<PAGE>
As filed with the Securities and Exchange Commission on February 23, 1996
File Nos. 33-78264, 811-8490
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 7
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 9
Excelsior Institutional Trust
(Exact Name of Registrant as Specified in Charter)
73 Tremont St., Boston, Massachusetts 02108
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 617-557-8000
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
Philadelphia National Bank Building, 1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
CROSS-REFERENCE SHEET
(As Required by Rule 495)
Optimum Growth and Value Equity Funds
-------------------------------------
<TABLE>
<CAPTION>
PART A
ITEM NUMBER Prospectus Headings
- ----------- -------------------
<S> <C>
1. COVER PAGE Cover Page.
2. SYNOPSIS Summary of Expenses.
3. CONDENSED FINANCIAL INFORMATION Not Applicable.
4. GENERAL DESCRIPTION OF REGISTRANT Cover Page;
Investment Objectives
and Policies.
5. MANAGEMENT OF THE FUND Management of the Trust.
5A. MANAGEMENT'S DISCUSSION
OF FUND PERFORMANCE Not applicable.
6. CAPITAL STOCK AND OTHER SECURITIES Cover Page;
Pricing of Shares;
How to Purchase, Exchange
and Redeem Shares;
Tax Matters;
Management of the Trust;
Dividends and Capital
Gains Distributions;
Description of Shares,
Voting Rights and Liabilities.
7. PURCHASE OF SECURITIES BEING OFFERED How to Purchase,
Exchange and Redeem Shares;
Investor Programs.
8. REDEMPTION OR REPURCHASE How to Purchase,
Exchange and Redeem Shares;
Investor Programs.
9. PENDING LEGAL PROCEEDINGS Not applicable.
</TABLE>
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
CROSS-REFERENCE SHEET
(As Required by Rule 495)
Optimum Growth and Value Equity Funds
<TABLE>
<CAPTION>
Statement of Additional
PART B ITEM NUMBER Information Headings
- ------------------ --------------------
<S> <C>
10. COVER PAGE Cover Page.
11. TABLE OF CONTENTS Table of Contents.
12. GENERAL INFORMATION AND HISTORY Excelsior Institutional Trust.
13. INVESTMENT OBJECTIVES AND POLICIES Investment Objectives,
Policies and Restrictions.
14. MANAGEMENT OF THE FUND Management of the Trust.
15. CONTROL PERSONS AND PRINCIPAL
HOLDERS OF SECURITIES Management of the Trust.
16. INVESTMENT ADVISORY AND
OTHER SERVICES Management of the Trust;
see Prospectus --
"Management of the Trust".
17. BROKERAGE ALLOCATION AND
OTHER PRACTICES Investment Objectives,
Policies and Restrictions.
18. CAPITAL STOCK AND OTHER SECURITIES Excelsior Institutional Trust;
Taxation; Description of the Trust;
Fund Shares; see Prospectus
-- "Management of the Trust"
and "Description of Shares,
Voting Rights and Liabilities".
19. PURCHASE, REDEMPTION AND
PRICING OF SECURITIES
BEING OFFERED Determination of Net
Asset Value; Valuation
of Securities; Additional
Purchase, Exchange and
Redemption Information.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
20. TAX STATUS Taxation; see Prospectus
-- "Tax Matters".
21. UNDERWRITERS Management of the Trust;
see Prospectus --
"Management of the Trust".
22. CALCULATION OF PERFORMANCE
DATA Performance Information.
23. FINANCIAL STATEMENTS Not applicable.
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate items, so numbered, in Part C of this Registration Statement.
<PAGE>
EXPLANATORY NOTE
This Post-Effective Amendment No. 7 (the "Amendment") to the Registrant's
registration statement on Form N-1A (the "Registration Statement") is being
filed to add two new portfolios, the Institutional Optimum Growth and
Institutional Value Equity Funds.
Accordingly, the prospectus and statement of additional information for the
Excelsior Institutional Equity Fund, Institutional Income Fund, Institutional
Total Return Bond Fund, Institutional Bond Index Fund, Institutional Balanced
Fund, Institutional Equity Growth Fund and Institutional International Equity
Fund are not included in this filing.
<PAGE>
EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND
EXCELSIOR INSTITUTIONAL VALUE EQUITY FUND
EXCELSIOR INSTITUTIONAL TRUST
73 TREMONT STREET
BOSTON, MASSACHUSETTS 02108
(617) 557-8000
For initial purchase and existing account information, call (800) 909-1989
(From overseas, call (617) 557-1755)
For current prices and yield information, call (800) 861-3430
This Prospectus describes 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 Institutional 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.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY, 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 ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS DATED MAY __, 1996
<PAGE>
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
through capital appreciation.
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
adviser 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 Manager".
2
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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
Institutional Shares of the Funds, as a percentage of average daily net assets
of the Funds, and (ii) an example illustrating the dollar cost of such estimated
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
transaction expenses imposed by the Trust, although in connection with purchases
and redemptions of shares of the Funds, some institutional investors
("Shareholder Organizations") may charge their customers account fees for
investment and other cash management services. See "How to Purchase, Exchange
and Redeem Shares" below. Customers should contact their Shareholder
Organization directly for further information. Investments in Trust Shares and
Institutional Shares of a Fund are subject to the operating expenses set forth
below for each Fund as a percentage of the average daily net assets of the Fund.
Expenses of the Funds are discussed below under "Management of the Trust".
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL SHARES TRUST
SHARES
<S> <C> <C>
Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fees None None
Exchange Fees None None
</TABLE>
3
<PAGE>
EXPENSE TABLE
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
OPTIMUM GROWTH FUND VALUE EQUITY FUND
---------------------------- -------------------
INSTITUTIONAL TRUST INSTITUTIONAL TRUST
SHARES SHARES SHARES SHARES
--------------- ----------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fees (after fee waivers and .40% .40% .40% .40%
expense reimbursements)/(1)/
12b-1 Fees/(2)/ None .35% None .35%
Other Operating Expenses .30% .30% .30% .30%
--- ---- --- ----
Administration Fees (after fee waivers and .15% .15% .15% .15%
expense reimbursements)/(1)/
Administrative Servicing Fees/(1)/ 0% 0% 0% 0%
Other Expenses .15% .15% .15% .15%
--- --- --- ---
Total Fund Operating Expenses .70% 1.05% .70% 1.05%
(after fee waivers and === ==== === ====
expense reimbursements)/(1)/
</TABLE>
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) $_____ $_____
Value Equity Fund (Institutional Shares) $7 $22
Value Equity Fund (Trust Shares) $_____ $_____
=================
</TABLE>
______________________
(1) The investment adviser and the administrators have agreed to voluntarily
waive a portion of their respective fees and to reimburse certain operating
expenses of the Funds, which waivers and reimbursements may be terminated at
any time. Until further notice, the investment adviser and/or the
administrators intend to voluntarily waive fees in an amount equal to the
administrative servicing fees. Without waivers, advisory fees would be .65%
and administration fees would be __ for each class of each Fund; without fee
waivers and expense reimbursements, "Total Fund Operating Expenses" would
be: (i) 1.50% and 1.50% for Institutional Shares of the Optimum Growth and
Value Equity Funds, respectively; and (ii) 1.85% and 1.85% for Trust Shares
of the Optimum Growth and Value Equity Funds, respectively. Shareholder
Organizations may charge their customers account fees for investment and
other cash management services. See "How to Purchase, Exchange and Redeem
Shares" below. Accordingly, the Expense Table and the Example do not
reflect an amount for any such fees paid directly to a Shareholder
Organization by its customers.
4
<PAGE>
(2) 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 load
permitted by the National Association of Securities Dealers, Inc. ("NASD").
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS
THAN THOSE SHOWN. The purpose of the table is to assist investors in
understanding the various costs and expenses that shareholders of each of the
Funds will bear directly or indirectly. The Expense Table and Example reflect
voluntary undertakings (i) by U.S. Trust and the administrators to waive certain
of their fees, and (ii) by U.S. Trust and/or the administrators to reimburse the
Trust for certain expenses. The estimated aggregate operating expenses
(including amortization of organizational expenses but exclusive of taxes,
interest, brokerage commissions and extraordinary expenses) of each class of
each Fund are shown above after giving effect to such waivers and
reimbursements. For more information with respect to the expenses of each of
the Funds, see "Management of the Trust". Fee waivers and expense
reimbursements are terminable at any time in the sole discretion of the service
providers waiving fees or reimbursing expenses.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION
Excelsior Institutional Trust was organized as a business trust under the laws
of the State of Delaware, with the Funds established as separate series of the
Trust on April 27, 1994. Shares of the Funds are continuously sold to
institutional investors.
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
applicable 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 through
capital appreciation. The 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 Equity Fund
seeks to achieve this objective by investing in a diversified portfolio of
equity securities whose market value, in the opinion of the investment adviser,
appears to be undervalued relative to the marketplace.
The following is a discussion of the various investment policies and
strategies employed by each Fund. Additional information about the investment
policies and strategies of each Fund appears in the Statement of Additional
Information. 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.
6
<PAGE>
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 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 able to dominate their markets by being the
low-cost, high quality producers of products or services. The investment
adviser believes that earnings growth is the primary determinant of stock prices
and that efficient financial 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
approach 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 results
than attempting to take advantage of short-term price movements.
Implementation of this long-term value philosophy consists of searching for,
identifying and obtaining the benefits of present or future investment values.
For example, such values may be found in a company's future earnings potential
or in its existing resources and assets. Accordingly, U.S. Trust in managing
investments for the Value Equity Fund is constantly engaged in assessing,
comparing and judging the worth of companies, particularly in comparison to the
price the markets place on such companies' shares.
Strategies. In order to translate its investment philosophy into more
specific guidance for selection of investments, U.S. Trust uses three specific
strategies. These strategies, while identified separately, may overlap so that
more than one may be applied in an investment decision.
U.S. Trust's "PROBLEM/OPPORTUNITY STRATEGY" seeks to identify industries and
companies with the capabilities to provide solutions to or benefit from complex
problems such as the changing demographics and aging of the U.S. population or
the need to enhance industrial productivity. U.S. Trust's second strategy is a
"TRANSACTION VALUE" comparison of a company's real underlying asset value with
the market price of its shares and with the sale prices for similar assets
changing ownership in public market transactions. Differences between a
company's real asset value and the price of its shares often are corrected over
time by restructuring of the assets or by market recognition of their value.
U.S. Trust's third strategy involves identifying "EARLY LIFE CYCLE" companies
whose products are in their earlier stages of development or that seek to
exploit new markets. Frequently such companies are smaller companies, but early
life cycle companies may also include larger established companies with new
products or new markets for existing products. U.S. Trust believes that over
time the value of such companies should be recognized in the market.
Themes. To complete U.S. Trust's investment philosophy, the three portfolio
strategies discussed above are applied in concert with several "longer-term
investment themes" to
7
<PAGE>
identify investment opportunities. These themes include the aging of America,
the restructuring of business and industry, the convergence of the communication
and entertainment industries, the demand for environmentally related products
and services, the continued need for businesses to become global competitors,
investment in the long-term supply of energy and the continued need to enhance
productivity. U.S. Trust believes these longer-term themes represent strong and
inexorable trends. U.S. Trust also believes that understanding the instigation,
catalysts and effects of these longer-term trends should help to identify
companies that are beneficiaries of these trends.
INVESTMENT POLICIES
OPTIMUM GROWTH FUND seeks superior, risk-adjusted total return through capital
appreciation 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 market.
The investment adviser will utilize a two-tiered approach to select
appropriate securities. A "core" portfolio will consist primarily (i.e. from 60%
to 80% under ordinary market conditions) of mid- to large-capitalization growth
stocks. These investments will be complimented with a structured overlay
developed through the use of quantitative analysis to further diversify
investment selections among stocks included within the Russell 1000 Growth
Universe. The Russel 1000 Growth Universe contains those Russel 1000 Securities
with a greater than average growth orientation. This "structured" segment of the
portfolio is developed by analyzing the risk characteristics, i.e. profit to
earnings ratio, return on equity, capitalization, earnings per share, industry
sector, etc., of the "core" portfolio. Based upon these factors, securities are
systematically selected which possess financial characteristics which compliment
those of the core portfolio. These portfolio selections result in a broader
diversification of the "core" portfolio holdings within the Russell Mid- to
Large-Capitalization Growth Universe.
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
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.
The Optimum Growth Fund may invest in the securities of foreign issuers
directly, or indirectly through sponsored and unsponsored American Depository
Receipts. See "Additional Investment Strategies and Techniques; Risk Factors -
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 designed
to provide investors with a means of speculating on short-term stock market
movements. Investors should not consider the Optimum Growth Fund a complete
investment program.
8
<PAGE>
VALUE EQUITY FUND seeks long-term capital appreciation by investing in a
diversified 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 investments 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 convertible
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 limitation in
U.S. Government securities, high quality money market instruments and repurchase
agreements collateralized by the foregoing obligations, if deemed appropriate by
U.S. Trust for temporary defensive purposes. For a description of these
securities, see "U.S. Government and Agency Securities" and "Short-Term
Instruments" below under "Additional Investment Strategies and Techniques; Rick
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
portfolio in the securities of high growth, small companies where U.S. Trust
expects earnings and the price of the securities to grow at an above-average
rate, such as small capitalization issuers. 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
directly, or indirectly through sponsored and unsponsored American Depository
Receipts. 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
Equity Fund is intended to be a long-term investment vehicle and is not designed
to provide investors with a means of speculating on short-term stock market
movements. Investors should not consider the Value Equity Fund a complete
investment program.
9
<PAGE>
ADDITIONAL INVESTMENT STRATEGIES AND TECHNIQUES; RISK FACTORS
The Funds may 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
securities, which differ only in their interest rates, maturities and times of
issuance: Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, such as Government
National Mortgage Association pass-through certificates, are supported by the
full faith and credit of the U.S. Treasury; other securities, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the Treasury. Securities issued by the Federal National Mortgage
Association are supported by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; other securities,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality. While the U.S. Government
provides financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law. For additional information on U.S. Government
securities, see the Statement of Additional Information.
CONVERTIBLE SECURITIES. Each of the Funds may invest in investment grade
convertible securities of domestic and foreign issuers. 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 preferred stock which may be converted
into common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time.
INVESTMENT GRADE RATINGS. The Funds may purchase convertible securities only
if they are deemed investment grade, that is, carry a rating of at least Baa
from Moody Investors Service, Inc. ("Moody's") or BBB from Standard & Poor's
Ratings Group ("S&P") or, if not rated by these rating agencies, are judged by
the investment managers to be of comparable quality. With respect to securities
rated Baa by Moody's and BBB by S&P, interest and principal payments are
regarded as adequate for the present; however, securities with these ratings may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. The 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
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis
10
<PAGE>
in order to hedge against anticipated changes in interest 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 general level of interest rates.
When such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. When-issued securities
and forward commitments may be sold prior to the settlement date, but 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 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 commenced 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 Securities" below.
REVERSE REPURCHASE AGREEMENTS. 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 requests,
but not for leverage. Each Fund may also agree to sell portfolio securities to
financial institutions such as banks and broker-dealers and to repurchase them
at a mutually agreed date and price (a "reverse repurchase agreement"). The
Securities and Exchange Commission (the "SEC") views reverse repurchase
agreements as a form of borrowing. At the time a Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account 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
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advisory fees and other expenses a Fund bears directly in connection with its
own operations, as a shareholder of another investment company, such Fund would
bear its pro rata portion of the other investment company's advisory fees and
other expenses. As such, the corresponding Fund's shareholders would indirectly
bear the expenses of the other investment company, some or all of which would be
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 securities 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
securities of foreign issuers, and in obligations of foreign branches or
subsidiaries of domestic or foreign banks, may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
Overall, there may be limited publicly available information with respect to
foreign issuers, and there may be less supervision of foreign stock exchanges
and market participants such as brokers and issuers. Moreover, available
information may not be as reliable as information regarding U.S. companies,
because foreign issuers often are not subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies.
Dividends and interest paid by foreign issuers may be subject to withholding
and other foreign taxes. To the extent that such taxes are not offset by
credits or deductions allowed to investors under the Federal income tax laws,
they may reduce the net return to investors. See "Tax Matters" below.
Investors should realize that the value of a Fund's investments in foreign
securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or changes in) exchange controls or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of 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
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by a Fund must
be made in compliance with U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
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While the volume of transactions effected on foreign stock exchanges has
increased in recent years, in most cases it remains appreciably below that of
domestic security exchanges. Accordingly, a 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
additional 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
underlying foreign securities. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer of the underlying foreign
securities. EDRs are receipts issued by a European financial institution
evidencing a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets.
Changes in foreign exchange rates will affect the value in U.S. dollars of all
foreign currency-denominated securities held by the 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 Optimum Growth and Value Equity 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 currency exchange transactions. The Funds will either
enter into these transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or use forward contracts to
purchase or sell foreign currencies. The cost of a Fund's spot currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold.
A forward foreign currency exchange contract is an obligation by a 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 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
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without commission. The Funds will not enter into forward contracts for
speculative purposes. Neither spot transactions nor forward foreign currency
exchange contracts eliminate fluctuations in the prices of a 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
principally 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 currency in exchange for another foreign currency if its investment
manager expects the foreign currency purchased to appreciate against the U.S.
dollar.
Although these transactions are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they limit any
potential gain that might be realized should the value of the hedged currency
increase. In addition, forward contracts that convert a foreign currency into
another foreign currency will cause a Fund to assume the risk of fluctuations in
the value of the currency purchased vis a vis the hedged currency and the U.S.
dollar. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
FUTURES CONTRACTS AND OPTIONS. Each 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
securities indices will be used primarily to accommodate cash flows or in
anticipation of taking a market position when, in the opinion of the investment
managers, available cash balances do not permit economically efficient purchases
of securities. Moreover, a 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 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
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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 managers and consistent with its objective and policies.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which involves
investment strategies and risks different from those associated with ordinary
portfolio securities transactions, and there can be no guarantee that their use
will increase a Fund's return. While the use of these techniques by a Fund may
reduce certain risks associated with owning its portfolio securities, these
investments entail certain other risks. If a Fund's investment managers apply a
strategy at an inappropriate time or judge 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 significantly increase the
Fund's turnover rate. For more information on these investment 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
contracts, only if such options are written by other persons and if (i) the
aggregate premiums paid on all such options which are held at any time do not
exceed 20% of such Fund's total net assets, and (ii) the aggregate margin
deposits 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
subject to certain limitations pursuant to the regulations of the Commodity
Futures Trading Commission. Neither Fund has any current intention of
purchasing futures contracts or investing in put and call options on securities,
indices 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 limited liquidity,
such as private placements or investments that are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), and cannot be offered for
public sale in the United States without first being registered under the 1933
Act. An illiquid investment is any investment that cannot be disposed of within
seven days in the normal course of business at approximately the amount
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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 following
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 assets
would be invested in illiquid securities. Each of the Funds may also purchase
Rule 144A securities sold to institutional investors without registration under
the 1933 Act. These securities may be determined to be liquid in accordance
with guidelines established by the investment managers and approved by the
Trustees. The 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 illiquidity of a Fund.
As a result, a Fund holding these securities might not be able to sell these
securities when the investment manager wishes to do so, or might have to sell
them at less than fair value.
SHORT-TERM INSTRUMENTS. Each Fund may invest in short-term income securities
in accordance with its investment objective and policies as described above.
The Funds may also make money market investments pending other investments or
settlement, 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.
Government and its agencies or instrumentalities; commercial paper and other
debt securities; variable and floating rate securities; bank obligations;
repurchase agreements collateralized by these securities; and shares of other
investment companies that primarily invest in any of the above-referenced
securities. 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) issued by
domestic and foreign corporations. The Funds may invest in commercial paper
issued by major corporations in reliance on the exemption from registration
afforded by Section 3(a)(3) of the 1933 Act. Such commercial paper may be
issued only to finance current transactions and must mature in nine months or
less. Trading of such commercial paper is conducted primarily by institutional
investors through investment dealers, and individual investor participation in
the commercial paper market is very limited.
Each Fund may invest in U.S. dollar-denominated certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks and domestic or foreign branches or subsidiaries of foreign
banks. Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time. Such
instruments include Yankee Certificates of Deposit ("Yankee CDs"), which are
certificates of deposit denominated in U.S. dollars and issued in the United
States by the domestic branch of a foreign bank. Time deposits are non-
negotiable deposits maintained in a banking institution for a specified period
of time at a stated interest rate.
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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. The
Funds will not invest, respectively, more than 15% of the value of their net
assets in time deposits maturing in longer than seven days and other instruments
which are deemed illiquid or not readily marketable. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations 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-
denominated instruments which are determined by or on behalf of the Board of
Trustees of the Trust to present minimal credit risks and which are of "high
quality" as determined by a major rating service (i.e., rated P-1 by Moody's or
A-1 by S&P) or, in the case of instruments which are not rated, are deemed to be
of comparable quality pursuant to procedures established by the Board of
Trustees of the Trust. The Funds may invest in obligations of banks which at
the date of investment have capital, surplus and undivided profits (as of the
date of their most recently published financial statements) in excess of $100
million. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
SECURITIES LENDING. The Funds may seek to increase their income by lending
securities to banks, brokers or dealers and other recognized institutional
investors. Such loans may not exceed 30% of the value of a 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
market 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, and in addition, if the collateral received is other
than cash, receives a fee based on the amount of the loan. 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
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". A Fund may make a short sale as a hedge, when
it believes 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".
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CERTAIN OTHER OBLIGATIONS. Consistent with their respective investment
objectives, 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 instruments that may be created in the future, upon the
Trust supplementing this Prospectus, a Fund may invest in obligations other than
those listed previously, 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
securities have been held. Each Fund may sell a portfolio investment
immediately after its acquisition if the investment managers believe that such a
disposition is consistent with the investment objective of the particular Fund.
Portfolio investments may be sold for a variety of reasons, such as a more
favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments.
The 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 ultimately
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
represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities which
for purposes of this calculation are subject to the following fundamental
limitations: (a) the 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
investment strategies and techniques, and a listing of other fundamental
investment restrictions and non-fundamental investment policies which govern the
investment policies of each Fund. Fundamental investment restrictions may not be
changed, in the case of each Fund, without the approval of that Fund's
shareholders. 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.
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The investment objective of each Fund may be changed without the approval of
that Fund's shareholders, but not without written notice thereof to that Fund's
shareholders thirty days prior to implementing the change. If there were a
change in a Fund's investment objective, shareholders should consider whether
the Fund remains an appropriate investment in light of their then-current
financial position and needs. There can, of course, be no assurance that the
investment 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 without
approval by the holders of a "majority of the outstanding voting securities" (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 purchases
and redemptions at the close of regular trading hours on the New York Stock
Exchange (the "NYSE"), currently 4:00 p.m. (Eastern time). Net asset value and
pricing for each Fund are determined on each day the NYSE and U.S. Trust are
open for trading ("Business Day"). Net asset value is 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.
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
circumstances, debt securities maturing in 60 days or less are valued at
amortized cost.
Securities of the Funds which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an event subsequent
to the time when value was so established is likely to have changed such value,
then the fair value of those securities will be determined after consideration
of such events and other material factors, all under the direction 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 established by the Board
of Trustees of the Trust. For valuation purposes,
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quotations of foreign securities in foreign currency are converted to U.S.
dollars equivalent at the prevailing market rate on the day of conversion. Some
of the securities acquired by the Funds may be traded on foreign exchanges or
over-the-counter markets on days which are not Business Days. In such cases,
the net asset value of the Shares may be significantly affected on days when
investors can neither purchase nor redeem a Fund's Shares. The administrators
have undertaken to price the securities held by the Funds, and may use one or
more independent pricing services in connection with this service. The methods
used by the pricing services and the valuations so established will be reviewed
by each Fund's investment managers 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
several procedures for purchasing and redeeming shares in order to accommodate
different types of investors.
Trust Shares may be purchased by individuals ("Individual Investors") and
Institutional 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
customers ("Customers") and to record beneficial ownership of shares on the
account statements provided to its Customers. In that case, it is the
Shareholder Organization's responsibility to transmit to the Distributor all
purchase and redemption orders for its Customers and to transmit, on a timely
basis, payment for purchase orders to Chase Global Funds Service Company
("CGFSC") and redemption 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 Organization. In the alternative, a Shareholder Organization may
elect to establish its Customers' accounts of record with CGFSC. In this event,
even if the Shareholder Organization continues to place its Customers' purchase
and redemption orders with the 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.
Depending upon the terms of the particular account, Shareholder Organizations
may charge a Customer's account fees for automatic investment and other cash
management services provided. Customers should contact their Shareholder
Organizations directly for further information on purchase and redemption
procedures and account fees.
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 next
determined after an order
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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 that a Fund's net asset value is calculated are priced according
to the net asset value determined on that day. Purchase orders received after
the close of regular trading on the NYSE are priced as of the time the net asset
value per share is next determined.
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
described below. These procedures only apply to Customers of Shareholder
Organizations for whom individual accounts have been established with CGFSC.
Customers whose individual accounts are maintained by Shareholder Organizations
must contact their Shareholder Organizations directly to purchase shares.
Certificates will not be issued for shares.
General
Individual Investors may purchase Trust Shares by completing the Application
for purchase of shares accompanying this Prospectus and mailing it, together
with a check payable to Excelsior Institutional Trust, to:
Excelsior Institutional Trust
c/o Chase Global Funds Service 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 Institutional
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:
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The Chase Manhattan Bank, N.A.
ABA #021000021
Excelsior Institutional Trust
Credit DDA #910-2-733046
[Account Registration]
[Account Number]
[Wire Control Number] *See Above*
Purchases of shares by federal funds wire will be effected at the net asset
value per share next determined after acceptance of the order provided that the
federal funds wire has been received by the Fund's bank on that Business Day.
It is intended that each Fund will be as fully invested at all times as is
reasonably practicable in order to enhance the return on its assets.
Accordingly, in order to make investments which will immediately generate
income, a Fund must have federal funds available. Purchase orders received and
accepted after 4:00 p.m. (Eastern time) will be effected at the net asset value
next determined even if a Fund received federal funds on that day.
Investors making initial investments by wire must promptly complete the
application accompanying this Prospectus and forward it to CGFSC. No account
application is required for subsequent purchases. Completed applications should
be directed to:
Excelsior Institutional Trust
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
The application may also be sent via facsimile. Please contact CGFSC at (800)
909-1989 (from overseas, please call (617) 557-1755) for complete instructions.
Redemptions by investors will not be processed until the completed application
for purchase of shares has been received and accepted by CGFSC. Investors making
subsequent investments by wire should follow the above instructions.
Purchases by Telephone
For Institutional Investors who have previously selected the telephone
purchase option, a purchase order may be placed by calling CGFSC at (800) 909-
1989 (from overseas, please call (617) 557-1755). The purchase by telephone will
be effected at the net asset value per share next determined after acceptance of
the order.
By establishing the telephone purchase option, the Institutional Investor
authorizes CGFSC and the Distributor to act upon telephone instructions believed
to be genuine. CGFSC and the Distributor will not be held liable for any loss,
liability, cost or expense for acting upon such instructions. Accordingly,
Institutional Investors bear the risk of loss. The Trust will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
including, without limitation, recording telephonic instructions and/or
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<PAGE>
requiring the caller to provide some form of personal identification. Failure to
employ reasonable procedures may make the Trust liable for any losses due to
unauthorized or fraudulent telephone instructions.
This option may be changed, modified or terminated at any time. The Trust
currently does not charge a fee for this service, although some Service
Organizations may charge their Customers fees. Customers should contact their
Service Organizations directly for further information.
REDEMPTION OF SHARES
Investors may redeem all or any portion of the shares in their account at the
net asset value next determined after CGFSC receives and accepts a redemption
order in proper form. Proceeds from redemption orders received 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 five Business Days.
It is necessary for Institutional Investors and other entities to have on file
appropriate documentation authorizing redemptions by the institution or entity
before a redemption request is considered 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
shareholder may realize a gain or loss.
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
responsibility of the Shareholder Organizations to transmit their Customers'
redemption 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
certified financial planners may incur transaction charges in connection with
such redemptions. Customers should contact their Shareholder Organization for
further information on transaction fees.
Redemption Procedures
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
individual accounts have been established with CGFSC. Customers whose individual
accounts are maintained by Shareholder Organizations must contact their
Shareholder Organization directly to redeem shares.
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<PAGE>
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
application, or have subsequently arranged in writing to do so, may redeem
shares by instructing CGFSC, by wire or telephone, to wire the redemption
proceeds directly to the investor's predesignated bank account at any commercial
bank in the United States. Investors may have their shares redeemed by wire by
instructing 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
account. No charge is imposed by the Trust for wiring redemption payments to
Institutional Investors. However, an $8.00 fee for each wire redemption by an
Individual Investor is deducted by CGFSC from the proceeds of the redemption,
and Shareholder Organizations may charge Customers for wiring or crediting such
redemption payments to their accounts. Information relating to such redemption
services and charges, if any, is available to Customers directly from their
Shareholder Organizations.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank account designated to receive redemption
proceeds, an Investor must send a written request to the Trust at the address
listed below under "Redemption by Mail". Such requests must be signed by the
Investor, with signatures guaranteed (see "Redemption by Mail" below for details
regarding signature guarantees). Further documentation may be requested.
CGFSC and the Distributor reserve the right to refuse a wire or telephone
redemption. Procedures for redeeming shares by wire or telephone may be modified
or terminated at any time by the Trust or the Distributor. CGFSC, the Trust and
the Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions believed to be genuine. Accordingly,
shareholders will bear the risk of loss. The Trust will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
including, without limitation, recording telephone instructions and/or requiring
the caller to provide some form of personal identification. Failure to employ
reasonable procedures may make the Trust liable for any losses due to
unauthorized or fraudulent telephone instructions.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If an Investor is unable to contact CGFSC by
telephone, the Investor may also deliver the redemption request to CGFSC in
writing at the address noted below under "Redemption by Mail."
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<PAGE>
Redemption by Mail
Shares may be redeemed by an Investor by submitting a written request for
redemption to:
Excelsior Institutional Trust
c/o Chase Global Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to CGFSC must (i) state the number of shares to
be redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed for each registered owner or by its authorized
officer exactly as the shares are registered.
A redemption request for an amount in excess of $5,000, or for any amount if
the proceeds are to be sent elsewhere than the address of record, must be
accompanied by signature guarantees from any eligible guarantor institution
approved by CGFSC in accordance with its Standards, Procedures and Guidelines
for the Acceptance of Signature Guarantees ("Signature Guarantee Guidelines").
Eligible guarantor institutions generally include banks, broker-dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. All eligible guarantor institutions
must participate in the Securities Transfer Agents Medallion Program ("STAMP")
in order to be approved by CGFSC pursuant to the Signature Guarantee Guidelines.
Copies of the Signature Guarantee Guidelines and information on STAMP can be
obtained from CGFSC at (800) 909-1989 (from overseas, please call (617) 557-
1755) or at the address given above. CGFSC may require additional supporting
documents. A redemption request will not be deemed to be properly received in
good form until CGFSC receives all required documents in proper form.
Questions with respect to the proper form for redemption requests should be
directed to CGFSC at (800) 909-1989 (from overseas, please call (617) 557-1755).
Other Redemption Information
Except as described in "Investor Programs" below, Investors may be required to
redeem shares in a Fund after 60 days' written notice if due to investor
redemptions the balance in the particular account with respect to the Fund
remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance with respect to shares of a Fund and
the balance in such account falls below that minimum, the Customer may be
obliged by the Shareholder Organization to redeem all or part of 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
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<PAGE>
availability of, and the procedures and account charges applicable to, these
investor programs.
INSTITUTIONAL SHARES AND TRUST SHARES
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged without payment of any exchange fee for
shares of the same class in another Fund described herein at their respective
net asset values. Institutional Shares of a Fund may be exchanged for shares of
the Excelsior Institutional Money Fund of Excelsior Funds. Additionally, Trust
Shares of a Fund may be exchanged for shares of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. An exchange of shares is treated for federal
and state income tax purposes as a redemption (sale) of shares given in exchange
by the shareholder, and an exchanging shareholder may, therefore, realize a
taxable gain or loss in connection with the exchange. Shareholders exchanging
shares of a Fund for shares of another Fund should carefully review the
disclosure provided herein relating 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
requests 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 Service Organizations may charge their
Customers fees. Customers should contact their Service Organizations 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 overseas,
please call (617) 557-1755). The exchange by telephone will be effected at the
net asset value per share for each Fund 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 instruction. Accordingly, Investors bear the
risk of loss. The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, including, without
limitation, recording telephonic instructions and/or requiring the caller to
provide some form of personal identification. Failure to employ reasonable
procedures may make the Trust liable for any losses due to unauthorized or
fraudulent telephone instructions.
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."
26
<PAGE>
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York 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 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
selected by the Individual Investor. Provided the Individual Investor's
financial institution allows automatic withdrawals, Trust Shares are purchased
by transferring funds from a checking, bank money market or NOW account
designated by the Individual Investor. At the Individual Investor's option, the
account designated will be debited in the specified amount, and Trust Shares
will be purchased 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
predetermined 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
Averaging should usually be followed on a sustained, consistent basis.
Individual Investors should be aware, however, that shares bought using Dollar
Cost Averaging are purchased without regard to their price on the day of
investment or to market trends. In addition, while Individual Investors may
find Dollar Cost Averaging 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.
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<PAGE>
Information concerning the availability of, and the procedures and fees
relating to, Automatic Investment accounts may be obtained 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.
Information concerning the availability of, and the procedures and fees relating
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
withholding taxes. If a Fund fails to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and the Fund's distributions 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
domestic corporations may qualify for the dividends-received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund Shares. Availability of the deduction for
particular shareholders is subject to certain limitations, and deducted amounts
may be subject to the alternative minimum tax and may result in certain basis
adjustments.
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<PAGE>
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to have
been received by shareholders and paid by a Fund on December 31 of such year in
the event such dividends are actually paid during January of the following year.
At the end of each calendar year, each shareholder receives information for
tax purposes on the dividends and other distributions received during that
calendar year, including the portion thereof taxable as ordinary income, the
portion taxable as long-term capital gains, the portion (if any) which
constitutes a return of capital (which is generally free of tax, but results in
a basis reduction), and the amount of dividends (if any) which may qualify for
the dividends-received deduction for corporations.
In general, any gain or loss realized upon a taxable disposition of Shares of
a Fund by a shareholder that holds such Shares as a capital asset will be
treated as long-term capital gain or loss if the Shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a redemption of Shares in a Fund held for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of net capital gain made with respect to those Shares. Any loss realized upon a
disposition of Shares may also be disallowed under rules relating to wash sales.
The Trust may be required to withhold federal income tax at the rate of 31%
from all taxable distributions and redemption proceeds payable to shareholders
who do not provide the Trust with their correct taxpayer identification number
or make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Such withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's federal income tax liability.
Under current law, neither the Trust, as a Delaware business trust, nor 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 investment in the Funds, including the status of distributions from the
Funds under applicable state and local tax laws.
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust provides general supervision over the
affairs of the Trust. The trustees decide upon matters of general policy and
review the actions of service providers such as the investment managers, the
administrators, the distributor, and others.
29
<PAGE>
INVESTMENT MANAGERS
OPTIMUM GROWTH FUND AND VALUE EQUITY FUND
U.S. Trust is responsible for the management of the assets of each Fund
pursuant to an investment advisory agreement (the "Advisory Agreement") with the
Trust on behalf of the Funds. As investment adviser to the Funds, U.S. Trust
makes decisions with respect to and places orders for all purchases and sales of
portfolio securities, and maintains records relating to such purchases and
sales.
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
management of the Value Equity Fund's investment portfolio. Mr. Williams,
Senior Vice President, Department Manager and Senior Portfolio Manager of the
Personal 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
inception.
For its services under the Advisory Agreement, U.S. Trust is entitled to
receive 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 portion
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
nationally and internationally, including investment management, 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 Corporation,
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 following
funds: Equity Fund; Income and Growth Fund; Long-Term Supply of Energy Fund;
Productivity Enhancers Fund; Environmentally-Related Products and Services Fund;
Aging of America Fund; Communication and Entertainment Fund; Business and
Industrial Restructuring Fund; Global Competitors Fund; Early Life Cycle Fund;
International Fund, Emerging Americas Fund; Pan European Fund; Pacific/Asia
Fund; Money Fund; Government Money Fund; Treasury Money Fund; Short-Term
Government Securities Fund; Intermediate-Term Managed Income Fund; Managed
Income Fund; Tax-Exempt Money Fund; Short-Term Tax-Exempt Securities Fund; New
York Intermediate-Term Tax-Exempt Fund; Intermediate-Term Tax-Exempt Fund; and
Long-Term Tax-Exempt Fund. U.S. Trust also
30
<PAGE>
serves as investment adviser to Excelsior Funds, a registered investment company
consisting of one investment portfolio: Excelsior Institutional Money 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.
ADMINISTRATORS
U.S. Trust, located at 114 West 47th Street, New York, NY 10036, Chase Global
Fund Service Company ("CGFSC"), located at 73 Tremont Street, Boston,
Massachusetts 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'
administrators (the "Administrators"). The Administrators supervise the affairs
of the Trust, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
various service providers of the Trust; provide equipment and clerical personnel
necessary for maintaining the organization of the Trust; prepare and distribute
all materials in connection with meetings of trustees and investors; prepare and
file all documents required for compliance by the Trust with applicable laws and
regulations; and arrange for the maintenance of Fund accounting 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
European Funds) and Excelsior Tax-Exempt Funds, Inc. (collectively the "Fund
Complex") as follows:
<TABLE>
<CAPTION>
Combined Average Daily Net Assets
---------------------------------
of the Fund Complex Annual 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 Complex at
the time of determination. From time to time one or more of the Administrators
may waive all or a portion of the administrative fee payable to them by the
Funds, which waiver may be terminated at any time.
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<PAGE>
DISTRIBUTOR
Pursuant to a Distribution Agreement, Edgewood Services, Inc. (the
"Distributor"), Clearing Operations, P.O. Box 897, Pittsburgh, Pennsylvania
15230-0897, acts as principal underwriter for the Shares. Edgewood Services,
Inc., a registered broker-dealer and a wholly-owned subsidiary of Federated
Investors, is unaffiliated with U.S. Trust or any of its affiliates. The
Distributor and its affiliates act as distributor and serve as administrator to
twenty-four 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 reimburse the Distributor monthly
for distribution expenses in an amount not to exceed the 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. Distribution expenses payable by the Distributor
under the Distribution Plan include direct and indirect marketing expenses 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, television or other print or electronic media; and iii)
the expense of payments to financial institutions that are not affiliated with
the Distributor ("Distribution Organizations") for distribution assistance
(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 Plan fees if,
to the extent, and for as long as such limit would otherwise be exceeded.
SHAREHOLDER SERVICING AGENTS
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
administrative services provided to customers, a Fund will pay the Service
Organization 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, exchange and redemption requests; transmitting and receiving funds in
connection with customer orders to purchase, exchange or redeem Shares; and
providing periodic statements. Under the terms of the Servicing Agreement,
Service Organizations 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 notice, 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.
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<PAGE>
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
Manhattan Bank, N.A., Mutual Funds Service Division, 770 Broadway, New York, NY
10003. Chase Global Funds Services Company ("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 managers; governmental fees; interest charges;
taxes; 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
shareholders 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 Company 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
investment 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
constitute underwriting activities and are consistent with the requirements of
the Glass-Steagall Act. In addition, counsel has advised that this combination
of individually permissible activities is consistent with the Glass-Steagall Act
and other federal or state legal and regulatory precedent. There is presently
no controlling precedent regarding the performance of a combination of
investment advisory, administrative and/or shareholder servicing activities by
banks. State laws on this issue may differ from the interpretations of relevant
federal law and banks and financial institutions may be required to register as
dealers pursuant to state securities law. Future changes in either federal
statutes or regulations relating to the permissible activities of banks, as well
as future judicial or administrative decisions and interpretations of present
and future statutes and regulations, could prevent a bank from continuing to
perform all or part of its servicing or investment management activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Funds might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such
<PAGE>
bank. The Trustees of the Trust do not expect that shareholders of the Funds
would suffer any adverse financial consequences as a result of these
occurrences.
Certain Relationships and Activities. U.S. Trust 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 outstanding
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
information 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 affiliates.
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 affiliate.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends equal to all or substantially all of each Fund's net investment
income will be declared and paid 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
necessary to avoid the application of non-deductible federal excise taxes on
certain undistributed income and net capital gains of mutual Funds.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Trust Instrument permits the trustees of the Trust to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.00001 per share) of each class of each series and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in each Fund. The Trust
34
<PAGE>
reserves the right to create and issue any number of series or classes;
investments in each series participate equally in the earnings, dividends and
assets of the particular series only and no other series. Currently, the Trust
has nine series. The series include: Excelsior Institutional Equity Fund,
Excelsior Institutional Income Fund, Excelsior Institutional Total Return Bond
Fund, Excelsior Institutional Bond Index Fund, Excelsior Institutional Balanced
Fund, Excelsior Institutional 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 different
expenses than Institutional Shares which may affect performance.
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. Shares have no preference, preemptive, conversion or similar
rights. Shares when issued are fully paid and nonassessable, except as set
forth below. Shareholders are entitled to one vote for each Share held on
matters on which they are entitled to vote 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 liquidation
or dissolution of a Fund, shareholders would be entitled to share pro rata in
the net assets of such Fund available for distribution to shareholders.
The Trust is a business trust organized under the laws of the State of
Delaware. Under Delaware law, shareholders of Delaware business trusts are
entitled to the same limitation on personal liability extended to shareholders
of private for profit corporations organized under the general corporation law
of the State of Delaware; the courts of other states may not apply Delaware law,
however, and shareholders may, under certain circumstances, be held personally
liable for the obligations of the Trust. The Trust Instrument contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Fund
property for any shareholder held personally liable for the obligations of a
Fund solely by reason of his being or having been a shareholder. The Trust
Instrument also provides for the maintenance, by or on behalf of the Trust and
each Fund, of appropriate insurance (for example, fidelity bond and errors and
omissions insurance) for the protection of the Trust and each Fund, their
shareholders, Trustees, officers, employees and agents, covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which
Delaware law did not apply, inadequate insurance existed and a Fund itself was
unable to meet its obligations.
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<PAGE>
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.
For more information regarding the Trustees of the Trust, see "Management of
the Trust" in the Statement of Additional Information.
PERFORMANCE INFORMATION
From time to time, in advertisements, reports to shareholders, or other
communications to shareholders or prospective investors, the performance of
Institutional 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 mutual funds.
Performance information includes the Fund's investment results and/or
comparisons of its investment results to various unmanaged indices, or results
of other mutual funds or investment or savings vehicles. A Fund's investment
results as used in such communications are calculated on a "yield" or "total
rate of return" basis in the manner set forth below.
The Trust provides period and annualized "total rates of return" and non-
standardized total return data for each class of each Fund. The "total rate of
return" refers to the change in the value of an investment in shares of a
particular 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.
The Trust provides annualized "yield" quotations for each class of each Fund.
The "yield" of a particular class of a Fund refers to the income generated by an
investment in such class over a thirty day or one month period. The dates of
any such period are identified in all advertisements or communications
containing yield quotations. Income is then annualized; that is, the amount of
income generated by an investment in shares of that class over a period is
assumed to be generated (or remain constant) over one year and is shown as a
percentage of the net asset value on the last day of that year-long period. The
Funds may also advertise the "effective yields" for each class of shares, which
are calculated similarly but, when annualized, income is assumed to be
reinvested, thereby making the effective yields slightly higher because of the
compounding effect of the assumed reinvestment. See "Performance Information"
in the Statement of Additional Information. These methods of calculating
"yield" and "total rate of return" are determined by regulations of the SEC.
Since the yield and total rate of return quotations for each class of each
Fund are based on historical earnings and since such yields and total rates of
return fluctuate over time, such quotations should not be considered as an
indication or representation of the future performance of either Fund.
Shareholders should remember that performance is generally
36
<PAGE>
a function of the kind and quality of the instruments held in a Fund, Fund
maturity, operating expenses, and market conditions. Any fees charged by
Shareholder Organizations to Customers that have invested in shares and any
charges to institutional investors for asset management and related services
will not be included in calculations of performance. From time to time, Fund
rankings may be quoted from various sources, such as Lipper Analytical Services,
Inc.
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
brokerage commissions, (iv) rights and liabilities of shareholders of the Trust,
(v) additional performance information, including methods used to calculate
yield and total return, and (vi) determination of the net asset value of Shares
of the Funds.
37
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail (regular or overnight) to:
Excelsior Institutional Trust
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please enclose with the Application(s) your check made payable to the
"Excelsior Institutional Trust" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus
entitled "How to Purchase and Redeem Shares - Purchase Procedures".
Minimum Investments:
Except as provided in the Prospectus, there is no minimum amount required for
an initial or subsequent investment.
Redemptions:
Shares can be redeemed in any amount and at any time in accordance with
procedures described in the Prospectus. In the case of shares recently
purchased by check, redemption proceeds will not be made available until the
transfer agent is reasonably assured that the check has been collected in
accordance with applicable banking regulations.
Certain legal documents will be required from corporations or other
organizations, executors and trustees, or if redemption is requested by anyone
other than the shareholder of record. Written redemption requests of $5,000 or
more must be accompanied by signature guarantees.
Signatures:
Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
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<PAGE>
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
-----
* A corporate resolution or appropriate certificate may be required.
Taxpayer Identification Number:
Institutional Investors and other entities must provide a tax identification
or social security number on the application. Investors who do not supply this
information or who have been notified by the Internal Revenue Service that they
are subject to backup withholding will be subject to a withholding rate of 31%
from all taxable distributions paid to the shareholder.
Questions:
If you have any questions regarding the Application or redemption
requirements, please contact your shareholder servicing agent.
39
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY OF EXPENSES 3
INVESTMENT OBJECTIVES AND POLICIES 6
OPTIMUM GROWTH FUND 8
VALUE EQUITY FUND 9
PRICING OF SHARES 19
HOW TO PURCHASE, EXCHANGE AND
REDEEM SHARES 20
INVESTOR PROGRAMS 25
TAX MATTERS 28
MANAGEMENT OF THE TRUST 29
DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS 34
DESCRIPTION OF SHARES, VOTING
RIGHTS AND LIABILITIES 34
PERFORMANCE INFORMATION 36
MISCELLANEOUS 37
INSTRUCTIONS FOR NEW
ACCOUNT APPLICATION 38
ACCOUNT APPLICATION
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EXCELSIOR
INSTITUTIONAL TRUST OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER BY EXCELSIOR INSTITUTIONAL TRUST OR ITS DISTRIBUTOR IN ANY JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
<PAGE>
EXCELSIOR
INSTITUTIONAL
TRUST
Excelsior Institutional Optimum Growth Fund
Excelsior Institutional Value Equity Fund
PROSPECTUS
MAY __, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY __, 1996
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 shares of the
Excelsior Institutional Optimum Growth Fund and Excelsior Institutional Value
Equity Fund (each, a "Fund"; collectively, the "Funds").
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C>
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 32
Counsel 38
Independent Auditors 38
Taxation 38
Description of the Trust; Fund Shares 40
Appendix A-1
</TABLE>
Excelsior Institutional Trust
73 Tremont Street
Boston, Massachusetts 02108
(617) 557-8000
<PAGE>
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 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 the Fund's objective of long-term
capital appreciation, 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.
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U.S. Trust's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership. U.S. Trust employs the following three different but closely
interrelated portfolio strategies to focus and organize its search for
investment values.
1. Problem/Opportunity Companies. Important investment opportunities
-----------------------------
often occur where companies develop solutions to large, complex, fundamental
problems, such as declining industrial productivity; rising costs and declining
sources of energy; the economic imbalances and value erosion caused by years of
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
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<PAGE>
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 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.
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<PAGE>
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an amount
equal to a specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches within the
state.
U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one to
ten years; and Treasury Bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, since it is not so obligated by law.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
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
-5-
<PAGE>
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.
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 either investing the cash collateral in short-term securities
subject to payment of a rebate fee to the borrower or by obtaining a fee from
the borrower when U.S. Government obligations are used as collateral. There may
be risks of delay in receiving additional collateral or risks of delay in
recovery of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. A 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
-6-
<PAGE>
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 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 managers determine
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 managers 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.
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<PAGE>
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them which,
if possible at all, would result in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.
Each Fund's investment managers 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 managers will consider, among
other things, the following factors: (1) the frequency of trades and quotes for
the security, (2) the number of dealers and other potential purchasers wishing
to purchase or sell the security, (3) dealer undertakings to make a market in
the security and (4) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
UNSECURED PROMISSORY NOTES
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into the investment managers' long-term
investment decisions, the Funds will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the
investment managers believe that it is important to have the flexibility to
enter into foreign currency hedging transactions when they determine that the
transactions would be in a 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 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
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<PAGE>
currency forward contracts at attractive prices and this will limit a Fund's
ability to use such contract 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 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).
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<PAGE>
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
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
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part upon its investment managers' 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
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<PAGE>
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 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
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<PAGE>
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 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 managers may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the investment
managers believe that use of such contracts will benefit the Funds, if the
judgment of the investment managers 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.
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<PAGE>
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 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.
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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, 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
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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 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
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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
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<PAGE>
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 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,
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<PAGE>
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 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.
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<PAGE>
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 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 managers 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
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<PAGE>
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 managers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. A Fund will not purchase such options unless its
investment managers believe the market is sufficiently developed such that the
risk of trading in such options is no greater than the risk of trading in
options on securities.
Price movements in the 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 managers 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.
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<PAGE>
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, 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 subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, the investment managers also make their own evaluations of these
securities, subject to review by the Board of Trustees of the 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.
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<PAGE>
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. The Fund will not purchase securities while borrowings exceed 5% of
the Fund's total assets;
(2) underwrite securities issued by other persons except insofar as the
Trust or a Fund may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except (a) through the lending of the
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;
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<PAGE>
(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 that 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;
(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;
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<PAGE>
(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 loss. Each Fund
may engage in short-term trading to achieve its investment objective(s).
Portfolio turnover may vary greatly from year to year as well as within a
particular year. 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 managers believe 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 managers in their 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 managers will seek to obtain
the best net price and the most favorable execution. The investment managers
shall consider factors they deem relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
In addition, the Advisory Agreement authorizes the investment managers, to
the extent permitted by law and subject to the review of the Trust's Board of
Trustees, to cause the Funds
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<PAGE>
to pay a broker which furnishes brokerage and research services a higher
commission than that which might be charged by another broker for effecting the
same transaction, provided that the investment managers determine in good faith
that such commission is reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms of either that
particular transaction or the overall responsibilities of the investment
managers to the accounts as to which it exercises investment discretion. Such
brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy. Such services might also include reports on global, regional, and
country-by-country prospects for economic growth, anticipated levels of
inflation, prevailing and expected interest rates, and the outlook for currency
relationships.
Supplementary research information so received is in addition to and not in
lieu of services required to be performed by the investment managers and does
not reduce the investment advisory fees (if any) payable by the Funds. Such
information may be useful to the investment managers 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 managers
in carrying out their 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 its investment managers or any of their affiliates. If, however, a
Fund and other investment companies or accounts managed by the same investment
manager are contemporaneously engaged in the purchase or sale of the same
security, the transactions may be averaged as to price and allocated equitably
to each account. In some cases, this policy might adversely affect the price
paid or received by a 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 manager occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Furthermore, in certain circumstances affiliates of the investment managers
whose investment portfolios are managed internally, rather than by the
investment managers, might seek to purchase or sell the same type of investments
at the same time as a 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.
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<PAGE>
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)/1/n/ - 1]
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.
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 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
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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 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."
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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 records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
- -------------
section reporting on the mutual fund/financial industry.
-30-
<PAGE>
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, 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.
-31-
<PAGE>
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
Shares are continuously offered for sale by Edgewood Services, Inc. (the
"Distributor"). As described in the Prospectus, Trust 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 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 of a
class of one Fund for shares in the same class of another Fund.
Shareholders should be aware, however, that certain Shareholder
Organizations may charge a Customer's account fees for exchange orders and other
cash management services provided. Customers should contact their Shareholder
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 Securities and Exchange Commission.
In the event that shares are redeemed in cash at their net asset value, a
shareholder may receive in payment for such shares an amount that is more or
less than his original investment due to changes in the market prices of that
Fund's portfolio securities.
OTHER INVESTOR PROGRAMS
As described in the Prospectus, Trust 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. 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.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust, their dates of birth 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
- --------
ALFRED C. TANNACHION -- 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) and
Excelsior Funds (since 1996). His age is 69. His address is 1135 Hyde Park
Court, Mahwah, NJ 07430.
RODMAN L. DRAKE -- Trustee; 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 date of birth is February 2, 1943. His address is c/o
KMR Power Corp., 30 Rockefeller Plaza, Suite 5425, New York, NY 10112.
W. WALLACE MCDOWELL, JR. -- Trustee; 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 date of birth is November 7, 1936.
His address is c/o Prospect Capital Corporation, 43 Arch Street, Greenwich, CT
06830.
JONATHAN PIEL -- Trustee; 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,
MIT. His date of birth is November 23, 1938. His address is 558 East 87th
Street, New York, NY 10128.
DONALD L. CAMPBELL -- Director; Retired; 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.
JOSEPH H. DUGAN -- Director; Retired; President, CEO and Director, L.B.
Foxter 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.
-33-
<PAGE>
WOLFE J. FRANKL -- Director; Retired; Director, Deutsche Bank Financial,
Inc.; Director, The Harbus Corporation; Trustee, Mariner Funds Trust. His age
is 74. His address is 40 Gooseneck Lane, Charlottesville, VA 22903.
ROBERT A. ROBINSON -- Director; President Emeritus, The Church Pension Fund
and its affiliated companies, since 1968; Trustee, Mariner Funds Trust; 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. His age is 69. His address is Church Pension Fund,
800 Second Avenue, New York, NY 10017.
FREDERICK S. WONHAM -- Director; Retired; 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
- -------------------------------
ALFRED C. TANNACHION -- Chairman of the Board, President and Treasurer;
Retired. His address is 1135 Hyde Park Court, Mahway, NJ 07430.
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.
Each Trustee is paid an annual fee as follows 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.
-34-
<PAGE>
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM THE TRUST
AGGREGATE ACCRUED AS ANNUAL AND FUND
COMPENSATION PART OF TRUST BENEFITS UPON COMPLEX PAID TO
FROM THE TRUST EXPENSES RETIREMENT TRUSTEES
-------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Donald L. Campbell, Trustee $ 0 None None (4)/1/ $34,250
Rodman L. Drake, Trustee $5,000 None None (2)/1/ $ 5,000
Jospeh H. Dugan, Trustee $ 0 None None (4)/1/ $34,250
Wolfe J. Frankl, Trustee $ 0 None None (4)/1/ $34,250
W. Wallace McDowell, $5,250 None None (2)/1/ $ 5,250
Trustee
Jonathan Piel, Trustee $5,250 None None (2)/1/ $ 5,250
Robert A. Robinson, $ 0 None None (4)/1/ $34,250
Trustee
Alfred C. Tannachion, $ 0 None None (4)/1/ $44,750
Trustee
Frederick S. Wonham, $ 0 None None (4)/1/ $ 0
Trustee
</TABLE>
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. The Trust
has no pension plan.
* * * * *
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
- -------------------------------------
/1/ Total number of such other investment company boards trustee serves on
within the Fund Complex.
-35-
<PAGE>
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 on behalf of such Funds, 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 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.
-36-
<PAGE>
ADMINISTRATORS
U.S. Trust, Chase Global Funds Service 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 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.
-37-
<PAGE>
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
____________________ 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, 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.
-38-
<PAGE>
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
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.
TAXATION OF DISTRIBUTIONS
Dividends from ordinary income and any distributions from net short-
term capital gains are taxable to shareholders as ordinary income for federal
income tax purposes. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, are taxable
to shareholders as long-term capital gains without regard to the length of time
the shareholders have held their shares. A portion of the ordinary income
dividends of a Fund
-39-
<PAGE>
invested in stock of domestic corporations may qualify for the dividends-
received deduction for corporations if the recipient otherwise qualifies for
that deduction with respect to its holding of Shares. Availability of the
deduction for particular shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax and 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 gains 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 that December 31 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.
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
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<PAGE>
account, and are to be charged with the liabilities in respect to such series
and with such a share of the general liabilities of the Trust. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given 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 Trustees may amend the Trust Instrument without shareholder
approval, except shareholder approval is required for any amendment (a) which
affects the voting rights of shareholders under the Trust Instrument, (b) which
affects shareholders' rights to approve certain amendments to the Trust
Instrument, (c) required to be approved by shareholders by law or the
Registration Statement, or (d) submitted to shareholders for their approval by
the Trustees in their discretion. Pursuant to Delaware business trust law and
the Trust Instrument, the Trustees may, without shareholder approval, (x) cause
the Trust to merge or consolidate with one or more entities, if the surviving or
resulting entity is the Trust or another open-end management investment company
registered under the 1940 Act, or a series thereof, that will succeed to or
assume the Trust's registration under the 1940 Act, or (y) cause the Trust to
incorporate under the laws of the State of Delaware.
Shares of a Fund entitle their holder to one vote per share 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 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.
-41-
<PAGE>
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.
-42-
<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
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 and
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 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.
A-1
<PAGE>
"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.
"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 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+."
A-2
<PAGE>
"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 is 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."
"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.
A-3
<PAGE>
"A1" - Obligations are supported by a strong 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
- ----------------------------------------------
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" - 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
A-4
<PAGE>
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 principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes 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
A-5
<PAGE>
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.
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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A-6
<PAGE>
"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, 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
A-7
<PAGE>
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.
"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
higher 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.
A-8
<PAGE>
"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.
"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:
A-9
<PAGE>
"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 of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
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 MANAGERS
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
LLP
200 Clarendon Street
Boston, MA 02116
<PAGE>
DISTRIBUTOR
Edgewood Services, Inc.
Federated Investors Tower
Pittsburgh, PA 15222
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR INSTITUTIONAL OPTIMUM GROWTH FUND
EXCELSIOR INSTITUTIONAL EQUITY VALUE FUND
STATEMENT OF ADDITIONAL
INFORMATION
MAY __, 1996
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The Financial Statements included in Part A are as follows:
None.
The Financial Statements included in Part B are as follows:
None.
(b) Exhibits:
1. Trust Instrument of the Registrant. 5
1(a). Amended and Restated Schedule A to Trust
Instrument of the Registrant. 5
2. By-Laws of the Registrant. 5
5(a). Form of Investment Advisory Agreement between
the Registrant and U.S. Trust Company of New
York. 7
5(b). Form of Investment Subadvisory Agreement. 7
5(c). Form of Investment Advisory Agreement between
the Registrant and U.S. Trust Company of New
York with respect to the Optimum Growth and
Value Equity Funds. 8
6. Distribution Agreement between the Registrant
and Edgewood Services, Inc. 6
8(a). Form of Custodian Agreement between the Registrant
and Chase Manhattan Bank, N.A. 7
8(b). Form of Subcustodian Agreement between Chase
<PAGE>
Manhattan Bank, N.A. and foreign subcustodians. 7
9(a). Form of Administration Agreement between the
Registrant and United States Trust Company
of New York, Chase Global Funds Service Company
and Federated Administrative Services 7
9(b). Form of Fund Accounting and Servicing Agreement
between the Registrant and Federated Services Company 7
9(c). Form of Shareholder Servicing Agreement between
the Registrant and certain financial institutions. 2
9(d). Form of Transfer Agency Agreement between the
Registrant and Chase Global Funds Service Company. 2
9(e). Administrative Services Plan and Related Form
of Shareholder Servicing Agreement. 8
10. Opinion of Counsel./1/
11(a). Consent of Counsel. 8
13(a). Investor Representation Letter of Initial Shareholder. 2
13(b). Form of Purchase Agreement between the
Registrant and Edgewood Services, Inc. relating
to shares of the Optimum Growth and Value
Equity Portfolios. 8
15. Distribution Plan and Form of Distribution Agreement. 8
16. Schedule for Computation of Performance Quotations. 2
17. Financial Data Schedules. 7
1 Incorporated herein by reference from the Registrant's Registration
Statement on Form N-1A (File Nos. 33-78264 and 811-8490) (the "Registration
Statement"), as filed with the Securities and Exchange Commission (the "SEC") on
April 28, 1994.
- -------------------
/1/Filed on July 30, 1995 under Rule 24f-2 as part of Registrant's
Rule 24f-2 Notice.
<PAGE>
2 Incorporated herein by reference from Pre-Effective Amendment No. 2 to
the Registration Statement, as filed with the SEC on June 22, 1994.
3 Incorporated herein by reference from Post-Effective Amendment No. 1 to
the Registration Statement, as filed with the SEC on July 13, 1994.
4 Incorporated herein by reference from Post-Effective Amendment No. 2 to
the Registration Statement, as filed with the SEC on September 28, 1994.
5 Incorporated herein by reference from Post-Effective Amendment No. 3 to
the Registration Statement, as filed with the SEC on June 13, 1995.
6 Incorporated herein by reference from Post-Effective Amendment No. 4 to
the Registration Statement, as filed with the SEC on October 2, 1995.
7 Incorporated herein by reference from Post-Effective Amendment No. 5 to
the Registration Statement, as filed with the SEC on December 19, 1995.
8 Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Shares of Beneficial Interest (par value $.00001).
<TABLE>
<CAPTION>
Title of Class: Number of Record Holders As
of November 25, 1995.
<S> <C>
Excelsior Institutional Equity Fund: 3
Excelsior Institutional Income Fund: 2
Excelsior Institutional Total Return Bond Fund: 3
Excelsior Institutional Bond Index Fund: 2
Excelsior Institutional Balanced Fund: 2
Excelsior Institutional Equity Growth Fund: 2
Excelsior Institutional International Equity Fund: 2
Excelsior Institutional Value Equity Fund (Trust
Shares) None
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Excelsior Institutional Value Equity Fund
(Institutional Shares) None
Excelsior Institutional Optimum Growth Fund (Trust
Shares) None
Excelsior Institutional Optimum Growth Fund
(Institutional Shares) None
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article IX of the Registrant's Trust
Instrument, filed as an exhibit to this Registration Statement.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940,
as amended (the "1940 Act").
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, trustee,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suite or proceeding) is
asserted against the Registrant by such director, trustee, officer or
controlling person or principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
United States Trust Company of New York ("U.S. Trust") is a full-service
state-chartered bank located in New York, New York. The name, position with U.S.
Trust, address, principal occupation and type of business are set forth below
for the trustees and certain senior executive officers of U.S. Trust, including
those who are engaged in any other business, profession, vocation, or employment
of a substantial nature.
SAMUEL C. BUTLER -- Trustee/Director; Cravath, Swaine & Moore, Worldwide
Plaza,
<PAGE>
825 Eighth Avenue, New York, NY 10019; Partner in Cravath, Swaine &
Moore (law firm).
PETER O. CRISP -- Trustee/Director; Venrock Associates, Room 5600, 30
Rockefeller Plaza, New York, NY 10112; General Partner in Venrock Associates.
ANTONIA M. GRUMBACH -- Trustee/Director; Patterson, Belknap, Webb & Tyler,
30 Rockefeller Plaza, New York, NY 10112; Partner in Patterson, Belknap, Webb &
Tyler (law firm).
H. MARSHALL SCHWARZ -- Trustee/Director; Chairman of the Board and Chief
Executive Officer; United States Trust Co. of New York, 114 West 47th Street,
New York, NY 10036; Chairman of the Board & Chief Executive Officer of U.S.
Trust Corporation and U.S. Trust Company of N.Y. (bank).
PHILIPPE DE MONTEBELLO -- Trustee/Director; Metropolitan Museum of Art,
1000 Fifth Avenue, New York, NY 10029-0198; Director of the Metropolitan Museum
of Art (art museum).
PAUL W. DOUGLAS -- Trustee/Director; 250 Park Avenue, Room 1900, New York,
NY 10177; Retired
FREDERIC C. HAMILTON -- Trustee/Director; Hamilton Oil Corp., 1560
Broadway, Suite 2000, Denver, CO 80202; Chairman of the Board of Hamilton Oil
Corp. (oil & gas exploration).
FRANK S. STREETER -- Honorary Trustee; 380 Madison Ave., 4th Floor, New
York, NY 10017; Trustees and Corp.
JOHN H. STOOKEY -- Trustee/Director; Quantum Chemical Corp., 99 Park
Avenue, New York, NY 10016; Director, Chairman of the Board, Chief Executive
Officer and President of Quantum Chemical Corp.
ROBERT N. WILSON -- Trustee/Director; Johnson & Johnson, One Johnson &
Johnson Plaza, New Brunswick, NJ 08933; Vice Chairman of the Board of Johnson &
Johnson.
PETER L. MALKIN -- Trustee/Director; Wein, Malkin & Bettex, Lincoln
Building, 60 East 42nd Street, New York, NY 10165; Chairman of Wein, Malkin &
Bettex.
RICHARD F. TUCKER -- Trustee/Director; 11 Over Rock Lane, Westport, CT
06880; Retired.
CARROLL L. WAINRIGHT, JR. -- Trustee/Director; Milbank, Tweed, Hadley &
McCloy, One Chase Manhattan Plaza, New York, NY 10005; Consulting Partner of
Milbank, Tweed, Hadley & McCloy (law firm).
FREDERICKS S. WONHAM -- Trustee/Director and Vice Chairman; United States
Trust Company of New York, 114 West 47th Street, New York, NY 10036; Vice
Chairman of the
<PAGE>
Board of U.S. Trust Corporation and United States Trust Company of New York
(bank).
FREDERICK S. WONHAM -- Trustee/Director and Vice Chairman; United States
Trust Company of New York, 114 West 47th Street, New York, NY 10036; Vice
Chairman of the Board of U.S. Trust Corporation and United States Trust Company
of New York (bank).
DONALD M. ROBERTS -- Trustee/Director, Vice Chairman and Treasurer; United
States Trust Company of New York, 114 West 47th Street, New York, NY 10036; Vice
Chairman of the Board and Treasurer of U.S. Trust Corporation and United States
Trust Company of New York (bank).
FREDERICK B. TAYLOR -- Trustee/Director, Vice Chairman and Chief Investment
Officer; United States Trust Company of New York; 114 West 47th Street, New
York, NY 10036; Vice Chairman and Chief Investment Officer of U.S. Trust
Corporation and United States Trust Company of New York (bank).
JEFFREY S. MAURER -- Trustee/Director, President; United States Trust
Company of New York, 114 West 47th Street, New York, NY 10036; president of U.S.
Trust Corporation and U.S. Trust Company of New York (bank).
DANIEL P. DAVISON -- Trustee/Director; Christie, Manson & Woods
International, Inc., 502 Park Avenue, New York, NY 10021; Chairman, Christie,
Manson & Woods International, Inc. (fine art auctioneer).
TOM KILLEFER -- Honorary Trustee; United States Trust Company of New York,
114 West 47th Street, New York, NY 10036; Former Chairman of the Board and
President of U.S. Trust Corporation and United States Trust Company of New York
(bank).
ORSON D. MUNN -- Trustee/Director; Munn, Bernhard & Associates, Inc., 6
East 43rd Street, 28th Floor, New York, NY 10017; Chairman and Director of
Munn, Bernhard & Associates, Inc. (investment advisory firm).
WALTER N. ROTHSCHILD, JR. -- Trustee/Director; 145 East 48th Street, Suite
16D, New York, NY 10017; Corporate Director and Trustee.
PHILIP L. SMITH -- Trustee/Director; P.O. Box 205, Oakledge, Mount Sunapee,
NH 03772; Corporate Director and Trustee.
EDWIN D. ETHERINGTON -- Trustee/Director; P.O. Box 100, Old Lyme, CT 06371;
President Emeritus, Wesleyan University, and Former President of American Stock
Exchange (education).
HAROLD J. HUDSON, JR. -- Honorary Trustee; General Reinsurance Co.,
Financial Center, P.O. Box 10350, Stamford, CT 06904; Former Chairman of the
Board of General Reinsurance Corporation.
United States Trust Company of the Pacific Northwest ("UST-PN") is a full-
service state chartered bank located in Portland, Oregon. The name, position
with UST-PN, address, principal occupation and type of business are set forth
below for the trustees and certain
<PAGE>
senior executive officers of UST-PN, including those who are engaged in any
other business, profession, vocation, or employment of a substantial nature.
RALPH C. RITTENOUR, JR. -- Trustee/Director; United States Trust Company of
the Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201;
Chairman and Chief Executive Officer of United States Trust Company of the
Pacific Northwest (bank).
CHARLES J. SWINDELLS -- Trustee/Director; United States Trust Company of
the Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201;
President of United States Trust Company of the Pacific Northwest (bank).
NANCY L. JACOB, PH.D. -- Trustee/Director; United States Trust Company of
the Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201;
Executive Vice President of United States Trust of the Pacific Northwest (bank).
RICHARD ACKERMAN -- Trustee/Director; United States Trust Company of the
Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201; Chief
Administrative Officer and Senior Vice President of United States Trust Company
of the Pacific Northwest (bank).
STEPHEN BRINK -- Trustee/Director; United States Trust Company of the
Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201 ;
Senior Vice President and Chief Investment Officer of United States Trust
Company of the Pacific Northwest (bank).
MARCIA BENNETT -- Trustee/Director; United States Trust Company of the
Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201; Senior
Vice President, Trust Officer and Operations Officer of United States Trust
Company of the Pacific Northwest (bank).
MARV VUKOVICH -- Trustee/Director; United States Trust Company of the
Pacific Northwest, 4380 SW Macadam Avenue, Suite 450, Portland, OR 97201; Vice
President and Chief Financial Officer of United States Trust Company of the
Pacific Northwest (bank).
CAROL HIBBS -- Trustee/Director; Tonkon Torp, Galen, Marmaduke & Booth,
1600 Pioneer Tower, 888 SW Fifth Avenue, Portland, OR 97204; Attorney at Tonkon
Torp, Galen, Marmaduke & Booth (law firm).
Becker Capital Management, Inc. ("Becker") is a registered Investment
Adviser located in Portland, Oregon. The name, position with Becker, address,
principal occupation and type of business are set forth below for the trustees
and certain senior executive officers of Becker, including those who are engaged
in any other business, profession, vocation, or employment of a substantial
nature.
PATRICK E. BECKER -- Director; President and Chief Investment Officer;
Becker
<PAGE>
Capital Management, Inc., 1211 SW Fifth Avenue, #2185, Portland, OR 97204;
President and Chief Investment Officer of Becker Capital Management, Inc.
(investment advisory).
JANEEN S. MCANINCH -- Director; Executive Vice President; Becker Capital
Management, Inc. , 1211 SW Fifth Avenue, #2185, Portland, OR 97204; Executive
Vice President of Becker Capital Management, Inc. (investment advisory).
GEARY T. BECKER -- Senior Vice President - Fixed Income; Becker Capital
Management, Inc. , 1211 SW Fifth Avenue, #2185, Portland, OR 97204 , Senior Vice
President - Fixed Income of Becker Capital Management, Inc. (investment
advisory).
MICHAEL C. MALONE -- Senior Vice President - Marketing; Becker Capital
Management, Inc. , 1211 SW Fifth Avenue, #2185, Portland, OR 97204 ; Senior Vice
President - Marketing of Becker Capital Management, Inc. (investment advisory).
DONALD L. WOLCOTT -- Vice President - Equity Portfolio Manager; Becker
Capital Management, Inc., 1211 SW Fifth Avenue, #2185, Portland, OR 97204; Vice
President -Equity Portfolio Manager of Becker Capital Management, Inc.
(investment advisory).
ROBERT N. SCHAEFFER -- Vice President - Equity Portfolio Manager; Becker
Capital Management, Inc., 1211 SW Fifth Avenue, #2185, Portland, OR 97204; Vice
President -Equity Portfolio Manager of Becker Capital Management, Inc.
(investment advisory).
MICHAEL F. MCCOY -- Vice President - Quantitative Research; Becker Capital
Management, Inc., 1211 SW Fifth Avenue, #2185, Portland, OR 97204; Vice
President --Quantitative Research of Becker Capital Management, Inc. (investment
advisory).
Harding, Loevner Management, L.P. ("Harding Loevner") is a registered
Investment Advisor located in Somerville, New Jersey. The name, position with
Harding Loevner, address, principal occupation and type of business are set
forth below for the trustees and certain senior executive officers of Harding
Loevner, including those who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
DANIEL D. HARDING -- Director/Chief Investment Officer; Harding, Loevner
Management, L.P. , 50 Division Street, Suite 401, Somerville, NJ 08876; Chief
Investment Officer of Harding, Loevner Management, L.P. (investment advisory).
DAVID R. LOEVNER -- Director/Chief Executive Officer; Harding, Loevner
Management, L.P. , 50 Division Street, Suite 401, Somerville, NJ 08876; Chief
Executive Officer of Harding, Loevner Management, L.P. (investment advisory).
SIMON HALLETT -- Director/Senior Portfolio Manager; Harding, Loevner
Management, L.P., 50 Division Street, Suite 401, Somerville, NJ 08876; Senior
Portfolio Investment Manager of Harding, Loevner Management, L.P. (investment
advisory).
Luther King Capital Management ("Luther King") is a registered Investment
Advisor located in Fort Worth, Texas. The name, position with Luther King,
address, principal
<PAGE>
occupation and type of business are set forth below for the trustees and certain
senior executive officers of Luther King, including those who are engaged in any
other business, profession, vocation, or employment of a substantial nature.
J. LUTHER KING, JR. -- President; Luther King Capital Management, 301
Commerce Street, Suite 1600, Ft. Worth, TX 76102; Chief Investment Officer of
Luther King Capital Management (investment advisory).
EMMETT M. MURPHY -- Vice President/Principal; Luther King Capital
Management, 301 Commerce Street, Suite 1600, Ft. Worth, TX 76102; Portfolio
Manager of Luther King Capital Management (investment advisory).
PAUL W. GREENWELL -- Vice President/Principal; Luther King Capital
Management, 301 Commerce Street, Suite 1600, Ft. Worth, TX 76102; Portfolio
Manager of Luther King Capital Management (investment advisory).
ROBERT M. HOLT, JR. -- Vice President/Principal; Luther King Capital
Management, 301 Commerce Street, Suite 1600, Ft. Worth, TX 76102; Portfolio
Manager of Luther King Capital Management (investment advisory).
SCOT C. HOLLMANN -- Vice President/Principal; Luther King Capital
Management, 301 Commerce Street, Suite 1600, Ft. Worth, TX 76102; Portfolio
Manager of Luther King Capital Management (investment advisory).
DAVID L. DOWLER -- Vice President/Principal; Luther King Capital
Management, 301 Commerce Street, Suite 1600, Ft. Worth, TX 76102 ; Portfolio
Manager of Luther King Capital Management (investment advisory).
BARBARA S. GARCIA -- Treasurer/Principal; Luther King Capital Management,
301 Commerce Street, Suite 1600, Ft. Worth, TX 76102; Officer Manager of Luther
King Capital Management (investment advisory).
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Edgewood Services, Inc. is the distributor for the shares of the
Registrant. Edgewood Services, Inc. also serves as the principal underwriter for
Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds.
(b) The following are the directors and officers of Edgewood Services,
Inc. The principal business address of these individuals is Federated Investors
Tower, Pittsburgh, PA 15222-3779. Their respective position and offices with the
Registrant, if any, are also indicated.
<PAGE>
NAME: POSITION.
James J. Dolan: Trustee and President.
Douglas L. Hein: Trustee.
R. Jeffrey Niss: Trustee and Senior Vice-President.
Frank E. Polefrone: Trustee.
Newton Heston III: Vice-President.
Ernest L. Linane: Assistant Vice-President.
S. Elliot Cohan: Secretary.
Charles H. Field: Assistant Secretary.
Jeannete Fisher-Garber: Assistant Secretary.
Kenneth W. Pegher, Jr.: Treasurer.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of:
UNITED STATES TRUST COMPANY OF NEW YORK (administrator) 114 West 47th Street,
New York, New York 10036
FEDERATED SERVICES, COMPANY (servicing and fund accounting agent): Federated
Investors Tower, Pittsburgh, PA 15222-3779.
CHASE GLOBAL FUND SERVICES COMPANY (transfer agent and administrator): 73
Tremont Street, Boston, MA 02108-3913.
THE CHASE MANHATTAN BANK, N.A. (custodian): 770 Broadway, New York, NY
10003-9598.
INVESTORS BANK & TRUST COMPANY (custodian of Bond Index Portfolio): 79 Milk
Street, Boston, MA 02205.
EDGEWOOD SERVICES, INC. (distributor): Federated Investors Tower, Pittsburgh, PA
15222-3779.
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant shall furnish each
person to whom a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
<PAGE>
(a) If the information called for by Item 5A of Form N-1A is contained
in the latest annual report to shareholders, the Registrant shall furnish each
person to whom a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940
Act as though such provisions of the 1940 Act were applicable to the Registrant,
except that the request referred to in the third full paragraph thereof may only
be made by shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset value of
shares held by such requesting shareholders.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Excelsior Institutional Trust has duly caused
this Amendment No. 7 to its Registration Statement on Form N-1A to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York and the State of New York, on the 23rd day of February, 1996.
EXCELSIOR INSTITUTIONAL TRUST
Registrant
/s/ Alfred Tannachion
---------------------------------------
Alfred Tannachion, President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 7 to Excelsior Institutional Trust Registration
Statement on Form N-1A has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alfred Tannachion
- ---------------------------
Alfred Tannachion Chairman of the February 23, 1996
Board, President
and Treasurer
/s/ Joseph H. Dugan
- ---------------------------
Joseph H. Dugan Trustee February 23, 1996
/s/ Donald L. Campbell
- --------------------------
Donald L. Campbell Trustee February 23, 1996
/s/ Wolfe J. Frankl
- ------------------------------
Wolfe J. Frankl Trustee February 23, 1996
/s/ Robert A. Robinson
- ---------------------------
Robert A. Robinson Trustee February 23, 1996
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Frederick S. Wonham
- -------------------------
Frederick S. Wonham Trustee February 23, 1996
/s/ Rodman L. Drake
- --------------------------
Rodman L. Drake Trustee February 23, 1996
/s/ W. Wallace McDowell
- ------------------------
W. Wallace McDowell Trustee February 23, 1996
/s/ Jonathan Piel
- ------------------------------
Jonathan Piel Trustee February 23, 1996
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
5(c). Form of Investment Advisory Agreement between the Registrant and U. S.
Trust Company of New York with respect to the Optimum Growth and Value
Equity Funds.
9(e). Administrative Services Plan and Related Form of Shareholder Servicing
Agreement.
11(a). Consent of Counsel.
13(b). Form of Purchase Agreement between the Registrant and Edgewood Services,
Inc. relating to shares of the Optimum Growth and Value Equity
Portfolios.
15. Distribution Plan and Form of Distribution Agreement.
<PAGE>
FORM OF
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of ___________, 19__ by and between EXCELSIOR
INSTITUTIONAL TRUST, a Delaware business trust (the "Trust") registered as an
open-end diversified management investment company under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), and UNITED STATES TRUST
COMPANY OF NEW YORK, a New York corporation (the "Adviser").
In consideration of the promises and the mutual covenants herein contained,
the Trust and the Adviser agree as follows:
1. Appointment. The Trust appoints the Adviser to act as investment
adviser to the Trust with respect to the series of the Trust listed on Exhibit A
hereto (the "Series") for the period and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to provide an
investment program for the compensation provided by this Agreement. In providing
the services and assuming the obligations set forth herein, the Adviser may, at
its own expense, employ one or more sub-advisers; provided that the Adviser
understands and agrees that it shall remain fully responsible for the
performance of all the duties set forth in this Agreement and that it shall
supervise the activities of each sub-adviser. Any agreement between the Adviser
and a sub-adviser shall be subject to the renewal, termination and amendment
provisions applicable to this Agreement.
2. Duties of the Adviser. Subject to the direction and control of the
Board of Trustees of the Trust, the Adviser shall:
(a) prepare (or otherwise obtain) and evaluate on both a
macroeconomic and microeconomic level any pertinent research; statistical,
financial and economic data; and other information necessary or appropriate for
the performance of its duties under this Agreement;
(b) formulate and continuously review, supervise, and administer an
investment program for the Series;
(c) determine the securities to be purchased by the Series, and
continuously monitor such securities and the issuers thereof to determine
whether and when to sell, exchange, or take any other action concerning such
securities;
<PAGE>
(d) determine whether and how to exercise warrants, voting rights, or
other rights with respect to the Series' securities;
(e) provide valuations with respect to the securities held by the
Series if so requested by the Trustees of the Trust;
(f) render regular reports to the Trust's officers and the Board of
Trustees concerning the investment performance of the Trust, the Adviser's
discharge of its responsibilities under this Agreement, and any other subject as
the Trust's officers or Board of Trustees reasonably may request; and
(g) assist the Trust's officers in connection with the operation of
the Trust and perform any further acts that may be necessary to effectuate the
purposes of this Agreement.
3. Supervision and compliance. The activities of the Adviser shall be
subject at all times to the direction and control of the Board of Trustees of
the Trust and shall comply with: (a) the Trust Instrument and By-Laws of the
Trust; (b) the Registration Statement of the Trust, as it may be amended from
time to time, including the investment objectives and policies set forth
therein; (d) the Investment Company Act and the regulations thereunder; (e) the
Internal Revenue Code of 1986 and the regulations thereunder applicable to
regulated investment companies; (f) any other applicable laws or regulations;
and (g) such other limitations as the Board of Trustees may adopt.
4. Purchase and Sale of Securities. The Adviser shall, at its own
expense, place orders for the purchase, sale or loan of securities by the Trust
either directly with the issuer or with any broker and/or dealer who deals in
such securities.
(a) In placing orders with brokers and/or dealers, the Adviser shall
use its best efforts to obtain the best net price and the most favorable
execution of its orders, after taking into account all 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 and/or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis.
Consistent with this obligation, the Adviser may, to the extent permitted by
law, purchase and sell portfolio securities to and from brokers who provide
brokerage and research services (within the meaning of Section 28(e) of the
Securities Exchange Act of 1934) to or for the benefit of the Trust and/or other
accounts over which the Adviser exercises investment discretion. The Adviser is
authorized to pay a broker who provides such brokerage and research services a
commission for effecting a securities transaction which is in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Adviser determines in good faith that such commission was
reasonable in relation to the value of brokerage and research services provided
by
-2-
<PAGE>
such broker. This determination may be viewed in terms of either that particular
transaction or of the overall responsibilities of the Adviser with respect to
the accounts as to which it exercises investment discretion.
(b) The Adviser may execute transactions through itself and its
affiliates on a securities exchange provided that the commissions paid by the
Trust are "reasonable and fair" compared to commissions received by other
brokers having comparable execution capability and provided that the
transactions are effected pursuant to procedures established by the Board of
Trustees of the Trust. An affiliated broker may transmit, clear and settle
transactions for the Trust that are executed on a securities exchange provided
that the affiliated broker arranges for unaffiliated brokers to execute the
transactions.
(c) Notwithstanding the foregoing, the Board of Trustees periodically
shall review the commissions paid by the Trust and determine whether those
commissions were reasonable in relation to the brokerage and research services
received. In addition, the Board of Trustees of the Trust, in its discretion,
may instruct the Adviser to effect all or a portion of its securities
transactions with one or more brokers and/or dealers selected by the Board of
Trustees, if it determines that the use of such brokers and/or dealers is in the
best interest of the Trust.
(d) When the Adviser deems the purchase or sale of a security to be
in the best interest of the Trust as well as other customers, the Adviser, to
the extent permitted by applicable law, may aggregate the securities to be so
sold or purchased in order to obtain the best execution or lower brokerage
commissions. The Adviser also may purchase or sell a particular security for one
or more customers in different amounts. Allocation of the securities purchased
or sold in either manner, as well as the expenses incurred in the transactions,
will be made by the Adviser in a manner that is equitable and consistent with
applicable law and regulations and with its fiduciary obligations to the Trust
and to such other customers.
5. Expenses.
(a) The Adviser shall furnish at its own expense all office space,
office facilities, equipment and personnel necessary or appropriate to the
performance of its duties under this Agreement. The Adviser also shall pay the
salaries and fees of all personnel of the Trust or the Adviser performing
services related to the Adviser's duties under this Agreement.
(b) It is understood that the Trust will pay all of its expenses and
liabilities, including compensation of its independent Trustees; taxes and
governmental fees; interest charges; fees and expenses of the Trust's
independent auditors and legal counsel; trade association membership dues; fees
and expenses of any custodian (including safekeeping of funds and securities,
maintenance of books and accounts and
-3-
<PAGE>
calculation of the net asset value of beneficial interests of the Series),
transfer agent and registrar and dividend disbursing agent of the Trust;
expenses of preparing and mailing reports to investors and regulatory agencies;
expenses relating to the issuance, registration and qualification of shares of
the Series, and the preparation, printing and mailing of prospectuses for such
purposes; insurance premiums; brokerage and other expenses of executing
portfolio transactions; expenses of investors' and Trustees' meetings;
organization expenses; and extraordinary expenses.
6. Compensation of the Adviser. In consideration of the services to be
rendered by the Adviser under this Agreement, the Trust shall pay the Adviser a
fee accrued daily and paid monthly from the Series at an annual rate equal to
that specified in Exhibit A to this Agreement for the Series' average daily net
assets. The fee for any period in which the Adviser serves as investment adviser
pursuant to this Agreement for less than one full month shall be paid for that
portion of the month accrued. For purposes of calculating fees, the value of the
net assets of the Series shall be computed in the manner specified in its
Registration Statement on Form N-1A.
7. Services to Others. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser is free to render services to others and
to engage in other activities, provided, however, that those services and
activities do not adversely affect the Adviser's ability to perform its
obligations under this Agreement.
8. Books, Records, and Information. The Adviser shall provide the Trust
with all records concerning the Adviser's activities that the Trust is required
by law to maintain. Any records required to be maintained and preserved pursuant
to the provisions of Rule 31a-l and Rule 31a-2 under the Investment Company Act
which are prepared or maintained by the Adviser on behalf of the Trust are the
property of the Trust and will be surrendered promptly to the Trust on request.
The Trust also shall comply with all reasonable requests for information by the
Trust's officers or Board of Trustees, including information required for the
Trust's filings with the Securities and Exchange Commission and state securities
commissions.
9. Limitations on Liability.
(a) The Adviser hereby is notified expressly of the limitation of
shareholder liability as set forth in the Trust Instrument and agrees that any
obligation of the Trust or the Series arising in connection with this Agreement
shall be limited in all cases to the Series and its assets, and the Adviser
shall not seek satisfaction of any such obligation from any Trustee or
shareholder of the Series.
(b) The Adviser shall give the Trust the benefit of its best judgment
and efforts in rendering services under this Agreement. In the absence of
willful malfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Adviser, the Adviser shall
not be liable to the Trust or to
-4-
<PAGE>
any shareholder of the Series for any act or omission in the course of, or
connected with, rendering services under this Agreement or for any losses that
may be sustained in the purchase, holding or sale of any security.
10. Effective Date; Termination; Amendments.
(a) This Agreement shall be effective as to the Series on the date
the Series commences investment operations, and, unless terminated sooner as
provided herein, shall continue until the second anniversary of the execution of
this Agreement. Thereafter, unless terminated sooner as provided herein, this
Agreement shall continue in effect as to the Series for successive annual
periods, provided that such continuance is specifically approved at least
annually by the vote of a majority of the Board of Trustees of the Trust who are
not parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such continuance, and
either: (i) the vote of a majority of the outstanding voting securities of the
Series; or (ii) the vote of a majority of the full Board of Trustees.
(b) This Agreement may be terminated at any time, without the payment
of any penalty, either by: (i) the Trust, by action of the Board of Trustees or
by vote of a majority of the outstanding voting securities of the Series, on 60
days' written notice to the Adviser; or (ii) the Adviser, on 90 days' written
notice to the Trust. This Agreement shall terminate immediately in the event of
its assignment.
(c) This Agreement may be amended only if such amendment is approved
by the vote of a majority of the outstanding voting securities of the Series or
by vote of a majority of the Board of Trustees of the Trust who are not parties
to this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment.
(d) As used in this Agreement, the terms "specifically approved at
least annually," "majority of the outstanding voting securities," "interested
persons" and "assignment" shall have the same meanings as such terms have in the
Investment Company Act and the regulations thereunder.
11. Governing Law. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Massachusetts without giving effect to the
choice of law provisions thereof, to the extent that such laws are consistent
with provisions of the Investment Company Act and the regulations thereunder.
12. Miscellaneous. The captions in this Agreement are included for the
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. Should any
part of this Agreement be held or made invalid by a court decision, statute,
regulation, or otherwise, the remainder of this Agreement shall not be affected
thereby. This Agreement shall be
-5-
<PAGE>
binding and shall inure to the benefit of the parties hereto and their
respective successors, to the extent permitted by law.
IN WITNESS WHEREOF, the Trust and the Adviser have caused this Agreement to
be executed and delivered in their names and on their behalf by the undersigned,
duly authorized officers, all as of the day and year first above written.
Attest: EXCELSIOR INSTITUTIONAL
TRUST
________________________ By:______________________________
Name:
Title:
Attest: UNITED STATES TRUST COMPANY
OF NEW YORK
________________________ By:______________________________
Name:
Title:
-6-
<PAGE>
Exhibit A
to Investment
Advisory Agreement
SCHEDULE OF SERIES AND FEES UNDER INVESTMENT
ADVISORY AGREEMENT
Annual Fee (as a percentage of the
average daily net assets of the
Series Name Series)
- ----------- ----------------------------------------
Optimum Growth Fund 0.65%
Value Equity Fund 0.65%
-7-
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
-----------------------------
ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Chase Global Funds Service
---------
Company, Federated Administrative Services or U.S. Trust Company of New York
(each a "Co-Administrator") as Co-Administrator of Excelsior Institutional Trust
(the "Company"), any officer of the Company (or any other person authorized by
the Company's Board) is authorized to execute and deliver, in the name and on
behalf of the Company, written agreements in substantially the form attached
hereto or in any other form duly approved by the Board of Trustees ("Servicing
Agreements") with institutions that are shareholders of record or that have
clients that are shareholders of record or beneficial owners of any of the Funds
of the Company, including without limitation the Company's service providers and
their affiliates ("Service Organizations"). Such Servicing Agreements shall
require the Service Organizations to provide or arrange for the provision of
support services as set forth therein to their clients who beneficially own
Shares of any Fund offered by the Company in consideration of a fee, computed
and paid in the manner set forth in the Servicing Agreements, at the annual rate
of up to .40% of the applicable net asset value of Shares beneficially owned by
such clients. Among other institutions, any bank, trust company, thrift
institution or broker-dealer is eligible to become a Service Organization and to
receive fees under this Plan. All expenses incurred by the Company with respect
to a particular class or series of Shares of a particular Fund in connection
with Servicing Agreements and the implementation of this Plan shall be borne
entirely by the holders of that class or series.
Section 2. The Co-Administrators shall monitor the arrangements
---------
pertaining to the Company's Servicing Agreements with Service Organizations in
accordance with the terms of the Co-Administration Agreement by and among the
Co-Administrators and the Company. The Co-Administrators shall not, however, be
obliged by this Plan to recommend, and the Company shall not be obliged to
execute, any Servicing Agreement with any qualifying Service Organization.
Section 3. So long as this Plan is in effect, the Co-Administrators
---------
shall provide to the Company's Board of Trustees, and the Trustees shall review,
at least quarterly, a written report of the amounts expended pursuant to this
Plan and the purposes for which such expenditures were made.
<PAGE>
Section 4. This Plan shall become effective immediately upon the
---------
approval of the Plan (and the form of Servicing Agreement attached hereto) by a
majority of the Board of Trustees, including a majority of the trustees who are
not "interested persons" as defined in the Investment Company Act of 1940 (the
"Act") of the Company and have no direct or indirect financial interest in the
operation of this Plan or in any Servicing Agreement or other agreements related
to this Plan (the "Disinterested Trustees"), pursuant to a vote cast in person
at a meeting called for the purpose of voting on the approval of this Plan (or
form of Servicing Agreement).
Section 5. Unless sooner terminated, this Plan shall continue until
---------
July 31, 1996 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of
---------
Trustees, provided that any material amendments of the terms of this Plan shall
become effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority
---------
of the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and nomination
---------
of the new trustees of the Company who are not "interested persons" (as defined
in the Act) of the Company shall be committed to the discretion of the existing
Disinterested Trustees.
Section 9. The Company initially adopted this Plan as of February 9,
---------
1996.
-2-
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
-----------------------------
ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Chase Global Funds Service
---------
Company, Federated Administrative Services or U.S. Trust Company of New York
(each a "Co-Administrator") as Co-Administrator of Excelsior Institutional Trust
(the "Company"), any officer of the Company (or any other person authorized by
the Company's Board) is authorized to execute and deliver, in the name and on
behalf of the Company, written agreements in substantially the form attached
hereto or in any other form duly approved by the Board of Trustees ("Servicing
Agreements") with institutions that are shareholders of record or that have
clients that are shareholders of record or beneficial owners of any of the Funds
of the Company, including without limitation the Company's service providers and
their affiliates ("Service Organizations"). Such Servicing Agreements shall
require the Service Organizations to provide or arrange for the provision of
support services as set forth therein to their clients who beneficially own
Shares of any Fund offered by the Company in consideration of a fee, computed
and paid in the manner set forth in the Servicing Agreements, at the annual rate
of up to .40% of the applicable net asset value of Shares beneficially owned by
such clients. Among other institutions, any bank, trust company, thrift
institution or broker-dealer is eligible to become a Service Organization and to
receive fees under this Plan. All expenses incurred by the Company with
respect to a particular class or series of Shares of a particular Fund in
connection with Servicing Agreements and the implementation of this Plan shall
be borne entirely by the holders of that class or series.
Section 2. The Co-Administrators shall monitor the arrangements
---------
pertaining to the Company's Servicing Agreements with Service Organizations in
accordance with the terms of the Co-Administration Agreement by and among the
Co-Administrators and the Company. The Co-Administrators shall not, however, be
obliged by this Plan to recommend, and the Company shall not be obliged to
execute, any Servicing Agreement with any qualifying Service Organization.
Section 3. So long as this Plan is in effect, the Co-Administrators
---------
shall provide to the Company's Board of Trustees, and the Trustees shall review,
at least quarterly, a written report of the amounts expended pursuant to this
Plan and the purposes for which such expenditures were made.
<PAGE>
Section 4. This Plan shall become effective immediately upon the
---------
approval of the Plan (and the form of Servicing Agreement attached hereto) by a
majority of the Board of Trustees, including a majority of the trustees who are
not "interested persons" as defined in the Investment Company Act of 1940 (the
"Act") of the Company and have no direct or indirect financial interest in the
operation of this Plan or in any Servicing Agreement or other agreements related
to this Plan (the "Disinterested Trustees"), pursuant to a vote cast in person
at a meeting called for the purpose of voting on the approval of this Plan (or
form of Servicing Agreement).
Section 5. Unless sooner terminated, this Plan shall continue until
---------
July 31, 1996 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of
---------
Trustees, provided that any material amendments of the terms of this Plan shall
become effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority
---------
of the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and nomination
---------
of the new trustees of the Company who are not "interested persons" (as defined
in the Act) of the Company shall be committed to the discretion of the existing
Disinterested Trustees.
Section 9. The Company initially adopted this Plan as of February 9,
---------
1996.
-2-
<PAGE>
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, by and between Excelsior Institutional Trust (the
"Trust") and the shareholder service organization (the "Organization") listed on
the signature page hereof;
WITNESSETH:
WHEREAS, certain transactions in shares of beneficial interest,
$0.00001 par value, of the Trust or of any series now existing or later created
of the Trust ("Shares") may be made by investors who are customers of, and using
the services of or arranged by, an Organization, including without limitation
the Company's service providers and their affiliates, that has entered into a
shareholder servicing agreement with the Trust; and
WHEREAS, the Organization wishes to make it possible for its customers
(the "Customers") to purchase Shares and wishes to act as the Customers' agent
in performing or arranging for the performance of certain administrative
functions in connection with purchases, exchanges and redemptions of Shares from
time to time upon the order and for the account of Customers and to provide
related services to its Customers in connection with their investments in the
Trust; and
WHEREAS, it is in the interest of the Trust to make the services of
the Organization available to Customers who are or may become beneficial owners
of Shares of the Trust;
NOW, THEREFORE, the Trust and the Organization hereby agree as
follows:
1. Appointment. The Organization, as an independent contractor, hereby
-----------
agrees to perform or to have performed certain services for Customers as
hereinafter set forth. The Organization's appointment hereunder is non-
exclusive, and the parties recognize and agree that, from time to time, the
Trust may enter into other shareholder servicing agreements with others without
the Organization's consent. For the purposes of this Agreement, the Organization
is deemed an independent contractor and will have no authority to act as the
Trust's agent in any respect.
<PAGE>
2. Service to be Performed.
-----------------------
2.1 Type of Service. The Organization shall be responsible for performing
---------------
or having performed shareholder account administrative and servicing functions,
which shall include without limitation/1/: (a) assisting Customers in
-
designating and changing dividend options, account designations and addresses;
(b) providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records, as may reasonably be requested from
time to time by the Trust; (c) assisting in processing purchases, exchange and
redemption transactions; (d) arranging for the wiring of funds; (e) transmitting
and receiving funds in connection with Customer orders to purchase, exchange or
redeem Shares; (f) verifying and guaranteeing Customer signatures in connection
with redemption orders, transfers among and changes in Customer-designated
accounts; (g) providing periodic statements showing a Customer's account
balances and, to the extent practicable, integration of such information with
information concerning other client transactions otherwise effected with or
through the Organization; (h) furnishing on behalf of the Trust's distributor
(either separately or on an integrated basis with other reports sent to a
Customer by the Organization) periodic statements and confirmations of all
purchases, exchanges and redemptions of Shares in a Customer's account required
by applicable federal or state law, all such confirmations and statements to
conform to Rule 10b-10 under the Securities Exchange Act of 1934 and other
applicable federal or state law; (i) transmitting proxy statements, annual
reports, updating prospectuses and other communications from the Trust to
Customers; (j) receiving, tabulating and transmitting to the Trust proxies
executed by Customers with respect to annual and special meetings of
shareholders of the Trust; (k) providing reports (at least monthly, but more
frequently if so requested by the Trust's distributor) containing state-by-state
listings of the principal residences of the beneficial owners of the Shares; and
(l) providing or arranging for the provision of such other related services as
the Trust or a Customer may reasonably request. The Organization shall provide
or arrange for all personnel and facilities to perform the functions described
in this paragraph with respect to its Customers.
- --------------------
/1/ Services may be modified or omitted in a particular case and items
-
relettered or renumbered.
-2-
<PAGE>
2.2 Standard of Services. All services to be rendered or arranged for by
--------------------
the Organization hereunder shall be performed in a professional, competent and
timely manner. The details of the operating standards and procedures to be
followed in performance of the services described above shall be determined from
time to time by agreement between the Organization and the Trust. The Trust
acknowledges that the Organization's ability to perform on a timely basis
certain of its obligations under this Agreement depends upon the Trust's timely
delivery of certain materials and/or information to the Organization. The Trust
agrees to use its best efforts to provide such materials to the Organization in
a timely manner.
3. Fees.
----
3.1 Fees from the Trust. In consideration for the services described in
-------------------
Section 2 hereof and the incurring of expenses in connection therewith, the
Organization shall receive fees set forth in Appendix A hereto, such fees to be
paid in arrears periodically (but in no event less frequently than
semi-annually) at annual rates of up to .40% of the average daily net assets of
the Trust's Shares owned during the period for which payment has been made by
Customers for whom the Organization is the holder or agent of record or with
whom it maintains a servicing relationship. For purposes of determining the fees
payable to the Organization hereunder, the value of the Trust's net assets shall
be computed in the manner specified in the Trust's then-current prospectus for
computation of the net asset value of the Trust's Shares. The above fees
constitute all fees to be paid to the Organization by the Trust with respect to
the transactions contemplated hereby. The Trust may at any time in its
discretion suspend or withdraw the sale of its Shares.
3.2 Fees from Customers. It is agreed that the Organization may impose
-------------------
certain conditions on Customers, in addition to or different from those imposed
by the Trust, such as requiring a minimum initial investment or charging
Customers direct fees for the same or similar services as are provided hereunder
by the Organization (which fees may either relate specifically to the
Organization's services with respect to the Trust or generally cover services
not limited to those with respect to the Trust). The Organization shall bill
Customers directly for such fees. In the event the Organization charges
Customers such fees, it shall notify the Trust in advance and make appropriate
prior written disclosure (such disclosure to be in accordance with all
applicable laws) to Customers of any such fees charged to the Customer. To the
extent required by applicable rules and regulations of the Securities and
Exchange Commission, the Trust shall make written disclosure of the fees paid or
to be paid to the Organization pursuant to Section 3.1 of
-3-
<PAGE>
this Agreement. It is understood, however, that in no event shall the
Organization have recourse or access to the account of any shareholder of the
Trust except to the extent expressly authorized by law or by such shareholder,
or to any assets of the Trust, for payment of any direct fees referred to in
this Section 3.2.
4. Information Pertaining to the Shares. The Organization and its
------------------------------------
officers, employees and agents are not authorized to make any representations
concerning the Trust or the Shares to Customers or prospective Customers,
excepting only accurate communication of any information provided by or on
behalf of any administrator or distributor of the Trust or any factual
information contained in the then-current prospectus relating to the Trust or to
any series of the Trust. In furnishing such information regarding the Trust or
the Shares, the Organization shall act as agent for the Customer only and shall
have no authority to act as agent for the Trust. Advance copies or proofs of
all materials which are generally circulated or disseminated by the Organization
to Customers or prospective Customers which identify or describe the Trust shall
be provided to the Trust at least 10 days prior to such circulation or
dissemination (unless the Trust consents in writing to a shorter period), and
such materials shall not be circulated or disseminated or further circulated or
disseminated at any time after the Trust shall have given written notice within
such 10 day period to the Organization of any objection thereto.
Nothing in this Section 4 shall be construed to make the Trust liable
for the use (or accuracy unless prepared by the Trust for the specific use) of
any information about the Trust which is disseminated by the Organization.
5. Use of the Organization's Name. The Trust shall not use the name of
------------------------------
the Organization (or any of its affiliates or subsidiaries) in any prospectus,
sales literature or other material relating to the Trust in a manner not
approved by the Organization prior thereto in writing; provided, however, that
the approval of the Organization shall not be required for any use of its name
which merely refers in accurate and factual terms to its appointment hereunder
and the terms hereof or which is required by law, including without limitation,
by the Securities and Exchange Commission or any state securities authority or
any other appropriate regulatory, governmental or judicial authority; provided,
further, that in no event shall such approval be unreasonably withheld or
delayed.
6. Use of the Trust's Name. The Organization shall not use the name of
-----------------------
the Trust on any checks, bank drafts, bank statements or forms for other than
internal use in a manner not
-4-
<PAGE>
approved by the Trust prior thereto in writing; provided, however, that the
approval of the Trust shall not be required for the use of the Trust's name in
connection with communications permitted by Section 4 hereof or (subject to
Section 4, to the extent the same may be applicable) for any use of the Trust's
name which merely refers in accurate and factual terms to the Trust in
connection with the Organization's role hereunder or which is required by law,
including without limitations, by the Securities and Exchange Commission or any
state securities authority or any other appropriate regulatory, governmental or
judicial authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
7. Security. The Organization represents and warrants that to the best
--------
of its knowledge, the various procedures and systems which it has implemented
(including provision for twenty-four hours a day restricted access) with regard
to safeguarding from loss or damage attributable to fire, theft or any other
cause the Trust's records and other data and the Organization's records, data,
equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as in its judgment are required for the secure performance of
its obligations hereunder. The parties shall review such systems and procedures
on a periodic basis, and the Trust shall from time to time specify the types of
records and other data of the Trust to be safeguarded in accordance with this
Section 7.
8. Compliance with Laws. The Organization shall comply with all
--------------------
applicable federal and state laws and regulations, including without limitation
securities laws. The Organization represents and warrants to the Trust that the
performance of all its obligations hereunder will comply with all applicable
laws and regulations, the provisions of its charter documents and by-laws and
all material contractual obligations binding upon the Organization. The
Organization furthermore undertakes that it will promptly, after the
Organization becomes so aware, inform the Trust of any change in applicable laws
or regulations (or interpretations thereof) or in its charter or by-laws or
material contracts which would prevent or impair full performance of any of its
obligations hereunder.
9. Reports. Quarterly, and more frequently to the extent requested by
-------
the Trust from time to time, the Organization agrees that it will provide the
administrator of the Trust with a written report of the amounts expended by the
Organization pursuant to this Agreement and the purposes for which such
expenditures were made. Such written reports shall be in a form satisfactory to
the Trust and shall supply all information
-5-
<PAGE>
necessary for the Trust to discharge its responsibilities under applicable laws
and regulations.
10. Record Keeping.
--------------
10.1 Section 31. The Organization shall maintain records in a form
----------
reasonably acceptable to the Trust and in compliance with applicable laws and
the rules and regulations of the Securities and Exchange Commission, including
but not limited to the record-keeping requirements of Section 31 of the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules
thereunder. Such records shall be deemed to be the property of the Trust and
will be made available at the Trust's request for inspection and use by the
Trust, representatives of the Trust and governmental authorities. The
Organization agrees that, for so long as it retains any records of the Trust, it
will meet all reporting requirements pursuant to the 1940 Act and applicable to
the Organization with respect to such records. Upon termination of this
Agreement, the Organization shall deliver to the administrator of the Trust all
books and records maintained by the Organization and deemed to be the Trust's
property hereunder.
10.2 Rules 17a-3 and 17a-4. The Organization shall maintain accurate and
---------------------
complete records with respect to services performed by the Organization in
connection with the purchase and redemption of Shares. Such records shall be
maintained in form reasonably acceptable to the Trust and in compliance with the
requirements of all applicable laws, rules and regulations, including without
limitation, Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934, as
amended, pursuant to which any dealer of the Shares must maintain certain
records. All such records maintained by the Organization shall be the property
of such dealer and will be made available for inspection and use by the Trust or
such dealer upon the request of either. The Organization shall file with the
Securities and Exchange Commission and other appropriate governmental
authorities, and furnish to the Trust and any such dealer copies of, all reports
and undertakings as may be reasonably requested by the Trust or such dealer in
order to comply with the said rules. If so requested by any such dealer, the
Organization shall confirm to such dealer its obligations under this Section
10.2 by a writing reasonably satisfactory to such dealer.
10.3 Transfer of Customer Data. In the event this Agreement is terminated
-------------------------
or a successor to the Organization is appointed, the Organization shall transfer
to such designee as the Trust may direct a certified list of the shareholders of
the Trust serviced by the Organization (with name, address and tax
identification or Social Security number, if any), a complete record of the
account of each such shareholder and the status thereof, and all other
-6-
<PAGE>
relevant books, records, correspondence, and other data established or
maintained by the Organization under this Agreement. In the event this
Agreement is terminated, the Organization will use its best efforts to cooperate
in the orderly transfer of such duties and responsibilities, including
assistance in the establishment of books, records and other data by the
successor.
10.4 Survival of Record-Keeping Obligations. The record-keeping
--------------------------------------
obligations imposed in this Section 10 shall survive the termination of this
Agreement for a period of three years.
10.5 Obligations Pursuant to Agreement Only. Nothing in this Section 10
--------------------------------------
shall be construed so that the Organization would, by virtue of its role
hereunder, be required under applicable law to maintain the records required to
be maintained by it under this Section 10, but is understood that the
Organization has agreed to do so in order to enable the Trust and its dealer or
dealers to comply with laws and regulations applicable to them.
10.6 Organization's Rights to Copy Records. Anything in this Section 10
-------------------------------------
to the contrary notwithstanding, except to the extent otherwise prohibited by
law, the Organization shall have the right to copy, maintain and use any records
maintained by the Organization pursuant to this Section 10, except as otherwise
prohibited by Sections 4 and 6 hereof.
11. Force Majeure. The Organization shall not be liable or responsible
-------------
for delays or errors by reason of circumstances beyond its reasonable control,
including, but not limited to, acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdown, flood or
catastrophe, Acts of God, insurrection, war, riots or failure of communication
or power supply.
12. Indemnification.
---------------
12.1 Indemnification of the Organization. The Trust will indemnify and
-----------------------------------
hold the Organization harmless from all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) from any claim,
demand, action or suit (collectively, "Claims") arising in connection with
material misstatements or omissions in the Trust's Prospectus. Notwithstanding
anything herein to the contrary, the Trust will indemnify and hold the
Organization harmless from any and all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) resulting from any
Claim as a result of its acting in accordance with any written instructions
reasonably believed by the Organization to have been
-7-
<PAGE>
executed by any person duly authorized by the Trust, or as a result of acting in
reliance upon any instrument or stock certificate reasonably believed by the
Organization to have been genuine and signed, countersigned or executed by a
person duly authorized by the Trust, excepting only the negligence or bad faith
of the Organization.
In any case in which the Trust may be asked to indemnify or hold the
Organization harmless, the Trust shall be advised of all pertinent facts
concerning the situation in question and the Organization shall use reasonable
care to identify and notify the Trust promptly concerning any situation which
presents or appears likely to present a claim for indemnification against the
Trust. The Trust shall have the option to defend the Organization against any
Claim which may be the subject of indemnification hereunder. In the event that
the Trust elects to defend against such Claim, the defense shall be conducted by
counsel chosen by the Trust and satisfactory to the Organization. The
Organization may retain additional counsel at its expense. Except with the
prior written consent of the Trust, the Organization shall not confess any Claim
or make any compromise in any case in which the Trust will be asked to indemnify
the Organization.
12.2 Indemnification of the Trust. Without limiting the rights of the
----------------------------
Trust under applicable law, the Organization will indemnify and hold the Trust
harmless from all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) from any Claim (a) arising from (i) the
bad faith or negligence of the Organization, its officers, employees or agents,
(ii) any breach of applicable law by the Organization, its officers, employees
or agents, (iii) any action of the Organization, its officers, employees or
agents which exceeds the legal authority of the Organization or its authority
hereunder, or (iv) any actions, inactions, errors or omissions of the
Organization, its officers, employees or agents with respect to the purchase,
redemption, transfer and registration of Customers' Shares or the Trust's
verification or guarantee of any Customer signature.
In any case in which the Organization may be asked to indemnify or
hold the Trust harmless, the Organization shall be advised of all pertinent
facts concerning the situation in question and the Trust shall use reasonable
care to identify and notify the Organization promptly concerning any situation
which presents or appears likely to present a claim for indemnification against
the Organization. The Organization shall have the option to defend the Trust
against any Claim which may be the subject of indemnification hereunder. In the
event that the Organization elects to defend against such Claim, the defense
shall be
-8-
<PAGE>
conducted by counsel chosen by the Organization and satisfactory to the Trust.
The Trust may retain additional counsel at its expense. Except with the prior
written consent of the Organization, the Trust shall not confess any Claim or
make any compromise in any case in which the Organization will be asked to
indemnify the Trust.
12.3 Survival of Indemnities. The indemnities granted by the parties in
-----------------------
this Section 12 shall survive the termination of this Agreement.
13. Notices. All notices or other communications hereunder to either party
-------
shall be in writing and shall be deemed sufficient if mailed to such party at
the address of such party set forth on the signature page of this Agreement or
at such other address as such party may have designated by written notice to the
other.
14. Further Assurances. Each party agrees to perform such further acts
------------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
15. Termination. Unless sooner terminated, this Agreement will continue
-----------
until ____________, 1996 and thereafter will continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by vote of a majority of (i) the Board of Trustees of the Trust
and (ii) those Trustees who are not "interested persons" (as defined in the 1940
Act) of the Trust and have no direct or indirect financial interest in the
operation of the Trust's Administrative Services Plan or in any agreement
related thereto cast in person at a meeting called for the purpose of voting on
such approval ("Disinterested Trustees"). This Agreement is terminable, without
penalty, at any time by the Trust (which termination may be by a vote of a
majority of the Disinterested Trustees) or by you upon notice to the Trust.
16. Changes; Amendments. This Agreement may be changed or amended only by
-------------------
written instrument signed by both parties hereto.
17. Subcontracting By Organization. The Organization may, with the
------------------------------
written approval of the Trust (such approval not to be unreasonably withheld),
subcontract for the performance of the Organization's obligations hereunder with
any one or more persons, including but not limited to any one or more persons
which is an affiliate of the Organization; provided, however, that the
Organization shall be as fully responsible to the Trust for the acts and
omissions of any subcontractor as it would be for its own acts or omissions.
-9-
<PAGE>
18. Compliance with Laws and Policies; Cooperation. The Trust hereby
----------------------------------------------
agrees that it will comply with all laws and regulations applicable to its
operations and the Organization agrees that it will comply with all laws and
regulations applicable to its operations hereunder. Each party understands that
the other may from time to time adopt or modify policies relating to the subject
matter of this Agreement, in which case the party adopting or modifying such a
policy shall notify the other thereof and the parties shall consider the
applicability thereof and endeavor to comply therewith to the extent not
impracticable or unreasonably burdensome. Each of the parties agrees to
cooperate with the other in connection with the performance of this Agreement
and the resolution of any problems, questions or disagreements in connection
herewith.
18.1 Annual Financial Reports. At least once a year, the Trust shall send
------------------------
to the record owners of its Shares the Trust's audited financial statements.
18.2 Annual Certification. At least once a year, the Organization shall
--------------------
certify to the Trust that it is conducting its business in accordance with the
terms and conditions of the Agreement.
19. Single Portfolio. Notwithstanding anything in this Agreement to the
----------------
contrary, any amount owed by the Trust to the Organization under this Agreement
or otherwise with respect to any matter hereunder shall be paid only from and
shall be limited to the assets and property of the particular investment
portfolio of the Trust to which the matter relates.
20. Miscellaneous. This Agreement shall be construed and enforced in
-------------
accordance with and governed by the laws of the State of Delaware. The captions
in this Agreement are included for convenience of reference only and in no way
define or limit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument. The terms of this
Agreement shall become effective as of the date set forth below.
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have caused this Agreement to be executed and delivered in their names
and on their behalf by the undersigned, thereunto duly authorized, all as of the
day and year set forth below.
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<PAGE>
Dated as of: ___________________
Excelsior Institutional Trust Address for Notices:
_________________________
_________________________
_________________________
By: ___________________________ _________________________
(Authorized Officer)
________________________________ Address for Notices:
[Service Organization] ________________________
________________________
________________________
________________________
By: ____________________________
(Authorized Officer)
-11-
<PAGE>
APPENDIX A
----------
EXCELSIOR INSTITUTIONAL TRUST
Pursuant to the terms and conditions set forth in the attached
Shareholder Servicing Agreement, the Organization will receive the fees set
forth below in consideration for the services described in Section 2 of said
Agreement and the incurring of expenses in connection therewith, such fees
(calculated pursuant to Section 3.1 of said Agreement) to be paid in arrears
periodically (but in no event less frequently than semi-annually):
<TABLE>
<CAPTION>
FUND SHAREHOLDER
SERVICING
FEE
======================================================================
<S> <C>
Institutional Equity Fund __ BP
Institutional Equity Growth Fund __ BP
Institutional International Equity Fund __ BP
Institutional Value Equity Fund __ BP
======================================================================
Institutional Income Fund __ BP
Institutional Total Return Bond Fund __ BP
Institutional Bond Index Fund __ BP
======================================================================
Institutional Balanced Fund __ BP
Institutional Optimum Growth Fund __ BP
================================================================
</TABLE>
-12-
<PAGE>
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to
our Firm under the caption "Counsel" in the Statement of Additional Information
that is included in Post-Effective Amendment No. 7 to the Registration Statement
(No. 33-78264) on Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, of Excelsior Institutional Trust. This consent
does not constitute a consent under section 7 of the Securities Act of 1933, and
in consenting to the use of our name and the references to our Firm under such
caption we have not certified any part of the Registration Statement and do not
otherwise come within the categories of persons whose consent is required under
said section 7 or the rules and regulations of the Securities and Exchange
Commission thereunder.
/s/DRINKER BIDDLE & REATH
-------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
February 23, 1996
<PAGE>
PURCHASE AGREEMENT
------------------
Excelsior Institutional Trust (the "Company"), a Delaware business trust,
and Edgewood Services, Inc. ("Edgewood"), a New York corporation, hereby agree
with each other as follows:
1. The Company hereby offers Edgewood and Edgewood hereby purchases one
share each of the Optimum Growth and Value Equity Funds of the Company
at $10 per share (collectively, the "Shares"). The Company hereby
acknowledges receipt from Edgewood of funds in the total amount of $20
in full payment for the Shares.
2. Edgewood represents and warrants to the Company that the Shares are
being acquired for investment purposes and not with a view to the
distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the ____ day of __________ 1996.
EXCELSIOR INSTITUTIONAL TRUST
By:_____________________________
its
EDGEWOOD SERVICES, INC.
By:____________________________
its
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
DISTRIBUTION PLAN
-----------------
February 9, 1996
This Distribution Plan (the "Plan") has been adopted by the Board of
Trustees of Excelsior Institutional Trust (the "Trust") in conformance with Rule
12b-1 under the Investment Company Act of 1940 (the "Act").
Section 1. Payments. The Trust may reimburse its Distributor (or any
---------- --------
other person) for certain expenses that are incurred in connection with the
offering and sale of Trust Shares of each of the Trust's Funds (all such shares,
hereinafter called "Shares" and all such Funds hereinafter called "Funds").
Reimbursements by the Trust under the Plan will be calculated daily and paid
monthly at a rate or rates set from time to time by the Trust's Board of
Trustees, provided that no rate set by the Board for any Fund may exceed the
annual rate of .75% of the average daily net asset value of Shares of such Fund.
For purposes of determining the reimbursements payable under the Plan, the net
asset value of the outstanding Shares of the respective Fund shall be computed
in the manner specified in the Trust's prospectuses and statements of additional
information for such Shares.
Section 2. Expenses Covered by Plan. Payments to the Distributor under
---------- ------------------------
Section 1 of the Plan will be to reimburse the Distributor for its expenses in
connection with services intended to result in the sale of the Shares. Such
services may include but are not limited to: (a) direct out-of-pocket
promotional expenses incurred by the Distributor in connection with the
advertising and marketing of Shares; and (b) payments to one or more securities
dealers, financial institutions or other industry professionals and financial
intermediaries, such as but not limited to investment advisers, accountants and
estate planning firms that are not affiliated with the Distributor (severally, a
"Distribution Organization") for distribution assistance. As used herein,
"direct out-of-pocket promotional expenses" include without limitation amounts
spent by the Distributor in connection with advertising via radio, television,
newspapers, magazines and otherwise; preparing, printing and mailing sales
materials, brochures and prospectuses (except for prospectuses used for
regulatory purposes or for distribution to existing shareholders); and other
out-of-pocket expenses incurred in connection with the promotion of the Shares.
Payments made by a particular Fund must be for distribution services
rendered for or on behalf of such Fund. However, joint distribution financing
with respect to Shares of the Funds (which
<PAGE>
financing may also involve other investment portfolios or companies that are
affiliated persons of such a person, or affiliated persons of the Distributor)
shall be permitted in accordance with applicable regulations of the Securities
and Exchange Commission as in effect from time to time.
Upon proper authorization by the Trust's Trustees in accordance with Rule
12b-1 under the Act, expenses covered by the Plan may also include other
expenses the Distributor (or any other person) may incur in connection with the
distribution of the Shares including, without limitation, expenditures for
telephone facilities and in-house telemarketing.
Section 3. Reports of Distributor. So long as the Plan is in effect, the
---------- ----------------------
Distributor shall provide to the Trust's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended
pursuant to the Plan and the purposes for which such expenditures were made.
Section 4. Approval of Plan. The Plan will become effective immediately,
---------- ----------------
as to any series of Shares, upon its approval by (a) a majority of the
outstanding Shares of such series, and (b) a majority of the Board of Trustees,
including a majority of the Trustees who are not "interested persons" (as
defined in the Act) of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements entered into in
connection with the Plan, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of the Plan.
Section 5. Continuance of Plan. The Plan shall continue in effect for so
---------- -------------------
long as its continuance is specifically approved at least annually by the
Trust's Board of Trustees in the manner described in Section 4.
Section 6. Amendments. The Plan may be amended at any time by the Board
---------- ----------
of Trustees provided that (a) any amendment to increase materially the costs
which any series of Shares may bear for distribution pursuant to the Plan shall
be effective only upon approval by a vote of a majority of the outstanding
Shares of such series, and (b) any material amendments of the terms of the Plan
shall become effective only upon approval as provided in paragraph 4(b) hereof.
Section 7. Termination. The Plan is terminable, as to any series of
---------- -----------
Shares, without penalty at any time by (a) a vote of a majority of the Trustees
who are not "interested persons" (as defined in the Act) of the Trust and who
have no direct or indirect financial interest in the operation of the Plan or in
any agreements entered into in connection with the Plan, or (b) a vote of a
majority of the outstanding Shares of such series.
-2-
<PAGE>
Section 8. Selection/Nomination of Trustees. While this Plan is in
---------- --------------------------------
effect, the selection and nomination of those Trustees who are not "interested
persons" (as defined in the Act) of the Trust shall be committed to the
discretion of such non-interested Trustees.
Section 9. Miscellaneous. The captions in this Agreement are included for
---------- -------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the Trust has executed the Plan as of February 9, 1996
on behalf of each of the Funds.
EXCELSIOR INSTITUTIONAL TRUST
By:____________________
President
-3-
<PAGE>
DISTRIBUTION AGREEMENT
Gentlemen:
We wish to enter into this Distribution Agreement ("Agreement") with you
concerning the provision of distribution services in connection with Trust
Shares ("Shares") of each Fund offered by Excelsior Institutional Trust (the
"Trust"), of which we are the principal underwriter as defined in the Investment
Company Act of 1940 (the "Act") and the exclusive agent for the continuous
distribution of said Shares.
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide reasonable assistance in connection with
the distribution of Shares to your Clients as requested from time to time by us,
which assistance may include without limitation forwarding sales literature and
advertising provided by us for Clients, and such other similar services as we
may reasonably request to the extent you are permitted to do so under applicable
statutes, rules and regulations.
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services and assistance to Clients.
Section 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us or the Shares except those
contained in the Trust's applicable prospectus and statement of additional
information for the Shares, copies of which will be supplied by us to you, or in
such supplemental literature or advertising as may be authorized by us in
writing.
Section 4. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us or the
Trust in any matter or in any respect. By your written acceptance of this
Agreement, you agree to and do release, indemnify and hold us harmless and the
Trust harmless from and against any and all direct or indirect liabilities or
losses resulting from requests, directions, actions or inactions of or by you or
your officers, employees or agents regarding your responsibilities hereunder or
the purchase, redemption, transfer of registration of Shares (or orders relating
to the same) by or on behalf of Clients. You and your employees will, upon
request, be available during normal business hours to consult with us or our
designees concerning the performance of your responsibilities under this
Agreement.
<PAGE>
Section 5. In consideration of the services and facilities provided by you
hereunder, we will pay to you, and you will accept as full payment therefor, a
fee at the annual rate of __% of the average daily net asset value of the Shares
beneficially owned by your Clients for whom you are the dealer of record or
holder of record (the "Clients' Shares"), which fee will be computed daily and
payable monthly. For purposes of determining the fees payable under this
Section 5, the average daily net asset value of the Clients' Shares will be
computed in the manner specified in the Trust's Registration Statement (as the
same is in effect from time to time) in connection with the computation of the
net asset value of the particular Shares involved for purposes of purchases and
redemptions. The fee rate stated above may be prospectively increased or
decreased by us, in our sole discretion, at any time upon notice to you.
Further, we may, in our discretion and without notice, suspend or withdraw the
sale of Shares, including the sale of Shares for the account of any Client or
Clients.
Section 6. Any person authorized to direct the disposition of monies paid
or payable by us pursuant to this Agreement will provide to us and the Trust,
and the Trust's Trustees will review, at least quarterly, a written report of
the amounts so expended and the purposes for which such expenditures were made.
In addition, you will furnish us or our designees with such information as we or
they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to the Trust's Board of Trustees concerning this
Agreement and the monies paid or payable by us pursuant hereto, as well as any
other reports or filings that may be required by law.
Section 7. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you represent,
warrant and agree that this Agreement has been entered into pursuant to Rule
12b-1 under the Act, and is subject to the provisions of said Rule, as well as
any other applicable rules or regulations promulgated by the Securities and
Exchange Commission.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless
sooner terminated, this Agreement will continue until _______________, 199__
and thereafter will continue automatically for successive annual periods
provided such continuance is specifically approved at least annually by the
-2-
<PAGE>
Trust in the manner described in Section 12. This Agreement is terminable with
respect to any series of Shares, without penalty, at any time by the Trust
(which termination may be by a vote of a majority of the Disinterested Trustees
as defined in Section 12 or by vote of the holders of a majority of the
outstanding Shares of such series) or by us or you upon notice to the other
party hereto. This Agreement will also terminate automatically in the event of
its assignment (as defined in the Act).
Section 10. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
Section 11. This Agreement will be construed in accordance with the laws
of the State of Delaware.
Section 12. This Agreement has been approved by vote of a majority of (i)
the Trust's Board of Trustees and (ii) those Trustees of the Trust who are not
"interested persons" (as defined in the Act) of the Trust and have no direct or
indirect financial interest in the operation of the Distribution Plan adopted by
the Trust regarding the provision of distribution services in connection with
the Shares or in any agreement related thereto cast in person at a meeting
called for the purpose of voting on such approval ("Disinterested Trustees").
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated
-3-
<PAGE>
below and promptly return it to us, at the following address:
____________________________________________________________.
Very truly,
EDGEWOOD SERVICES, INC.
By: _________________________
Date: ________________ (Authorized Officer)
Accepted and Agreed to:
[Distribution Organization]
By: ________________________
Date: ________________ (Authorized Officer)
Address of Distribution _______________________
Organization _______________________
_______________________
-4-
