. Government
securities) of any one issuer may not be greater than 2% of the value
(taken at market value) of the Fund's net assets or more than 2% of
the securities of any class of any issuer;
(viii) enter into repurchase agreements providing for settlement in more
than seven days after notice, or purchase securities which are not
readily marketable, if, in the aggregate, more than 15% of its net
assets would be so invested; or
(ix) purchase puts, calls, straddles, spreads or any combination thereof,
if by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's total assets.
Policies (i) through (ix) may be changed by the Board of Trustees of the
Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or
-25-
<PAGE>
loss. Each Fund may engage in short-term trading to achieve its investment
objective. Portfolio turnover may vary greatly from year to year as well as
within a particular year. Each Fund's portfolio turnover rate may also be
affected by cash requirements for redemptions of Shares and by regulatory
provisions which enable a Fund to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
Portfolio trading is engaged in for a Fund if its investment adviser believes
that a transaction net of costs (including custodian charges) will help achieve
the Fund's investment objective.
A Fund's purchase and sales of securities may be principal transactions,
that is, securities may be purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases and, therefore, the Funds do not anticipate
paying brokerage commissions in such transactions. Any transactions for which a
Fund pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and the
asked price.
Allocations of transactions, including their frequency, to various dealers
is determined by the investment adviser in its best judgment and in a manner
deemed to be in the best interest of the investors in the applicable Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner at the most favorable price.
The Advisory Agreement provides that, in executing portfolio transactions
and selecting brokers or dealers, the investment adviser will seek to obtain the
best net price and the most favorable execution. The investment adviser shall
consider factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis.
In addition, the Advisory Agreement authorizes the investment adviser, to
the extent permitted by law and subject to the review of the Trust's Board of
Trustees, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the investment
adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the accounts as to which it
exercises investment discretion. Such brokerage and research services might
consist of reports and statistics on specific companies or industries, general
summaries of groups of stocks and their comparative earnings, or broad overviews
of the stock market and the economy. Such services might also include reports on
global, regional, and country-by-country prospects for economic growth,
anticipated levels of inflation, prevailing and expected interest rates, and the
outlook for currency relationships.
Supplementary research information so received is in addition to and not in
lieu of services required to be performed by the investment adviser and does not
reduce the investment advisory fees (if any) payable by the Funds. Such
information may be useful to the investment
-26-
<PAGE>
adviser in serving the Funds and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to the investment adviser in carrying out its obligations to the Funds.
Investment decisions for a Fund will be made independently from those for
any other account or investment company that is or may in the future become
managed by the investment adviser or any of its affiliates. If, however, a Fund
and other investment companies or accounts managed by the same investment
adviser are contemporaneously engaged in the purchase or sale of the same
security, the transactions may be averaged as to price and allocated equitably
to each account. In some cases, this policy might adversely affect the price
paid or received by a Fund or the size of the position obtainable for the Fund.
In addition, when purchases or sales of the same security for a Fund and for
other investment companies managed by the same investment adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Furthermore, in certain circumstances affiliates of the investment adviser whose
investment portfolios are managed internally, rather than by the investment
adviser, might seek to purchase or sell the same type of investments at the same
time as a Fund. Such an event might also adversely affect that Fund.
PORTFOLIO TURNOVER
Under normal market conditions, it is expected that the annual portfolio
turnover rate for each Fund will not exceed 100%. High portfolio turnover may
result in the realization of substantial net capital gains or losses. 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 "Taxation" below.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the performance of a Fund's Institutional
Shares and Trust Shares may be included in advertisements, sales literature or
shareholder reports. These performance figures are calculated in the following
manner:
TOTAL RETURN. The "average annual total return" for Institutional Shares
and Trust Shares of each Fund may be quoted, and such return is computed by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
T = [(ERV/P) to the first power divided by n - 1]
-27-
<PAGE>
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1-, 5- or 10-year (or other) periods
at the end of the applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
The calculation is made assuming that (1) all dividends and capital gains
distributions are reinvested on the reinvestment dates at the price per Share
existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the applicable Fund
class during the periods is reflected. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.
BASED ON THE FOREGOING CALCULATIONS, THE TOTAL RETURN FOR INSTITUTIONAL
SHARES OF EACH OF THE FUNDS AND FOR TRUST SHARES OF THE OPTIMUM GROWTH FUND FOR
THE PERIOD FROM COMMENCEMENT OF OPERATIONS THROUGH SEPTEMBER 30, 1996 WERE AS
FOLLOWS:
Commencement of Operations(*)
Funds through 9/30/96
----- ----------------------------
Optimum Growth Fund
Institutional Shares 0.04%
Trust Shares 1.21%
Value Equity Fund
Institutional Shares 2.61%
_____________
(*) Institutional Shares for each of the Funds commenced operations on June 1,
1996. Trust Shares for the Optimum Growth Fund commenced operations on July 3,
1996.
DISTRIBUTION RATE. Each Fund may also quote its distribution rate for each
class of its Shares. A Fund's distribution rate is calculated by annualizing
the per Share distribution for a particular class of Shares for the most recent
calendar month and dividing such annualized distribution by the net asset value
per Share of such class on the last day of such month. The distribution rate of
a Fund will not be used in advertising unless accompanied by standard
performance measures.
PERFORMANCE RESULTS. Any total return quotation provided for Institutional
Shares and
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<PAGE>
Trust Shares of a Fund should not be considered as representative of the
performance of that Fund in the future since the net asset value of Shares of
that Fund will vary based not only on the type, quality and maturities of the
securities held by it, but also on changes in the current value of such
securities and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total return should be
considered when comparing the total return of Institutional Shares and Trust
Shares of a Fund to total rates of return published for other investment
companies or other investment vehicles. Total return reflects the performance of
both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparisons of non-standardized performance measures of various investments
are valid only if performance is calculated in the same manner for each measure
in the comparison. Since there are different methods of calculating
performance, investors should consider the effect of the methods used to
calculate performance when comparing the performance of Institutional Shares and
Trust Shares of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, each Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. The Funds may invest in some
instruments not eligible for inclusion in such an index, and may be prohibited
from investing in some instruments included in this index. Evaluations of a
Fund's performance made by independent sources may also be used in
advertisements concerning such Fund. Sources for a Fund's performance
information may include, but are not limited to, the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
- -------------------------
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
- --------
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
- -------------
performance rankings and ratings of a variety of mutual funds investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
- --------------------------------------
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a "Money
- ---------------
Watch" section featuring financial news.
Donoghue's Money Fund Report, a weekly publication of the Donoghue Organization,
- ----------------------------
Inc., of
-29-
<PAGE>
Holliston, Massachusetts, reporting on the performance of the nation's money
market funds, summarizing money market fund activity, and including certain
averages as performance benchmarks, specifically "Donoghue's Money Fund Average"
and "Donoghue's Government Money Fund Average."
Financial Times, Europe's business newspaper, which features from time to time
- ---------------
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
- ---------------
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
- ------
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
- -------
of a variety of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic and
- ----------------
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
- -------------------------------------------------------------------
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
- -----
and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
- --------------
financial news.
Personal Investing News, a monthly news publication that often reports on
- -----------------------
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
- -----------------
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
- -------
business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically reports
- --------------------------
mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
- -------------------
covers financial news.
Weisenberger Investment Companies Services, an annual compendium of information
- ------------------------------------------
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend
-30-
<PAGE>
records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
- -------------
section reporting on the mutual fund/financial industry.
World Investor, a European publication that periodically reviews the performance
- --------------
of U.S. mutual funds investing internationally.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The Trust determines the net asset value of the Institutional Shares and
Trust Shares of each Fund each day that the New York Stock Exchange (the "NYSE")
is open for business (a "Business Day"). Daily determinations of net asset
value for each Fund are made at 4:00 p.m. (Eastern time) and are calculated
separately for each class of Shares by dividing the value of all securities and
other assets belonging to a Fund that are allocated to a particular class of
Shares, less the liabilities charged to that class, by the number of Shares of
the class that are outstanding. Purchases and redemptions will be effected at
the time of determination of net asset value next following the receipt of any
purchase or redemption order deemed to be in good order. See "How To Purchase,
Exchange and Redeem Shares" in the Prospectus.
Portfolio securities are valued on the basis of market quotations when they
are readily available. Each Fund values debt securities for which market
quotations are not readily available at their fair value as determined in good
faith, utilizing procedures approved by the Board of Trustees of the Trust, on
the basis of valuations provided either by dealers or a pricing service. Absent
unusual circumstances, debt securities having a remaining maturity of sixty days
or less when purchased, and debt securities originally purchased with maturities
in excess of sixty days but which currently have maturities of sixty days or
less, are valued at cost adjusted for amortization of premiums and accretion of
discounts.
Interest rate futures contracts held by a Fund are valued on the basis of
closing market quotations, which are normally available daily. When market
quotations are not readily available, the fair value of these contracts will be
determined in good faith utilizing procedures approved by the Board of Trustees
of the Trust.
A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by the
Trust's Board of Trustees. While no single standard for determining fair value
exists, as a general rule, the current fair value of a security would appear to
be the amount which a Fund could expect to receive upon its current sale. Some,
but not necessarily all, of the general factors which may be considered in
determining fair value include: (i) the fundamental analytical data relating to
the investment; (ii) the nature and duration of restrictions on disposition of
the securities; and (iii) an evaluation of the forces which influence the market
in which these securities are purchased and sold. Without limiting or including
all of the specific factors which may be considered in determining fair value,
some of the specific factors include: type of security, financial statements of
the issuer,
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<PAGE>
cost at date of purchase, size of holding, discount from market value, value of
unrestricted securities of the same class at the time of purchase, special
reports prepared by analysts, information as to any transactions or offers with
respect to the security, existence of merger proposals or tender offers
affecting the securities, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
Shares are continuously offered for sale by Edgewood Services, Inc. (the
"Distributor"). As described in the Prospectus, Trust Shares and Institutional
Shares are offered to individual investors and institutions, respectively. Both
Institutional Shares and Trust Shares may be purchased directly from the
Distributor or through Shareholder Organizations. Different types of Customer
accounts at certain Shareholder Organizations may be used to purchase Trust
Shares and Institutional Shares, including eligible agency and trust accounts.
Investors purchasing Shares may include officers, directors, or employees of the
particular Shareholder Organization.
As stated in the Prospectus, no sales charge is imposed by the Trust on the
purchase of Shares or reinvestment of dividends or distributions. Additionally,
the Trust does not currently charge any fees for the exchange of Shares pursuant
to the exchange program described in the Prospectus under "Investor Programs --
Exchange Privilege."
Shareholders should be aware, however, that certain Shareholder
Organizations may charge a Customer's account fees for exchange orders and other
cash management services provided. Customers should contact their Shareholder
Organizations directly for further information.
The Trust may suspend the right of redemption or postpone the date of
payment for Shares for more than 7 days during any period when (a) trading on
the NYSE is restricted by applicable rules and regulations of the SEC; (b) the
NYSE is closed for other than customary weekend and holiday closings; (c) the
SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC.
In the event that Shares are redeemed in cash at their net asset value, a
shareholder may receive in payment for such Shares an amount that is more or
less than his original investment due to changes in the market prices of that
Fund's portfolio securities.
OTHER INVESTOR PROGRAMS
As described in the Prospectus, Trust Shares and Institutional Shares of
the Funds may be purchased in connection with certain Retirement Programs, and
Trust Shares may be purchased through an Automatic Investment Program and
redeemed through a systematic withdrawal Plan. Customers of Shareholder
Organizations should contact their Shareholder Organizations directly for
information on the availability of, and procedures and account charges
associated with, these and other investor programs.
-32-
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The trustees and officers of the Trust, their ages and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period.
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<PAGE>
TRUSTEES
- --------
DONALD L. CAMPBELL -- Director; Retired; Director, Excelsior Funds, Inc.
(formerly known as UST Master Funds, Inc.) (since 1990), Excelsior Tax-Exempt
Funds, Inc. (formerly known as UST Master Tax-Exempt Funds, Inc.) (since 1990);
Senior Vice President, Royal Insurance Company, Inc., until August 1989;
Director, Royal Life Insurance Co. of New York. His age is 69. His address is
333 East 69th Street, Apt. 10-H, New York, NY 10021.
RODMAN L. DRAKE -- Trustee; Trustee, Excelsior Funds (since 1993);
Director, Parsons Brinkerhoff, Inc., (engineering firm) (since 1995); President,
R.L. Drake & Co. Inc. (investment and consulting firm) (since 1991); Trustee,
Hyperion Total Return Fund, Inc., and three other closed-end funds for which
Hyperion Capital Management, Inc. is the investment adviser; Co-Chairman, KMR
Power Corporation (power plants) (since 1993); Chairman, Car Rental Systems do
Brazil S.A. (Hertz licensee for Brazil) (since 1994); Managing Director and
Chief Executive Officer, Cresap, McCormick & Paget, Inc. (subsequently, Cresap,
a Towers Perrin Company) (from 1980 to 1990); Director, Alex. Brown & Sons, Inc.
(1989 to 1991); Director, Mueller Industries, Inc. (1992 to 1994). His age is
53. His address is c/o KMR Power Corp., 30 Rockefeller Plaza, Suite 5425, New
York, NY 10112.
JOSEPH H. DUGAN -- Director; Retired; Director, Excelsior Funds, Inc.
(formerly known as UST Master Funds, Inc.) (since 1984), Excelsior Tax-Exempt
Funds, Inc. (formerly known as UST Master Tax-Exempt Funds, Inc.) (since 1984);
President, CEO and Director, L.B. Foster Company (tubular products), from
September, 1987 until May, 1990; Executive Vice President and COO, L.B. Foster
Company, from September, 1986 until September, 1987; Senior Vice President --
Finance, Chief Financial Officer and Director, Todd Shipyards Corporation, prior
to January 3, 1986. His age is 70. His address is 913 Franklin Lake Road,
Franklin Lakes, NJ 07417.
WOLFE J. FRANKL -- Director; Retired; Director, Excelsior Funds, Inc.
(formerly known as UST Master Funds, Inc.) (since 1986), Excelsior Tax-Exempt
Funds, Inc. (formerly known as UST Master Tax-Exempt Funds, Inc.) (since 1986);
Director, Deutsche Bank Financial, Inc.; Director, The Harbus Corporation;
Trustee, HSBC Funds Trust and HSBC Mutual Funds Trust. His age is 74. His
address is 2320 Cumberland Rd., Charlottesville, VA 22901.
W. WALLACE MCDOWELL, JR. -- Trustee; Trustee, Excelsior Funds (since 1993);
Private Investor (since 1994); Managing Director, Morgan Lewis Githens & Ahn
(1991 to 1994); Chairman and Chief Executive Officer, The Prospect Group, Inc.
(1983 to 1990) and Director, U.S. Homecare Corporation (since 1992), Grossmans,
Inc. (since 1993), Children's Discovery Centers (since 1984), Interactive
Technologies, Inc. (since 1992) and Jack Morton Productions (since 1987). His
age is 59. His address is c/o Prospect Capital Corporation, 43 Arch Street,
Greenwich, CT 06830.
JONATHAN PIEL -- Trustee; Trustee, Excelsior Funds (since 1993); President
and Editor, Scientific American, Inc. (1969 to 1994); Director, Group for The
South Fork, Bridgehampton, New York (since October 1993); Member, Advisory
Committee, Knight Journalism Fellowships,
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<PAGE>
MIT. His age is 57. His address is 558 East 87th Street, New York, NY 10128.
ROBERT A. ROBINSON -- Director; President Emeritus, The Church Pension Fund
and its affiliated companies, since 1991; President and Director, 1989-91;
Trustee, HSBC Funds Trust and HSBC Mutual Funds Trust; Director, Excelsior
Funds, Inc. (formerly known as UST Master Funds, Inc.) (since 1989), Excelsior
Tax-Exempt Funds, Inc. (formerly known as UST Master Tax-Exempt Funds, Inc.)
(since 1989); Trustee, H.B. and F.H. Bugher Foundation and Director of its
wholly owned subsidiaries -- Rosiclear Lead and Flourspar Mining Co. and The
Pigmy Corporation; Director, Morehouse Publishing Co. since 1989. His age is
69. His address is Church Pension Fund, 800 Second Avenue, New York, NY 10017.
ALFRED C. TANNACHION/1/ -- Retired; Chairman of the Board, President and
Treasurer and Director, Excelsior Funds, Inc. (since 1985), Excelsior Tax-Exempt
Funds, Inc. (since 1985), UST Master Variable Series, Inc. (since 1994). His
age is 69. His address is 1135 Hyde Park Court, Mahwah, NJ 07430.
FREDERICK S. WONHAM/1/ -- Director; Retired; Director, Excelsior Funds,
Inc. (formerly known as UST Master Funds, Inc.) (since 1995), Excelsior Tax-
Exempt Funds, Inc. (formerly known as UST Master Tax-Exempt Funds, Inc.) (since
1995); Trustee, Excelsior Funds (since 1996); Vice Chairman of U.S. Trust
Corporation and U.S. Trust Co. of New York, until September, 1995; Chairman,
U.S. Trust of Connecticut. His age is 64. His address is 238 June Road,
Stamford, CT 06903.
EXECUTIVE OFFICERS OF THE TRUST
- -------------------------------
JOHN M. CORCORAN -- Assistant Treasurer; Second Vice President, Chase
Global Funds Services Company (since 1993); Audit Manager, Ernst & Young (1987
to 1993). His address is c/o Chase Global Funds Services Company, 73 Tremont
Street, Boston, MA 02108.
MICHAEL LEARY -- Assistant Secretary; Assistant Treasurer, Chase Global
Funds Services Company (since 1993); Audit Manager, Ernst & Young (1988 to
1993). His address is c/o Chase Global Funds Services Company, 73 Tremont
Street, Boston, MA 02108.
W. BRUCE McCONNEL, III -- Secretary; Partner of the Law Firm of Drinker
Biddle & Reath. His address is PNB Building, 1345 Chestnut Street,
Philadelphia, PA 19107.
ALFRED C. TANNACHION/1/ -- Chairman of the Board, President and Treasurer;
Retired. His address is 1135 Hyde Park Court, Mahwah, NJ 07430.
Each trustee is paid an annual fee in the amount of $4,000 and a meeting
fee of $250
- ----------
/1/ This trustee is considered by the Trust to be an "interested person" of the
Trust as defined in the 1940 Act.
-35-
<PAGE>
for each board meeting attended for serving as trustee of the Trust, and is
reimbursed for expenses incurred in connection with service as a trustee. The
compensation paid to the trustees for the fiscal year ended May 31, 1995 is set
forth below. The trustees may hold various other directorships unrelated to
these funds.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF BENEFITS FROM THE
NAME OF PERSON, FROM TRUST UPON TRUST AND
POSITION THE TRUST EXPENSES RETIREMENT FUND COMPLEX/1/
- --------------- ------------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Donald L. Campbell, Trustee/3/ $ 0 None None (3)/2/ $34,250
Rodman L. Drake, Trustee/3/ $5,000 None None (1)/2/ $ 5,000
Joseph H. Dugan, Trustee/3/ $ 0 None None (3)/2/ $34,250
Wolfe J. Frankl, Trustee/3/ $ 0 None None (3)/2/ $34,250
W. Wallace McDowell, $5,250 None None (1)/2/ $ 5,250
Trustee
Jonathan Piel, Trustee $5,250 None None (1)/2/ $ 5,250
Robert A. Robinson, $ 0 None None (3)/2/ $34,250
Trustee/3/
Alfred C. Tannachion, $ 0 None None (3)/2/ $44,750
Chairman of the Board,
President and Treasurer/3/
Frederick S. Wonham, $ 0 None None (3)/2/ $ 0
Trustee/3/
</TABLE>
* * * * *
________________________
/1/ As used in the above compensation table, the term "Fund Complex" shall
refer to the Trust, Excelsior Funds, Inc. (formerly known as UST Master
Funds, Inc.), Excelsior Tax-Exempt Funds, Inc. (formerly known as UST
Master Tax-Exempt Funds, Inc.), UST Master Variable Series, Inc. and
Excelsior Funds.
/2/ Total number of such other investment company boards trustee serves on
within the Fund Complex.
/3/ Messrs. Campbell, Dugan, Frankl, Robinson and Tannachion were elected to
serve as trustees of the Trust at a shareholder meeting held on November
15, 1995. Mr. Wonham was elected to serve as trustee of the Trust as of
January 1, 1996.
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<PAGE>
The Trust Instrument of the Trust provides that it will indemnify its
trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust unless it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless it is finally adjudicated that they did not act in good
faith in the reasonable belief that their actions were in the best interests of
the Trust. In the case of settlement, such indemnification will not be provided
unless it has been determined by a court or other body approving the settlement
or other disposition, or by a reasonable determination, based upon a review of
readily available facts, by vote of a majority of disinterested trustees, or in
a written opinion of independent counsel, that such officers or trustees have
not engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
Shareholders owning 25% or more of the outstanding Shares of a Fund may
have the ability to take actions without the approval of any other investor in
that Fund.
INVESTMENT ADVISORY SERVICES
U.S. Trust is responsible for the management of the assets of the Optimum
Growth and Value Equity Funds pursuant to an investment advisory agreement with
the Trust, subject to the general supervision and guidance of the Board of
Trustees of the Trust. The investment advisory agreement described above is
referred to herein as "Advisory Agreement."
The Advisory Agreement will continue in effect with respect to each Fund as
long as such continuance is specifically approved at least annually by the Board
of Trustees of the Trust or by a majority vote of the shareholders in the
applicable Fund and, in either case, by a majority of the trustees of the Trust
who are not parties to the Advisory Agreement or interested persons of any such
party, at a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement was approved by the Trust's Board of Trustees on February
9, 1996. The investment adviser and administrators have agreed to waive certain
fees. Shareholder Organizations may charge their Customers account fees for
investment and other cash management services.
The Advisory Agreement provides that the investment adviser may render
services to others, and the Advisory Agreement is terminable by the Trust
without penalty on not more than 60 days' nor less than 30 days' written notice
when authorized either by majority vote of the Fund or by a vote of a majority
of the Board of Trustees of the Trust, or by the investment adviser on not more
than 60 days' nor less than 30 days' written notice, and will automatically
terminate in the event of its assignment. The Advisory Agreement provides that
neither the investment adviser nor its personnel shall be liable for any error
of judgment or mistake of law or for any loss arising out of any investment, or
for any act or omission in the execution of security transactions for a Fund,
except for willful misfeasance, bad faith, gross negligence or reckless
disregard of its or their obligations and duties under the Advisory Agreement.
The Prospectus contains a description of the fees payable to the investment
adviser under
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the Advisory Agreement. The investment adviser, if required by applicable state
law, shall reimburse a Fund or waive all or part of its fees up to, but not
exceeding, its investment advisory fees from the Fund. Such reimbursement, if
required, will be equal to the annual expenses of the appropriate Fund which
exceed that expense limitation with the lowest threshold prescribed by any state
in which such Fund is qualified for offer or sale. Management of the Trust has
been advised that the lowest such threshold currently in effect is 2 1/2% of net
assets up to $30,000,000, 2% of the next $70,000,000 of net assets and 1 1/2% of
net assets in excess of that amount.
ADMINISTRATORS
U.S. Trust, Chase Global Funds Services Company ("CGFSC") and Federated
Administrative Services ("FAS") serve as the Funds' administrators (the
"Administrators") pursuant to an agreement between the Administrators and the
Trust (the "Administrative Agreement"). The Prospectus contains a description
of the compensation payable to the Administrators under the Administrative
Agreement.
Under the Administrative Agreement, the Administrators have agreed to
maintain office facilities for the Funds, furnish the Funds with statistical and
research data, clerical, accounting and bookkeeping services, and certain other
services required by the Funds, and to compute the net asset value, net income
and realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare annual and semiannual reports to the SEC, prepare Federal
and state tax returns, prepare filings with state securities commissions,
arrange for and bear the cost of processing Share purchase and redemption
orders, maintain the Funds' financial accounts and records, and generally assist
in the Funds' operations. Pursuant to the Administrative Agreement, the
Administrators may render fund accounting and other services to others. The
Administrative Agreement terminates automatically if assigned and may be
terminated, without penalty by any party on not less than 90 days' notice. The
Administrative Agreement also provides that neither the Administrators nor their
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the administration or management of the Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of their
duties, or by reason of reckless disregard of its or their obligations and
duties under said agreement.
TRANSFER AGENT AND CUSTODIAN
The Chase Manhattan Bank, N.A. ("Chase") serves as custodian of the Funds'
assets pursuant to a custody agreement between Chase and the Trust.
Under such agreement and acting as the Funds' custodian, Chase has agreed
to (i) maintain a separate account or accounts for each of the Funds (ii) make
receipts and disbursements of money on behalf of the Funds; (iii) collect and
receive income and other payments and distributions on account of the Funds'
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Trust concerning the Funds' operations. For
the services provided by Chase under the custody agreements, the Trust has
agreed to pay Chase
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a fee as agreed upon from time to time.
Chase may, at its own expense, open and maintain custody accounts with
respect to the Funds with other banks or trust companies, provided that Chase
shall remain liable under the custody agreement for the performance of all of
its duties under such agreement, notwithstanding any such delegation.
CGFSC serves as transfer agent for the Funds pursuant to a transfer agency
agreement. Under this agreement, CGFSC will perform the following functions,
among others: (i) issue and redeem shares of the Funds; (ii) address and mail
all communications by the Funds to their shareholders, including reports to
shareholders, dividend and distribution notices, and proxy materials for their
meetings of shareholders; (iii) respond to correspondence by shareholders and
others relating to its duties; (iv) maintain shareholder accounts; and (v) make
periodic reports to the Trust concerning the Funds' operations. For its
transfer agency and dividend disbursement services, CGFSC is entitled to receive
from the Trust such compensation as may be agreed upon from time to time between
the Trust and CGFSC. In addition, CGFSC is entitled to be reimbursed for its
out-of-pocket expenses for the cost of forms, postage, processing purchase and
redemption orders, handling of proxies, and other similar expenses in connection
with the above services.
CGFSC may delegate its transfer agency obligations to another transfer
agent registered or qualified under applicable law, provided that CGFSC shall
remain liable for the performance of all of its transfer agency duties under the
transfer agency agreement, notwithstanding any such delegation.
COUNSEL
Drinker Biddle & Reath, Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, of which W. Bruce McConnel, III,
Secretary of the Trust, is a partner, will pass upon the legality of the Shares
offered hereby.
INDEPENDENT AUDITORS
Ernst & Young LLP are the independent auditors for Excelsior Institutional
Trust and provide audit services and assistance and consultation with respect to
the preparation of filings with the SEC.
TAXATION
TAXATION OF THE FUNDS
Each series of the Trust is treated as a separate entity for federal income
tax purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code (a "RIC") by
meeting all applicable requirements of Subchapter M,
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including requirements as to the nature of the Fund's gross income, the amount
of the Fund's distributions, and the composition and holding period of the
Fund's portfolio assets. Because each Fund intends to distribute all of its net
investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although a Fund's foreign source income may be subject to foreign withholding
taxes. If a Fund fails to qualify as a RIC in any year, the Fund would incur a
regular corporate federal income tax upon its taxable income, and the Fund's
distributions generally would be taxable as ordinary dividend income to
shareholders.
Any Fund distribution will have the effect of reducing the per Share net
asset value of shares in the Fund by the amount of the distribution. Thus,
shareholders purchasing Shares shortly before the record date of any
distribution may pay the full price for the Shares and then effectively receive
a portion of the purchase price back as a taxable distribution.
Any investment by a Fund in zero coupon bonds, certain securities purchased
at a market discount, and similar instruments could cause a Fund to recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund.
While certain of the Funds might invest in municipal securities, the
interest on which might otherwise be exempt from tax, it is generally not
expected that any Fund will satisfy the requirements under the Code to pass-
through such exempt income to shareholders as tax-exempt dividends.
Any Fund's transactions in options, futures contracts, and forward currency
exchange contracts will be subject to special tax rules that may affect the
amount, timing, and character of Fund income and distributions to shareholders.
In addition, foreign exchange gains or losses realized by any Fund generally
will be treated as ordinary income or loss by the Fund. Investment by a Fund in
certain "passive foreign investment companies" also may have to be limited in
order to avoid a tax on the Fund. Such a Fund may elect (if such election is
available) to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income of a Fund from foreign securities may be subject to
foreign income tax withheld at the source. Neither Fund expects to be able to
pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle a Fund to a reduced rate of tax or an exemption from
tax on such income; each Fund intends to qualify for treaty-reduced rates where
available. It is not possible, however, to determine a Fund's effective rate of
foreign tax in advance since the amount of the Fund's assets that will be
invested within various countries is not known.
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TAXATION OF DISTRIBUTIONS
Dividends from ordinary income and any distributions from net short-term
capital gains are taxable to shareholders as ordinary income for federal income
tax purposes. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss), if any, are taxable to
shareholders as long-term capital gain without regard to the length of time the
shareholders have held their Shares. A portion of the ordinary income dividends
of a Fund invested in stock of domestic corporations may qualify for the
dividends-received deduction for corporate shareholders if the recipient
otherwise qualifies for that deduction with respect to its holding of Shares.
Availability of the deduction for particular shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and may result in certain basis adjustments. Distributions are taxable as
described above whether paid in cash or reinvested in additional Shares.
Shareholders will be notified annually as to the federal tax status of
distributions.
Amounts not distributed in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, each Fund intends to distribute during each calendar year
substantially all of its ordinary income for that year and substantially all of
its capital gain in excess of its capital losses for the one-year period ending
on October 31, plus any undistributed ordinary income and capital gain from
previous periods. For this and other purposes, a Fund dividend will be treated
as paid on December 31, if it is declared by a Fund in October, November or
December with a record date in such a month and is paid by the Fund during
January of the following calendar year. Accordingly, those distributions will
be taxable to shareholders for the taxable year in which the record date falls.
OTHER TAXATION
The Trust is organized as a Delaware business trust and, under current law,
neither the Trust nor the Funds are liable for any income or franchise tax in
the State of Delaware, provided that the Funds continue to qualify as RICs for
federal income tax purposes.
Fund shareholders may be subject to state and local taxes on Fund
distributions to them by a Fund. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
DESCRIPTION OF THE TRUST; FUND SHARES
The Trust is a Delaware business trust established under a Trust Instrument
dated April 27, 1994. Its authorized capital consists of an unlimited number of
shares of beneficial interest of $0.00001 par value, which may be issued in
separate series or classes. Currently, the Trust has nine series, although
additional series may be established from time to time. Each Share
(irrespective of class designation) of a Fund represents an interest in that
Fund that is proportionate with the interest represented by each other Share.
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The Shares of each Fund are classified into two separate classes of Shares
representing Trust Shares and Institutional Shares. Trust Shares have different
expenses than Institutional Shares which may affect performance.
The assets of the Trust received for the issue or sale of the Shares of
each class of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such class and series and constitute the underlying assets of such class and
series. The underlying assets of each series are segregated on the books of
account, and are to be charged with the liabilities in respect to such series
and with such a share of the general liabilities of the Trust. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Board of Trustees, have the power to determine which
liabilities are allocable to a given class or series, or which are general or
allocable to two or more classes or series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the Shares of any series
are entitled to receive the value of the underlying assets of such Shares
available for distribution to shareholders.
The Board of Trustees may amend the Trust Instrument without shareholder
approval, except shareholder approval is required for any amendment (a) which
affects the voting rights of shareholders under the Trust Instrument, (b) which
affects shareholders' rights to approve certain amendments to the Trust
Instrument, (c) required to be approved by shareholders by law or the
Registration Statement, or (d) submitted to shareholders for their approval by
the Trustees in its discretion. Pursuant to Delaware business trust law and the
Trust Instrument, the Board of Trustees may, without shareholder approval, (x)
cause the Trust to merge or consolidate with one or more entities, if the
surviving or resulting entity is the Trust or another open-end management
investment company registered under the 1940 Act, or a series thereof, that will
succeed to or assume the Trust's registration under the 1940 Act, or (y) cause
the Trust to incorporate under the laws of the State of Delaware.
Shares of a Fund entitle their holder to one vote per Share and
shareholders will vote in the aggregate and not by class or series, except as
otherwise expressly required by law. Separate votes, however, are taken by each
class or series on matters affecting an individual class or series. For
example, a change in investment policy for a series would be voted upon only by
shareholders of the series involved.
The Trust Instrument provides that obligations of the Trust are not binding
upon the trustees individually but only upon the property of the Trust, that the
trustees and officers will not be liable for errors of judgment or mistakes of
fact or law, and that the Trust will indemnify its trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Trust unless it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust.
In the case of settlement, such indemnification will not be provided unless it
has been determined by a court or other body approving the settlement or other
disposition, or by a reasonable
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determination, based upon a review of readily available facts, by vote of a
majority of disinterested trustees, or in a written opinion of independent
counsel, that such officers or trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
Under Delaware law, shareholders of a Delaware business trust are entitled
to the same limitation on personal liability which is extended to shareholders
of private for profit corporations organized under the General Corporation Law
of the State of Delaware. The Trust Instrument contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Fund property for any
shareholder held personally liable for the obligations of a Fund solely by
reason of his being or having been a shareholder. The Trust Instrument also
provides for the maintenance, by or on behalf of the Trust and each Fund, of
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust and each Fund, their shareholders,
trustees, officers, employees and agents, covering possible tort and other
liabilities.
MISCELLANEOUS
As of November 4, 1996, U.S. Trust and its affiliates held of record, but
not beneficially, substantially all of the outstanding shares in the Funds.
As of November 4, 1996, the name, address and percentage ownership of each
person, in addition to U.S. Trust, that beneficially owned 5% or more of the
outstanding shares of a Fund were as follows: Optimum Growth Fund: United
--------------------
States Trust Company Retirement Fund, 114 West 47th Street, New York, New York
10036, 99.40%; Value Equity Fund: United States Trust Company Retirement Fund,
------------------
114 West 47th Street, New York, New York 10036, 99.95%.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE TRUST.
The unaudited financial statements and notes thereto in the Trust's Semi-
Annual Report to Shareholders for the period June 1, 1996 to September 30, 1996
(the "1996 Semi-Annual Report") are incorporated into this Statement of
Additional Information by reference. No other parts of the 1996 Semi-Annual
Report are incorporated by reference herein. Additional copies of the 1996
Semi-Annual Report may be obtained at no charge by telephoning the Distributor
at the telephone number appearing on the front page of this Statement of
Additional Information.
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APPENDIX A
COMMERCIAL PAPER RATINGS
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A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization
A-1
<PAGE>
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
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<PAGE>
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
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The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
A-4
<PAGE>
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates 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.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or
A-5
<PAGE>
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes that such payments will be made
during such grace period. "D" rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
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Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal,
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which is unlikely to be affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
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"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins
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of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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ADMINISTRATORS
Federated Administrative Services
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108
United States Trust Company of New York
114 West 47 Street
New York, NY 10036
INVESTMENT ADVISER
United States Trust Company of New York
114 West 47 Street
New York, NY 10036
TRANSFER AGENT
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
<PAGE>
DISTRIBUTOR
Edgewood Services, Inc.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND
EXCELSIOR INSTITUTIONAL EQUITY VALUE FUND
STATEMENT OF ADDITIONAL
INFORMATION
NOVEMBER 8, 1996
