EXHIBIT (17)(c)
EXCELSIOR FUNDS, INC.
Blended Equity Fund
Income and Growth Fund
Value and Restructuring Fund
Small Cap Fund
Large Cap Growth Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the Blended Equity, Income and
Growth, Value and Restructuring, Small Cap and Large Cap Growth Funds
(individually, a "Fund" and collectively, the "Funds") of Excelsior Funds, Inc.
("Excelsior Fund") dated August 1, 1998 (the "Prospectus"). Much of the
information contained in this Statement of Additional Information expands upon
the subjects discussed in the Prospectus. No investment in shares of the Funds
described herein (collectively, the "Shares") should be made without reading the
Prospectus. A copy of the Prospectus may be obtained by writing Excelsior Fund
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-
3913 or by calling (800) 446-1012.
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES............................................... 1
Other Investment Considerations - Blended Equity, Value and Restructuring,
Small Cap and Large Cap Growth Funds 1
Other Investment Considerations - Income and Growth Fund.................... 2
Additional Information on Portfolio Instruments............................. 4
Additional Investment Limitations........................................... 10
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................... 13
INVESTOR PROGRAMS................................................................ 14
Systematic Withdrawal Plan.................................................. 14
Exchange Privilege.......................................................... 15
Other Investor Programs..................................................... 15
DESCRIPTION OF CAPITAL STOCK..................................................... 16
MANAGEMENT OF THE FUNDS.......................................................... 17
Directors and Officers...................................................... 17
Investment Advisory and Administration Agreements........................... 23
Shareholder Organizations................................................... 25
Expenses.................................................................... 26
Custodian and Transfer Agent................................................ 26
PORTFOLIO TRANSACTIONS........................................................... 27
INDEPENDENT AUDITORS............................................................. 30
COUNSEL.......................................................................... 30
ADDITIONAL INFORMATION CONCERNING TAXES.......................................... 30
PERFORMANCE INFORMATION.......................................................... 31
MISCELLANEOUS.................................................................... 33
FINANCIAL STATEMENTS............................................................. 34
APPENDIX A....................................................................... A-1
INVESTMENT OBJECTIVES AND POLICIES
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The investment objectives and policies of the Blended Equity (prior to
August 1, 1997, the "Equity"), Income and Growth, Value and Restructuring (prior
to August 1, 1997, the "Business and Industrial Restructuring"), Small Cap
(prior to August 1, 1997, the "Early Life Cycle") and Large Cap Growth Funds are
described in the Prospectus. The following information supplements the
description of the investment objectives and policies as set forth in the
Prospectus.
Other Investment Considerations - Blended Equity, Value and Restructuring, Small
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Cap and Large Cap Growth Funds
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The Blended Equity, Value and Restructuring, Small Cap and Large Cap
Growth Funds invest primarily in common stocks, but each Fund may also purchase
both preferred stocks and securities convertible into common stock at the
discretion of United States Trust Company of New York ("U.S. Trust New York")
and U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and,
collectively, with U.S. Trust New York, the "Investment Adviser" or "U.S.
Trust"). While current income is secondary to the objective of long-term
capital appreciation, the Investment Adviser expects that the broad and
diversified strategies utilized by it will result in somewhat more current
income than would be generated if the Investment Adviser utilized a single
strategy more narrowly focused on rapid growth of principal and involving
exposure to higher levels of risk.
The Investment Adviser'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. The Investment Adviser 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 very wide range of
investment potential, current income return rates, and exposure to fundamental
and market risks. Income generated by each Fund's investments in these
companies would be expected to be moderate,
characterized by lesser rates than those of a fund whose sole objective is
current income, and somewhat higher rates than those of a higher-risk growth
fund.
2. Transaction Value Companies. In the opinion of the Investment Adviser, the
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stock market frequently values the aggregate ownership of a company at a
substantially lower figure than its component assets would be worth if they were
sold off separately over time. Such assets may include intangible assets such
as product and market franchises, operating know-how, or distribution systems,
as well as such tangible properties as oil reserves, timber, real estate, or
production facilities. Investment opportunities in these companies are
determined by the magnitude of difference between economic worth and current
market price.
Market undervaluations are very often corrected by purchase and sale,
restructuring of the company, or market appreciation to recognize the actual
worth. The recognition process may well occur over time, however, incurring a
form of time-exposure risk. Success from investing in these companies is often
great, but may well be achieved only after a waiting period of inactivity.
Income derived from investing in undervalued companies is expected to
be moderately greater than that derived from investments in either the
Problem/Opportunity or Early Life Cycle companies.
3. Early Life Cycle Companies. Investments in Early Life Cycle companies tend
--------------------------
to be narrowly focused on an objective of higher rates of capital appreciation.
They correspondingly will involve a significantly greater degree of risk and the
reduction of current income to a negligible level. Such investments will not be
limited to new, small companies engaged only in frontier technology, but will
seek opportunities for maximum appreciation through the full spectrum of
business operations, products, services, and asset values. Consequently, the
Funds' investments in Early Life Cycle companies are primarily in younger,
small- to medium- sized companies in the early stages of their development.
Such companies are usually more flexible in trying new approaches to problem-
solving and in making new or different employment of 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.
Other Investment Considerations - Income and Growth Fund
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The Income and Growth Fund is expected to have a greater portion of
its assets invested in debt obligations under normal market conditions than the
Blended Equity, Value and Restructuring, Small Cap and Large Cap Growth Funds.
Further, although the Investment Adviser will generally use the three strategies
described above for the Blended Equity, Value and Restructuring, Small Cap and
Large Cap Growth Funds, the Income and Growth Fund will generally invest in
those companies which are expected to generate the greater income. As a result,
the Income and Growth Fund is likely to have a relatively small portion of its
assets invested in Early Life Cycle companies.
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As stated in the Prospectus, the Income and Growth Fund may invest up
to 10% of its assets in instruments such as liquidating trust receipts;
certificates of beneficial ownership; limited partnership interests; creditor
claims; loan participations; and warrants, options and other rights to purchase
securities. Liquidating trust receipts, as well as certificates of beneficial
interest, acquired by the Income and Growth Fund represent interests in trusts
holding specific assets. In the case of a liquidating trust, such assets may
include airplanes, ships and trucks that have been leased to third parties.
Limited partnership interests acquired by the Fund may represent equitable
interests in enterprises engaged in activities related to leasing of electronic,
computer and other types of equipment. Normally, the profits and losses
attributable to the foregoing types of instruments pass directly to the holders
of the instruments and are not taxed at the trust or partnership level.
Creditor claims (which may be in the form of notes or debentures)
acquired by the Income and Growth Fund comprise debt obligations of companies
being reorganized under bankruptcy or insolvency laws. Creditor claims normally
sell at a substantial discount from their face value, may be convertible into
stock of the reorganized company, and have a high degree of potential risk and
reward. Loan participations acquired by the Income and Growth Fund represent
interests in either separate, privately negotiated loans that have been made by
lending institutions to third parties or pools of privately negotiated loans
maintained in the loan portfolios of lending institutions. Lending institutions
may sell loan participations to the Income and Growth Fund and other
institutional investors in order to achieve additional revenues and to reduce
their exposure on the loans involved, as well as for other reasons. Loan
participations are considered to be illiquid securities subject to the 10%
limitation on investments in illiquid securities described in the Prospectus.
The instruments described above may provide a higher than normal rate
of return but may also entail greater risks. These risks include the absence of
any secondary or other organized market for certain instruments that the Income
and Growth Fund may acquire; the likelihood that the transfer of certain
instruments will otherwise be restricted because they have not been registered
under Federal or state securities laws; the probability that certain instruments
will represent interests in a single asset or project and will be entirely
dependent upon market and economic factors affecting such asset or project and
upon the skill of project managers to produce value; the possibility of volatile
changes in the value of an instrument because of changes in the value of the
asset underlying the instrument; the possibility that certain instruments will
be subject to heavy cash flow dependency, defaults by borrowers, self-
liquidation and the risk that the underlying portfolio company will fail to
qualify for favorable tax treatment under the Internal Revenue Code of 1986, as
amended (the "Code"); the possibility that the Fund's loss with respect to an
instrument may exceed the amount of its investment; and, with respect to
creditor claims and other debt instruments, the quality of the credit extended.
In addition, as discussed in the Prospectus, income from some of the instruments
described above may be non-qualifying income for purposes of the Code and must
be monitored by the Investment Adviser so that the amount of any such non-
qualifying income does not exceed the amount permitted by the Code. The
Investment Adviser will purchase such instruments only when it determines that
the expected return justifies the attendant risks.
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Additional Information on Portfolio Instruments
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Options
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As stated in the Prospectus, the Income and Growth, Value and
Restructuring, Small Cap and Large Cap Growth Funds may purchase put and call
options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such purchases would be in an amount not exceeding 5% of
each such Fund's net assets. Purchase of options is a highly specialized
activity which entails greater than ordinary investment risks. Regardless of
how much the market price of the underlying security increases or decreases, the
option buyer's risk is limited to the amount of the original investment for the
purchase of the option. However, options may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities. A listed call option gives the purchaser of the option
the right to buy from a clearing corporation, and the writer has the obligation
to sell to the clearing corporation, the underlying security at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. Put and call options purchased by the Income and Growth, Value
and Restructuring, Small Cap and Large Cap Growth Funds will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.
Also as stated in the Prospectus, each Fund may engage in writing
covered call options and enter into closing purchase transactions with respect
to such options. When any of the Funds writes a covered call option, it may
terminate its obligation to sell the underlying security prior to the expiration
date of the option by executing a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to permit the
writing of a new call option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
writer will have incurred a loss on the transaction. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. There is no assurance that a liquid secondary market on an
exchange will exist for any particular option. A covered option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer in such circumstances
will be subject to the risk of market decline in the underlying security during
such period. The Funds will write an option on a particular security only if
the Investment Adviser believes that a liquid secondary market will exist on an
exchange for options of the same series, which will permit the Funds to make a
closing purchase transaction in order to close out its position.
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When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that 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 value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date, or if the Fund involved enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold),
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Fund involved may deliver the underlying security from its
portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses.
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by the Funds' custodian (or sub-custodian) or in
the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered loans by a Fund under the Investment Company Act of 1940, as amended
(the "1940 Act").
Futures Contracts and Related Options
-------------------------------------
The Value and Restructuring, Small Cap and Large Cap Growth Funds may
invest in futures contracts and options thereon. They may enter into interest
rate futures contracts and other types of financial futures contracts, including
foreign currency futures contracts, as well as any index or foreign market
futures which are available on recognized exchanges or in other established
financial markets. A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency for an
amount fixed in U.S. dollars. Foreign currency futures, which operate in a
manner similar to interest rate futures contracts, may be used by the Value and
Restructuring, Small Cap and Large Cap Growth Funds to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. Positions
in futures contracts may be closed out only on an exchange which provides a
secondary market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In
the
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event of adverse price movements, a Fund would continue to be required to make
daily cash payments to maintain its required margin. In such situations, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge.
Successful use of futures by the Value and Restructuring, Small Cap
and Large Cap Growth Funds is also subject to the Investment Adviser's ability
to correctly predict movements in the direction of the market. For example, if
a Fund has hedged against the possibility of a decline in the market adversely
affecting securities held by it and securities prices increase instead, the Fund
will lose part or all of the benefit to the increased value of its securities
which it has hedged because it will have approximately equal offsetting losses
in its futures positions. In addition, in some situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by the Value and Restructuring,
Small Cap and Large Cap Growth Funds involves the risk of loss by a Fund of
margin deposits in the event of bankruptcy of a broker with whom such Fund has
an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
- 6 -
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Options on Futures Contracts
----------------------------
The Value and Restructuring, Small Cap and Large Cap Growth Funds may
purchase options on the futures contracts described above. A futures option
gives the holder, in return for the premium paid, the right to buy (call) from
or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder, or writer, of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing, an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, 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. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity
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and ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Forward Currency Transactions
-----------------------------
Each Fund will conduct its currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts; however, unlike futures contracts
which are traded on recognized commodities exchange, forward currency contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Also, forward currency
contracts usually involve delivery of the currency involved instead of cash
payment as in the case of futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose
of transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Fund will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
a Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
- 8 -
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable
when a Fund "covers" a forward currency position generally by entering into an
offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Investment Adviser may be
incorrect in its expectations as to currency fluctuations, and a Fund may incur
losses in connection with its currency transactions that it would not otherwise
incur. If a price movement in a particular currency is generally anticipated, a
Fund may not be able to contract to sell or purchase that currency at an
advantageous price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
Real Estate Investment Trusts
-----------------------------
Each Fund may invest in equity real estate investment trusts
("REITs"). REITs pool investors' funds for investment primarily in commercial
real estate properties. Investments in REITs may subject a Fund to certain
risks. REITs may be affected by changes in the value of the underlying property
owned by the trust. REITs are dependent upon specialized management skill, may
not be diversified and are subject to the risks of financing projects. REITs
are also
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subject to heavy cash flow dependency, defaults by borrowers, self liquidation
and the possibility of failing to qualify for the beneficial tax treatment
available to REITs under the Code, and to maintain exemption from the 1940 Act.
As a shareholder in a REIT, a Fund would bear, along with other shareholders,
its pro rata portion of the REIT's operating expenses. These expenses would be
in addition to the advisory and other expenses a Fund bears directly in
connection with its own operations.
Securities Lending
------------------
When a Fund lends its securities, it continues to receive interest or
dividends on the securities lent and may simultaneously earn interest on the
investment of the cash loan collateral, which will be invested in readily
marketable, high-quality, short-term obligations. Although voting rights, or
rights to consent, attendant to lent securities pass to the borrower, such loans
may be called at any time and will be called so that the securities may be voted
by a Fund if a material event affecting the investment is to occur.
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the investment limitations enumerated below.
Fundamental investment limitations may be changed with respect to a Fund only by
a vote of a majority of the holders of such Fund's outstanding Shares (as
defined under "Miscellaneous" in the Prospectus). However, investment
limitations which are "operating policies" with respect to a Fund may be changed
by Excelsior Fund's Board of Directors without shareholder approval.
The following investment limitations are fundamental with respect to
each of the Blended Equity, Income and Growth, Value and Restructuring and Small
Cap Funds. Each such Fund may not:
1. Act as an underwriter of securities within the meaning of the Securities
Act of 1933, except insofar as it might be deemed to be an underwriter upon
disposition of certain portfolio securities acquired within the limitation on
purchases of restricted securities;
2. Purchase or sell real estate, except that each Fund may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interests in real estate; and
3. Issue any senior securities, except insofar as any borrowing in accordance
with a Fund's investment limitation contained in the Prospectus might be
considered to be the issuance of a senior security.
The following investment limitations are fundamental with respect to
the Large Cap Growth Fund. The Fund may not:
4. Act as an underwriter of securities within the meaning of the Securities
Act of 1933, except insofar as it might be deemed to be an underwriter upon
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disposition of certain portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with its investment
objective, policies and limitations may be deemed to be underwriting;
5. Purchase or sell real estate, except that (a) the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by real estate or interests therein, and (b) the Fund may hold
and sell any real estate it acquires as a result of the Fund's ownership of such
securities;
6. Issue any senior securities, except insofar as any borrowing in accordance
with the Fund's investment limitations might be considered to be the issuance of
a senior security; and
7. Purchase or sell commodities or commodities futures contracts or invest in
oil, gas, or other mineral exploration or development programs; provided,
however, that the Fund may: (a) purchase publicly traded securities of
companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.
The following investment limitations are fundamental with respect to
the Blended Equity and Income and Growth Funds, but are operating policies with
respect to the Value and Restructuring, Small Cap and Large Cap Growth Funds.
No Fund may:
8. Purchase securities on margin, make short sales of securities, or maintain
a short position;
9. Invest in companies for the purpose of exercising management or control;
and
10. Acquire any other investment company or investment company security, except
in connection with a merger, consolidation, reorganization, or acquisition of
assets or where otherwise permitted by the 1940 Act.
The following investment limitations are fundamental with respect to
the Blended Equity and Income and Growth Funds. Neither the Blended Equity nor
the Income and Growth Funds may:
11. Invest in or sell put options, call options, straddles, spreads, or any
combination thereof; provided, however, that each Fund may write covered call
options with respect to its portfolio securities that are traded on a national
securities exchange, and may enter into closing purchase transactions with
respect to such options if, at the time of the writing of such option, the
aggregate value of the securities subject to the options written by the Fund
involved does not exceed 25% of the value of its total assets; and provided that
the Income and
- 11 -
Growth Fund may purchase options and other rights in accordance with its
investment objective and policies;
12. Invest more than 5% of its total assets in securities issued by companies
which, together with any predecessor, have been in continuous operation for
fewer than three years; and
13. Purchase or sell commodities futures contracts or invest in oil, gas, or
other mineral exploration or development programs; provided, however, that this
shall not prohibit either Fund from purchasing publicly traded securities of
companies engaging in whole or in part in such activities or the Income and
Growth Fund from investing in liquidating trust receipts, certificates of
beneficial ownership or other instruments in accordance with its investment
objectives and policies.
The following investment limitation is fundamental with respect to the
Value and Restructuring and Small Cap Funds. The Value and Restructuring and
Small Cap Funds may not:
14. Purchase or sell commodities or commodities futures contracts or invest in
oil, gas, or other mineral exploration or development programs; provided,
however, that (i) this shall not prohibit either Fund from purchasing publicly
traded securities of companies engaging in whole or in part in such activities
or from investing in liquidating trust receipts, certificates of beneficial
ownership or other instruments in accordance with their investment objectives
and policies, and (ii) each Fund may enter into futures contracts and futures
options.
* * *
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
In addition to the above investment limitations, each Fund currently
intends to limit its investments in warrants so that, valued at the lower of
cost or market value, they do not exceed 5% of the Fund's net assets. For the
purpose of this limitation, warrants acquired by a Fund in units or attached to
securities will be deemed to be without value. Each Fund also intends to
refrain from entering into arbitrage transactions.
Each of the Blended Equity and Income and Growth Funds may not
purchase or sell commodities except as provided in Investment Limitation No. 9
above.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.
- 12 -
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, Inc., and
the Distributor has agreed to use appropriate efforts to solicit all purchase
orders. As described in the Prospectus, Shares may be sold to customers
("Customers") of financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and to members of
the general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically
"sweep" a Customer's account not less frequently than weekly and invest amounts
in excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares selected by the Customer. Investors purchasing Shares may
include officers, directors, or employees of the particular Shareholder
Organization.
Excelsior Fund has authorized certain brokers to accept on its behalf
purchase, exchange and redemption orders. Such brokers are authorized to
designate other intermediaries to accept purchase, exchange and redemption
orders on behalf of Excelsior Fund. Excelsior Fund will be deemed to have
received a purchase, exchange or redemption order when such an authorized broker
or designated intermediary accepts the order.
Shares of the Funds are offered for sale at their net asset value per
Share next computed after a purchase order is received in good order by
Excelsior Fund's sub-transfer agent or after a purchase order is accepted by an
authorized broker or designated intermediary. Similarly, an order for the
exchange or redemption of Shares will receive the net asset value per Share next
computed after the order is received in good order by Excelsior Fund's sub-
transfer agent or after the order is accepted by an authorized broker or
designated intermediary.
Prior to February 14, 1997, Shares of the Funds were offered for sale
with a maximum sales charge of 4.50%. For the fiscal years ended March 31, 1997
and 1996, total sales charges paid by shareholders of the Blended Equity, Income
and Growth, Value and Restructuring and Small Cap Funds were $3,806 and $2,725;
$1,241 and $1,223; $8,716 and $3,970; and $698 and $961, respectively. The
Distributor retained none of the foregoing sales charges with respect to the
Funds for the fiscal year ended March 31, 1997 and for the period August 1, 1995
through March 31, 1996. UST Distributors, Inc., Excelsior Fund's former
distributor, retained $473 with respect to the Blended Equity Fund; $298 with
respect to the Income and Growth Fund; $42 with respect to the Value and
Restructuring Fund; and $0 with respect to the Small Cap Fund for the period
April 1, 1995 through July 31, 1995. The balance was paid to selling
dealers.
Excelsior Fund 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 New York Stock Exchange (the "Exchange") is restricted by
applicable rules and regulations of the Securities and Exchange Commission (the
"SEC"); (b) the Exchange is closed for other than
- 13 -
customary weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Excelsior Fund reserves the right to honor any request for redemption
or repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by Excelsior Fund and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value. If payment is made
in securities, a shareholder may incur transaction costs in converting these
securities into cash. Such redemptions in kind will be governed by Rule 18f-1
under the 1940 Act so that a Fund is obligated to redeem its Shares solely in
cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder of a Fund.
Under certain circumstances, Excelsior Fund may, in its discretion,
accept securities as payment for Shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the account);
or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor
must deposit any outstanding certificates for Shares with Chase Global Funds
Services Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of a Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund involved if the amount of
the withdrawal
- 14 -
payments exceeds the dividends and distributions paid on the Shares and the
appreciation of the investor's investment in the Fund. This in turn may result
in a complete depletion of the shareholder's investment. An investor may not
participate in a program of systematic investing in a Fund while at the same
time participating in the Systematic Withdrawal Plan with respect to an account
in the same Fund. Customers of Shareholder Organizations may obtain information
on the availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of any other portfolio of
Excelsior Fund or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund"
and, collectively with Excelsior Fund, the "Companies") or for Trust Shares of
Excelsior Institutional Trust. Shares may be exchanged by wire, telephone or
mail and must be made to accounts of identical registration. There is no
exchange fee imposed by the Companies or Excelsior Institutional Trust. In
order to prevent abuse of this privilege to the disadvantage of other
shareholders, the Companies and Excelsior Institutional Trust reserve the right
to limit the number of exchange requests of investors to no more than six per
year. The Companies and Excelsior Institutional Trust may modify or terminate
the exchange program at any time upon 60 days' written notice to shareholders,
and may reject any exchange request. Customers of Shareholder Organizations may
obtain information on the availability of, and the procedures and fees relating
to, such program directly from their Shareholder Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged Shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Other Investor Programs
- -----------------------
As described in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program and certain Retirement
Programs. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, such programs directly
from their Shareholder Organizations.
- 15 -
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of Excelsior Fund into one or more
classes or series by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption. The Prospectus describes the classes of shares into which Excelsior
Fund's authorized capital is currently classified. Prior to December 28, 1995,
Excelsior Fund was known as "UST Master Funds, Inc."
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of Excelsior Fund's portfolios, of any general assets of Excelsior
Fund not belonging to any particular portfolio of Excelsior Fund which are
available for distribution. In the event of a liquidation or dissolution of
Excelsior Fund, its shareholders will be entitled to the same distribution
process.
Shareholders of Excelsior Fund are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
Excelsior Fund's shares may elect all of Excelsior Fund's directors, regardless
of votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Excelsior Fund shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each portfolio affected by the matter. A portfolio is affected by a
matter unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of Excelsior Fund voting
without regard to class.
Excelsior Fund's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which
- 16 -
may be paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares of the Fund
involved to be redeemed at their net asset value; or (c) combine the assets
belonging to a Fund with the assets belonging to another portfolio of Excelsior
Fund, if the Board of Directors reasonably determines that such combination will
not have a material adverse effect on shareholders of any portfolio
participating in such combination, and, in connection therewith, to cause all
outstanding Shares of the Fund involved to be redeemed at their net asset value
or converted into shares of another class of Excelsior Fund's capital stock at
net asset value. The exercise of such authority by the Board of Directors will
be subject to the provisions of the 1940 Act, and the Board of Directors will
not take any action described in this paragraph unless the proposed action has
been disclosed in writing to the particular Fund's shareholders at least 30 days
prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of Excelsior Fund's Common Stock (or of the Shares of a Fund voting separately
as a class) in connection with any corporate action, unless otherwise provided
by law (for example, by Rule 18f-2, discussed above) or by Excelsior Fund's
Charter, Excelsior Fund may take or authorize such action upon the favorable
vote of the holders of more than 50% of the outstanding Common Stock of
Excelsior Fund voting without regard to class.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The directors and executive officers of Excelsior Fund, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:
- 17 -
Principal Occupation
Position with During Past 5 Years and
Name and Address Excelsior Fund Other Affiliations
- ---------------- -------------- ------------------
Frederick S. Wonham/1/ Chairman of the Retired; Director of
238 June Road Board, President Excelsior Fund and Excelsior
Stamford, CT 06903 and Treasurer Tax-Exempt Fund (since 1995);
Age: 67 Trustee of Excelsior Funds
and Excelsior Institutional Trust (since 1995);
Vice Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust
Connecticut (from March 1993 to May 1997).
Donald L. Campbell Director Retired; Director of
333 East 69th Street Excelsior Fund and Excelsior
Apt. 10-H Tax-Exempt Fund (since 1984);
New York, NY 10021 Director of UST Master
Age: 72 Variable Series, Inc.
(from 1994 to June 1997); Trustee of Excelsior
Institutional Trust (since 1995); and Director,
Royal Life Insurance Co. of New York (since
1991).
Rodman L. Drake Director Director, Excelsior Fund and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Fund (since 1996); Trustee of
1251 Avenue of the Americas Excelsior Institutional Trust and Excelsior
9th Floor Funds (since 1994); Director, Parsons
New York, NY 10020 Brinkerhoff Energy Services Inc. (since 1996);
Age: 55 Director, Parsons Brinkerhoff, Inc.
(engineering firm) (since 1995); President,
Continuation Investments Group, Inc. (since
1997); President, Mandrake Group (investment
and consulting firm) (1994-1997); Director,
Hyperion Total Return Fund, Inc. and four other
funds for which Hyperion Capital Management,
Inc. serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power
plants) (from 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(since 1993); Member of Advisory Board,
Argentina Private Equity Fund L.P. (from 1992
to 1996) and Garantia L.P. (Brazil) (from 1993
to 1996); and Director, Mueller Industries,
Inc. (from 1992 to 1994).
- -----------------------------
/1/ This director is considered to be an "interested person" of Excelsior Fund
as defined in the 1940 Act.
- 18 -
Principal Occupation
Position with During Past 5 Years and
Name and Address Excelsior Fund Other Affiliations
- ---------------- -------------- ------------------
Joseph H. Dugan Director Retired; Director of
913 Franklin Lake Road Excelsior Fund and Excelsior
Franklin Lakes, NJ 07417 Tax-Exempt Fund (since 1984);
Age: 73 Director of UST Master
Variable Series, Inc.
(from 1994 to June 1997); and Trustee of
Excelsior Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Fund and
2320 Cumberland Road Excelsior Tax-Exempt Fund (since 1986);
Charlottesville, VA 22901 Director of UST Master Variable Series, Inc.
Age: 77 (from 1994 to June 1997); Trustee of Excelsior
Institutional Trust (since 1995); Director,
Deutsche Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since 1951);
and Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1988).
W. Wallace McDowell, Jr. Director Director of Excelsior Fund and Excelsior
c/o Prospect Capital Tax-Exempt Fund (since 1996); Trustee of
Corp. Excelsior Institutional Trust and Excelsior
43 Arch Street Funds (since 1994); Private Investor (since
Greenwich, CT 06830 1994); Managing Director, Morgan Lewis Githens
Age: 61 & Ahn (from 1991 to 1994); and Director, U.S.
Homecare Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's Discovery
Centers (since 1984), ITI Technologies, Inc.
(since 1992) and Jack Morton Productions (since
1987).
Jonathan Piel Director Director of Excelsior Fund and Excelsior
558 E. 87th Street Tax-Exempt Fund (since 1996); Trustee of
New York, NY 10128 Excelsior Institutional Trust and Excelsior
Age: 59 Funds (since 1994); Vice President and Editor,
Scientific American, Inc. (from 1986 to 1994);
Director, Group for The South Fork,
Bridgehampton, New York (since 1993); and
Member, Advisory Committee, Knight Journalism
Fellowships, Massachusetts Institute of
Technology (since 1984).
- 19 -
Principal Occupation
Position with During Past 5 Years and
Name and Address Excelsior Fund Other Affiliations
- ---------------- -------------- ------------------
Robert A. Robinson Director Director of Excelsior Fund
Church Pension Fund and Excelsior Tax-Exempt Fund
800 Second Avenue (since 1987); Director of UST
New York, NY 10017 Master Variable Series, Inc.
Age: 72 (from 1994 to June 1997); Trustee of Excelsior
Institutional Trust (since 1995); President
Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and Director of
its wholly owned subsidiaries -- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse
Publishing Co. (1974-1998); Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1982);
and Director, Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of Excelsior Fund and
6549 Pine Meadows Drive Excelsior Tax-Exempt Fund (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior Fund and
Age: 72 Excelsior Tax-Exempt Fund (1991-1997) and
Excelsior Institutional Trust (1996-1997);
President and Treasurer of Excelsior Fund and
Excelsior Tax-Exempt Fund (1994-1997) and
Excelsior Institutional Trust (1996-1997);
Chairman of the Board, President and Treasurer
of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
Philadelphia National Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 39
- -------------------------
/2/ This director is considered to be an "interested person" of Excelsior Fund
as defined in the 1940 Act.
- 20 -
Principal Occupation
Position with During Past 5 Years and
Name and Address Excelsior Fund Other Affiliations
- ---------------- -------------- ------------------
Edward Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 37
John M. Corcoran Assistant Vice President, Director of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since April 1998); Vice President,
73 Tremont Street Senior Manager of Fund Administration, Chase
Boston, MA 02108-3913 Global Funds Services Company (from July 1996
Age: 33 to April 1998); Second Vice President, Manager
of Fund Administration, Chase Global Funds
Services Company (from October 1993 to July
1996); and Audit Manager, Ernst & Young LLP
(from August 1987 to September 1993).
Each director of Excelsior Fund receives an annual fee of $9,000 plus
a meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to
receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to Excelsior Fund. The employees of Chase Global Funds
Services Company do not receive any compensation from Excelsior Fund for acting
as officers of Excelsior Fund. No person who is currently an officer, director
or employee of the Investment Adviser serves as an officer, director or employee
of Excelsior Fund. As of July 8, 1998, the directors and officers of Excelsior
Fund as a group owned beneficially less than 1% of the outstanding shares of
each fund of Excelsior Fund, and less than 1% of the outstanding shares of all
funds of Excelsior Fund in the aggregate.
The following chart provides certain information about the fees
received by Excelsior Fund's directors in the most recently completed fiscal
year.
- 21 -
Pension or
Retirement Total
Benefits Compensation
Accrued as from Excelsior Fund
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position Excelsior Fund Expenses to Directors
--------------- ----------------- ---------- --------------
Donald L. Campbell $18,000 None $38,000(3)**
Director
Rodman L. Drake $16,500 None $39,500(4)**
Director
Joseph H. Dugan $18,000 None $38,000(3)**
Director
Wolfe J. Frankl $16,500 None $36,500(3)**
Director
W. Wallace McDowell, Jr. $15,000 None $38,000(4)**
Director
Jonathan Piel $18,000 None $43,000(4)**
Director
Robert A. Robinson $18,000 None $38,000(3)**
Director
Alfred C. Tannachion $18,000 None $38,000(3)**
Director
Frederick S. Wonham $23,000 None $53,000(4)**
Chairman of the Board,
President and Treasurer
- ---------------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
- 22 -
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as
Investment Adviser to the Funds. In the Investment Advisory Agreements, the
Investment Adviser has agreed to provide the services described in the
Prospectus. The Investment Adviser has also agreed to pay all expenses incurred
by it in connection with its activities under the respective agreements other
than the cost of securities, including brokerage commissions, purchased for the
Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Blended Equity, Income and Growth, Value and Restructuring and
Small Cap Funds pursuant to advisory agreements substantially similar to the
Investment Advisory Agreements currently in effect for such Funds.
For the fiscal year or period ended March 31, 1998, Excelsior Fund
paid U.S. Trust advisory fees of $3,139,705, $990,357, $1,163,708, $320,547 and
$65,472 with respect to the Blended Equity, Income and Growth, Value and
Restructuring, Small Cap and Large Cap Growth Funds, respectively. For the same
period, U.S. Trust waived advisory fees totaling $332,044, $110,502, $84,739,
$41,845 and $16,680 with respect to the Blended Equity, Income and Growth, Value
and Restructuring, Small Cap and Large Cap Growth Funds, respectively.
For the fiscal year ended March 31, 1997, Excelsior Fund paid U.S.
Trust New York advisory fees of $1,954,607, $876,995, $552,746 and $408,027 with
respect to the Blended Equity, Income and Growth, Value and Restructuring and
Small Cap Funds, respectively. For the same period, U.S. Trust New York waived
advisory fees totaling $132,737, $105,756, $41,509 and $61,885 with respect to
the Blended Equity, Income and Growth, Value and Restructuring and Small Cap
Funds, respectively.
For the fiscal year ended March 31, 1996, Excelsior Fund paid U.S.
Trust New York advisory fees of $1,111,127, $785,037, $273,025, and $336,194
with respect to the Blended Equity, Income and Growth, Value and Restructuring
and Small Cap Funds, respectively. For the same period, U.S. Trust New York
waived fees totaling $106,377, $69,637, $21,119 and $57,942 with respect to the
Blended Equity, Income and Growth, Value and Restructuring and Small Cap Funds,
respectively.
The Investment Advisory Agreements provide that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of such agreements,
except that the Investment Adviser shall be jointly, but not severally, liable
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its
- 23 -
duties or from reckless disregard by it of its duties and obligations
thereunder. In addition, the Investment Adviser has undertaken in the Investment
Advisory Agreements to maintain its policy and practice of conducting its Asset
Management Group independently of its Banking Group.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services (an affiliate of the Distributor) and U.S. Trust
Connecticut (collectively, the "Administrators") serve as Excelsior Fund's
administrators. Under the Administration 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 semiannual reports to the SEC,
prepare Federal and state tax returns, prepare filings with state securities
commissions, arrange for and bear the cost of processing Share purchase and
redemption orders, maintain the Funds' financial accounts and records, and
generally assist in the Funds' operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as Excelsior Fund's administrators pursuant to an
administration agreement substantially similar to the Administration Agreement
currently in effect for Excelsior Fund. Prior to August 1, 1995, administrative
services were provided to Excelsior Fund by CGFSC and Concord Holding
Corporation (collectively, the "former administrators") under an administration
agreement having substantially the same terms as the Administration Agreement
currently in effect.
For the fiscal year or period ended March 31, 1998, Excelsior Fund
paid CGFSC, Federated Administrative Services and U.S. Trust $707,403, $223,661,
$315,023, $92,358 and $16,759 in the aggregate with respect to the Blended
Equity, Income and Growth, Value and Restructuring, Small Cap and Large Cap
Growth Funds, respectively. For the same period, CGFSC, Federated
Administrative Services and U.S. Trust waived administration fees totaling $834,
$914, $3,331 and $52 with respect to the Blended Equity, Income and Growth,
Value and Restructuring and Small Cap Funds.
For the fiscal year ended March 31, 1997, Excelsior Fund paid CGFSC,
Federated Administrative Services and U.S. Trust New York $422,505, $200,249,
$152,248 and $120,363 in the aggregate with respect to the Blended Equity,
Income and Growth, Value and Restructuring and Small Cap Funds, respectively.
For the same period, CGFSC, Federated Administrative Services and U.S. Trust New
York waived administration fees totaling $5,344, $1,132, $108 and $87 with
respect to the Blended Equity, Income and Growth, Value and Restructuring and
Small Cap Funds, respectively.
For the period August 1, 1995 through March 31, 1996, Excelsior Fund
paid CGFSC, Federated Administrative Services and U.S. Trust New York $171,595,
$120,732, $57,370 and $74,016 in the aggregate with respect to the Blended
Equity, Income and Growth, Value and Restructuring and Small Cap Funds,
respectively. For the same period, CGFSC, Federated Administrative Services and
U.S. Trust New York waived administration fees
- 24 -
totaling $4,809, $1,416, $19 and $40 with respect to the Blended Equity, Income
and Growth, Value and Restructuring and Small Cap Funds, respectively.
For the period April 1, 1995 through July 31, 1995, Excelsior Fund
paid the former administrators $72,709, $53,296, $18,319 and $27,350 in the
aggregate with respect to the Blended Equity, Income and Growth, Value and
Restructuring and Small Cap Funds, respectively. For the same period, the
former administrators waived administration fees totaling $1,640, $575, $34 and
$75 with respect to the Blended Equity, Income and Growth, Value and
Restructuring and Small Cap Funds, respectively.
Shareholder Organizations
- -------------------------
As stated in the Prospectus, Excelsior Fund has entered into
agreements with certain Shareholder Organizations. Such agreements require the
Shareholder Organizations to provide shareholder administrative services to
their Customers who beneficially own Shares in consideration for a Fund's
payment of not more than the annual rate of 0.40% of the average daily net
assets of the Fund's Shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of Shares;
(b) assisting in processing purchase, exchange and redemption transactions; (c)
providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (d) providing tax and dividend
information to shareholders as appropriate; (e) transmitting proxy statements,
annual reports, updated prospectuses and other communications from Excelsior
Fund to Customers; and (f) providing or arranging for the provision of other
related services.
Excelsior Fund's agreements with Shareholder Organizations are
governed by an Administrative Services Plan (the "Plan") adopted by Excelsior
Fund. Pursuant to the Plan, Excelsior Fund's Board of Directors will review, at
least quarterly, a written report of the amounts expended under Excelsior Fund's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of Excelsior Fund's
directors, including a majority of the directors who are not "interested
persons" of Excelsior Fund as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to Excelsior Fund's arrangements with
Shareholder Organizations must be approved by a majority of Excelsior Fund's
Board of Directors (including a majority of the Disinterested Directors). So
long as Excelsior Fund's arrangements with Shareholder Organizations are in
effect, the selection and nomination of the members of Excelsior Fund's Board of
Directors who are not "interested persons" (as defined in the 1940 Act) of
Excelsior Fund will be committed to the discretion of such Disinterested
Directors.
For the fiscal years or periods ended March 31, 1998, 1997 and 1996,
payments to Shareholder Organizations totaled $182,660, $132,737 and $112,827;
$111,416, $106,888 and $71,628; $88,070, $41,617 and $21,172; $41,897, $61,972
and $58,058; and $1,501, $0 and $0 with respect to the Blended Equity, Income
and Growth, Value and Restructuring, Small Cap and Large Cap Growth Funds,
respectively. Of these amounts,
- 25 -
$175,989, $118,778 and $97,209; $107,369, $103,262 and $66,022; $55,667, $41,514
and $21,149; $41,636, $61,952 and $58,039; and $1,501, $0 and $0 were paid to
affiliates of U.S. Trust with respect to the Blended Equity, Income and Growth,
Value and Restructuring, Small Cap and Large Cap Growth Funds,
respectively.
Expenses
- --------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Funds bear the expenses incurred in their operations. Expenses
of the Funds include: taxes; interest; fees (including fees paid to Excelsior
Fund's directors and officers who are not affiliated with the Distributor or the
Administrators); SEC fees; state securities qualifications fees; costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders; advisory, administration and administrative servicing fees;
charges of the custodian, transfer agent, and dividend disbursing agent; certain
insurance premiums; outside auditing and legal expenses; cost of independent
pricing services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions
in connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase") serves as custodian of the Funds'
assets. Under the Custodian Agreement, Chase has agreed to: (i) maintain a
separate account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to Excelsior Fund's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreement, notwithstanding any delegation.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem Shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
Excelsior Fund's Board of Directors concerning the Funds' operations. For its
transfer agency, dividend disbursing, and subaccounting services, U.S. Trust New
York is entitled to receive $15.00 per annum per account and subaccount. In
addition, U.S. Trust New York is entitled to be reimbursed for its out-of-pocket
expenses for the cost of forms, postage, processing purchase and redemption
orders, handling of proxies, and other similar expenses in connection with the
above services.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that
- 26 -
U.S. Trust New York shall remain liable for the performance of all of its
transfer agency duties under the Transfer Agency Agreement, notwithstanding any
delegation. Pursuant to this provision in the agreement, U.S. Trust New York has
entered into a sub-transfer agency arrangement with CGFSC, an affiliate of
Chase, with respect to accounts of shareholders who are not Customers of U.S.
Trust New York. For the services provided by CGFSC, U.S. Trust New York has
agreed to pay CGFSC $15.00 per annum per account or subaccount plus out-of-
pocket expenses. CGFSC receives no fee directly from Excelsior Fund for any of
its sub-transfer agency services. U.S. Trust New York may, from time to time,
enter into sub-transfer agency arrangements with third party providers of
transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of Excelsior Fund's Board of Directors,
the Investment Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of the
Funds.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rate may also be
affected by cash requirements for redemptions of Shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Funds' portfolio
turnover rates.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers.
For the fiscal years ended March 31, 1998, 1997 and 1996, the Blended
Equity Fund paid brokerage commissions aggregating $288,470, $271,411 and
$174,492, respectively, none of which was paid to affiliates of U.S. Trust.
For the fiscal years ended March 31, 1998, 1997 and 1996, the Income
and Growth Fund paid brokerage commissions aggregating $113,280, $74,499 and
$89,512, respectively, none of which was paid to affiliates of U.S. Trust.
For the fiscal years ended March 31, 1998 and 1997, the Value and
Restructuring Fund paid brokerage commissions aggregating $412,406 and $271,334,
respectively, of which $26,847 and $13,069, respectively, was paid to UST
Securities Corp., an affiliate of U.S. Trust. For the same periods, the
percentages of total commissions paid by the Fund to UST Securities Corp. were
6.51% and 4.82%, respectively, and the percentages of the total amount of the
Fund's brokerage transactions involving the payment of commissions that was
effected through UST Securities Corp. were 7.74% and 5.76%, respectively. For
the same periods, the average commissions per Share paid by the Fund to UST
Securities Corp. and other unaffiliated brokers were $0.09 and $0.06, and $0.09
and
- 27 -
$0.08, respectively. For the fiscal year ended March 31, 1996, the Fund paid
brokerage commissions aggregating $152,269, none of which was paid to affiliates
of U.S. Trust.
For the fiscal year ended March 31, 1998, the Small Cap Fund paid
brokerage commissions aggregating $131,936, none of which was paid to affiliates
of U.S. Trust. For the fiscal year ended March 31, 1997, the Small Cap Fund
paid brokerage commissions aggregating $122,184, of which $7,047 was paid to UST
Securities Corp. For the same period, the percentage of total commissions paid
by the Fund to UST Securities Corp. was 5.77%, and the percentage of the total
amount of the Fund's brokerage transactions involving the payment of commissions
that was effected through UST Securities Corp. was 1.83%. For the same period,
the average commissions per Share paid by the Fund to UST Securities Corp. and
other unaffiliated brokers were $0.03 and $0.04, respectively. For the fiscal
year ended March 31, 1996, the Fund paid brokerage commissions aggregating
$95,108, none of which was paid to affiliates of U.S. Trust.
For the fiscal period ended March 31, 1998, the Large Cap Growth Fund
paid brokerage commissions aggregating $25,680, none of which was paid to
affiliates of U.S. Trust.
Transactions in domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to over-the-
counter transactions, the Funds, where possible, will deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
The Investment Advisory Agreements between Excelsior Fund and the
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment Adviser shall
consider factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and whether such broker or dealer is selling
shares of Excelsior Fund, and the reasonableness of the commission, if any, for
the specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreements authorize the
Investment Adviser, to the extent permitted by law and subject to the review of
Excelsior Fund's Board of Directors from time to time with respect to the extent
and continuation of the policy, to cause the Funds to pay a broker which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker for effecting the same transaction, provided
that the Investment Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or the overall responsibilities of the Investment Adviser to the accounts as to
which it exercises investment discretion. Such brokerage and research services
might consist of reports and statistics on specific companies or industries,
general summaries of groups of stocks and their comparative earnings, or broad
overviews of the stock market and the economy.
- 28 -
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fees payable by the Funds. Such
information may be useful to the Investment Adviser in serving the Funds and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, Distributor, or any affiliated person of either of them (as
such term is defined in the 1940 Act) acting as principal, except to the extent
permitted by the SEC.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Funds. When a purchase or sale of
the same security is made at substantially the same time on behalf of a Fund and
another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Investment Adviser believes to be equitable to the Fund and
such other investment company or common trust fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Funds or the size of the position obtained by the Funds. To the extent
permitted by law, the Investment Adviser may aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
To the extent that a Fund effects brokerage transactions with any
broker-dealer affiliated directly or indirectly with U.S. Trust, such
transactions, including the frequency thereof, the receipt of any commissions
payable in connection therewith, and the selection of the affiliated broker-
dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Fund.
Excelsior Fund is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1998, the following Funds held the following securities of Excelsior
Fund's regular brokers or dealers or their parents: the Blended Equity Fund held
202,694 shares of common stock of Morgan Stanley Dean Witter & Co.; the Income &
Growth Fund held 45,000 shares of common stock of Morgan Stanley Dean Witter &
Co.; and the Value and Restructuring Fund held 43,000 shares of common stock of
J.P. Morgan & Co., Inc.
- 29 -
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Excelsior Fund. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 1998 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
Excelsior Fund, and Mr. Malloy, Assistant Secretary of Excelsior Fund, are
partners), Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107, is counsel to Excelsior Fund and will pass
upon the legality of the Shares offered by the Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following supplements the tax information contained in the
Prospectus.
Each Fund is treated as a separate corporate entity under the Code,
and intends to qualify as a regulated investment company. If, for any reason, a
Fund does not qualify for a taxable year for the special Federal tax treatment
afforded regulated investment companies, such Fund would be subject to Federal
tax on all of its taxable income at regular corporate rates, without any
deduction for distributions to shareholders. In such event, dividend
distributions would be taxable as ordinary income to shareholders to the extent
of the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction in the case of corporate shareholders.
Each Fund will designate any distribution of the excess of net long-
term capital gain over net short-term capital loss as a capital gain dividend in
a written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Upon the sale or exchange of Shares, if the shareholder
has not held such Shares for more than six months, any loss on the sale or
exchange of those Shares will be treated as long-term capital loss to the extent
of the capital gain dividends received with respect to the Shares.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
- 30 -
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
PERFORMANCE INFORMATION
-----------------------
The Funds may advertise the "average annual total return" for their
Shares. 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:
ERV to the 1 divided by the nth power
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
Each Fund may also advertise the "aggregate total return" for its Shares
which is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate
total return is as follows:
- 31 -
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per Share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in a Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the average annual total returns
for the Shares of the Blended Equity, Income and Growth, Value and Restructuring
and Small Cap Funds for the one year period ended March 31, 1998 were 50.82%,
33.29%, 52.10% and 35.33%, respectively. The average annual total returns for
the Shares of the Blended Equity, Income and Growth, Value and Restructuring and
Small Cap Funds for the five year period ended March 31, 1998 were 20.92%,
16.84%, 28.11% and 13.30%, respectively. The average annual total returns for
the Shares of the Blended Equity and Income and Growth Funds for the ten year
period ended March 31, 1998 were 17.52% and 14.58%, respectively. The average
annual total returns for the Shares of the Value and Restructuring and Small Cap
Funds for the period from December 31, 1992 (commencement of operations) to
March 31, 1998 were 28.97% and 13.83%, respectively. The aggregate total return
for the Shares of the Large Cap Growth Fund for the period October 1, 1997
(commencement of operations) to March 31, 1998 was 21.57%.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in Shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.
The total return of Shares of a Fund may be compared to that of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Total return and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
----- -------- ------ -------- --- ---- ------ -------
and The New York Times, or in publications of a local or regional nature, may
--- --- ---- -----
also be used in comparing the
- 32 -
performance of a Fund. Advertisements, sales literature or reports to
shareholders may from time to time also include a discussion and analysis of
each Fund's performance, including, without limitation, those factors,
strategies and techniques that, together with market conditions and events,
materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund Shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund Shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Investment
Adviser as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury bills and Shares of a
Fund. In addition, advertisements, sales literature or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of Excelsior Fund not belonging to a particular portfolio of Excelsior
Fund. In determining a Fund's net asset value, assets belonging to the Fund are
charged with the direct liabilities in respect of the Fund and with a share of
the general liabilities of Excelsior Fund which are normally allocated in
proportion to the relative asset values of Excelsior Fund's portfolios at the
time of allocation. Subject to the provisions of Excelsior Fund's Charter,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular Fund, are conclusive.
As of July 8, 1998, U.S. Trust and its affiliates held of record
substantially all of Excelsior Fund's outstanding shares as agent or custodian
for their customers, but did not own
- 33 -
such shares beneficially because they did not have voting or investment
discretion with respect to such shares.
As of July 8, 1998, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding Shares
of a Fund were as follows: Blended Equity Fund: U.S. Trust Retirement Fund,
-------------------
c/o United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 11.41%; and United States Trust Company of New York Trustee FBO U.S.
Trust Plan, U.S. Trust Company of The Pacific Northwest, Attn: Jill Williams,
4380 SW Macadam Avenue, Suite 2700, Portland, Oregon 97201, 6.7%; Income and
----------
Growth Fund: U.S. Trust Company of California, N.A. Trustee For Crucible Fund,
- -----------
U.S. Trust Company of The Pacific Northwest, Attn: Jill Williams, 4380 SW
Macadam Avenue, Suite 450, Portland, Oregon 97201, 5.38%; Value and
---------
Restructuring Fund: Charles Schwab & Co., Inc., Special Custody A/C For Benefit
- ------------------
of Customers, Attn: Mutual Funds, 101 Montgomery Street, San Francisco,
California 94104, 20.13%; and Small Cap Fund: U.S. Trust Retirement Fund, c/o
--------------
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 16.00%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in Excelsior Fund's
Annual Report to Shareholders for the fiscal year ended March 31, 1998 (the
"1998 Annual Report") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 1998 Annual Report
are incorporated by reference herein. The financial statements included in the
1998 Annual Report for the Funds have been audited by Excelsior Fund's
independent auditors, Ernst & Young LLP, whose reports thereon also appear in
the 1998 Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 1998 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
- 34 -
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established
A-1
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
A-2
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to
A-3
adverse developments (both internal and external) than those with higher
ratings, the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
A-4
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"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 absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
A-5
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of 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.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
A-6
"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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
A-7
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
A-8
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 a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
A-9
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10