As filed with the Securities and Exchange Commission on March 31, 2000
Registration No. 333-30452
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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[x] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No.
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COUNTRYWIDE INVESTMENT TRUST
[Exact Name of Registrant as specified in Charter]
(513-629-2000)
[Area Code and Telephone Number]
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
[Address of principal executive offices]
TINA D. HOSKING, ESQ.
COUNTRYWIDE INVESTMENTS, INC.
312 WALNUT STREET, 21ST FLOOR
CINCINNATI, OHIO 45202
[Name and address of agent for service]
-------------------------
Copy to:
Karen M. McLaughlin, Esq.
Frost & Jacobs LLP
2500 PNC CENTER
201 EAST FIFTH STREET
CINCINNATI, OHIO 45202
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Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
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Title of securities being registered: Shares of beneficial interest of
Intermediate Bond Fund, a series of the Registrant.
Calculation of Registration Fee: The Registrant has registered an indefinite
amount of securities under the Securities Act of 1933 pursuant to Section 24(f)
under the Investment Company Act of 1940; accordingly, no fee is payable with
this Registration Statement on Form N-14. Pursuant to Rule 429, this
Registration Statement relates to shares previously registered on Form N-1A.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Facing Page
Contents of Registration Statement
Cross Reference Sheet
Notice of Special Meeting
Proxy Card
Part A--Proxy Statement /Prospectus
Part B--Statement of Additional Information
Part C--Other Information
Signature Page
Exhibits
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act of 1933
<TABLE>
<CAPTION>
Part A Item No. and Caption Proxy Statement/Prospectus Caption
--------------------------- ----------------------------------
<S> <C> <C>
Item 1. Beginning of Registration Statement and Cross Reference Sheet; Front Cover
Outside Front Cover Page of Prospectus
Item 2. Beginning and Outside Back Cover Page Back Cover
of Prospectus
Item 3. Fee Table, Synopsis and Risk Factors Expense Information; Introduction;
Summary
Item 4. Information About the Transaction The Proposed Reorganization; Description
of Shares of Intermediate Bond Fund; Tax
Considerations; Comparison of
Shareholder Rights; Capitalization;
Appendix A
Item 5. Information About the Registrant Prospectus of Intermediate Bond Fund
dated February 1, 2000; Expense
Information; Summary; Annual Report of
Countrywide Investment Trust--
September 30, 1999; Description of Shares
of Intermediate Bond Fund; Additional
Information
Item 6. Information About the Company Being Prospectus of Touchstone Series Trust
Acquired (Touchstone Family of Funds) dated
May 1, 1999; Expense Information;
Summary; Annual Report of Touchstone
Series Trust--December 31, 1999;
Additional Information
Item 7. Voting Information Voting Information
Item 8. Interest of Certain Persons Not Applicable
Item 9. Additional Infomration Required For Not Applicable
Reoffering by Persons Deemed to be
Underwriters
Part B Item No. and Caption Statement of Addition Information Caption
--------------------------- -----------------------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
<PAGE>
Item 12. Additional Information About the Cover Page; Statement of Additional
Registrant Information of Countrywide Investment
Trust dated February 1, 2000
Item 13. Additional Information About the Not Applicable
Company Being Acquired
Item 14. Financial Statements Annual Report of Countrywide Investment
Trust--September 30, 1999; Annual
Report of Touchstone Series Trust--
December 31, 1999; Pro forma Financial
Statements
Part C Item No. and Caption Other Information Caption
--------------------------- -------------------------
Item 15. Indemnification Indemnification
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
</TABLE>
TOUCHSTONE SERIES TRUST
Touchstone Bond Fund
311 Pike Street
Cincinnati OH 45202
800-669-2796
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
We are sending you this notice about a special meeting of shareholders of
Touchstone Bond Fund. Touchstone Bond Fund is a series of Touchstone Series
Trust, a Massachusetts business trust.
The special meeting will be held on April 19, 2000, at 10:30 a.m., Eastern
Time, at 312 Walnut Street, Cincinnati, OH 45202. At the meeting, shareholders
will be asked to consider and vote upon the following proposal:
To approve an Agreement and Plan of Reorganization and the transactions
contemplated by the reorganization plan, including (1) the transfer of
substantially all of the assets and liabilities of Touchstone Bond Fund to
Intermediate Bond Fund, a series of Countrywide Investment Trust, in
exchange for shares of Intermediate Bond Fund and (2) the distribution of
these shares to the shareholders of Touchstone Bond Fund.
Shareholders of record at the close of business on February 28, 2000, are
entitled to notice of, and to vote at, the special meeting. You should read the
accompanying Proxy Statement. PLEASE COMPLETE, SIGN AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR
INSTRUCTIONS.
By order of the Board of Trustees of
Touchstone Series Trust
Cynthia Surprise, Secretary
Cincinnati, Ohio
March _____, 2000
<PAGE>
[Front of Card]
TOUCHSTONE BOND FUND PROXY
(a series of Touchstone Series Trust)
The undersigned appoints Jill T. McGruder and David E. Dennison and each of
them, with full power of substitution, as attorneys and proxies of the
undersigned, and does thereby request that the votes attributable to the
undersigned be cast at the Meeting of the Shareholders of the Touchstone Bond
Fund, a separate series of the Touchstone Series Trust, to be held at 10:30 a.m.
on April 19, 2000 at the offices of the Trust, 312 Walnut Street, Cincinnati,
Ohio, and at any adjournment thereof.
PLEASE VOTE, DATE AND SIGN EXACTLY AS YOUR NAME APPEARS BELOW, AND RETURN THIS
FORM IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
Note: The undersigned hereby acknowledges
receipt of the notice of meeting and
proxy statement and revokes any proxy
heretofore given with respect to the
votes covered by this proxy.
Dated: ___________________, 2000
---------------------------------
Signature (s) (If Held Jointly)
- --------------------------------------------------------------------------------
[Back of Card]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR IF NO
DIRECTION IS INDICATED, WILL BE VOTED FOR THE PROPOSAL BELOW. AS TO ANY OTHER
MATTER, ALL PROXIES WILL BE VOTED IN THE DISCRETION OF THE PROXY HOLDERS.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS A VOTE FOR THE PROPOSAL.
Please vote by filling in the boxes below.
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization and the transactions [ ] [ ] [ ]
contemplated by the reorganization
plan, including (1) the transfer of
substantially all of the assets and
liabilities of Touchstone Bond Fund
to Countrywide Intermediate Bond Fund
in exchange for shares of Countrywide
Intermediate Bond Fund and (2) the
distribution of these shares to the
shareholders of Touchstone Bond Fund.
2. To transact any other business as may FOR AGAINST ABSTAIN
properly come before the special [ ] [ ] [ ]
meeting.
<PAGE>
TOUCHSTONE SERIES TRUST COUNTRYWIDE INVESTMENT TRUST
Touchstone Bond Fund Intermediate Bond Fund
311 Pike Street 312 Walnut Street
Cincinnati OH 45202 Cincinnati OH 45202
800-669-2796 800-543-0407
PROXY STATEMENT PROSPECTUS
This Proxy Statement/Prospectus contains information about a proposed
reorganization that a shareholder should know before voting and a prospective
investor ought to know before investing. You should read it carefully and keep
it for future reference. We are sending it to shareholders of Touchstone Bond
Fund, a series of Touchstone Series Trust, a Massachusetts business trust.
The proposed reorganization includes the merger of Touchstone Bond Fund
with Intermediate Bond Fund, a series of Countrywide Investment Trust, a
Massachusetts business trust. If the shareholders of Touchstone Bond Fund
approve the reorganization, we will implement the reorganization as described on
the next page. As a result of the reorganization, the shareholders of Touchstone
Bond Fund will become shareholders of Intermediate Bond Fund.
Additional information about Touchstone Series Trust and Countrywide
Investment Trust has been filed with the Securities and Exchange Commission and
is available upon oral or written request and without charge. A Statement of
Additional Information dated April 3, 2000, is also available upon oral or
written request and without charge. It is incorporated by reference in this
Proxy Statement/Prospectus. You can request these documents by contacting us at
the addresses or telephone numbers listed above.
This Proxy Statement/Prospectus is first being mailed to shareholders on or
about April 3, 2000. The date of this Proxy Statement/Prospectus is April 3,
2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED ANY SHARES OF COUNTRYWIDE INVESTMENT TRUST OR DETERMINED
WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE
IS COMMITTING A CRIME.
THE SHARES OF COUNTRYWIDE INVESTMENT TRUST ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE NATIONAL CREDIT UNION
SHARE INSURANCE FUND, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. MUTUAL
FUNDS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE MERGER
Touchstone Series Trust will transfer all of the assets of Touchstone Bond
Fund, subject to its liabilities, to Intermediate Bond Fund, a series of
Countrywide Investment Trust, in exchange for shares of Intermediate Bond Fund.
Class A shares of Intermediate Bond Fund that Touchstone Series Trust receives
in the exchange will be distributed pro rata to Class A shareholders of
Touchstone Bond Fund. Class C shares of Intermediate Bond Fund that
Continued on next page
<PAGE>
Touchstone Series Trust receives in the exchange will be distributed pro rata to
Class C shareholders of Touchstone Bond Fund. After the exchange, Touchstone
Bond Fund will be dissolved. As a result of the reorganization, each shareholder
of Touchstone Bond Fund will own shares of the corresponding class of
Intermediate Bond Fund equal in value to the shares of Touchstone Bond Fund that
he owns immediately before the organization.
After the share exchange, Intermediate Bond Fund intends to maintain its
investment objective and adopt the investment strategies and policies of
Touchstone Bond Fund. The funds have similar investment goals, strategies and
policies. However, for more information, you should refer to the section in this
Proxy Statement/Prospectus entitled Comparison of Touchstone Bond Fund to
Intermediate Bond Fund as well as the prospectus for Touchstone Series Trust and
the prospectus for Intermediate Bond Fund.
After the merger, Intermediate Bond Fund, using the investment strategies
and policies of Touchstone Bond Fund, will seek to provide as high a level of
current income as is consistent with the preservation of capital through
investments primarily in investment grade and non-investment grade debt
securities, mortgage-related securities, asset backed securities and preferred
stocks. Fort Washington Investment Advisors, the sub-advisor for Touchstone Bond
Fund, will become the sub-advisor of Intermediate Bond Fund.
<PAGE>
TOUCHSTONE SERIES TRUST COUNTRYWIDE INVESTMENT TRUST
Touchstone Bond Fund Intermediate Bond Fund
PROXY STATEMENT PROSPECTUS
INTRODUCTION
The proposed reorganization is part of a series of transactions designed to
consolidate the Touchstone and Countrywide mutual fund complexes. In connection
with the proposed reorganization, Touchstone Bond Fund will be merged with and
into Intermediate Bond Fund, a series of Countrywide Investment Trust. These
funds have similar investment goals and strategies and portfolio holdings.
Touchstone Advisors, Inc. serves as the investment advisor to each fund in
Touchstone Series Trust, including Touchstone Bond Fund. Touchstone Advisors is
a wholly-owned subsidiary of Western-Southern Life Assurance Company, which is a
wholly-owned subsidiary of The Western and Southern Life Insurance Company.
On October 29, 1999, Fort Washington Investment Advisors, Inc., another
wholly-owned subsidiary of The Western and Southern Life Insurance Company,
acquired all of the outstanding stock of Countrywide Financial Services, Inc.
Countrywide Financial Services, Inc. is the parent of Countrywide Investments,
Inc., which serves as the investment advisor to each fund in Countrywide
Investment Trust, including Intermediate Bond Fund.
REORGANIZATION OF FUNDS
After the merger of Touchstone Bond Fund with Intermediate Bond Fund,
Touchstone Advisors will become the investment advisor of Intermediate Bond
Fund. Touchstone Advisors will, in turn, engage a sub-advisor to manage the
portfolio of Intermediate Bond Fund. The current investment advisor (Countrywide
Investments, Inc.) to Intermediate Bond Fund will no longer provide any services
to this fund.
Fort Washington Investment Advisors will become the sub-advisor of
Intermediate Bond Fund. Although Countrywide Investments will no longer act as
the investment advisor for Intermediate Bond Fund, the persons currently
responsible for managing this fund will continue to manage it as employees of
Fort Washington Investment Advisors.
DEFINED TERMS
In this Proxy Statement/Prospectus, we will refer to Touchstone Bond Fund
and Intermediate Bond Fund as "Touchstone Bond Fund" and "Intermediate Bond
Fund," respectively. We will sometimes refer to the fund resulting from the
proposed merger of Touchstone Bond Fund and Intermediate Bond Fund as "Combined
Bond Fund."
<PAGE>
RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board of Trustees of Touchstone Series Trust recommends that the
shareholders of Touchstone Bond Fund vote for the approval of the reorganization
plan. In making this recommendation, the Touchstone Board believes that it is
acting in the best interests of the shareholders of Touchstone Bond Fund and has
determined that the interests of the existing shareholders of Touchstone Bond
Fund will not be diluted as a result of the proposed reorganization.
EXPENSE INFORMATION
FEES AND EXPENSES
The following table provides a comparison of the fees and expenses of
Touchstone Bond Fund, Intermediate Bond Fund and Combined Bond Fund including:
o A summary of the fees and expenses that you may pay if you buy and
hold shares of Touchstone Bond Fund
o A summary of the fees and expenses that you may pay if you buy and
hold shares of Intermediate Bond Fund, before giving effect to the
reorganization
o A summary of the pro forma fees and expenses of Combined Bond Fund,
after giving effect to the reorganization
2
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS C
Touchstone Intermediate Combined Touchstone Intermediate Combined
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund (1) Bond Fund
--------- --------- --------- --------- ---------- ---------
Shareholder Transaction Expenses
(fees paid directly from your investment)
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge (2).................... 4.75% 4.75% 4.75% 1.00% 2.25% 2.25%
Sales Charge ............................... 4.75% 4.75% 4.75% None 1.25% 1.25%
Deferred Sales Charge (3)................... None None None 1.00% 1.00% 1.00%
Annual Fund Operating Expenses (4)
(expenses that are deducted from Fund
assets)
Advisory Fee................................ 0.55% 0.50% 0.50% 0.55% 0.50% 0.50%
Rule 12b-1 Fees (5)......................... 0.25% 0.35% 0.35% 1.00% 1.00% 1.00%
Other Expenses.............................. 1.46% 0.73% 0.88% 1.46% 0.73% 0.88%
----- ----- ----- ----- ----- -----
Total Operating Expenses
(before waiver or reimbursement)............ 2.26% 1.58% 1.73% 3.01% 2.23% 2.38%
-----
Fee Waiver and/or
Expense Reimbursement (6) .................. 1.36% 0.63% 0.83% 1.36% 0.25% 0.73%
----- ----- ----- ----- ----- -----
Net Expenses................................ 0.90% 0.95% 0.90% 1.65% 1.98% 1.65%
===== ===== ===== ===== ===== =====
</TABLE>
NOTES TO FEE AND EXPENSE TABLES
(1) INTERMEDIATE BOND FUND: As of February 1, 2000, Class C had not commenced
operations. Other Expenses are based on estimated amounts for the current
fiscal year.
(2) TOUCHSTONE BOND FUND: The sales load is a percentage of the offering price.
You may pay a reduced sales charge on very large purchases. There is no
sales charge at the time of purchase for purchases of $1 million or more
but a sales charge of 1.00% will be assessed on the shares if you redeem
them within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
INTERMEDIATE BOND FUND: The sales load is a percentage of the offering
price. If you purchase $1 million or more and do not pay a front-end sales
load, you may be subject to a deferred sales load of 1% if the shares are
redeemed within one year of their purchase and a dealer's commission was
paid on the shares.
COMBINED BOND FUND: The sales load is a percentage of the offering price.
You may pay a reduced sales charge on very large purchases. There is no
sales charge at the time of purchase for purchases of $1 million or more
but a sales charge of 1.00% will be assessed on the shares if you redeem
them within one year of purchase.
3
<PAGE>
(3) TOUCHSTONE BOND FUND: The deferred sales load is a percentage of the amount
redeemed. The 1.00% charge is waived for benefits paid to you through a
qualified pension plan.
INTERMEDIATE BOND FUND: The deferred sales load is a percentage of the
original purchase price or the amount redeemed, whichever is less. An $8
fee will be charged for each wire redemption. This fee is subject to
change.
COMBINED BOND FUND: An $8 fee will be charged for each wire redemption.
This fee is subject to change.
(4) TOUCHSTONE BOND FUND, INTERMEDIATE BOND FUND AND COMBINED BOND FUND:
Amounts shown under Annual Fund Operating Expenses are shown as a
percentage of average net assets.
(5) COMBINED BOND FUND: For the period from May 1, 2000 through October 31,
2001, Touchstone Advisors has agreed to waive a portion of the maximum Rule
12b-1 fee assessed on Class A shares of Combined Bond Fund so that the
annual Rule 12b-1 fee on Class A shares of Combined Bond Fund during that
time period is 0.25% or less.
(6) TOUCHSTONE BOND FUND: Touchstone Advisors has agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each class of the
Fund through December 31, 2000.
INTERMEDIATE BOND FUND: The fee waivers may be discontinued at any time.
COMBINED BOND FUND: Touchstone Advisors has agreed to waive or reimburse
certain of the Annual Fund Operating Expenses of each class of Combined
Bond Fund through December 31, 2000 so that Net Expenses, on an annual
basis, are not greater than the percentage listed above for each class of
Combined Bond Fund.
EXAMPLES--COST OF A $10,000 INVESTMENT
The following table provides a comparison of the cost of investing in
Touchstone Bond Fund, Intermediate Bond Fund and Combined Bond Fund including:
o An example illustrating the cost of investing $10,000 in Touchstone
Bond Fund
o An example illustrating the cost of investing $10,000 in Intermediate
Bond Fund, before giving effect to the reorganization
o The pro forma cost of investing $10,000 in Combined Bond Fund, after
giving effect to the reorganization
The purpose of the examples is to assist you in understanding and comparing
the costs of investing in Touchstone Bond Fund, Intermediate Bond Fund and
Combined Bond Fund. The examples assume that you invest $10,000 in Touchstone
Bond Fund, Intermediate Bond Fund or Combined Bond Fund for the time period
indicated. It also assumes that your investment has a 5% return each year and
the operating expenses of each fund remain the same. Although your actual costs
may be higher or lower, based on these assumptions, your costs would be the
amounts shown below.
4
<PAGE>
You would pay the following expenses if you redeemed your shares at the end of
the indicated period:
<TABLE>
<CAPTION>
CLASS A CLASS C
Touchstone Intermediate Combined Touchstone Intermediate Combined
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
--------- --------- --------- --------- --------- ---------
Time Period
- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Year ............. $ 562 $ 567 $ 562 $ 168 $ 323 $ 291
3 Years ............ $1,023 $ 891 $ 917 $ 802 $ 790 $ 789
5 Years ............ $1,509 $1,238 $1,295 $1,462 $1,282 $1,314
10 Years ........... $2,846 $2,213 $2,353 $3,231 $2,638 $2,752
</TABLE>
The examples should not be considered to be a representation of past or
future expenses. Actual expenses may be higher or lower than those shown.
Moreover, the examples assume a 5% annual return. The performance of a mutual
fund will vary and may result in an actual return higher or lower than 5%.
The examples for one year are calculated using Net Expenses after fee
waiver and/or reimbursement. The examples for 3 years, 5 years and 10 years are
calculated using Total Operating Expenses before waiver or reimbursement.
SUMMARY
This section of the Proxy Statement/Prospectus discusses the key features
of the proposed merger of Touchstone Bond Fund and Intermediate Bond Fund,
compares Touchstone Bond Fund to Intermediate Bond Fund or Combined Bond Fund,
as applicable, discusses the tax consequences of the merger, and discusses the
risks of investing in Combined Bond Fund. The information is a summary of
certain information contained elsewhere in this Proxy Statement/Prospectus, the
Agreement and Plan of Reorganization, the prospectus of Touchstone Series Trust
dated May 1, 1999, and the prospectus of Intermediate Bond Fund dated February
1, 2000, each of which is incorporated by reference into this Proxy
Statement/Prospectus.
5
<PAGE>
PROPOSED MERGER
Touchstone Bond Fund is a series of Touchstone Series Trust. Touchstone
Series Trust is a registered open-end investment company. It is organized as a
Massachusetts business trust.
Intermediate Bond Fund is a series of Countrywide Investment Trust.
Countrywide Investment Trust is a registered open-end investment company. It is
organized as a Massachusetts business trust.
In the reorganization, Touchstone Series Trust will transfer all of the
assets of Touchstone Bond Fund, subject to its liabilities, to Intermediate Bond
Fund. Class A shares of Intermediate Bond Fund that Touchstone Series Trust
receives in the exchange will be distributed pro rata to Class A shareholders of
Touchstone Bond Fund. Class C shares of Intermediate Bond Fund that Touchstone
Series Trust receives in the exchange will be distributed pro rata to Class C
shareholders of Touchstone Bond Fund. After the exchange, Touchstone Bond Fund
will be dissolved. As a result of the reorganization, each shareholder of
Touchstone Bond Fund will own shares of the corresponding class of Intermediate
Bond Fund equal in value to the shares of Touchstone Bond Fund that he owns
immediately before the reorganization.
COMPARISON OF TOUCHSTONE BOND FUND TO COMBINED BOND FUND
Investment Objective and Principal Investment Strategies. The investment
objective of Combined Bond Fund will be identical to the investment objective of
Intermediate Bond Fund. Effective with the completion of the merger, the
principal investment strategies of Combined Bond Fund will be identical to the
principal investment strategies of Touchstone Bond Fund.
The investment objective of Combined Bond Fund will be to seek to provide
as high a level of current income as is consistent with the preservation of
capital. The investment objective of Touchstone Bond Fund is to seek to provide
a high level of income.
Combined Bond Fund will invest primarily in higher quality investment grade
debt securities (at least 65% of total assets). Combined Bond Fund's investment
in debt securities may be determined by the direction in which interest rates
are expected to move because the value of these securities generally moves in
the opposite direction from interest rates. Combined Bond Fund expects to have
an average maturity between 5 and 15 years.
Combined Bond Fund will invest in:
o Mortgage-related securities (up to 60%)
o Asset-backed securities
o Preferred stocks.
Combined Bond Fund will also invest in non-investment grade U.S. or foreign
debt securities and preferred stock which are rated as low as B (up to 35%).
6
<PAGE>
In addition, Combined Bond Fund may invest in debt securities denominated
in foreign currencies (20% or less).
Risk Factors. An investment in Combined Bond Fund will have the same risks
as an investment in Touchstone Bond Fund. Combined Bond Fund's key risks could
cause an investment in this fund to return less than other investments:
o If interest rates go up, causing the value of any debt securities held
by the Combined Bond Fund to decline
o Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
o Because issuers of non-investment grade securities held by the Fund
are more likely to be unable to make timely payments of interest or
principal
o Because mortgage-related securities and asset-backed securities may
lose more value due to changes in interest rates than other debt
securities and are subject to prepayment.
Investment Management. Fort Washington Investment Advisors, Inc., the
sub-advisor of Touchstone Bond Fund, will be the sub-advisor of Combined Bond
Fund. The terms of the sub-advisory agreement for the Combined Bond Fund will be
identical to the terms of the current sub-advisory agreement for the Touchstone
Bond Fund except for the rate of the sub-advisory fees, the name of the
sub-advisor and the effective and termination dates.
The rate of the sub-advisory fee to be paid by Combined Bond Fund to Fort
Washington will be 0.50% of its average daily net assets. The rate of the
sub-advisory fee paid by the Touchstone Bond Fund to Fort Washington is 0.55% of
its average daily net assets.
Administrative Services. Investors Bank & Trust Company serves as
custodian, administrator and fund accounting agent for the Touchstone Bond Fund
and will provide these services to Combined Bond Fund. State Street Bank and
Trust Company serves as transfer agent and dividend paying agent for the
Touchstone Bond Fund. It is anticipated that, following the reorganization,
Countrywide Fund Services, Inc. will serve as transfer agent and dividend paying
agent to Combined Bond Fund at an annual fee less than that currently paid by
the Touchstone Bond Fund. Countrywide Fund Services is an affiliate of
Touchstone Advisors.
Sales Charges. The maximum sales charge (4.75% of the offering price) for
Class A shares of Combined Bond Fund will be the same as the maximum sales
charge for Class A shares of Touchstone Bond Fund. Both funds reduce the rate of
the sales charge for large purchases, offer reduced sales loads for certain
purchase programs, permit purchases at net asset value for certain persons and
impose a 1.00% contingent deferred sales load on certain redemptions.
The sales charge for Class C shares of the Combined Bond Fund will be 1.25%
of the offering price. There is no sales charge for Class C shares of Touchstone
Bond Fund. Both Intermediate Bond Fund and Touchstone Bond Fund generally impose
a contingent deferred
7
<PAGE>
sales charge of 1.00% on Class C shares redeemed within one year of purchase,
and this contingent deferred sales charge will be applicable to Combined Bond
Fund.
No sales charge will be applicable to the merger transactions. In addition,
the 1.25% sales load will be waived on future purchases by current shareholders
of Class C shares of Touchstone Bond Fund. Therefore, if you are a Class C
shareholder of Touchstone Bond Fund and the merger with Intermediate Bond Fund
is completed, you will not pay the 1.25% sales charge when you purchase
additional Class C shares of Combined Bond Fund.
See Appendix B to this Proxy Statement/Prospectus for a more complete
description of the sales charges that will be applicable to Class A and Class C
shares of Combined Bond Fund.
Rule 12b-1 Fees. The distribution fees to be paid by the Class A shares of
Combined Bond Fund pursuant to its Rule 12b-1 Plan will be 0.35%, which is
greater than the Rule 12b-1 fee of 0.25% for Class A shares of Touchstone Bond
Fund. However, for the period from May 1,2000 through October 31, 2001,
Touchstone Advisors has agreed to waive a portion of the maximum Rule 12b-1
distribution fee so that the maximum Rule 12b-1 fee on Class A shares of
Combined Bond Fund will be 0.25% of the average daily net assets attributable to
Class A shares. This maximum equals the maximum rate of 12b-1 fees payable by
Class A shares of Touchstone Bond Fund. After October 31 2001, the distribution
fees to be paid by the Class A shares of Combined Bond Fund pursuant to its Rule
12b-1 Plan will be no greater than 0.35% of the average daily net assets
attributable to Class A shares.
The maximum rate of 12b-1 fees payable by Class C shares of Intermediate
Bond Fund and Touchstone Bond Fund is the same (1.00% of average daily net
assets attributable to Class C shares). This will be the 12b-1 fee payable by
Class C shareholders of Combined Bond Fund.
COMPARISON OF PURCHASE, REDEMPTION AND EXCHANGE PROCEDURES
The procedures for purchasing, redeeming and exchanging shares of Combined
Bond Fund will be substantially similar to those of Touchstone Bond Fund. A more
complete description of the applicable purchase, redemption and exchange
procedures is set forth in Appendix B to this Proxy Statement/Prospectus.
The following list highlights the most significant differences in the
purchase, redemption and exchange procedures of the Touchstone Bond Fund and the
Intermediate Bond Fund.
o Under some circumstances, the minimum investment amount required for
an initial investment in Combined Bond Fund will be greater than the
minimum investment amount required in the Touchstone Bond Fund.
o Under some circumstances, no minimum investment amount will be
required for an additional investment in Combined Bond Fund.
o The sales charge for a purchase of Class A shares in Combined Bond
Fund will generally be slightly higher.
8
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o The purchase of Class C shares in Combined Bond Fund will be subject
to a 1.25% front-end sales charge, but this sales charge will not be
applicable to future purchases by current holders of Class C shares of
Touchstone Bond Fund.
o A potential investor in Combined Bond Fund will not be able to open an
account with a wire transfer.
o A shareholder in Combined Bond Fund cannot sell shares over the
telephone if the amount of the sale is more than $25,000 or the
account is an IRA.
o A wire charge fee of $8.00 will be charged to selling shareholders who
direct the proceeds of the sale to be wired into a bank account.
o A signature guarantee is required when the proceeds from the sale of
you shares exceeds $25,000.
TAX CONSEQUENCES
Touchstone Series Trust and Countrywide Investment Trust have received an
opinion of counsel that the reorganization will not result in any gain or loss
for federal income tax purposes to Touchstone Bond Fund or its shareholders or
Intermediate Bond Fund or its shareholders. See "The Proposed
Reorganization--Tax Considerations."
PRINCIPAL RISKS OF INVESTING IN COMBINED BOND FUND
Combined Bond Fund will be subject to the same risks are the same risks
associated with an investment in Touchstone Bond Fund. The risks applicable to
the funds are also discussed in a prior section in this Proxy
Statement/Prospectus entitled "Comparison of Touchstone Bond Fund to Combined
Bond Fund" and also in the prospectus of the Touchstone Series Trust that
accompanies this Proxy Statement/Prospectus. These risks include the following:
o Interest Rate Risk
o Credit Risk
o Foreign Investing Risk
INTEREST RATE RISK. Combined Bond Fund will be subject to the risk that the
market value of the debt securities in which it invests will decline because of
rising interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
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o Mortgage-related securities. Payments from the pool of loans
underlying a mortgage-related security may not be enough to meet
the monthly payments of the mortgage-related security. If this
occurs, the mortgage-related security will lose value. Also,
prepayments of mortgages or mortgage foreclosures will shorten
the life of the pool of mortgages underlying a mortgage-related
security and will affect the average life of the mortgage-related
securities held by Combined Bond Fund. Mortgage prepayments vary
based on several factors including the level of interest rates,
general economic conditions, the location and age of the mortgage
and other demographic conditions. In periods of falling interest
rates, there are usually more prepayments. The reinvestment of
cash received from prepayments will, therefore, usually be at
lower interest rate than the original investment, lowering the
Fund's yield. Mortgage-related securities may be less likely to
increase in value during periods of falling interest rates than
other debt securities.
CREDIT RISK. The debt securities in Combined Bond Fund's portfolio will be
subject to credit risk. Credit risk is the possibility that an issuer will fail
to make timely payments of interest or principal. Securities rated in the lowest
category of investment grade securities have some risky characteristics and
changes in economic conditions are more likely to cause issuers of these
securities to be unable to make payments.
o Non-Investment Grade Securities. Non-investment grade securities
are sometimes referred to as "junk bonds" and are very risky with
respect to their issuers' ability to make payments of interest
and principal. There is a high risk that the Fund could suffer a
loss from investments in non-investment grade securities caused
by the default of an issuer of such securities. Part of the
reason for this high risk is that, in the event of a default or
bankruptcy, holders of non-investment grade securities generally
will not receive payments until the holders of all other debt
have been paid. In addition, the market for non-investment grade
securities has, in the past, had more frequent and larger price
changes than the markets for other securities. Non-investment
grade securities can also be more difficult to sell for good
value.
FOREIGN INVESTING. Investing in foreign securities poses unique risks such
as fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
An investment in Combined Bond Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. As with any investment in the bond market, there is a risk
that you may lose money by investing in Combined Bond Fund.
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THE PROSPOSED REORGANIZATION
CONSIDERATION OF THE PROPOSED REORGANIZATION BY THE TOUCHSTONE BOARD
The Board of Trustees of Touchstone Series Trust, including a majority of
the Trustees who are not interested persons of Touchstone Series Trust,
Countrywide Investment Trust, Touchstone Advisors, Fort Washington Investment
Advisors, Countrywide Investments or any affiliated person of these entities,
has unanimously approved the Agreement and Plan of Reorganization and determined
that the reorganization is in the best interests of Touchstone Bond Fund and the
interests of the existing shareholders of Touchstone Bond Fund will not be
diluted as a result of the reorganization. The Board of Trustees of Touchstone
Series Trust considered the following factors in its review of the
reorganization:
o The investment objective of Intermediate Bond Fund is similar to that
of Touchstone Bond Fund.
o The principal investment strategies of Combined Bond Fund will be
identical to those of Touchstone Bond Fund.
o The projected expense ratio of Combined Bond Fund will be the same as
or lower than the expense ratio of Touchstone Bond Fund.
o The sales load for Class C shares of Combined Bond Fund will not apply
to future purchases of Class C shares of Combined Bond Fund by current
Class C shareholders of Touchstone Bond Fund.
o The investment advisory agreement and sub-advisory agreement of
Combined Bond Fund will be substantially similar to those of
Touchstone Bond Fund.
o The reorganization will not result in any tax consequences to the
existing shareholders of Touchstone Bond Fund.
o The costs of the reorganization will be paid by Touchstone Advisors or
its affiliates.
o The current sub-advisor for Touchstone Bond Fund will serve as the
sub-advisor to Combined Bond Fund.
In addition, the Board considered the representation made by
representatives of Touchstone Advisors and Countrywide Investments that the
consolidation of the Touchstone and Countrywide complexes may result in
operating efficiencies and permit a more focused marketing strategy resulting in
the greater likelihood of asset growth. Management representatives explained to
the Board members that there are certain duplicate costs associated with
maintaining 4 separate investment companies and similar funds, including
separate audit fees and state filing fees. Combining the Touchstone and the
Countrywide complexes and eliminating similar funds, such as Touchstone Bond
Fund and Intermediate Bond Fund, should eliminate these duplicate costs.
Furthermore, merging duplicate funds, such as Touchstone Bond Fund and
Intermediate Bond Fund, will avoid confusion among current and potential
shareholders and could result in a
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Combined Bond Fund with more assets. Asset growth could enable Combined Bond
Fund to obtain economies of scale by spreading certain expenses over a larger
asset base and by reaching asset breakpoints in the rate of certain fees, which
may result in an overall lower expense ratio for the fund. There can be no
assurance, however, that asset growth, economies of scale or lower expense
ratios will be achieved.
The Board of Trustees also considered alternatives to the reorganization,
including maintaining the current structure. In addition, the Board of Trustees
considered the proposed merger in the context of management's stated goal of
consolidating and simplifying the Touchstone and Countrywide mutual fund
complexes. The Board recognized that, although the merger of Touchstone Bond
Fund and Intermediate Bond Fund potentially could benefit Touchstone Advisors
and its affiliates, it should also benefit shareholders by facilitating
increased operational efficiencies and more focused marketing strategies.
AGREEMENT AND PLAN OF REORGANIZATION
The terms and conditions under which the proposed reorganization would be
completed are set forth in the Agreement and Plan of Reorganization. Significant
provisions of the Plan are summarized below. This summary is qualified in its
entirety by reference to the Plan, a copy of which is attached as Appendix A to
the Proxy Statement/Prospectus. Unless otherwise defined in this Proxy
Statement/Prospectus, a defined term used in this section has the same meaning
as when it is used in the Plan.
As of the Effective Time of the reorganization, Touchstone Bond Fund will
transfer all of its assets, subject to liabilities, to Intermediate Bond Fund in
exchange solely for shares of Intermediate Bond Fund. The shares of Intermediate
Bond Fund will be deemed to be distributed immediately on a pro rata basis to
the shareholders of the Touchstone Bond Fund.
It is anticipated that the Effective Time of the reorganization will be
immediately after the close of business on April 28, 2000 (the last business day
of the month), if all conditions of the Plan are fulfilled or waived. The date
of the Effective Time may be extended to a later date by the Board of Trustees
of Touchstone Series Trust and the Board of Trustees of Countrywide Investment
Trust.
The assets of Touchstone Bond Fund to be acquired in the reorganization
will include all property, including without limitation, all cash, cash
equivalents, securities, commodities and futures interests, receivables
(including interest or dividends receivable), any claims or rights of action or
rights to register shares under applicable securities laws, and other property
owned by Touchstone Bond Fund and any deferred or prepaid expenses shown as an
asset on the books of Touchstone Bond Fund at the Effective Time, all of which
will be consistent with the investment limitations of Intermediate Bond Fund.
Intermediate Bond Fund will assume from Touchstone Bond Fund all liabilities,
expenses, costs, charges and reserves of the Touchstone Bond Fund of whatever
kind or nature, provided that Touchstone Bond Fund utilized its best efforts to
discharge all of its known debts, liabilities, obligations and duties before the
Effective Time. In exchange for all of the assets and liabilities of Touchstone
Bond Fund, Intermediate Bond Fund will deliver shares of Intermediate Bond Fund
to Touchstone Bond Fund. Touchstone Bond Fund
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will deliver the shares of Intermediate Bond Fund to the shareholders of
Touchstone Bond Fund in exchange for their shares of Touchstone Bond Fund.
The value of the assets and liabilities of Touchstone Bond Fund will be
determined as of the Effective Time in accordance with the policies and
procedures set forth in the prospectus of Touchstone Series Trust. The value of
Intermediate Bond Fund to be issued in exchange for the net assets of Touchstone
Bond Fund will be equal to the value of these assets.
As soon as practicable after the Closing Date, Touchstone Bond Fund will
liquidate and distribute pro rata to its shareholders of record the shares of
the Intermediate Bond Fund received by Touchstone Bond Fund. The liquidation and
distribution will be accomplished by opening accounts on the books of
Countrywide Investment Trust in the names of shareholders of Touchstone Bond
Fund and by transferring the shares of Intermediate Bond Fund credited to the
account of Touchstone Bond Fund on the books of Countrywide Investment Trust.
The number of shares transferred to each shareholder's account will be a number
of shares of the corresponding class of Intermediate Bond Fund equal in value to
the shares of Touchstone Bond Fund held by the shareholder as of the Effective
Time. Fractional shares of Intermediate Bond Fund will be rounded to the nearest
thousandth of a share.
Any transfer of taxes payable upon issuance of the shares of Intermediate
Bond Fund in a name other than the name of the registered holder of the shares
on the books of Touchstone Bond Fund as of that time must be paid by the person
to whom such shares are to be issued as a condition of the transfer. Any
reporting responsibility of Touchstone Series Trust with respect to Touchstone
Bond Fund will continue to be the responsibility of Touchstone Series Trust up
to and including the Effective Time and such later date on which Touchstone Bond
Fund is liquidated and Touchstone Series Trust is dissolved.
Conditions of the closing of the reorganization include a condition that
each of Touchstone Series Trust and Countrywide Investment Trust must receive an
opinion from Frost & Jacobs LLP regarding certain tax aspects of the
reorganization (see "Tax Considerations") and an order from the Commission to
permit them to implement the proposed reorganization (see "The Proposed
Reorganization--Section 17(b) Exemptive Order").
The Plan may be terminated and the reorganization abandoned at any time,
before or after approval by the shareholders of the Touchstone Bond Fund, prior
to the Closing Date. In addition, the Plan may be amended in any mutually
agreeable manner, except that no amendment may be made subsequent to the special
meeting which will detrimentally affect the value of the shares of Intermediate
Bond Fund to be distributed.
Touchstone Advisors and/or its affiliates will pay the costs of the
reorganization, including legal, accounting and other professional fees and the
cost of soliciting proxies for the special meeting (consisting principally of
printing and mailing expenses). The total estimated costs for the proposed
reorganization are approximately $375,000.
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SECTION 17(b) EXEMPTIVE ORDER
Touchstone Series Trust, Countrywide Investment Trust and Touchstone
Advisors (the "Applicants") have submitted an application to the Securities and
Exchange Commission for an order, pursuant to Section 17(b) of the Investment
Company Act of 1940, exempting the Applicants from the provisions of Section
17(a) of the Investment Company Act of 1940 to permit them to implement the
proposed reorganization. Section 17(a) generally prohibits any affiliated
person, or any affiliated person of an affiliated person, of a registered
investment company, acting as principal, from knowingly purchasing any security
from, or selling any security to, the investment company. The proposed transfer
of assets from Touchstone Bond Fund to Intermediate Bond Fund in exchange for
shares of the Intermediate Bond Fund may be deemed to be a sale of Touchstone
Bond Fund's portfolio securities to Intermediate Bond Fund. Due to certain
affiliations among the Applicants, Section 17(a) may be applicable to the
proposed reorganization and may prohibit the Applicants from implementing the
proposed reorganization unless the Applicants obtain the requested order.
Section 17(b) permits the Securities and Exchange Commission to issue an order
of exemption if the applicable statutory standards are met. In the application,
the Applicants have asserted that they meet the applicable statutory standards
because (1) the terms of the proposed reorganization are reasonable and fair and
do not involve overreaching on the part of any person concerned and (2) the
proposed reorganization will be consistent with the policies of Touchstone
Series Trust and the policies of Countrywide Investment Trust.
If the Securities and Exchange Commission does not issue the requested
order, the Boards of Trustees of Touchstone Series Trust and Countrywide
Investment Trust will take such actions as they deem appropriate and in the best
interests of the shareholders of the relevant trust. These actions will include
the consideration of other options, such as restructuring the proposed
reorganization, implementing other strategies to consolidate the Touchstone and
Countrywide mutual fund complexes, or maintaining the current structure. The
reorganization as proposed will not be implemented if the Securities and
Exchange Commission does not issue the requested order.
DIVIDENDS AND OTHER DISTRIBUTIONS
Touchstone Bond Fund distributes substantially all of its net investment
income and capital gains to shareholders each year. On or before the Closing
Date, Touchstone Bond Fund may declare additional dividends or other
distributions in order to distribute substantially all of their investment
company taxable income and net realized capital gain.
TAX CONSIDERATIONS
It is a condition to the consummation of the reorganization that each of
Touchstone Series Trust and Countrywide Investment Trust must receive an opinion
from Frost & Jacobs LLP, counsel to Touchstone Series Trust and Countrywide
Investment Trust, to the effect that, with respect to the reorganization as it
affects Touchstone Bond Fund or Intermediate Bond Fund, as the case may be:
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o the reorganization will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Code
o no gain or loss will be recognized by either of Touchstone Bond Fund
or Intermediate Bond Fund upon the transfer of assets of Touchstone
Bond Fund in exchange for shares of Intermediate Bond Fund
o no gain or loss will be recognized by shareholders of Touchstone Bond
Fund upon liquidation of Touchstone Bond Fund and the distribution of
shares of Intermediate Bond Fund constructively in exchange for shares
of Touchstone Bond Fund
o Intermediate Bond Fund's basis in the assets of Touchstone Bond Fund
received pursuant to the reorganization will be the same as the basis
of those assets in the hands of Touchstone Bond Fund immediately prior
to the exchange, and the holding period of those assets in the hands
of Intermediate Bond Fund will include the holding period of
Touchstone Bond Fund
o the basis of shares of Intermediate Bond Fund received by each
shareholder of Touchstone Bond Fund pursuant to the reorganization
will be the same as the shareholder's basis in shares of Touchstone
Bond Fund held by the shareholder immediately prior to the exchange
o the holding period of shares of Intermediate Bond Fund received by
each shareholder of Touchstone Bond Fund pursuant to the
reorganization will include the shareholder's holding period of shares
of Touchstone Bond Fund held immediately prior to the exchange,
provided that the shares of Touchstone Bond Fund were held as capital
assets on the date of the reorganization.
Touchstone Series Trust and Countrywide Investment Trust are not seeking a
tax ruling from the Internal Revenue Service ("IRS") but are acting in reliance
upon the opinion of counsel discussed in the previous paragraph. That opinion is
not binding on the IRS and does not preclude the IRS from adopting a contrary
position. This discussion relates only to the federal income tax consequences of
the reorganization. Shareholders should consult their tax advisors about any
state and local tax consequences of the reorganization.
CAPITALIZATION
The following tables show the capitalization of Touchstone Bond Fund and
the capitalization of Intermediate Bond Fund as of as of September 30, 1999, and
the pro forma capitalization of the Combined Bond Fund as of that date, giving
effect to the reorganization.
Touchstone Intermediate Combined
CLASS A Bond Fund Bond Fund Bond Fund*
--------- --------- ----------
Net Assets (in thousands) ............... $ 4,971 $11,687 $30,584
Net Asset Value per Share ............... $ 9.79 $ 9.45 $ 9.45
Shares Outstanding (in thousands) ....... 508 1,236 3,236
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Touchstone Intermediate Combined
CLASS C Bond Fund Bond Fund Bond Fund
--------- --------- ---------
Net Assets (in thousands) ................. $ 928 N/A $ 928
Net Asset Value per Share ................. $9.47 N/A $9.47
Shares Outstanding (in thousands) ......... 98 N/A 98
*The pro forma capitalization reflects the anticipated investment of
approximately $13,926,000 in Class A shares of Combined Bond Fund by an
affiliated person of Touchstone Advisors prior to the reorganization.
On September 30, 1999, there were 1,039,000 Class Y shares of Touchstone
Bond Fund issued and outstanding with a net asset value per share of $13.40 and
net assets of $13,926,000. The Class Y shares will be redeemed prior to the
reorganization, so Combined Bond Fund will issue no Class Y shares.
DESCRIPTION OF SHARES OF INTERMEDIATE BOND FUND
Each share of Intermediate Bond Fund represents an equal proportionate
interest in the assets and liabilities belonging to Intermediate Bond Fund with
each other share of this fund. Each share of Intermediate Bond Fund is entitled
to the dividends and distributions belonging to the fund as are declared by the
Trustees of Countrywide Investment Trust.
The Trustees have the authority from time to time to divide or combine the
shares of Intermediate Bond Fund into a greater or lesser number of shares of
the fund so long as the proportionate beneficial interest in the assets
belonging to the Intermediate Bond Fund and the rights of shares of any other
fund of the Trust are in no way affected. The Board of Trustees may classify or
reclassify the shares of Intermediate Bond Fund into additional classes of
shares at a future date.
The shares of the Intermediate Bond Fund do not have cumulative voting
rights or any preemptive or conversion rights.
Shares of each fund of Countrywide Investment Trust have equal voting
rights. Each Fund votes separately on matters submitted to a vote of the
shareholders except in matters where a vote of all Funds of the Trust in the
aggregate is required by the Investment Company Act of 1940 or otherwise. Each
class of shares of a fund of Countrywide Investment Trust votes separately on
matters relating to its plan of distribution pursuant to Rule 12b-1. When
matters are submitted to shareholders for a vote, each shareholder is entitled
to one vote for each full share owned and fractional votes for fractional shares
owned.
Any general expenses of Countrywide Investment Trust not readily
identifiable as belonging to a particular fund are allocated by or under the
direction of the Trustees in the
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manner determined by the Trustees to be fair and equitable. Generally, the
Trustees allocate these expenses on the basis of relative net assets or number
of shareholders.
No shareholder of Intermediate Bond Fund is liable to further calls or to
assessment by Countrywide Investment Trust without his express consent. Under
Massachusetts law, under certain circumstances, shareholders of a Massachusetts
business trust could be deemed to have the same type of personal liability for
the obligations of the Trust as does a partner of a partnership. However,
numerous investment companies registered under the Investment Company Act of
1940 have been formed as Massachusetts business trusts and management is not
aware of an instance where this result has occurred.
In addition, the Declaration of Trust of Countrywide Investment Trust
disclaims shareholder liability for its acts or obligations and requires that
notice of this disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or its Trustees. The Declaration of Trust
also provides for the indemnification out of the Trust's property for all losses
and expenses of any shareholder held personally liable for the Trust's
obligations. Moreover, the Declaration of Trust provides that the Trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment against the
shareholder.
As a result, and particularly as the assets of Countrywide Investment Trust
are readily marketable and ordinarily substantially exceed liabilities,
management believes that the risk of shareholder liability is slight and limited
to circumstances in which the Trust itself will be unable to meet its
obligations. Management believes that, in view of the factors discussed above,
the risk of personal liability is remote.
Additional information about shares of Intermediate Bond Fund is contained
in the following section of this Proxy Statement/Prospectus.
COMPARISON OF SHAREHOLDER RIGHTS
General
Touchstone Bond Fund is a series of Touchstone Series Trust, which is a
Massachusetts business trust, formed on February 7, 1994. Intermediate Bond Fund
is a series of Countrywide Investment Trust, also a Massachusetts business
trust, which was formed December 7, 1980. Each of Touchstone Series Trust and
Countrywide Investment Trust is registered under the Investment Company Act of
1940 as an open-end management company and is a series investment company as
defined by Rule 18f-2 under the Act. Each of Touchstone Series Trust and
Countrywide Investment Trust is governed by its Declaration of Trust, By-laws
and Board of Trustees, as well as by applicable state and federal law.
The Board of Trustees for each of Touchstone Series Trust and Countrywide
Investment Trust has authorized the issuance of several series and has the
authority under its respective Declaration of Trust to issue additional series
in the future. The Board of Trustees of Touchstone
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Series Trust has authorized the issuance of 8 series, each representing shares
in one of 8 separate portfolios. The Board of Trustees of Countrywide Investment
Trust has authorized the issuance of 6 series of shares, each representing
shares in one of 6 separate portfolios.
The assets of each portfolio are segregated and separately managed and the
interest of a shareholder is in the assets of the portfolio in which he or she
holds shares. In both the Touchstone Bond Fund and the Intermediate Bond Fund,
Class A shares and Class C shares represent interests in the assets of the
applicable fund and have identical voting, dividend, liquidation, and other
rights on the same terms and conditions except that (1) expenses related to the
distribution of each class of shares are borne solely by that class and (2) each
class of shares has exclusive voting rights with respect to provisions of the
Rule 12b-1 distribution plan pertaining to that class.
TRUSTEES
The By-laws of Touchstone Series Trust and the Bylaws of Countrywide
Investment Trust provide that the term of office of each Trustee shall be from
the time of his or her election until his or her successor is elected and
qualified or until his or her earlier resignation or removal. Trustees of either
Countrywide Investment Trust or Touchstone Series Trust may be removed with or
without cause at any meeting of shareholders by the affirmative vote of at least
two thirds of the shares outstanding. A meeting for the removal of a Trustee of
Countrywide Investment Trust will be held upon the request of the holders of at
least 10% of the voting power of that trust.
Vacancies on the Board of either Touchstone Series Trust or Countrywide
Investment Trust may be filled by the Trustees remaining in office; provided,
however, a meeting of shareholders will be required for the purpose of electing
additional Trustees whenever fewer than a majority of the Trustees then in
office were elected by shareholders.
VOTING RIGHTS
Neither Countrywide Investment Trust nor Touchstone Series Trust holds a
meeting of shareholders annually. Neither trust typically holds a meeting of
shareholders for the purpose of electing Trustees.
Countrywide Investment Trust will hold a meeting to elect Trustees when (a)
less than a majority of the Trustees holding office in Countrywide Investment
Trust have been elected by shareholders or (b) upon a written request by
shareholders of Countrywide Investment Trust holding not less than 10% of the
shares outstanding. A meeting of shareholders of Countrywide Investment Trust,
for any purpose, may be called upon the written request of shareholders holding
at least 25% of the outstanding shares entitled to vote at such meeting or by
the Board of Trustees.
Special meetings of shareholders of Touchstone Series Trust, for any
purpose, may be called upon the request of holders of at least 10% of the shares
or by the Board of Trustees.
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On each matter submitted to a vote of the shareholders of either
Countrywide Investment Trust or Touchstone Series Trust, each shareholder is
entitled to one vote for each whole share owned and a proportionate, fractional
vote for each fractional share owned.
With respect to Countrywide Investment Trust, the affirmative vote of the
majority of votes validly cast in person or by proxy at a shareholder meeting at
which a quorum is present decides any questions except when a different vote is
required or permitted by any provision of the Investment Company Act of 1940 or
other applicable law or as may otherwise be set forth in the applicable
organizational documents. With respect to Touchstone Series Trust, the required
shareholder vote, provided that a quorum is present, varies depending on the
provision as set forth in the organizational documents, subject to specific
requirements under any provision of the Investment Company Act of 1940 or other
applicable law. Under either trust's Declaration of Trust, a shareholder vote
may be submitted to the holders of one or more but not all portfolios or
classes.
LIQUIDATION OR DISSOLUTION
In the event of the liquidation or dissolution of either of Intermediate
Bond Fund or Touchstone Bond Fund, the shareholders of the fund are entitled to
receive when, and as declared by the Trustees, the excess of the assets
belonging to the fund over the fund's liabilities. In either case, the assets
distributed to shareholders of the fund will be distributed among the
shareholders in proportion to the number of shares of the fund held by them and
recorded on the fund's books.
INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust of Countrywide Investment Trust provides that each
individual who is a present or former Trustee or officer of Countrywide
Investment Trust who, by reason of his or her position was, is, or is threatened
to be made a party to any threatened, pending or completed action shall be
indemnified against all liabilities in addition to and not exclusive of the
other rights applicable to such an individual. This indemnification provision
does not protect any person from any liability arising out of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. In addition, the Declaration of
Trust of Countrywide Investment Trust expressly provides for the advancement of
expenses upon the undertaking by or on behalf of the individual seeking
indemnification to repay the advance unless it is ultimately determined that the
individual is entitled to indemnification.
The Declaration of Trust of the Touchstone Series Trust provides that each
Trustee and officer shall be indemnified against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their positions with the Touchstone Series Trust, to the fullest extent
permitted by law and the Investment Company Act of 1940, except for such
person's willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
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SHAREHOLDER LIABILITY
Under each trust's Declaration of Trust, the shareholders of the
Countrywide Investment Trust and Touchstone Series Trust do not have personal
liability for the acts and obligations of any of the Intermediate Bond Fund or
the Touchstone Bond Fund, respectively.
Shares of Intermediate Bond Fund issued to the shareholders of the
Touchstone Bond Fund in the reorganization will be fully paid and nonassessable
when issued, transferable without restrictions and will have no preemptive
rights.
RIGHTS OF INSPECTION
The By-laws of the Touchstone Series Trust and the Declaration of Trust of
the Countrywide Investment Trust afford shareholders the same inspection rights
as provided under the Massachusetts Business Corporate Law. Massachusetts law
permits any shareholder of a corporation or any agent of the shareholder to
inspect and copy, during the corporation's usual business hours, the
corporation's By-laws, minutes of shareholder proceedings, annual statements of
the corporation's affairs and voting trust agreements on file at its principal
office.
The discussion in "Description of Shares of Intermediate Bond Fund" and
"Comparison of Shareholder Rights" is only a summary of certain information with
respect to Intermediate Bond Fund and Touchstone Bond Fund. It is not a complete
description of the documents cited. Shareholders should refer to the provisions
of the governing documents of each trust and Massachusetts law for a more
thorough description.
VOTING INFORMATION
SOLICITATION OF PROXIES
We are furnishing this Proxy Statement/Prospectus to the shareholders of
Touchstone Bond Fund in connection with the solicitation of proxies by the Board
of Trustees of Touchstone Series Trust. The proxies will be used at a special
meeting of shareholders to be held on Wednesday, April 19, 2000, at 10:30 a.m.
Eastern time, at the offices of Countrywide Investment Trust, 312 Walnut Street,
Cincinnati, Ohio 45202. Each class of shares (Class A shares and Class C shares)
of Touchstone Bond Fund will vote separately on the proposal.
QUORUM
The presence at the special meeting, in person or by proxy, of shareholders
representing a majority of all Class A shares entitled to vote on a proposal
constitutes a quorum for the transaction of business by the Class A shares. The
presence at the special meeting, in person or by proxy, of shareholders
representing a majority of all Class C shares entitled to vote on a proposal
constitutes a quorum for the transaction of the business by the Class C shares.
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VOTING PROCEDURES
VOTING OF PROXIES. Shares represented by properly executed proxies received
by Touchstone Series Trust will be voted at the special meeting and any
adjournment of the meeting in accordance with the voting instructions provided
in the proxies for each applicable proposal. If no instructions are specified on
a signed proxy received from a shareholder, the shares represented by the proxy
will be voted for each applicable proposal.
BROKER NON-VOTES. Broker non-votes are proxies from brokers or other
nominee owners indicating that the brokers or nominee owners have not received
instructions from the beneficial owners or other persons entitled to vote the
shares as to a matter with respect to which the brokers or other nominee owners
do not have discretionary power to vote. In tabulating votes on any matter,
broker non-votes will be counted as represented for purposes of determining the
presence or absence of a quorum. Therefore, broker non-votes will have the
effect of a vote against the applicable proposal.
ABSTENTIONS. Abstentions will also be counted as represented for purposes
of determining the presence or absence of a quorum. Therefore, abstentions will
have the effect of a negative vote.
REVOCATION OF YOUR PROXY. You may revoke a proxy that you have delivered to
Touchstone Series Trust at any time before the voting of the proxy. You may
revoke that proxy by filing a written notice of revocation with the Secretary of
Touchstone Series Trust or by delivering a duly executed proxy dated after the
proxy you previously delivered.
SHAREHOLDERS OF RECORD. Shareholders of record at the close of business on
February 28, 2000 will be entitled to vote on each applicable proposal. Each
full share of Touchstone Bond Fund is entitled to one vote, with proportional
voting for fractional shares. As of February 28, 2000, there were 431,354 Class
A shares, 109,098 Class C shares and 1,072,774 Class Y shares of Touchstone Bond
Fund issued and outstanding.
VOTE REQUIRED FOR APPROVAL OF REORGANIZATION PLAN. The Agreement and Plan
of Reorganization and the transactions contemplated by the Agreement will be
implemented with respect to Touchstone Bond Fund only if "a majority of the
outstanding voting securities" of Class A shares and "a majority of the
outstanding voting securities" of Class C shares approve the Agreement. A
"majority of the outstanding voting securities" of a class means the lesser of
(1) 67% or more of the shares of the class present at a meeting, if shareholders
who are the owners of more than 50% of the shares of the class then outstanding
are present in person or by proxy, or (2) more than 50% of the outstanding
shares of the class.
ADJOURNMENT OF THE SPECIAL MEETING. If sufficient votes in favor of a
proposal are not received by the time scheduled for the special meeting, the
persons named as proxies may propose one or more adjournments of the special
meeting to permit additional solicitation of proxies with respect to the
proposal. The special meeting may also be adjourned if certain issues under the
Investment Company Act of 1940 have not been resolved to the mutual satisfaction
of
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Touchstone Series Trust and Countrywide Investment Trust by the scheduled time
of the special meeting.
Any adjournment will require the affirmative vote of a majority of the
votes cast on the question in person or by proxy at the session of the special
meeting to be adjourned. The persons named as proxies will vote proxies that
they are entitled to vote in favor of the proposal in favor of the adjournment.
The persons named as proxies will vote proxies that they are entitled to vote
against the proposal against the adjournment.
SHARE OWNERSHIP
AFFILIATED SHAREHOLDERS AND 5% SHAREHOLDERS
The following table provides information about the share ownership of
certain affiliated shareholders of Touchstone Bond Fund and Intermediate Bond
Fund and pro forma information about the share ownership of these shareholders
in Combined Bond Fund, after giving effect to the reorganization. The table
shows:
o the number of shares of Touchstone Bond Fund owned of record on
February 28, 2000 by Western-Southern Life Assurance Company ("WSLAC")
and The Western and Southern Life Insurance Company ("WSLIC"), each of
which is an affiliate of Touchstone Advisors, Fort Washington
Investment Advisors and Countrywide Investments
o the names and addresses of other persons ("5% Shareholders") who owned
of record 5% or more of the outstanding shares of Touchstone Bond Fund
on February 28, 2000 and Intermediate Bond Fund on February 28, 2000
o the pro forma ownership of WSLAC, WSLIC and the 5% Shareholders as of
February 28, 2000, after giving effect to the mergers
The address of WSLAC and WSLIC is 400 Broadway, Cincinnati, OH 45202. Each
of WSLAC and WSLIC is organized under the laws of the State of Ohio.
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The percentages in the following table are based on the number of shares
outstanding in each class of Touchstone Bond Fund as of February 28, 2000.
Touchstone Bond Fund++
--------------------------------------------
Name and Address Class A Class C
- --------------------------------------------------------------------------------
Shares % Shares %
WSLIC 219,241.63 50.83% N/A N/A
WSLAC 1,835.32 0.43% 14,942.61 13.70%
State Street Bank & Trust Co. N/A N/A 6,921.93 6.34%
Custodian for the Rollover IRA of
Frederic R. Duggan
545 Spring Ridge Dr.
Mabelvale, AR 72103-8938
++The Western and Southern Life Insurance Separate Account A is the only
shareholder of Class Y shares of Touchstone Bond Fund. This shareholder has
informed Touchstone Advisors that it intends to redeem its shares of Touchstone
Bond Fund before the completion of the reorganization. Therefore, no Class Y
shares of Touchstone Bond Fund will be issued in the reorganization.
The percentages in the following table are based on the number of shares
outstanding in each class of Intermediate Bond Fund as of February 28, 2000.
Intermediate Bond Fund
--------------------------------------------
Name and Address Class A Class C*
- --------------------------------------------------------------------------------
Shares % Shares %
BAND & Co. c/o Firstar East 97,695.53 20.75% N/A N/A
P.O. Box 1787
Milwaukee, WI 53201
Amivest Corp TWU-Westchester 84,711.99 17.99% N/A N/A
Pvt Bus Lines Pension Trust
767 5th Ave.
New York, NY 10153-0002
HSBC Bank USA c/f Industry & 43,806.61 9.30% N/A N/A
Local 338 PTF - Amivest Dim
P.O. Box 1329
Buffalo, NY 14240
*As of the date of this Proxy Statement/Prospectus, no Class C shares of
Intermediate Bond Fund have been issued.
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The following table provides the pro forma ownership of WSLAC, WSLIC and
the 5% Shareholders of Combined Bond Fund as of February 28, 2000, after giving
effect to the merger.
Combined Bond Fund
--------------------------------------------
Name and Address Class A Class C
- --------------------------------------------------------------------------------
Shares % Shares %
WSLIC 219,241.63 24.29% N/A N/A
BAND & Co. c/o Firstar East 97,965.53 10.83% N/A N/A
P.O. Box 1787
Milwaukee, WI 53201
Amivest Corp TWU-Westchester 84,711.99 9.39% N/A N/A
Pvt Bus Lines Pension Trust
767 5th Ave.
New York, NY 10153-0002
WSLAC 1,835.32 0.20% 14,942.61 13.70%
State Street Bank & Trust co. N/A N/A 6,921.93 6.34%
Custodian for the Rollover IRA of
Frederic R. Duggan
545 Spring Ridge Dr.
Mabelvale, AR 72103-8938
SHARE OWNERSHIP OF TRUSTEES AND OFFICERS
The following table shows information about the record ownership of shares
of Touchstone Bond Fund and Intermediate Bond Fund by the Trustees and officers
of Touchstone Series Trust and the Trustees and officers of Countrywide
Investment Trust as a group on February 28, 2000.
Class A Class C
--------------------------------------------
Fund Shares % Shares %
- --------------------------------------------------------------------------------
Touchstone Bond Fund 100,718.37 23.35% 64.18 0.05%
Intermediate Bond Fund N/A N/A N/A N/A
VOTING BY AFFILIATED PERSONS
Western-Southern Life Assurance Company or The Western and Southern Life
Insurance Company, each an affiliate of Touchstone Advisors, Fort Washington
Investment Advisors and Countrywide Investments, owns more than 5% of the
outstanding shares of each Touchstone Fund, including Touchstone Bond Fund.
Therefore, Western-Southern Life Assurance Company or The Western and Southern
Life Insurance Company arguably could have the ability to
24
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influence the proposed reorganization based on its ownership of shares of
Touchstone Bond Fund.
To address the policy concerns underlying Section 17(a) of the Investment
Company Act of 1940 and Rule 17a-8 promulgated under the Act with respect to the
influence of persons that are affiliated persons of an investment company due to
share ownership and are also affiliated persons of the investment advisor to the
investment company, each of Western-Southern Life Assurance Company and The
Western and Southern Life Insurance Company has agreed to vote the shares of
Touchstone Bond Fund that it owns in the same proportion as the vote of all
other shareholders. This method of voting will effectively allow the
shareholders, other than Western-Southern Life Assurance Company and The Western
and Southern Life Insurance Company, to approve or disapprove the proposed
reorganization and ensures that neither Western-Southern Life Assurance Company
nor The Western and Southern Life Insurance Company improperly influences
Touchstone Series Trust, Touchstone Bond Fund or the terms of the proposed
reorganization.
PROXY SOLICITATION
Touchstone Series Trust has retained Management Information Services Corp.
("MIS") in connection with the entire reorganization, which includes the
proposed merger set forth in this Proxy Statement/Prospectus. MIS is responsible
for printing proxy cards, mailing proxy material to shareholders, soliciting
brokers, custodians, nominees and fiduciaries, tabulating the returned proxies
and performing other proxy solicitation services. The anticipated cost of these
services for the entire reorganization is approximately $85,000, which includes
costs related to this Proxy Statement/Prospectus, and will be paid by Touchstone
Advisors or an affiliate thereof.
In connection with the entire reorganization, Touchstone Advisors, as
necessary, will engage D.F. King & Co., Inc. to assist with proxy solicitation
at a projected total fee of $65,000 plus reasonable expenses, which fee includes
the costs incurred in connection with this Proxy Statement/Prospectus. The cost
of these services will be paid by Touchstone Advisors or an affiliate thereof.
Touchstone Advisors or its affiliates will pay the cost of the proxy
solicitation, the special meeting, the merger of Touchstone Bond Fund with
Intermediate Bond Fund, the reorganization of the Touchstone Funds and the
consolidation of the Touchstone and Countrywide complexes. Touchstone Advisors
or its affiliates will also reimburse brokerage firms and others for their
reasonable expenses in forwarding solicitation material to the beneficial owners
of shares of Touchstone Bond Fund.
In addition to this solicitation of proxies by use of the mails, employees
of Touchstone Advisors or its affiliates may solicit proxies personally or by
telephone.
ADDITIONAL INFORMATION
SHAREHOLDER INQUIRIES
If you have questions about the proposed reorganization or would like to
request a copy of any prospectus, statement of additional information, annual
report, semi-annual report or other
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document mentioned in this Proxy Statement/Prospectus, please contact us at 311
Pike Street, Cincinnati, OH 45202 or call 800-669-2796 to talk to a shareholder
service representative.
ADDITIONAL INFORMATION ABOUT COMBINED BOND FUND
After the proposed merger, Combined Bond Fund will maintain the current
investment objective of Intermediate Bond Fund and adopt the principal
investment strategies and policies of Touchstone Bond Fund, which are described
in more detail earlier in this Proxy Statement/Prospectus and in the prospectus
of Touchstone Series Trust dated May 1, 1999 (the "Touchstone Prospectus) that
accompanies this Proxy Statement/Prospectus. The Touchstone Prospectus contains
information about the following topics for Touchstone Bond Fund in the location
indicated. Except as modified in this Proxy Statement/Prospectus, the
information in the Touchstone Prospectus about the Touchstone Bond Fund will
apply to the Combined Bond Fund because, after the merger of Touchstone Bond
Fund with Intermediate Bond Fund, Combined Bond Fund will be managed in the same
manner as Touchstone Bond Fund.
Topic Location in Touchstone Prospectus
- --------------------------------------------------------------------------------
Principal investment strategies and Touchstone Bond Fund
related risks
................................................................................
Risk return chart Touchstone Bond Fund
................................................................................
Investment adviser The Fund's Management
................................................................................
Portfolio manager The Fund's Management
................................................................................
Dividends and distributions Distributions and Taxes
................................................................................
Tax consequences Distributions and Taxes
................................................................................
Financial highlights Financial Highlights
................................................................................
The investment objective for Combined Bond Fund is located in the
Prospectus for Intermediate Bond Fund series of Countrywide Investment Trust in
the section entitled "Risk/Return Summary."
Management's discussion of Touchstone Bond Fund's performance is contained
in the 1999 Annual Report to Shareholders of Touchstone Series Trust that
accompanies this Proxy Statement/Prospectus.
ADDITIONAL INFORMATION ABOUT INTERMEDIATE BOND FUND, COUNTRYWIDE INVESTMENT
TRUST, TOUCHSTONE BOND FUND AND TOUCHSTONE SERIES TRUST
Additional information about Intermediate Bond Fund and Countrywide
Investment Trust is contained in the Countrywide Prospectus, which accompanies
this Proxy Statement/Prospectus, and a Statement of Additional Information dated
February 1, 2000.
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Additional information about the Touchstone Bond Fund and Touchstone Series
Trust is contained in the Touchstone Prospectus, which accompanies this Proxy
Statement/Prospectus, and a Statement of Additional Information dated May 1,
1999.
ACCOMPANYING DOCUMENTS
This Proxy Statement/Prospectus is accompanied by the following documents:
o Prospectus of Touchstone Series Trust (Touchstone Family of Funds)
dated May 1, 1999, as supplemented on July 19, 1999 and March 15, 2000
o Annual Report of Touchstone Series Trust--December 31, 1999
o Prospectus of Intermediate Bond Fund dated February 1, 2000
o Annual Report of Countrywide Investment Trust--September 30, 1999
INFORMATION AVAILABLE FROM THE SECURITIES AND EXCHANGE COMMISSION
COUNTRYWIDE INVESTMENT TRUST. Countrywide Investment Trust has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form N-14 under the Securities Act of 1933, as amended, with
respect to the shares of Intermediate Bond Fund offered by this Prospectus. As
permitted by the rules and regulations of the Commission, this Proxy
Statement/Prospectus and the accompanying Statement of Additional Information
omit certain information, exhibits and undertakings contained in the
Registration Statement.
TOUCHSTONE SERIES TRUST AND COUNTRYWIDE STRATEGIC TRUST. Touchstone Series
Trust and Countrywide Investment Trust are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act of 1940, as amended, and file reports and other
information with the Commission.
HOW TO OBTAIN INFORMATION FROM THE COMMISSION. You can inspect and copy
reports, proxy statements and other information filed with the Commission at the
Public Reference Facilities of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following regional offices: Seven World
Trade Center, 13th Floor, New York, New York 10048; and CitiCorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain copies
of this material at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
A Statement of Additional Information, dated April 3, 2000, relating to the
proposed reorganization described in this Proxy Statement/Prospectus has been
filed with the Commission and is incorporated by reference herein. You can
obtain a copy of this SAI without charge by writing to Countrywide Investment
Trust at 312 Walnut Street, Cincinnati OH 45202 or by calling 800-543-0407.
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<PAGE>
Touchstone Series Trust's current Prospectus and Statement of Additional
Information, both dated May 1, 1999, as supplemented to date, have been filed
with the Commission as part of Post-Effective Amendment No. 11 to its
Registration Statement on Form N-1A (1933 Act File No. 033-75764 and 1940 Act
File No. 811-08380) and are incorporated by reference herein. Any information in
the Post-Effective Amendment that is modified or superseded by information in
this Proxy Statement/Prospectus shall not be deemed to be incorporated by
reference in this Proxy Statement/Prospectus or to be part of this Proxy
Statement/Prospectus.
Countrywide Investment Trust's current Prospectus and Statement of
Additional Information, both dated February 1, 2000, as supplemented to date,
have been filed with the Commission as part of Post-Effective Amendment No. 70
to its Registration Statement on Form N-1A (1933 Act File No. 002-52242 and 1940
Act File No. 811-02538) and are incorporated by reference herein. Any
information in the Post-Effective Amendment that is modified or superseded by
information in this Proxy Statement/Prospectus shall not be deemed to be
incorporated by reference in this Proxy Statement/Prospectus or to be part of
this Proxy Statement/Prospectus.
---------------------------------------------
All information contained in this Proxy Statement/Prospectus relating to
Touchstone Series Trust and/or the Touchstone Bond Fund has been supplied by
Touchstone Series Trust, and all information relating to Countrywide Investment
Trust and/or Intermediate Bond Fund has been supplied by Countrywide Investment
Trust.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus in
connection with the offer contained in this Proxy Statement/Prospectus. You
should not rely on any information or representations other than those contained
in this Proxy Statement/Prospectus or in other filings made by Touchstone Series
Trust or Countrywide Investment Trust with the Commission. This Proxy
Statement/Prospectus does not constitute an offer to sell securities in any
state or other jurisdiction to any person to whom it would be unlawful to make
an offer.
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Table of Contents
INTRODUCTION...................................................................1
Reorganization of Funds....................................................1
Defined Terms..............................................................1
RECOMMENDATION OF THE BOARD OF TRUSTEES........................................2
EXPENSE INFORMATION............................................................2
Fees and Expenses..........................................................2
Notes to Fee and Expense Tables............................................3
Examples--Cost of a $10,000 Investment.....................................4
SUMMARY........................................................................5
Proposed Merger............................................................6
Comparison of Touchstone Bond Fund to Combined Bond Fund...................6
Comparison of Purchase, Redemption and Exchange Procedures.................8
Tax Consequences...........................................................9
Principal Risks of Investing in Combined Bond Fund.........................9
THE PROSPOSED REORGANIZATION..................................................11
Consideration of the Proposed Reorganization by the Touchstone Board......11
Agreement and Plan of Reorganization......................................12
Section 17(b) Exemptive Order.............................................14
Dividends and Other Distributions.........................................14
TAX CONSIDERATIONS............................................................14
CAPITALIZATION................................................................15
DESCRIPTION OF SHARES OF INTERMEDIATE BOND FUND...............................16
COMPARISON OF SHAREHOLDER RIGHTS..............................................17
General...................................................................17
Trustees..................................................................18
Voting Rights.............................................................18
Liquidation or Dissolution................................................19
Indemnification of Trustees and Officers..................................19
Shareholder Liability.....................................................20
Rights of Inspection......................................................20
VOTING INFORMATION............................................................20
Solicitation of Proxies...................................................20
Quorum....................................................................20
Voting Procedures.........................................................21
SHARE OWNERSHIP...............................................................22
Affiliated Shareholders and 5% Shareholders...............................22
Share Ownership of Trustees and Officers..................................24
Voting by Affiliated Persons..............................................24
Proxy Solicitation........................................................25
ADDITIONAL INFORMATION........................................................25
Shareholder Inquiries.....................................................25
Additional Information about Combined Bond Fund...........................26
<PAGE>
Additional Information about Intermediate Bond Fund, Countrywide
Investment Trust, Touchstone Bond Fund and Touchstone Series Trust........26
Accompanying Documents....................................................27
Information Available from the Securities and Exchange Commission.........27
Incorporation of Certain Documents by Reference...........................27
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Plan") is made as of this
15th day of February, 2000 by and between Countrywide Investment Trust
("Investment Trust") for itself and on behalf of its series, Intermediate Bond
Fund (hereinafter, the "Acquiring Fund"), and Touchstone Series Trust
("Touchstone Trust ") for itself and on behalf of its series, Touchstone Bond
Fund (hereinafter, the "Acquired Fund").
This Plan governs the proposed issuance of shares of the Acquiring Fund in
exchange for all of the assets and liabilities of the Acquired Fund.
This Plan is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code"). A reorganization (each a
"Reorganization") will comprise the transfer of all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for the Acquiring Fund's
shares and the assumption by the Acquiring Fund of certain liabilities of the
Acquired Fund, and the constructive distribution after the Closing Date (as
hereinafter defined) of such shares to the shareholders of the Acquired Fund in
liquidation of the Acquired Fund, all upon the terms and conditions hereinafter
set forth in this Plan.
WHEREAS, Investment Trust and Touchstone Trust are each (a) a Massachusetts
business trust duly organized, validly existing and in good standing under the
laws of the Commonwealth of Massachusetts, and (b) registered as an open-end
series investment company under the Investment Company Act of 1940, as amended(
the "1940 Act"); and the Acquired Fund owns securities which generally are
assets of the character in which the Acquiring Fund is permitted to invest; and
<PAGE>
WHEREAS, effective as of the Closing Date, the shares of beneficial
interest of the Acquiring Fund will consist of two separate classes, designated
as Class A shares of beneficial interest ("Class A") and Class C shares of
beneficial interest ("Class C"). The shares of each class of the Acquiring Fund
(the "Acquiring Class") that the Acquiring Fund will issue to the shareholders
of the corresponding Acquired Fund class (the "Corresponding Acquired Class")
are set forth in the Corresponding Classes Table in Schedule A; and
WHEREAS the Board of Trustees of Touchstone Trust has determined that an
exchange of all of the assets of the Acquired Fund for shares of the Acquiring
Fund and the assumption of the liabilities of the Acquired Fund by the Acquiring
Fund is in the best interests of the Acquired Fund's Shareholders (as defined
below) and that the interests of the existing shareholders of the Acquired Fund
will not be diluted as a result of this transaction; and
WHEREAS, the execution, delivery and performance of this Plan will have
been duly authorized prior to the Closing Date by all necessary action on the
part of Investment Trust and Touchstone Trust, respectively, and this Plan
constitutes a valid and binding obligation of each of the parties hereto
enforceable in accordance with its terms, subject to the requisite approval of
the shareholders of the Acquired Fund.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Transfer of Assets and Liabilities of the Acquired Fund to the
Acquiring Fund in Exchange for the Acquiring Fund's Shares;
Liquidation of the Acquired Fund.
1.1 Transfer and Exchange of Assets for Shares. Subject to the
requisite approval of the shareholders of the Acquired Fund and to the other
terms and conditions set forth herein and on the basis of the representations
and warranties contained herein, Touchstone Bond Fund series of Touchstone Trust
shall transfer to Countrywide Intermediate Bond Fund series of
2
<PAGE>
Investment Trust, and Countrywide Bond Fund series of Investment Trust shall
acquire from Touchstone Bond Fund series of Touchstone Trust, as of the Closing
Date, all of the Assets (as hereinafter defined) (a) of the Touchstone Bond Fund
in exchange for that number of Acquiring Class shares of Countrywide
Intermediate Bond Fund determined in accordance with Section 2.2 hereof and the
assumption by Countrywide Intermediate Bond Fund of the Liabilities (as
hereinafter defined) of the Touchstone Bond Fund. Such transaction shall take
place at the closing provided for in Article 3 of this Plan (the "Closing").
Touchstone Trust will (a) pay or cause to be paid to Investment Trust
any interest received on or after the Closing Date with respect to the Assets of
each Acquired Fund and (b) transfer to Investment Trust any distributions,
rights, stock dividends or other property received by Touchstone Trust after the
Closing Date as distributions on or with respect to the Assets of the Acquired
Fund. Any such interest, distributions, rights, stock dividends or other
property so paid or transferred or received directly by Investment Trust shall
be allocated by Investment Trust to the account of the Acquiring Fund and the
Acquiring Class that acquired the Assets to which such property relates.
1.2 Description of Assets to be Acquired. The assets of the Acquired
Fund to be acquired by the Acquiring Fund shall consist of all property,
including without limitation, all cash, cash equivalents, securities,
commodities and future interests, receivables (including interest or dividends
receivable), any claims or rights of action or rights to register shares under
applicable securities laws, and other property owned by the Acquired Fund and
any deferred or prepaid expenses shown as an asset on the books of the Acquired
Fund at the Effective Time (the "Assets").
3
<PAGE>
1.3 Liabilities to be Assumed. The Acquiring Fund shall assume from
the Acquired Fund all liabilities, expenses, costs, charges and reserves of such
Acquired Fund of whatever kind or nature, whether absolute, accrued, contingent
or otherwise, whether or not arising in the ordinary course of business, whether
or not determinable as of the Effective Time and whether or not specifically
referred to in this Plan; provided, however, that it is understood and agreed by
the parties hereto that the Acquired Fund will utilize its best efforts to
discharge all of its known debts, liabilities, obligations and duties (the
"Liabilities") prior to the Effective Time.
1.4 Liquidation of the Acquired Fund. As provided in Section 3.3 of
this Plan, as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), Touchstone Trust will effect the termination and
liquidation of the Acquired Fund in the manner provided in its Declaration of
Trust and in accordance with applicable law. On the Closing Date, the Acquired
Fund will distribute pro rata to its shareholders of record, determined as of
the close of business on the Valuation Date (the "Acquired Fund's
Shareholders"), Acquiring Class shares received by the Acquired Fund pursuant to
Section 1.1 in exchange for each such shareholder's interest in the
Corresponding Acquired Class evidenced by such shareholder's shares of
beneficial interest in the Acquired Fund. Such liquidation and distribution will
be accomplished by opening accounts on the books of the Acquiring Fund in the
names of the Acquired Fund's Shareholders and transferring the shares credited
to the account of the Acquired Fund on the books of the Acquiring Fund. Each
account opened shall represent the respective pro rata number of Acquiring Class
shares due each Acquired Fund Shareholder. Fractional shares of each Acquiring
Class shall be rounded to the nearest thousandth of one share. All
4
<PAGE>
issued and outstanding shares of each Acquired Fund shall simultaneously be
cancelled on the books of the Acquired Fund.
1.5 No Issuance of Certificates. The Acquiring Fund will not issue
certificates representing its Acquiring Class shares issued in connection with
the exchange described in Section 1.1 hereof.
1.6 Transfer Agent's Records. Ownership of Acquiring Class shares will
be shown on the books of Investment Trust's transfer agent. Acquiring Class
shares will be issued in the manner described in the then-effective Prospectus
and Statement of Additional Information of Investment Trust relating to
Acquiring Class shares.
1.7 Transfer Taxes. Any transfer taxes payable upon the issuance of
Acquiring Class shares in a name other than the registered holder of the shares
on the books of the Acquired Fund as of the time of issuance shall be paid by
the person to whom such shares are to be issued as a condition of such transfer.
1.8 Reporting Responsibilities of the Acquired Fund. Any reporting
obligations relating to the Acquired Fund are and shall remain the
responsibility of Touchstone Trust up to and including the Closing Date and such
later date on which the Acquired Fund is terminated.
1.9 Operating Plan. From and after the Closing Date, the rights and
privileges of the Class A and Class C shares of the Acquiring Fund shall be
determined under the provisions of Massachusetts law, Investment Trust's
Declaration of Trust, as amended from time to time, Investment Trust's Bylaws
and the operating plan adopted by Investment Trust's Board of Trustees which
establishes policies and procedures for allocating income and expenses between
the Acquiring Fund's Class A shares and Class C shares which further defines the
5
<PAGE>
relative voting rights of the Class A and Class C shares and which otherwise
delineates the relative rights, privileges and liabilities of the Class A and
Class C shares.
1.10 On or before the Closing Date, the Acquired Fund may declare
additional dividends or other distributions in order to distribute substantially
all of its investment company taxable income and net realized capital gain. Any
such distribution is intended to preserve the Acquired Fund's status as
regulated investment company pursuant to Sections 851-855 of the Code.
2. Valuation.
2.1 Net Asset Value of the Acquired Fund. The value of the net assets
to be acquired by the Acquiring Fund hereunder shall be the value of the Assets
of the Acquired Fund, less the Liabilities of the Acquired Fund, and shall be
computed at the time and in the manner set forth in Investment Trust's
then-current Prospectus and Statement of Additional Information on the business
day immediately preceding the Closing Date or such other date as the parties may
agree in writing (such time and date being hereinafter called the "Valuation
Date").
2.2 Exchange Ratio. The number of Acquiring Class shares to be issued
(including fractional shares, if any) in exchange for the Assets of the Acquired
Fund and the assumption of its Liabilities shall be such number of shares of the
corresponding Acquiring Class so that shareholders of each Corresponding
Acquired Class will own shares of the corresponding Acquiring Class equal in
aggregate net asset value to the shares of the Corresponding Acquired Class at
the Closing Date.
2.3 Documentation. All computations of value shall be made by
[Countrywide] in accordance with its regular practice as pricing agent for
Investment Trust. In addition, Touchstone Trust shall furnish to Investment
Trust within 60 days of the Closing Date a
6
<PAGE>
statement of the Acquired Fund's assets and liabilities as of the Effective
Time, which statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by the
Treasurer of Touchstone Trust. In addition, Touchstone Trust shall supply to
Investment Trust in such form as is reasonably satisfactory to Investment Trust,
a statement of earnings and profits of the Acquired Fund for federal income tax
purposes which may be carried over to the shares of each Acquiring Class as a
result of Section 381 of the Code. This statement shall be provided within 180
days of the Closing Date.
3. Closing and Closing Date.
3.1 Establishment of Closing Dates; Description of Closing. The
"Closing Date" shall be the next full business day following the Valuation Date
or such later date as the parties may agree in writing. All acts taking place at
the Closing shall be deemed to take place simultaneously as of the close of
business on the last business day immediately preceding the Closing Date (the
"Effective Time"), unless otherwise provided. The Closing shall be held on the
Closing Date at 9:00 a.m. at the principal offices of Frost & Jacobs LLP, or
such other time and/or place as the parties may agree.
3.2 Deliveries by Transfer Agent. Investors Bank & Trust Company, as
custodian for Touchstone Trust shall deliver at the Closing a certificate of an
authorized officer stating that: (a) the Acquired Fund's portfolio securities,
cash and any other assets shall have been delivered in proper form to Investment
Trust on the Closing Date; and (b) all necessary taxes, including all applicable
federal and state stock transfer stamps, if any, shall have been paid, or
provision for payment shall have been made in connection with the delivery of
portfolio securities.
7
<PAGE>
3.3 Closing of New York Stock Exchange. In the event that on the
Valuation Date: (a) the New York Stock Exchange is closed to trading or trading
thereon is restricted; or (b) trading or the reporting of trading on said
Exchange or elsewhere is disrupted so that accurate appraisal of the value of
the total net assets of the Acquired Fund is impracticable, then the Closing
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.4 List of the Acquired Fund's Shareholders. Touchstone Trust shall
deliver at the Closing a list of names and addresses of the shareholders of the
Acquired Fund and the class, number and percentage ownership of outstanding
shares owned by each such shareholder, all as of the Effective Time, certified
by the Secretary or Assistant Secretary of Touchstone Trust. Investment Trust
shall issue and deliver to said Secretary or Assistant Secretary of Touchstone
Trust a confirmation evidencing Acquiring Class shares to be credited to the
Acquired Fund as soon as practicable after the Closing, or provide other
evidence satisfactory to Touchstone Trust that such Acquiring Class shares have
been credited to the account of the Acquired Fund on the records of Investment
Trust's transfer agent maintained with respect to the Acquiring Class shares. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, receipts or other transfer documents as such
other party may reasonably request.
4. Representations and Warranties.
4.1 Touchstone Trust, on behalf of the Acquired Fund, represents and
warrants to Investment Trust, on behalf of the Acquiring Fund, as follows:
8
<PAGE>
(a) Touchstone Trust is a voluntary association with transferable
shares of the type commonly referred to as a Massachusetts business trust, duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts;
(b) Touchstone Trust is registered as an investment company
classified as a management company of the open-end type and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the 1940 Act is in full force and effect;
(c) The current prospectus and statement of additional
information of Touchstone Trust relating to the Acquired Fund conform in all
material respects to the applicable requirements of the Securities Act of 1933,
as amended (the "1933 Act"), and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading;
(d) Touchstone Trust is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Declaration of Trust or By-Laws, as each may have been amended to the date
hereof, or of any agreement, indenture, instrument, contract, lease or other
undertaking to which Touchstone Trust is a party or by which it is bound;
(e) Touchstone Trust has no material contracts or other
commitments (other than this Agreement) which, if terminated prior to the
Closing Date, would result in an additional liability of the Acquired Fund;
9
<PAGE>
(f) No litigation or administrative proceedings or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Touchstone Trust or the Acquired Fund or any of
their respective properties or assets which, if adversely determined, would
materially and adversely affect their financial condition or the conduct of
their business. Touchstone Trust knows of no facts which might form the basis
for the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially or adversely affects its business or its ability to consummate
the transactions herein contemplated.
(g) At the Closing Date, all federal and other tax returns and
reports of the Acquired Fund required by law to have been filed by such date
shall have been filed, and all federal and other taxes shall have been paid so
far as due, or provisions shall have been made for the payment thereof and, to
the best of Touchstone Trust's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
(h) Touchstone Trust's Financial Statements, copies of which have
been previously delivered to Investment Trust, fairly present the financial
positions of the Acquired Fund as of the Fund's most recent fiscal year-end and
the results of the Fund's operations and changes in the Fund's net Assets for
the periods indicated. Touchstone Trust's Financial Statements are in accordance
with generally accepted accounting principals consistently applied. For purposes
of this Agreement, the Financial Statements include the audited financial
statements of the Acquired Fund for its most recently completed fiscal year and,
if applicable, the un-audited financial statements of the Acquired Fund for its
most recently completed semi-annual period.
10
<PAGE>
(i) For each fiscal year of its operation, the Acquired Fund has
(i) met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and (ii) been treated as a separate
corporation for federal income tax purposes pursuant to Section 851(g) of the
Code, and the Acquired Fund intends to be so treated as a separate corporation
and meet such qualification requirements for its current taxable year;
(j) All issued and outstanding shares of the Acquired Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof (recognizing that, under Massachusetts law, the Acquired Fund's
Shareholders could, under certain circumstances, be held personally liable for
obligations of the Acquired Fund);
(k) At the Closing Date, Touchstone Trust, on behalf of the
Acquired Fund, will have good and marketable title to the Assets to be
transferred to the Acquiring Fund pursuant hereto and full right, power and
authority to sell, assign, transfer and deliver such Assets hereunder and, upon
delivery and payment for such Assets, the Acquiring Fund will acquire good and
marketable title thereto, subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the 1933 Act, other
than as disclosed to the Acquiring Fund.
(l) The execution, delivery and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on the
part of Touchstone Trust's Board of Trustees, and on the date hereof and on the
Closing Date this Agreement will constitute a valid and binding obligation of
Touchstone Trust on behalf of the Acquired Fund enforceable against Touchstone
Trust in accordance with its terms, subject as to enforcement to
11
<PAGE>
bankruptcy, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights and to general principles of equity;
(m) On the Closing Date, the performance of this Agreement shall
have been duly authorized by all necessary action by the shareholders of the
Acquired Fund.
(n) Since the date of Touchstone Trust's Financial Statements,
there has been no material adverse change in the financial condition, result of
operations, business, properties or Assets of the Acquired Fund.
4.2 Investment Trust, on behalf of the Acquiring Fund, represents and
warrants to Touchstone Trust on behalf of the Acquired Fund as follows:
(a) Investment Trust is a voluntary association with transferable
shares of the type commonly referred to as a Massachusetts business trust, duly
organized, validly existing in good standing under the laws of the Commonwealth
of Massachusetts;
(b) Investment Trust is registered as an investment company
classified as a management company of the open-end type and its registration
with the Commission as an investment company under the 1940 Act, is in full
force and effect;
(c) The current prospectus and statement of additional
information of Investment Trust relating to the Acquiring Fund conform in all
material respects to the applicable requirements of the 1933 Act and the 1940
Act and the rules and regulations of the Commission thereunder and do not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(d) Investment Trust is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Declaration of Trust
12
<PAGE>
or Bylaws, as each may have been amended to the date hereof, or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
Investment Trust is a party or by which it is bound;
(e) Investment Trust has no material contracts or other
commitments (other than by this Agreement) which, if terminated prior to the
Closing Date, would result in an additional liability of the Acquiring Fund;
(f) No litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Investment Trust or the Acquiring Fund or any of
their respective properties or assets which, if adversely determined, would
materially and adversely affect their financial condition or the conduct of
their business. Investment Trust knows of no facts which might form the basis
for the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially or adversely affects its business or its ability to consummate
the transactions herein contemplated;
(g) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law to have been filed by such date
shall have been filed, and all federal and other taxes shall have been paid so
far as due, or provision shall have been made for the payment thereof and, to
the best of Investment Trust's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
(h) For each fiscal year of its operation, the Acquiring Fund has
(i) met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and (ii) been treated as a separate
corporation for federal income tax
13
<PAGE>
purposes pursuant to Section 851(g) of the Code, and the Acquiring Fund intends
to be so treated as a separate corporation and meet such qualification
requirements for its current taxable year;
(i) All issued and outstanding shares of the Acquiring Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof (recognizing that, under Massachusetts law, the Acquiring Fund's
Shareholders could, under certain circumstances, be held personally liable for
obligations of the Acquiring Fund);
(j) The execution, delivery and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on the
part of the Investment Trust's Board of Trustees, and on the date hereof and on
the Closing Date this Agreement will constitute a valid and binding obligation
of Investment Trust on behalf of the Acquiring Fund enforceable against
Investment Trust in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general principles of equity.
(k) Investment Trust's Financial Statements, copies of which have
been previously delivered to Touchstone Trust, fairly present the financial
positions of the Acquiring Fund as of the Fund's most recent fiscal year-end and
the results of the Fund's operations and changes in the Fund's net Assets for
the periods indicated. Investment Trust's Financial Statements are in accordance
with generally accepted accounting principals consistently applied. For purposes
of this Agreement, the Financial Statements include the audited financial
statements of the Acquiring Fund for its most recently completed fiscal year
and, if applicable, the un-audited financial statements of the Acquiring Fund
for its most recently completed semi-annual period.
14
<PAGE>
(l) Since its most recent fiscal year-end, there has been no
material adverse change in the financial condition, business, properties or
Assets of the Acquiring Fund.
5. Conditions Precedent to Obligations of the Parties.
5.1 Representations and Warranties. All representations and warranties
of each of Investment Trust and Touchstone Trust set forth herein shall be true
and correct in all material respects as of the date hereof and, except as may be
affected by the transactions contemplated by this Plan, as of the Effective Time
with the same force and effect as if made on and as of the Effective Time.
5.2 Approval of Plan by the Acquired Fund's Shareholders. This Plan
and the transactions contemplated hereby shall have been approved by the
requisite vote of the holders of the outstanding shares of the Acquired Fund in
accordance with the provisions of the law of business trusts of the Commonwealth
of Massachusetts, the provisions of the 1940 Act and the provisions of
Touchstone Trust's Declaration of Trust and By-laws;
5.3 No Adverse Actions. On the Closing Date, no action, suit or other
proceeding shall be pending before any court or governmental agency in which it
is sought to restrain or prohibit or obtain damages or other relief in
connection with this Plan or the transactions contemplated hereby;
5.4 Consents and Approvals.
(a) All consents of other parties and all other consents, orders
and permits of federal, state and local regulatory authorities (including those
of the Commission and of state securities authorities, including "no-action"
positions of such federal or state authorities) deemed necessary by Investment
Trust or Touchstone Trust to permit consummation, in all material respects, of
the transactions contemplated hereby, shall have been obtained, except
15
<PAGE>
where failure to obtain any such consent, order or permit would not involve a
risk of a material adverse effect on the assets or properties of the Acquired
Fund or the Acquiring Fund, provided that either party hereby may for itself
waive any such conditions; and
(b) The Board of Trustees of Investment Trust and Touchstone
Trust shall have approved the terms of the Reorganization and this Plan and
shall have determined that (i) participation by the Acquiring Fund and the
Acquired Fund, respectively, in the Reorganization is in the best interests of
such funds, (ii) the interests of existing shareholders of each of the Acquiring
Fund and the Acquired Fund, respectively, will not be diluted as a result of the
Reorganization, (iii) the terms of the Reorganization, including the
consideration to be paid or received, are reasonable and fair and do not involve
overreaching on the part of any person, and (iv) the Reorganization is
consistent with the policies of Investment Trust and Touchstone Trust,
respectively, as recited in its respective registration statement and reports
filed under the 1940 Act.
5.5 Effectiveness of Registration Statement on Form N-14; Exemptive
Order. A Registration Statement on Form N-14 relating to the Acquiring Class
shares issuable hereunder, including the combined Proxy Statement of the
Acquired Fund and the Prospectus of Investment Trust (relating to the Acquiring
Class shares issuable pursuant to the terms of this Plan) constituting a part
thereof, shall have become effective under the 1933 Act and no stop order
suspending the effectiveness thereof shall have been issued and, to the best
knowledge of the parties hereto, no investigation or proceeding for that purpose
shall have been instituted or be pending, threatened or contemplated under the
1933 Act. Additionally, in response to an application for exemption to be
submitted by Investment Trust, Touchstone Trust and certain affiliated persons,
the Commission shall have issued an order exempting Investment Trust,
16
<PAGE>
Touchstone Trust and the other applicants from certain provisions of the 1940
Act or the issues raised in the application shall have otherwise been resolved
to the mutual satisfaction of the parties.
5.6 Tax Opinions. Each of Investment Trust and Touchstone Trust shall
have obtained an opinion of Frost & Jacobs LLP, legal counsel to Investment
Trust and Touchstone Trust, in form and substance reasonably satisfactory to
their respective Boards, to the effect that:
(a) The transfer of all of the Acquired Fund's Assets solely in
exchange for the Acquiring Class shares and the assumption by the Acquiring Fund
of the Liabilities of the Acquired Fund, and the distribution of such Acquiring
Class shares to the shareholders of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368 (a)(1)(C) of the Code and the
Acquiring Fund and the Acquired Fund are each a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon
the transfer of the Acquired Fund's Assets to the Acquiring Fund in exchange for
the Acquiring Class shares and the assumption by the Acquiring Fund of the
Liabilities of the Acquired Fund or upon the distribution (whether actual or
constructive) of the Acquiring Class shares to the Acquired Fund's Shareholders
in exchange for their shares of the Acquired Fund;
(c) The tax basis of the Acquired Fund's Assets acquired by the
Acquiring Fund will be the same to the Acquiring Fund as the tax basis of such
Assets to the Acquired Fund immediately prior to the Reorganization, and the
holding period of the Assets of the Acquired Fund in the hands of the Acquiring
Fund will include the period during which those assets were held by the Acquired
Fund;
17
<PAGE>
(d) No gain or loss will be recognized by the Acquiring Fund upon
the receipt of the Assets of the Acquired Fund solely in exchange for the
Acquiring Class shares and the assumption by the Acquiring Fund of the
Liabilities of the Acquired Fund;
(e) No gain or loss will be recognized by shareholders of the
Acquired Fund upon the distribution of the Acquiring Class shares to such
shareholders, provided such shareholders receive solely such Acquiring Class
shares (including fractional shares) in exchange for their Corresponding
Acquired Class shares; and
(f) The aggregate tax basis for the Acquiring Class shares,
including any fractional shares, received by each shareholder of the Acquired
Fund pursuant to the Reorganization will be the same as the aggregate tax basis
of the Corresponding Acquired Class shares held by such shareholder immediately
prior to the Reorganization, and the holding period of the Acquiring Class
shares, including any fractional shares, to be received by each shareholder of
the Acquired Fund will include the period during which the Corresponding
Acquired Class shares exchanged therefor were held by such shareholder (provided
that the Corresponding Acquired Class shares were held as a capital asset on the
date of the Reorganization).
6. Expenses.
The expenses incurred in connection with the entering into and
carrying out the provisions of this Plan will be borne and paid by Touchstone
Advisors, Inc., and not by the Acquiring Fund or the Acquired Fund.
7. Termination.
7.1 Mutual Agreement. This Plan may be terminated by the mutual
agreement of Investment Trust and Touchstone Trust.
18
<PAGE>
7.2 Material Breach. In addition, either Investment Trust or
Touchstone Trust may, at its option, terminate this Plan at or prior to the
Closing Date on account of a material breach by the other of any agreement
contained herein to be performed by such other party at or prior to the Closing
Date.
7.3 Failure of Condition Precedent. In addition, either Investment
Trust or Touchstone Trust may, at its option, terminate this Plan at or prior to
the Closing Date on account of a condition herein expressed to be precedent to
the obligation of such party which has not been met and which appears cannot
reasonably, or will not, be met.
7.4 Effects of Termination. In the event of any such termination,
there shall be no liability for damage on the part of Investment Trust or
Touchstone Trust or their respective Trustees or officers.
8. Limitation on Liabilities. The obligations of Investment Trust,
Touchstone Trust and each Fund shall not bind any of the trustees, shareholders,
nominees, officers, agents, or employees of Investment Trust or Touchstone Trust
personally, but shall bind only the Assets and property of the Acquiring Fund
and the Acquired Fund. The execution and delivery of this Plan by the parties'
officers shall not be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the Assets
and the property of the Acquiring Fund or the Acquired Fund, as appropriate.
19
<PAGE>
9. Amendment.
This Plan may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties hereto; provided, however,
that following the meeting of the shareholders of the Acquired Fund described in
Section 5.2 of this Plan, no such amendment may have the effect of changing the
provisions for determining the number of shares of each corresponding Acquiring
Class shares to be issued to an Acquired Fund's Shareholders under this Plan to
the detriment of such shareholders without their further approval.
10. Miscellaneous.
10.1 Headings. The section headings contained in this Plan will have
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
10.2 Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, each of the parties hereto has caused this Plan to be
executed on its behalf by its duly authorized officer as of the day and year
first written above.
TOUCHSTONE SERIES TRUST
By:/s/ Jill T. McGruder
---------------------------------
Jill T. McGruder, President
COUNTRYWIDE INVESTMENT TRUST
By:/s/ Robert H. Leshner
---------------------------------
Robert H. Leshner, President
20
<PAGE>
TOUCHSTONE ADVISORS, INC.
(SOLELY TO EVIDENCE ITS CONCURRENCE
WITH SECTION 6 HEREOF)
By:/s/ Jill T. McGruder
---------------------------------
Jill T. McGruder, President
21
<PAGE>
SCHEDULE A
I. CORRESPONDING CLASSES TABLE
Acquiring Fund Classes Corresponding Acquired Fund Classes
---------------------- -----------------------------------
Intermediate Bond Fund Touchstone Bond Fund
A Shares A Shares
C Shares C Shares
22
<PAGE>
APPENDIX B
INVESTING WITH COUNTRYWIDE
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well
requires a plan. We recommend that you meet with your financial advisor to plan
a strategy that will best meet your financial goals.
OPENING AN ACCOUNT
YOU CAN CONTACT YOUR FINANCIAL ADVISOR TO PURCHASE SHARES OF THE FUND. You may
also purchase shares of the Fund directly from Touchstone Securities, Inc. (the
"Distributor"). In any event, you must complete the Investment Application
included in this Prospectus. You may also obtain an Investment Application from
the Distributor or your financial advisor.
Investor Alert: The Distributor may choose to refuse any purchase order.
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required to
purchase shares as well as to learn about the various ways you can purchase your
shares
Initial Additional
Investments Investment
----------- ----------
Regular Account $ 1,000 None
---------------
Accounts for Countrywide Affiliates $ 50 None
-----------------------------------
Retirement Plan Account or Custodial account under $ 250 None
a Uniform Gifts/Transfers to Minors Act ("UGTMA)"
- --------------------------------------------------
Investments through the Automatic Investment Plan $ 50 $ 50
-------------------------------------------------
o Investor Alert: The Distributor could change these initial and
additional investment minimums at any time.
PRICING OF FUND SHARES
The Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the New York
Stock Exchange (NYSE) is open. The Fund calculates its NAV per share, generally
using market prices, by dividing the total value of its net assets by the number
of shares outstanding. Shares are purchased at the next offering price
determined after your purchase or sale order is received in proper form by
Countrywide Fund Services, Inc. (the "Transfer Agent"). The offering price is
the NAV plus a sales charge, if applicable.
<PAGE>
The Fund's investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values. Some specific
pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost which the Board of
Trustees has determined represents fair value.
o Securities mainly traded on a U.S. exchange are valued at the last
sale price on that exchange or, if no sales occurred during the day,
at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However,
if an event which may change the value of a security occurs after the
time that the closing value on the non-U.S. exchange was determined,
the Board of Trustees might decide to value the security based on fair
value. This may cause the value of the security on the books of the
Fund to be significantly different from the closing value on the
non-U.S. exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when a Fund does not
price its shares, a Fund's NAV may change on days when shareholders
will not be able to buy or sell shares.
CHOOSING A CLASS OF SHARES
The Intermediate Bond Fund offers Class A shares and Class C shares. Each class
of shares has different sales charges and distribution fees. The amount of sales
charges and distribution fees you pay will depend on which class of shares you
decide to purchase.
CLASS A SHARES OF INTERMEDIATE BOND FUND AND SHARES OF INTERMEDIATE TERM
GOVERNMENT INCOME FUND
The offering price of Class A shares of the Fund is equal to its NAV plus a
front-end sales charge that you pay when you buy your shares. The front-end
sales charge is generally deducted from the amount of your investment.
The following table shows the amount of front-end sales charge you will pay on
purchases of Class A shares of the Intermediate Bond Fund as a percentage of (1)
offering price and (2) the net amount invested after the charge has been
subtracted. Note that the front-end sales charge gets lower as your investment
amount gets larger.
Sales Charge Sales Charge
as % of as % of
Amount of Your Investment Offering Price Net Amount Invested
- ------------------------- -------------- -------------------
Under $50,000 4.75% 4.99%
$50,000 but less than $100,000 4.50% 4.72%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.95% 3.04%
<PAGE>
$500,000 but less than $1 million 2.25% 2.31%
$1 million or more 0.00% 0.00%
There is no front-end sales charge if you invest $1 million or more in the Fund.
This includes large total purchases made through programs such as Aggregation,
Concurrent Purchases, Letters of Intent and Rights of Accumulation. These
programs are described more fully in the Statement of Additional Information
("SAI"). In addition, there is no front-end sales charge on purchases by certain
persons related to the Fund or its service providers and certain other persons
listed in the SAI.
If you redeem shares that you purchased as part of the $1 million purchase
within one year, you will pay a contingent deferred sales charge (a sales charge
you pay when you redeem your shares) of 1% on the shares redeemed.
The Intermediate Bond Fund has adopted a distribution plan under Rule 12b-1 of
the Investment Company Act of 1940, as amended (the "1940 Act") for its Class A
shares. These plans allow the Intermediate Bond Fund to pay distribution fees
for the sale and distribution of its Class A shares. Under the plan,
Intermediate Bond Fund pays an annual fee of up to 0.35% of its average daily
net assets that are attributable to its Class A shares. Touchstone Advisors has
agreed to waive a portion of the maximum Rule 12b-1 distribution fee assessed on
Class A shares of Intermediate Bond Fund from May 1, 2000 through October 31,
2002, such that the effective maximum Rule 12b-1 distribution fee on
Intermediate Bond Class A shares during that time period will be equal to 0.25%.
Because these fees are paid out of International Bond Fund's assets on an
ongoing basis, these fees will increase the cost of your investment.
CLASS C SHARES OF INTERMEDIATE BOND FUND
The offering price of Class C shares of the Intermediate Bond Fund is equal to
its NAV plus a 1.25% front-end sales charge that you pay when you buy your
shares. The front-end sales charge is generally deducted from the amount of your
investment. A contingent deferred sales charge of 1.00% of the offering price
will be charged on Class C shares redeemed within one year after you purchased
them.
No contingent deferred sales charge is applied if:
o The shares which you redeem were acquired through the reinvestment of
dividends or capital gains distributions
o The amount redeemed resulted from increases in the value of the
account above the amount of the total purchase payments
When we determine whether a contingent deferred sales charge is payable on a
redemption, we assume that:
o The redemption is made first from amounts free of any contingent
deferred sales charge; then
o From the earliest purchase payment(s) that remain invested in the Fund
<PAGE>
When we determine if amounts are available for redemption free of any contingent
deferred sales charge, we:
o Add together all of your original purchase payments
o Subtract any amounts previously withdrawn
o Check if there is any remaining amount free of any contingent deferred
sales charge that can be applied to the total of the current value of
the shares you have asked to redeem
The Intermediate Bond Fund has adopted a distribution plan under Rule 12b-1 of
the 1940 Act for its Class C shares. This plan allows the Fund to pay
distribution and other fees for the sale and distribution of its Class C shares
and for services provided to holders of Class C shares. Under the plan, the Fund
pays an annual fee of up to 1.00% of its average daily net assets that are
attributable to Class C shares. Because these fees are paid out of the Fund's
assets on an ongoing basis, these fees will increase the cost of your investment
and over time may cost you more than paying other types of sales charges.
PURCHASING YOUR SHARES
For information about how to purchase shares, telephone the Transfer Agent
(Nationwide call toll-free 800-543-0407; in Cincinnati call 629-2050).
You can invest in the Funds in the following ways:
OPENING AN ACCOUNT
o Please make your check (in U.S. dollars) payable to the
Fund.
o Send your check with the completed account application
to Countrywide Fund Services, Inc., P.O. Box 5354,
Cincinnati, Ohio 45201-5354 Your application will be
processed subject to your check clearing.
o You may also open an account through your financial
advisor. We price direct purchases based upon the next
determined public offering price (NAV plus any
applicable sales load) after your order is received.
Direct purchase orders received by the Transfer Agent
by 4:00 p.m., Eastern time, are processed at that day's
public offering price. Direct investments received by
the Transfer Agent after 4:00 p.m., Eastern time, are
processed at the public offering price next determined
on the following business day. Purchase orders received
from financial advisors before 4:00 p.m., Eastern time,
and transmitted to the Distributor by 5:00 p.m.,
Eastern time, are processed at that day's public
offering price. Purchase orders received from financial
advisors after 5:00 p.m., Eastern time, are processed
at the public offering price next determined on the
following business day.
BY MAIL OR
THROUGH YOUR
FINANCIAL ADVISOR
- --------------------------------------------------------------------------------
<PAGE>
o You may exchange shares of the Funds for shares of the
same class of another Countrywide Fund at NAV. You may
also exchange shares of the Funds for shares of any
money market fund.
o You do not have to pay any exchange fee for these
exchanges.
o You should review the disclosure provided in the
Prospectus relating to the exchanged-for shares
carefully before making an exchange of your Fund
shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may invest in the Funds through various retirement
plans. The Funds' shares are designed for use with
certain types of tax qualified retirement plans
including defined benefit and defined contribution
plans
THROUGH o For further information about any of the plans,
RETIREMENT agreements, applications and annual fees, contact the
PLANS Transfer Agent or your financial advisor
- --------------------------------------------------------------------------------
ADDING TO YOUR ACCOUNT
o Complete the investment form provided at the bottom of
a recent account statement.
o Make your check payable to the applicable Fund.
o Write your account number and asset allocation model
number, if applicable, on the check.
o Either: (1) Mail the check with the investment form in
the envelope provided with your account statement; or
(2) Mail your check directly to your financial advisor
at the address printed on your account statement. Your
financial advisor is responsible for forwarding payment
promptly to the Distributor.
BY CHECK
- --------------------------------------------------------------------------------
o Specify your name and account number. If the Transfer
Agent receives a properly executed wire by 4:00 p.m.
Eastern time on a day when the NYSE is open for regular
trading, your order will be processed at that day's
public offering price.
BY WIRE
- --------------------------------------------------------------------------------
o You may exchange your shares by calling the Transfer
Agent.
o You do not have to pay any exchange fee for these
exchanges.
o You should review the disclosure provided in the
Prospectus relating to the exchanged-for shares
carefully before making an exchange of your Fund
shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
<PAGE>
o You may add to your account in the funds through
THROUGH various retirement plans. For further information,
RETIREMENT contact the Transfer Agent or your financial advisor.
PLANS
- --------------------------------------------------------------------------------
INFORMATION ABOUT WIRE TRANSFERS.
You may make additional purchases in the Funds directly by wire transfers.
Contact your bank and ask it to wire federal funds to the Transfer Agent. Banks
may charge a fee for handling wire transfers. You should contact the Transfer
Agent or your financial advisor for further instructions.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
MORE INFORMATION ABOUT RETIREMENT PLANS.
Retirement Plans may include the following:
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE) IRAs
o Spousal IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Education Individual Retirement Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b) Tax Sheltered Accounts that employ as custodian a bank
acceptable to the Distributor
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401K plans, profit sharing plans
and money purchase plans)
o 457 plans
<PAGE>
AUTOMATIC INVESTMENT OPTIONS
The various ways that you can invest in the Fund are outlined below. The
Transfer Agent does not charge any fees for these services.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments of $50 or
more in the Fund to be processed electronically from a checking or savings
account. You will need to complete the appropriate section in the Investment
Application to do this. For further details about this service call the Transfer
Agent at 1-800-543-0407; in Cincinnati, 629-2050.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or in another Fund within
the same class of shares without a fee or sales charge. Dividends and capital
gains will be reinvested in the Fund that pays them, unless you indicate
otherwise on your account application. You may also choose to have your
dividends or capital gains paid to you in cash.
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security
checks, private payroll checks, pension pay outs or any other pre-authorized
government or private recurring payments in the Fund. This occurs on a monthly
basis and the minimum investment is $50.
DOLLAR COST AVERAGING. Our Dollar Cost Averaging program allows you to diversify
your investments by investing the same amount on a regular basis. You can set up
periodic automatic transfers of at least $50 from one Fund to any other. The
applicable sales charge, if any, will be assessed.
PROCESSING ORGANIZATIONS. You may also purchase shares of the Fund through a
"processing organization," (e.g., a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Some of the Funds have authorized certain processing organizations to
receive purchase and sales orders on their behalf. Before investing in the Funds
through a processing organization, you should read any materials provided by the
processing organization in conjunction with this Prospectus.
When shares are purchased this way, there may be various differences. The
processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on the Funds'
behalf
The Transfer Agent considers a purchase or sales order as received when an
authorized processing organization, or its authorized designee, receives the
order in proper form. These orders will be priced based on the Fund's NAV next
computed after such order is received in proper form.
<PAGE>
Shares held through a processing organization may be transferred into your name
following procedures established by your processing organization and the
Transfer Agent. Certain processing organizations may receive compensation from
the Funds, the Distributor, the Advisor or their affiliates.
SELLING YOUR SHARES
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is received in proper form before the close of regular
trading on the NYSE, you will receive a price based on that day's NAV for the
shares you sell. Otherwise, the price you receive will be based on the NAV that
is next calculated.
THROUGH o You can sell or exchange your shares over the
RETIREMENT telephone, unless you have specifically declined this
PLANS option. If you do not wish to have this ability, you
must mark the appropriate section of the Investment
Application. You may only sell shares over the
telephone if the amount is less than $25,000.
o To sell your Fund shares by telephone, call the
Transfer Agent, Nationwide at 800-543-0407; in
Cincinnati, 629-2050.
o IRA accounts cannot be sold by telephone
BY TELEPHONE
- --------------------------------------------------------------------------------
o Write to the Transfer Agent.
o Indicate the number of shares or dollar amount to be
sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your
Investment Application
BY MAIL
- --------------------------------------------------------------------------------
o Complete the appropriate information on the Investment
Application.
o If your proceeds are $1,000 or more, you may request
that the Transfer Agent wire them to your bank account.
o You will be charged a fee of $8.00.
o Redemption proceeds will only be wired to a commercial
bank or brokerage firm in the United States.
o Your redemption proceeds may be deposited without a
charge directly into your bank account through an ACH
transaction. Contact the Transfer Agent for more
information.
BY WIRE
- --------------------------------------------------------------------------------
o You may also sell shares by contacting your financial
advisor, who may charge you a fee for this service.
Shares held in street name must be sold through your
financial advisor or, if applicable, the processing
organization.
o Your financial advisor is responsible for making sure
that sale requests are transmitted to the Transfer
Agent in proper form in a timely manner.
<PAGE>
THROUGH
YOUR FINANCIAL
ADVISOR
- --------------------------------------------------------------------------------
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
Selling your shares may cause you to incur a taxable gain or loss.
o Investor Alert: Unless otherwise specified, proceeds will be sent to
the record owner at the address shown on the Transfer Agent's records.
SIGNATURE GUARANTEES. Some circumstances require that the request for the sale
of shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public. Some circumstances requiring a signature guarantee
include:
o Proceeds from the sale of shares that exceed $25,000
o Proceeds to be paid when the name or the address on the account has
been changed within 30 days of your sale request.
TELEPHONE SALES. If we receive your share sale request before 4:00 p.m., Eastern
time on a day when the NYSE is open for regular trading, the sale of your shares
will be processed at the next determined NAV on that day. Otherwise it will
occur on the next business day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to the Transfer Agent.
In order to protect your investment assets, the Transfer Agent will only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable, in those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case it may be liable for any losses due
to unauthorized or fraudulent instructions. Some of these procedures include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown on the
Trust's records
o Mailing checks only to the account address shown on the Trust's
records
o Directing wires only to the bank account shown on the Trust's records
o Providing written confirmation for transactions requested by telephone
o Tape recording instructions received by telephone
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. You may elect to receive or send to a third party
monthly or quarterly withdrawals of $50 or more if your account value is at
least $5,000. There is no special fee for this service and no minimum amount is
required for retirement plans.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
Involuntary sales may result in the sale of your Fund shares at a loss or may
result in taxable investment gains.
REINSTATEMENT PRIVILEGE. You may reinvest proceeds from a sale of Fund shares or
a dividend or capital gain distribution on Fund shares without a sales charge in
any of the Funds. You may do so by sending a written request and a check to the
Transfer Agent within 90 days after the date of the sale, dividend or
distribution. Reinvestment will be at the next NAV calculated after the Transfer
Agent receives your request.
LOW ACCOUNT BALANCES
The Transfer Agent may sell your Fund shares if your balance falls below the
minimum required for your account as a result of redemptions that you have made
(as opposed to a reduction from market changes). This involuntary sale does not
apply to retirement accounts or custodian accounts under the Uniform Gift to
Minors Act (UGTMA). The Transfer Agent will let you know that your shares are
about to be sold and you will have 30 days to increase your account balance to
the minimum amount.
RECEIVING SALE PROCEEDS
The Transfer Agent will forward the proceeds of your sale to you (or to your
financial advisor) within 7 business days (normally within 3 business days) from
the date of a proper request.
PROCEEDS SENT TO FINANCIAL ADVISORS
Proceeds which are sent to your financial advisor will not usually be
re-invested for you unless you provide specific instructions to do so.
Therefore, the financial advisor may benefit from the use of your money.
FUND SHARES PURCHASED BY CHECK
If you purchase Fund shares by personal check, the proceeds of a sale of those
shares will not be sent to you until the check has cleared, which may take up to
15 days. If you may need your
<PAGE>
money more quickly, you should purchase shares by federal funds, bank wire, or
with a certified or cashier's check.
It is possible that the payments of your sale proceeds could be postponed or
your right to sell your shares could be suspended during certain circumstances.
These circumstances can occur:
o When the NYSE is closed for other than customary weekends and holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a Fund Sub-Advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of its net assets
o During any other time when the SEC, by order, permits.
<PAGE>
Touchstone Family Of Funds
PROSPECTUS
May 1, 1999
o Touchstone Emerging Growth Fund
o Touchstone International Equity Fund
o Touchstone Income Opportunity Fund
o Touchstone Value Plus Fund
o Touchstone Growth & Income Fund
o Touchstone Balanced Fund
o Touchstone Bond Fund
o Touchstone Standby Income Fund
Neither the Securities and Exchange Commission nor any state securities
commission has approved any Fund's shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
<PAGE>
2
Touchstone Family of Funds
The Touchstone Family of Funds is a group of mutual funds. Each Fund has a
different investment goal and risk level and is a part of the Touchstone Series
Trust (the Trust).
<PAGE>
3
Table Of Contents
Table Of Contents
Page
Touchstone Emerging Growth Fund......................... 4
Touchstone International Equity Fund.................... 9
Touchstone Income Opportunity Fund...................... 13
Touchstone Value Plus Fund.............................. 17
Touchstone Growth & Income Fund......................... 20
Touchstone Balanced Fund................................ 24
Touchstone Bond Fund.................................... 28
Touchstone Standby Income Fund.......................... 32
Investment Strategies And Risks......................... 36
The Funds' Management................................... 42
Investing With Touchstone............................... 46
Distributions And Taxes................................. 58
Financial Highlights.................................... 59
For More Information.................................... 64
[ICON] Touchstone Family of Funds
<PAGE>
4
Touchstone Emerging Growth Fund
Touchstone Emerging Growth Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Emerging Growth Fund seeks to increase the value of Fund shares as a primary
goal and to earn income as a secondary goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in the common stocks
of smaller, rapidly growing (emerging growth) companies. In selecting its
investments, the portfolio managers focus on those companies they believe will
grow faster than the U.S. economy in general. They also choose companies they
believe are priced lower in the market than their true value.
When the portfolio managers believe the following securities offer a good
potential for capital growth or income, up to 35% of the Fund's assets may be
invested in:
o Larger company stocks
o Preferred stocks
o Convertible bonds
o Other debt securities, including:
collateralized mortgage obligations (CMOs), stripped U.S.
government securities (Strips) and mortgage-related securities,
all of which will be rated investment grade
The Fund may also invest in:
o Securities of foreign companies traded mainly outside the U.S.
(up to 20%)
o American Depositary Receipts (ADRs) (up to 20%)
o Emerging market securities (up to 10%)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o Because securities of small cap companies may be more thinly
traded and may have more frequent and larger price changes than
securities of larger cap companies
o If the market continually values the stocks in the Fund's
portfolio lower than the portfolio managers believe they should
be valued
[ICON] Touchstone Family of Funds
<PAGE>
5
Touchstone Emerging Growth Fund
o If the stocks in the Fund's portfolio are not undervalued as
expected
o If the companies in which the Fund invests do not grow as
rapidly as expected
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because CMOs, Strips and mortgage-related securities may lose
more value due to changes in interest rates than other debt
securities and are subject to prepayment
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The following bar chart indicates the risks of investing in the Emerging Growth
Fund. It shows changes in the performance of the Fund's Class A shares from year
to year since the Fund started. The chart does not reflect any sales charges.
Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
[ICON] Touchstone Family of Funds
<PAGE>
6
Touchstone Emerging Growth Fund
EMERGING GROWTH FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 22.56%
1996 10.56%
1997 32.20%
1998 2.57%
During the period shown in the bar chart, the highest quarterly return was
20.90% (for the quarter ended December 31, 1998) and the lowest quarterly
return was -19.30% (for the quarter ended September 30, 1998).
The following table shows how the Fund's average annual returns for the periods
shown compare to those of the Russell 2000 Index and to the Wiesenberger Small
Cap -- MF. The Russell 2000 Index is a widely recognized unmanaged index of
small cap stock performance. The Wiesenberger Small Cap -- MF is a composite
index of the annual returns of mutual funds that have an investment style
similar to that of the Emerging Growth Fund. The table shows the effect of the
Class A sales charge.
For the periods ended December 31, 1998
- --------------------------------------------------------------------------------
Past 12 Since
Months Fund Started
Emerging Growth Fund -- Class A -3.3% 14.5%
Emerging Growth Fund -- Class C 2.0% 15.1%
Russell 2000 Index -2.5% 14.1%
Wiesenberger Small Cap -- MF -0.4% 16.4%
[ICON] Touchstone Family of Funds
<PAGE>
7
Touchstone Emerging Growth Fund
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 3.15% 3.15%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 4.20% 4.95%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 2.70% 2.70%
- --------------------------------------------------------------------------------
Net Expenses 1.50% 2.25%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
The following example should help you compare the cost of investing in the
Emerging Growth Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same.
[ICON] Touchstone Family of Funds
<PAGE>
8
Touchstone Emerging Growth Fund
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
Class A Shares Class C Shares
1 Year $ 719 $ 228
- --------------------------------------------------------------------------------
3 Years $1,545 $1,246
- --------------------------------------------------------------------------------
5 Years $2,384 $2,265
- --------------------------------------------------------------------------------
10 Years $4,542 $4,816
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using
the Total Fund Operating Expenses before the limits agreed to
under the Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
<PAGE>
9
Touchstone International Equity Fund
Touchstone International Equity Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The International Equity Fund seeks to increase the value of Fund shares over
the long-term.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 80% of total assets) in equity securities
of foreign companies and will invest in at least three countries outside the
United States. A large portion of those non-U.S. equity securities may be issued
by companies active in emerging market countries (up to 40% of total assets).
The Fund may also invest in certain debt securities issued by U.S. and non-U.S.
entities (up to 20%), including non-investment grade debt securities rated as
low as B.
The portfolio manager uses a growth-oriented style to choose investments for the
Fund. This includes the use of both qualitative and quantitative analysis to
identify markets and companies that offer solid growth prospects at reasonable
prices. The portfolio manager's investment process seeks to add value by making
good regional and country allocations as well as by selecting individual stocks
within a region.
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
o If the stocks in the Fund's portfolio do not grow over the long
term as expected
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because issuers of non-investment grade securities held by the
Fund are more likely to be unable to make timely payments of
interest or principal
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
<PAGE>
10
Touchstone International Equity Fund
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the International
Equity Fund. It shows changes in the performance of the Fund's Class A shares
from year to year since the Fund started. The chart does not reflect any sales
charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
INTERNATIONAL EQUITY FUND --
CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 5.29%
1996 11.61%
1997 15.57%
1998 19.94%
During the period shown in the bar chart, the highest quarterly return
was 16.83% (for the quarter ended March 31, 1998) and the lowest
quarterly return was -13.67 (for the quarter ended September 30, 1998).
[ICON] Touchstone Family of Funds
<PAGE>
11
Touchstone International Equity Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the MSCI EAFE Index and the Wiesenberger Non-US Equity
- -- MF index. The MSCI EAFE Index is a Morgan Stanley index that includes stocks
traded on 16 exchanges in Europe, Australia and the Far East. The Wiesenberger
Non-US Equity -- MF is a composite index of the annual returns of mutual funds
that have an investment style similar to that of the International Equity Fund.
The table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
International Equity Fund -- Class A 13.0% 8.3%
- --------------------------------------------------------------------------------
International Equity Fund -- Class C 19.0% 9.0%
- --------------------------------------------------------------------------------
MSCI EAFE Index 20.3% 9.0%
- --------------------------------------------------------------------------------
Wiesenberger Non-US Equity -- MF 6.1% 3.9%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.95% 0.95%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 2.63% 2.63%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.83% 4.58%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement3 2.23% 2.23%
- --------------------------------------------------------------------------------
Net Expenses 1.60% 2.35%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
<PAGE>
12
Touchstone International Equity Fund
The following example should help you compare the cost of investing in the
International Equity Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 728 $ 238
- --------------------------------------------------------------------------------
3 Years $1,484 $1,182
- --------------------------------------------------------------------------------
5 Years $2,257 $2,135
- --------------------------------------------------------------------------------
10 Years $4,270 $4,550
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
<PAGE>
13
Touchstone Income Opportunity Fund
Touchstone Income Opportunity Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Income Opportunity Fund seeks to achieve a high level of current income as
its main goal. The Fund may also seek to increase the value of Fund shares, if
consistent with its main goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily in debt securities. These debt securities will
generally be more risky non-investment grade corporate and government
securities (up to 100% of total assets). Non-investment grade debt securities
are often referred to as "junk bonds" and are considered speculative.
The Fund's investments may include:
o Securities of foreign companies (up to 100%), but only up to 30%
of its assets in securities of foreign companies that are
denominated in a currency other than the U.S. dollar
o Debt securities that are emerging market securities (up to 65%)
o Mortgage-related securities, loans and loan participations
o Currency futures and option contracts
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because issuers of non-investment grade securities held by the
Fund are more likely to be unable to make timely payments of
interest or principal
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
o Because mortgage-related securities may lose more value due to
changes in interest rates than other debt securities and are
subject to prepayments
o Because loans and loan participations may be more difficult to
sell than other investments and subject to the risk of borrower
default
o If the stock market as a whole goes down
[ICON] Touchstone Family of Funds
<PAGE>
14
Touchstone Income Opportunity Fund
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The following bar chart indicates the risks of investing in the Income
Opportunity Fund. It shows changes in the performance of the Fund's Class A
shares from year to year since the Fund started. The chart does not reflect any
sales charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
[ICON] Touchstone Family of Funds
<PAGE>
15
Touchstone Income Opportunity Fund
INCOME OPPORTUNITY FUND --
CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 23.19%
1996 26.66%
1997 9.49%
1998 -13.77%
During the period shown in the bar chart, the highest quarterly return was
16.15% (for the quarter ended June 30, 1995) and the lowest quarterly
return was -16.50% (for the quarter ended September 30, 1998).
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Corporate Bond Index, the
Wiesenberger Corp -- High Yield -- MF, the Wiesenberger Global Income -- MF and
the Wiesenberger Emerging Market Income -- MF. The Lehman Brothers Corporate
Bond Index is based on all publicly issued intermediate fixed-rate,
non-convertible investment grade domestic corporate debt. The Wiesenberger Corp
- - -- High Yield -- MF index, the Wiesenberger Global Income -- MF index and the
Wiesenberger Emerging Market Income -- MF index are composite indexes of the
annual returns of mutual funds that have an investment style similar to the
Income Opportunity Fund. The table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Income Opportunity Fund-- Class A -17.8% 6.4%
- --------------------------------------------------------------------------------
Income Opportunity Fund-- Class C -14.5% 6.8%
- --------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index 8.5% 10.3%
- --------------------------------------------------------------------------------
Wiesenberger Corp-- High Yield-- MF -0.7% 9.3%
- --------------------------------------------------------------------------------
Wiesenberger Global Income-- MF 4.8% 7.5%
- --------------------------------------------------------------------------------
Wiesenberger Emerging Market Income-- MF -22.8% 5.8%
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
16
Touchstone Income Opportunity Fund
The Fund's Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.65% 0.65%
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 2.43% 2.43%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.33% 4.08%
- --------------------------------------------------------------------------------
Fee Waiver And/or Expense Reimbursement3 2.13% 2.13%
- --------------------------------------------------------------------------------
Net Expenses 1.20% 1.95%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
The following example should help you compare the cost of investing in the
Income Opportunity Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 591 $ 198
- --------------------------------------------------------------------------------
3 Years $1,261 $1,047
- --------------------------------------------------------------------------------
5 Years $1,953 $1,911
- --------------------------------------------------------------------------------
10 Years $3,787 $4,142
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
<PAGE>
17
Touchstone Value Plus Fund
Touchstone Value Plus Fund
The Fund's Investment Goal
The Value Plus Fund seeks to increase the value of Fund shares over the
long-term.
As with any mutual fund, there is no guarantee that it will achieve its goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in common stock of
larger companies that the portfolio manager believes are undervalued. In
choosing undervalued stocks, the portfolio manager looks for companies that have
proven management and unique features or advantages but are believed to be
priced lower than their true value. These companies may not pay dividends. The
Fund may also invest in common stocks of rapidly growing companies to enhance
the Fund's return and vary its investments to avoid having too much of the
Fund's assets subject to risks specific to undervalued stocks.
Approximately 70% of total assets will generally be invested in large cap
companies and approximately 30% will generally be invested in mid cap companies.
The Fund may invest in:
o Preferred stocks
o Investment grade debt securities
o Convertible securities
In addition, the Fund may invest in (up to 10%):
o Cash equivalent investments
o Short-term debt securities
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the market continually values the stocks in the Fund's
portfolio lower than the portfolio manager believes they should
be valued
o If the stocks in the Fund's portfolio are not undervalued as
expected
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
<PAGE>
18
Touchstone Value Plus Fund
Who May Want to Invest
This Fund will be most appealing to you if you are a moderate or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation may be important to you, but you may not want to take extreme risks
in order to achieve it. This Fund's approach may be most appropriate for you if
you are many years from retirement and are comfortable with a moderate level of
risk.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Value Plus Fund started on May 1, 1998,
there is no performance information included in this Prospectus.
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 1.14% 1.14%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.14% 2.89%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 0.84% 0.84%
- --------------------------------------------------------------------------------
Net Expenses 1.30% 2.05%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
<PAGE>
19
Touchstone Value Plus Fund
The following examples should help you compare the cost of investing in the
Value Plus Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods indicated and
then sell all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 700 $ 208
- --------------------------------------------------------------------------------
3 Years $1,130 $ 816
- --------------------------------------------------------------------------------
5 Years $1,585 $1,449
- --------------------------------------------------------------------------------
10 Years $2,843 $3,154
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year period is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
<PAGE>
20
Touchstone Growth & Income Fund
Touchstone Growth & Income Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Growth & Income Fund seeks to increase the value of Fund shares over the
long-term, while receiving dividend income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in dividend-paying
common stocks, preferred stocks and convertible securities in a variety of
industries. The portfolio manager may choose to purchase securities which do not
pay dividends (up to 35%) but which are expected to increase in value or produce
high income payments in the future.
In choosing securities for the Fund, the portfolio manager will follow a value-
oriented style, generally buying securities with yields that are at least 20%
higher than the average yield of companies in the S&P 500. The portfolio manager
focuses on investing in companies that have a market capitalization of at least
$1 billion, but may invest in companies of any size.
The Fund may also invest up to 20% of its total assets in debt securities -- and
within this 20% limitation, the Fund may invest the full 20% in investment grade
non-convertible debt securities, the full 20% in convertible debt securities
rated as low as the highest level of non-investment grade or up to 5% in
non-convertible non-investment grade debt securities.
The Fund may also invest in:
o Securities of foreign companies including American Depository
Receipts (ADRs) (up to 20%)
o Real estate investment trusts (REITs) (up to 10%)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If any of the stocks in the Fund's portfolio do not increase in
value as expected
o If earnings of companies the Fund invests in are not achieved and
income available for interest or dividend payments is reduced
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because investments in REITs are more sensitive to changes in
interest rates and other factors that affect real estate values
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
[ICON] Touchstone Family of Funds
<PAGE>
21
Touchstone Growth & Income Fund
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund will be most appealing to you if you are a moderate or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation of your investment capital may be important to you, however, you
may be uncomfortable taking extreme risk in order to achieve it. This Fund's
approach may be most appropriate for you if you are many years from retirement
and are comfortable with a moderate level of risk.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Growth &
Income Fund. It shows changes in the performance of the Fund's Class A shares
from year to year since the Fund started. The chart does not reflect any sales
charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
GROWTH & INCOME FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 35.14%
1996 16.95%
1997 20.70%
1998 6.87%
During the period shown in the bar chart, the highest quarterly return was
12.42% (for the quarter ended March 31, 1998) and the lowest quarterly
return was -12.72% (for the quarter ended September 30, 1998).
[ICON] Touchstone Family of Funds
<PAGE>
22
Touchstone Growth & Income Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Standard & Poor's Composite Index of 500 Stocks
(S&P500) and the Wiesenberger Growth & Income -- MF Index. The S&P 500 Index is
a widely recognized unmanaged index of stock performance. The Wiesenberger
Growth & Income -- MF Index is a composite index of the annual returns of mutual
funds that have an investment style similar to the Growth & Income Fund. The
table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Growth & Income Fund -- Class A 0.7% 16.7%
- --------------------------------------------------------------------------------
Growth & Income Fund -- Class C 6.0% 17.5%
- --------------------------------------------------------------------------------
S&P 500 Index 28.6% 28.5%
- --------------------------------------------------------------------------------
Wiesenberger Growth & Income -- MF 15.3% 21.0%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 1.40% 1.40%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.45% 3.20%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 1.15% 1.15%
- --------------------------------------------------------------------------------
Net Expenses 1.30% 2.05%
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
<PAGE>
23
Touchstone Growth & Income Fund
The following example should help you compare the cost of investing in the
Growth & Income Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 700 $ 228
- --------------------------------------------------------------------------------
3 Years $1,191 $ 879
- --------------------------------------------------------------------------------
5 Years $1,708 $1,574
- --------------------------------------------------------------------------------
10 Years $3,119 $3,424
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
<PAGE>
24
Touchstone Balanced Fund
Touchstone Balanced Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Balanced Fund seeks to achieve both an increase in the value of Fund shares
and current income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests in both equity securities (generally about 60% of total assets)
and debt securities (generally about 40%, but at least 25%, of total assets).
The debt securities will be rated investment grade or at the two highest levels
of non-investment grade.
The Fund may invest in:
o Warrants
o Preferred stocks
o Convertible securities
The Fund may also invest up to one-third of its assets in securities of foreign
companies, and up to 15% in emerging market securities.
In choosing equity securities for the Fund, the portfolio manager will seek out
companies that are in a strong position within their industry, are owned in part
by management and are selling at a price lower than the company's intrinsic
value. Debt securities are also chosen using a value style. The portfolio
manager will focus on higher yielding securities, but will also consider
expected movements in interest rates and industry position.
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the stocks in the Fund's portfolio do not increase in value as
expected
o If earnings of companies the Fund invests in are not achieved and
income available for interest or dividend payments is reduced sIf
interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
[ICON] Touchstone Family of Funds
<PAGE>
25
Touchstone Balanced Fund
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are a risk neutral or moderately
conservative investor. You may typically take a relatively low risk approach to
investing and may be comfortable with a low level of volatility in your
investments. While safety may be important to you, you may also value
appreciation of your investments. If you invest in this Fund, you should be
willing to accept some risk. This Fund's approach may be appropriate for you if
you are several years from retirement.
The Fund's Performance
The following bar chart indicates the risks of investing in the Balanced Fund.
It shows changes in the performance of the Fund's Class A shares from year to
year since the Fund started. The chart does not reflect any sales charges. Sales
charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
BALANCED FUND -- CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 23.24%
1996 16.86%
1997 19.25%
1998 3.98%
During the period shown in the bar chart, the highest quarterly return was
10.71% (for the quarter ended June 30, 1997) and the lowest quarterly
return was -10.39% (for the quarter ended September 30, 1998).
[ICON] Touchstone Family of Funds
<PAGE>
26
Touchstone Balanced Fund
The table which follows shows how the Fund's average annual returns for the
periods shown compare to those of the Standard & Poor's Composite Index
of 500 Stocks (S&P 500), the Lehman Brothers Aggregate Index, a blend made
up of 60% S&P 500 and 40% LB Aggregate and to the Wiesenberger Balanced Domestic
- - -- MF index. The Lehman Brothers Aggregate Index is composed of 5,400 publicly
issued corporate and U.S. government debt rated Baa or better with at least one
year to maturity and at least $25 million par outstanding. The Wiesenberger
Balanced Domestic -- MF index is a composite index of the annual returns of
mutual funds that have an investment style similar to the Balanced Fund. The
table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Balanced Fund -- Class A -2.0% 13.1%
- --------------------------------------------------------------------------------
Balanced Fund -- Class C 3.3% 13.9%
- --------------------------------------------------------------------------------
S&P 500 Index 28.6% 28.5%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.7% 9.5%
- --------------------------------------------------------------------------------
Blend -- 60% S&P 500, 40% LB Aggregate 21.0% 20.8%
- --------------------------------------------------------------------------------
Wiesenberger Balanced Domestic -- MF 12.9% 15.9%
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
27
Touchstone Balanced Fund
The Fund's Fees and Expenses
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed On
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 3.62% 3.62%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 4.67% 5.42%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 3.32% 3.32%
- --------------------------------------------------------------------------------
Net Expenses 1.35% 2.10%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
The following example should help you compare the cost of investing in the
Balanced Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods indicated and
then sell all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 705 $ 213
- --------------------------------------------------------------------------------
3 Years $1,620 $1,324
- --------------------------------------------------------------------------------
5 Years $2,541 $2,425
- --------------------------------------------------------------------------------
10 Years $4,872 $5,139
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the Total
Fund Operating Expenses before the limits agreed to under the Sponsor
Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
<PAGE>
28
Touchstone Bond Fund
Touchstone Bond Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Bond Fund seeks to provide a high level of current income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily in higher quality investment grade debt securities
(at least 65% of total assets). The Fund's investment in debt securities may be
determined by the direction in which interest rates are expected to move because
the value of these securities generally moves in the opposite direction from
interest rates. The Fund expects to have an average maturity between five and
fifteen years.
The Fund invests in:
o Mortgage-related securities (up to 60%)
o Asset-backed securities
o Preferred stocks
The Fund also invests in non-investment grade U.S. or foreign debt securities
and preferred stock which are rated as low as B (up to 35%).
In addition, the Fund may invest in:
o Debt securities denominated in foreign currencies (20% or less)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because issuers of non-investment grade securities held by the
Fund are more likely to be unable to make timely payments of
interest or principal
o Because mortgage-related securities and asset-backed securities
may lose more value due to changes in interest rates than other
debt securities and are subject to prepayment
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
<PAGE>
29
Touchstone Bond Fund
Who May Want to Invest
This Fund is most appropriate for you if you prefer to take a relatively low
risk approach to investing. Safety of your investment may be the most important
factor to you. You may be willing to accept potentially lower returns in order
to maintain a lower, more tolerable level of risk. This Fund's approach may be
most appropriate for you if you are nearing retirement.
The Fund's Performance
The following bar chart indicates the risks of investing in the Bond Fund. It
shows changes in the performance of the Fund's Class A shares from year to year
since the Fund's inception. The chart does not reflect any sales charges. Sales
charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
BOND FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 16.95%
1996 2.85%
1997 7.30%
1998 8.56%
During the period shown in the bar chart, the highest quarterly return was
5.21% (for the quarter ended December 31, 1997) and the lowest quarterly
return was -2.10% (for the quarter ended March 31, 1997).
[ICON] Touchstone Family of Funds
<PAGE>
30
Touchstone Bond Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Aggregate Index and to the
Wiesenberger Corp -- Investment Grade -- MF index. The Lehman Brothers Aggregate
Index is comprised of approximately 6000 publicly traded bonds with an average
maturity of about 10 years. The Wiesenberger Corp -- Investment Grade -- MF
index is a composite index of the annual returns of mutual funds that have an
investment style similar to the Bond Fund. The table shows the effect of the
Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Bond Fund -- Class A 3.4% 7.1%
- --------------------------------------------------------------------------------
Bond Fund -- Class C 6.9% 7.3%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.7% 9.5%
- --------------------------------------------------------------------------------
Wiesenberger Corp -- Investment Grade -- MF 7.2% 8.7%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed On
Purchases (as a percentage of offering price) 4.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.55% 0.55%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 1.49% 1.49%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.29% 3.04%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement3 1.39% 1.39%
- --------------------------------------------------------------------------------
Net Expenses 0.90% 1.65%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
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31
Touchstone Bond Fund
The following example should help you compare the cost of investing in the Bond
Fund with the cost of investing in other mutual funds. The example assumes that
you invest $10,000 in the Fund for the time periods indicated and then sell all
of your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 562 $ 168
- --------------------------------------------------------------------------------
3 Years $1,029 $ 809
- --------------------------------------------------------------------------------
5 Years $1,521 $1,475
- --------------------------------------------------------------------------------
10 Years $2,873 $3,258
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
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32
Touchstone Standby Income Fund
Touchstone Standby Income Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Standby Income Fund seeks to provide a higher level of current income than a
money market fund, while also seeking to prevent large fluctuations in the value
of your initial investment. The Fund does not try to keep a constant $1.00 per
share net asset value.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests mostly in various types of money market instruments. All
investments will be rated at least investment grade. On average, the securities
held by the Fund will mature in less than one year.
The Fund's investments may include:
o Short-term government securities
o Mortgage-related securities
o Asset-backed securities
o Repurchase agreements
The Fund may invest up to 50% of total assets in:
o Securities denominated in U.S. dollars and issued in the U.S. by
foreign issuers (known as Yankee bonds)
o Eurodollar Certificates of Deposit
In addition, the Fund may invest in:
o Debt securities denominated in foreign currencies (up to 20%)
o Corporate bonds, commercial paper, certificates of deposit, and
bankers' acceptances
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities
to decline
o Because mortgage-related securities and asset-backed securities
may lose more value due to changes in interest rates than other
debt securities and are subject to prepayment
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
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33
Touchstone Standby Income Fund
Who May Want to Invest
This Fund is most appropriate for you if you take a relatively low risk approach
to investing. Safety of your investment is of key importance to you.
Additionally, you are willing to accept potentially lower returns in order to
maintain a lower, more tolerable level of risk. This Fund's approach may be most
appropriate for you if you are nearing retirement, or if you have a longer time
horizon, but nevertheless, have a lower risk tolerance. This Fund is also
appropriate for you if you want the added convenience of writing checks directly
from your account.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Standby Income
Fund. It shows changes in the performance of the Fund's shares from year to year
since the Fund's inception.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
STANDBY INCOME FUND PERFORMANCE
YEARS TOTAL RETURN
1995 5.71%
1996 4.80%
1997 5.21%
1998 5.49%
During the period shown in the bar chart, the highest quarterly return was
1.57% (for the quarter ended December 31, 1995) and the lowest quarterly
return was 1.07% (for the quarter ended March 31, 1996).
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34
Touchstone Standby Income Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Merrill Lynch 91-Day Treasury Index, to the 30-Day
Money Market Yield Index and to the Smith Barney 3-Month Treasury Bill Index.
The Merrill Lynch 91-Day Treasury Index consists of short-term U.S. Treasury
securities, maturing in 91 days. The 30-Day Money Market Yield Index is an index
of money market funds based on 30-day yields. The Smith Barney 3-Month Treasury
Bill Index consists of short-term U.S. Treasury securities, maturing in 90 days.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Standby Income Fund 5.5% 5.3%
- --------------------------------------------------------------------------------
Merrill Lynch 91-day Treasury Index 5.2% 5.5%
- --------------------------------------------------------------------------------
30-day Money Market Yield Index 5.0% 5.1%
- --------------------------------------------------------------------------------
Smith Barney 3-Month Treasury Bill Index 5.1% 5.5%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.25%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None
- --------------------------------------------------------------------------------
Other Expenses 3.26%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.51%
- --------------------------------------------------------------------------------
Fee Waiver And/or Expense Reimbursement(1) 2.76%
- --------------------------------------------------------------------------------
Net Expenses 0.75%
- --------------------------------------------------------------------------------
1 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of the Fund (the
"Sponsor Agreement"). The Sponsor Agreement will remain in place until
at least December 31, 1999.
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35
Touchstone Standby Income Fund
The following example should help you compare the cost of investing in the
Standby Income Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 Year $ 77
- --------------------------------------------------------------------------------
3 Years $ 819
- --------------------------------------------------------------------------------
5 Years $1,584
- --------------------------------------------------------------------------------
10 Years $3,599
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
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36
Investment Strategies And Risks
Investment Strategies And Risks
Can a Fund Depart From its Normal Strategies?
Each Fund may depart from its investment strategies by taking temporary
defensive positions in response to adverse market, economic or political
conditions. During these times, a Fund may not achieve its investment goals.
Do the Funds Engage in Active Trading of Securities?
The International Equity Fund, Income Opportunity Fund and Bond Fund may engage
in active trading to achieve their investment goals. This may cause the Fund to
realize higher capital gains which would be passed on to you. Higher capital
gains could increase your tax liability. Frequent trading also increases
transaction costs, which would lower the Fund's performance.
Can a Fund Change its Investment Goal?
A Fund's investment goal(s) may be changed by a vote of the Board of Trustees
without shareholder approval. You would be notified at least 30 days before any
such change took effect.
Year 2000 Risk
Touchstone has implemented steps intended to assure that its major computer
systems and processes are capable of Year 2000 processing. We are also examining
the third parties with whom we work to assess their readiness and are developing
contingency plans to assure that any problems in their systems will not
materially affect Touchstone's operations.
Companies or governmental entities in which Touchstone Funds invest could also
be affected by the Year 2000 issue, but at this time the Funds cannot predict
the degree of impact.
Computer systems failure of Touchstone, a Fund Sub-Advisor or that of any Fund
service provider could impair Fund services and have a negative impact on a
Fund's operations and returns.
The Funds at a Glance
The following two tables can give you a quick basic understanding of the types
of securities a Fund tends to invest in and some of the risks associated with a
Fund's investments. You should read all of the information about a Fund and its
risks before deciding to invest.
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<PAGE>
37
Investment Strategies And Risks
How Can I Tell, at a Glance, Which Types of Securities a Fund Might Invest in?
The following table shows the main types of securities in which each Fund
generally will invest. Some of the Funds' investments are described in detail
below:
<TABLE>
<CAPTION>
EmergingInternational Income Value Growth Standby
Growth Equity Opportunity Plus & Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
Financial Instruments
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Invests in U.S. stocks o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in foreign stocks o o o o
Invests in investment grade
debt securities o o o o o o o o
Invests in non-investment
grade debt securities o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in foreign debt securities o o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in futures contracts o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in forward currency
contracts o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in asset-backed securities o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in mortgage-related
securities o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in real estate
investment trusts (REITs) o
- -----------------------------------------------------------------------------------------------------------------------------
Investment Techniques
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes securities of
small cap companies o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes securities of mid cap
companies o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes securities of
large cap companies o o o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes undervalued stocks o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in securities of
emerging markets countries o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes dividend-paying
common stocks o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in short-term
debt securities o o
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional Information About Fund Investments
Foreign Companies. A foreign company is organized under the laws of a foreign
country and:
o Has the principal trading market for its stock in a foreign
country
o Derives at least 50% of its revenues or profits from operations
in foreign countries or has at least 50% of its assets located in
foreign countries
American Depository Receipts. American Depository Receipts (ADRs) are securities
that represent an ownership interest in a foreign security. They are generally
issued by a U.S. bank to U.S. buyers as a substitute for direct ownership of the
foreign security and are traded on U.S. exchanges.
Investment Grade Securities. Investment grade securities are generally rated BBB
or better by Standard & Poor's Rating Service (S&P) or Baa or better by Moody's
Investor Service, Inc. (Moody's).
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38
Investment Strategies And Risks
Non-investment Grade Securities. Non-investment grade securities are higher
risk, lower quality securities, often referred to as "junk bonds", and are
considered speculative. They are rated by S&P as less than BBB or by Moody's as
less than Baa.
Asset-backed Securities. Asset-backed securities represent groups of other
assets, for example credit card receivables, that are combined or pooled for
sale to investors.
Mortgage-related Securities. Mortgage-related securities represent groups of
mortgage loans that are combined for sale to investors. The loans may be grouped
together by:
o The Government National Mortgage Association (GNMA)
o The Federal National Mortgage Association (FNMA)
o The Federal Home Loan Mortgage Corporation (FHLMC)
o Commercial banks
o Savings and loan institutions
o Mortgage bankers
o Private mortgage insurance companies
Real Estate Investment Trusts. Real estate investment trusts (REITs) pool
investors' money to invest primarily in income-producing real estate or real
estate-related loans or interests.
"Large cap" and "Mid cap" Companies. A large cap company has a market
capitalization of more than $5 billion. A mid cap company has a market
capitalization of between $1 billion and $5 billion.
Emerging Growth Companies. Emerging Growth companies are companies that have:
o A total market capitalization less than that of the average of
the companies in the Standard & Poor's Composite Index of 500
Stocks (S&P 500)
o Earnings that the portfolio managers believe may grow faster than
the U.S. economy in general due to new products, management
changes at the company or economic shocks such as high inflation
or sudden increases or decreases in interest rates
Emerging Market Securities. Emerging Market Securities are issued by a company
that:
o Is organized under the laws of an emerging market country (any
country other than Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Holland, Italy, Japan, Luxembourg, New
Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom
and the United States)
o Has its principal trading market for its stock in an emerging
market country
o Derives at least 50% of its revenues or profits from operations
within emerging market countries or has at least 50% of its
assets located in emerging market countries
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39
Investment Strategies And Risks
Undervalued Stocks. A stock is considered undervalued if the portfolio manager
believes it should be trading at a higher price than it is at the time of
purchase. Factors considered are:
o Price relative to earnings
o Price relative to cash flow
o Price relative to financial strength
Repurchase Agreements. Repurchase Agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the U.S. Government,
its agencies, and instrumentalities. A repurchase agreement is a transaction in
which a security is purchased with a simultaneous commitment to sell it back to
the seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date. This date is usually not more than seven days from
the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest, which is unrelated to the coupon rate or
maturity of the purchased security.
How Can I Tell, at a Glance, a Fund's Key Risks?
The following table shows some of the main risks to which each Fund is subject.
Each risk is described in detail below:
<TABLE>
<CAPTION>
EmergingInternational Income Growth Standby
Growth Equity Opportunity Value Plus & Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Risk o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Companies o
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts o
- -----------------------------------------------------------------------------------------------------------------------
Interest Rate Risk o o o o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Mortgage-Related Securities o o o o
- -----------------------------------------------------------------------------------------------------------------------
Credit Risk o o o o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Non-Investment Grade Securities o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Foreign Investing Risk o o o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Emerging Market Risk o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Political Risk o o
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
[ICON] Touchstone Family of Funds
<PAGE>
40
Investment Strategies And Risks
Risks of Investing in the Funds
Market Risk. A Fund that invests in common stocks is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a particular company's operations. Stock
markets tend to run in cycles, with periods when stock prices generally go up
and periods when they generally go down. Common stock prices tend to go up and
down more than those of bonds.
o Emerging Growth Companies. Investment in Emerging Growth
companies is subject to enhanced risks because such companies
generally have limited product lines, markets or financial
resources and often exhibit a lack of management depth. The
securities of such companies can be difficult to sell and are
usually more volatile than securities of larger, more established
companies.
o Real Estate Investment Trusts (REITs). Investment in REITs is
subject to risks similar to those associated with the direct
ownership of real estate (in addition to securities markets
risks). REITs are sensitive to factors such as changes in real
estate values and property taxes, interest rates, cash flow of
underlying real estate assets, supply and demand, and the
management skill and creditworthiness of the issuer. REITs may
also lose value due to changes in tax or other regulatory
requirements.
Interest Rat Risk. A Fund that invests in debt securities is subject to the
risk that the market value of the debt securities will decline because of rising
interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security, the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
o Mortgage-Related Securities. Payments from the pool of loans
underlying a mortgage-related security may not be enough to meet
the monthly payments of the mortgage-related security. If this
occurs, the mortgage-related security will lose value. Also,
prepayments of mortgages or mortgage foreclosures will shorten
the life of the pool of mortgages underlying a mortgage-related
security and will affect the average life of the mortgage-related
securities held by a Fund. Mortgage prepayments vary based on
several factors including the level of interest rates, general
economic conditions, the location and age of the mortgage and
other demographic conditions. In periods of falling interest
rates, there are usually more prepayments. The reinvestment of
cash received from prepayments will, therefore, usually be at a
lower interest rate than the original investment, lowering a
Fund's yield. Mortgage-related securities may be less likely to
increase in value during periods of falling interest rates than
other debt securities.
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41
Investment Strategies And Risks
Credit Risk. The debt securities in a Fund's portfolio are subject to credit
risk. Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. Securities rated in the lowest category of
investment grade securities have some risky characteristics and changes in
economic conditions are more likely to cause issuers of these securities to be
unable to make payments.
o Non-Investment Grade Securities. Non-investment grade securities
are sometimes referred to as "junk bonds" and are very risky with
respect to their issuers' ability to make payments of interest
and principal. There is a high risk that a Fund which invests in
non-investment grade securities could suffer a loss caused by the
default of an issuer of such securities. Part of the reason for
this high risk is that, in the event of a default or bankruptcy,
holders of non-investment grade securities generally will not
receive payments until the holders of all other debt have been
paid. In addition, the market for non-investment grade securities
has, in the past, had more frequent and larger price changes than
the markets for other securities. Non-investment grade securities
can also be more difficult to sell for good value.
Foreign Investing. Investing in foreign securities poses unique risks such as
fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
o Emerging Markets Risk. Investments in a country that is still
relatively underdeveloped involves exposure to economic
structures that are generally less diverse and mature than in the
U.S. and to political and legal systems which may be less stable.
In the past, markets of developing countries have had more
frequent and larger price changes than those of developed
countries.
o Political Risk. Political risk includes a greater potential for
revolts, and the taking of assets by governments. For example, a
Fund may invest in Eastern Europe and former states of the Soviet
Union. These countries were under communist systems that took
control of private industry. This could occur again in this
region or others in which a Fund may invest, in which case the
Fund may lose all or part of its investment in that country's
issuers.
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42
The Funds' Management
The Funds' Management
Investment Advisor
Touchstone Advisors, Inc., (the Advisor or Touchstone Advisors) located at 311
Pike Street, Cincinnati, Ohio 45202, is the investment advisor of the Funds.
Touchstone Advisors has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994. As of
December 31, 1998, Touchstone Advisors had approximately $422 million in assets
under management.
Touchstone Advisors is responsible for selecting Fund Sub-Advisors who have
shown good investment performance in their areas of expertise. The Board of
Trustees of the Trust reviews and must approve the Advisor's selections.
Touchstone considers various factors in evaluating Fund Sub-Advisors, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over five years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength
o Quality of service
Touchstone will also continually monitor each Fund Sub-Advisor's performance
through various analyses and through in-person, telephone and written
consultations with the Fund Sub-Advisors.
Touchstone discusses its expectations for performance with each Fund
Sub-Advisor. Touchstone provides written evaluations and recommendations to the
Board of Trustees, including whether or not each Fund Sub-Advisor's contract
should be renewed, modified or terminated.
Touchstone is also responsible for running all of the operations of the Funds,
except for those that are subcontracted to the Fund Sub-Advisors, custodian,
transfer agent and administrator.
Two or more Fund Sub-Advisors may manage a Fund, with each managing a portion of
the Fund's assets. If a Fund has more than one Fund Sub-Advisor, Touchstone
allocates how much of a Fund's assets are managed by each Sub-Advisor.
Touchstone may change these allocations from time to time, often based upon the
results of the evaluations of the Fund Sub-Advisors.
Each Fund pays Touchstone a fee for its services. Out of this fee Touchstone
pays each Fund Sub-Advisor a fee for its services.
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43
The Funds' Management
The fee paid to Touchstone by each Fund is shown in the table below:
Fee to Touchstone
(as % of average
daily net assets)
Emerging Growth Fund 0.80%
- --------------------------------------------------------------------------------
International Equity Fund 0.95%
- --------------------------------------------------------------------------------
Income Opportunity Fund 0.65%
- --------------------------------------------------------------------------------
Value Plus Fund 0.75%
- --------------------------------------------------------------------------------
Growth & Income Fund 0.80%
- --------------------------------------------------------------------------------
Balanced Fund 0.80%
- --------------------------------------------------------------------------------
Bond Fund 0.55%
- --------------------------------------------------------------------------------
Standby Income Fund 0.25%
- --------------------------------------------------------------------------------
Fund Sub-Advisors
The Fund Sub-Advisors make the day-to-day decisions regarding buying and selling
specific securities for a Fund. Each Fund Sub-Advisor manages the investments
held by the Fund it serves according to the applicable investment goals and
strategies.
Fund Sub-Advisors to the Emerging Growth Fund
David L. Babson & Company, Inc. (Babson)
One Memorial Drive, Cambridge, MA 02142-1300
Babson has been registered as an investment advisor under the Advisers Act since
1940. Babson provides investment advisory services to individual and
institutional clients. As of December 31, 1998, Babson and affiliates had assets
under management of $19.9 billion. Babson has been managing the Emerging Growth
Fund since the Fund's inception.
Dennis J. Scannell and Lance F. James have primary responsibility for the
day-to-day management of the Fund. Mr. Scannell has been with the firm since
1993, and Mr. James has been with the firm since 1986.
Westfield Capital Management Company, Inc. (Westfield)
One Financial Center, Boston, MA 02111
Westfield has been registered as an investment advisor under the Advisers Act
since 1989. Westfield provides investment advisory services to individual and
institutional clients. As of December 31, 1998, Westfield had assets under
management of $1.4 billion. Westfield has been managing the Emerging Growth Fund
since the Fund's inception.
William A. Muggia has managed the portion of the Emerging Growth Fund's assets
allocated to Westfield by the Advisor since April 1999. Mr. Muggia has been with
Westfield since 1994.
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44
The Funds' Management
Fund Sub-Advisor to the International Equity Fund
Credit Suisse Asset Management (Credit Suisse)
One Citicorp Center, 153 East 53rd Street, New York, NY 10022
Credit Suisse has been registered as an investment advisor under the Advisers
Act since 1968. Credit Suisse provides investment advisory services to
individual and institutional clients. As of December 31, 1998, Credit Suisse had
assets under management of $154.2 billion. Credit Suisse has been managing the
International Equity Fund since the Fund's inception.
The Fund is managed by the Credit Suisse International Equity Management Team.
The team consists of William Sterling, Richard Watt, Steven D. Bleiberg, Susan
Boland, Emily Alejos and Robert B. Hrabchak.
Fund Sub-Advisor to the Income Opportunity Fund
Alliance Capital Management L.P. (Alliance)
1345 Avenue of the Americas, New York, NY 10105
Alliance has been registered as an investment advisor under the Advisers Act
since 1971. Alliance provides investment advisory services to individual and
institutional clients. As of December 31, 1998, Alliance had assets under
management of $286.7 billion. Alliance has been managing the Income Opportunity
Fund since the Fund's inception.
Wayne Lyski and Vicki Fuller have primary responsibility for the day-to-day
management of the Fund. Mr. Lyski has been with Alliance since 1983. Ms. Fuller
(CPA) has been with Alliance, and its predecessors, since 1985.
Fund Sub-Advisor to the Value Plus Fund, Bond Fund,
and Standby Income Fund
Fort Washington Investment Advisors, Inc. (Fort Washington)
420 East Fourth Street, Cincinnati, OH 45202
Fort Washington has been registered as an investment advisor under the Advisers
Act since 1990. Fort Washington provides investment advisory services to
individual and institutional clients. As of December 31, 1998, Fort Washington
had assets under management of $6.3 billion. Fort Washington has been managing
the Value Plus Fund, the Bond Fund and the Standby Income Fund since each Fund's
inception.
Value Plus Fund: John C. Holden has managed the Value Plus Fund since May, 1998.
Mr. Holden (CFA) joined Fort Washington in 1997 and is Vice President and Senior
Portfolio Manager. Mr. Holden previously served as senior portfolio manager with
Mellon Private Asset Management in Pittsburgh, senior portfolio manager and
investment analyst for Star Bank's Stellar Performance Group in Cincinnati, and
senior employee benefit portfolio manager for First Kentucky Trust Company in
Louisville.
Bond Fund: Roger Lanham and Brendan White have managed the Bond Fund since 1994.
Mr. Lanham is a CFA and has been with Fort Washington since 1980. Mr. White is a
CFA and has been with Fort Washington since 1993.
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45
The Funds' Management
Standby Income Fund: Christopher J. Mahony has managed the Standby Income Fund
since 1994. Mr. Mahony joined Fort Washington in 1994 after eight years of
investment experience with Neuberger & Berman.
Fort Washington is an affiliate of Touchstone. Therefore, Touchstone may have a
conflict of interest when making decisions to keep Fort Washington as a Fund
Sub-Advisor. The Board of Trustees reviews all of Touchstone's decisions to
reduce the possibility of a conflict of interest situation.
Fund Sub-Advisor to the Growth & Income Fund
Scudder Kemper Investments, Inc. (Scudder Kemper)
345 Park Avenue, New York, NY 10154
Scudder Kemper and its predecessors have provided investment advisory services
to mutual fund investors, retirement and pension plans, institutional and
corporate clients, insurance companies, and private family and individual
accounts since 1943. As of December 31, 1998, Scudder Kemper had assets under
management of $280 billion. Scudder Kemper has been managing the Growth & Income
Fund since June 1997.
Robert T. Hoffman, Lori Ensinger, Benjamin W. Thorndike and Kathleen T. Millard
have primary responsibility for the day-to-day management of the Fund. Mr.
Hoffman, Lead Product Manager, joined Scudder in 1990. He has 13 years of
experience in the investment industry, including several years of pension fund
management experience. Lori Ensinger, Lead Portfolio Manager, focuses on stock
selection and investment strategy. She has been a portfolio manager since 1983
and joined Scudder in 1993. Benjamin W. Thorndike, Portfolio Manager, is the
Fund's chief analyst and strategist for convertible securities. Mr. Thorndike,
who has 18 years of investment experience, joined Scudder in 1983. Kathleen T.
Millard, Portfolio Manager, has worked as a portfolio manager since 1986. Ms.
Millard, who joined Scudder in 1991, focuses on strategy and stock selection.
Fund Sub-Advisor to the Balanced Fund
OpCap Advisors (OpCap)
Oppenheimer Tower, One World Financial Center, New York, NY 10281
OpCap is a subsidiary of Oppenheimer Capital. Oppenheimer Capital has been
registered as an investment advisor under the Advisers Act since 1968 and its
employees perform all investment advisory services provided to the Fund. As of
December 31, 1998, Oppenheimer Capital and its subsidiaries had assets under
management of $63 billion. OpCap has been managing the Balanced Fund
since May of 1997.
Louis Goldstein has managed the equity portion of the Balanced Fund since April
1999. Robert J. Bluestone and Matthew Greenwald have managed the fixed-income
portion of the Balanced Fund since 1997. Mr. Goldstein joined Oppenheimer
Capital in 1991 and is an equity analyst and portfolio manager. Mr. Bluestone
joined Oppenheimer Capital in 1986 and is Managing Director. Mr. Greenwald
joined Oppenheimer Capital in 1989 and is Vice President.
[ICON] Touchstone Family of Funds
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46
Investing With Touchstone
Investing With Touchstone
Opening An Account
Choosing the Appropriate Funds to Match Your Goals. Investing well requires a
plan. We recommend that you meet with your financial advisor to plan a strategy
that will best meet your financial goals.
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required for each
class of shares as well as to learn about the various ways you can purchase your
shares:
<TABLE>
<CAPTION>
Class A Class C
Initial Additional Initial Additional
Investment Investment Investment Investment
<S> <C> <C> <C> <C>
Regular Account $500 $50 $1,000 $50
- ------------------------------------------------------------------------------------------------------------
Retirement Plan account or Custodial account under
a Uniform Gifts/Transfers to Minors Act ("UGTMA") $250 $50 $ 250 $50
- ------------------------------------------------------------------------------------------------------------
Investments through the Automatic Investment
Plan or through the Direct Deposit Plan $ 50 $50 $ 50 $50
- ------------------------------------------------------------------------------------------------------------
</TABLE>
o Investor Alert: Touchstone could change these initial and
additional investment minimums at any time.
Investing in the Funds
You can contact your financial advisor to purchase shares of the Funds.
You may also purchase shares of any Fund directly from Touchstone. In any event,
you must complete an Investment Application. You may obtain account applications
from Touchstone or your financial advisor.
o Investor Alert: Touchstone may choose to refuse any purchase
order.
Pricing of Fund Shares
Each Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the New York
Stock Exchange (NYSE) is open. The fund calculates the NAV per share, generally
using market prices, by dividing the total value of each class' net assets by
the number of the class shares outstanding. Shares are purchased at the next
offering price determined after your purchase or sale order is received in
proper form by Touchstone. The offering price is the NAV plus a sales charge, if
applicable.
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Investing With Touchstone
The Fund's investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values. Some specific
pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60
days or less are valued on the basis of amortized cost which the
Board of Trustees has determined represents fair value.
o Securities mainly traded on a U.S. exchange are valued at the
last sale price on that exchange or, if no sales occurred during
the day, at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally
valued according to the preceding closing values on that
exchange. However, if an event which may change the value of a
security occurs after the time that the closing value on the
non-U.S. exchange was determined, the Board of Trustees might
decide to value the security based on fair value. This may cause
the value of the security on the books of the fund to be
significantly different from the closing value on the non-U.S.
exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a
non-U.S. exchange may trade on weekends or other days when a Fund
does not price its shares, a Fund's NAV may change on days when
shareholders will not be able to buy or sell shares.
Choosing a Class of Shares
Each of the Funds (other than the Standby Income Fund) offers Class A shares and
Class C shares. Each class of shares charges different sales charges and
distribution or service fees. The amount of sales charges and other fees you pay
will depend on which class of shares you decide to purchase.
Each Fund also offers Class Y shares. Class Y shares are only available for
purchase by pension plans.
The Standby Income Fund does not have share classes and it does not charge sales
charges, distribution fees or service fees. The Standby Income Fund may be
purchased by all investors.
Class A Shares
The offering price of each Class A share of a Fund is equal to its NAV plus a
front-end sales charge that you pay when you buy your shares. The front-end
sales charge is generally deducted from the amount of your investment.
The following tables show the amounts of the front-end sales charge you will pay
on purchases of Class A shares of each Fund as a percentage of (1) offering
price and (2) the net amount invested after the charge has been subtracted. Note
that the front-end sales charge gets lower as your investment amount gets
larger.
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Investing With Touchstone
For Emerging Growth Fund, International Equity Fund, Value Plus Fund, Growth &
Income Fund and Balanced Fund
Sales Charge As % of Sales Charge As % of
Amount of Your Investment Offering Price Net Amount Invested
Under $50,000 5.75% 6.10%
- ------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71%
- ------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63%
- ------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56%
- ------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04%
- ------------------------------------------------------------------------
$1 million or more 0.00% 0.00%
- ------------------------------------------------------------------------
For Income Opportunity Fund and Bond Fund
Sales Charge As % of Sales Charge As % of
Amount of Your Investment Offering Price Net Amount Invested
Under $25,000 4.75% 4.99%
- --------------------------------------------------------------------------------
$25,000 but less than $50,000 4.50% 4.71%
- --------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00% 4.17%
- --------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63%
- --------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56%
- --------------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04%
- --------------------------------------------------------------------------------
$1 million or more 0.00% 0.00%
- --------------------------------------------------------------------------------
There is no front-end sales charge if you invest $1 million or more in the
Funds. This includes large total purchases made through programs such as
Aggregation, Concurrent Purchases, Letters of Intent and Rights of Accumulation.
These programs are described more fully in the Statement of Additional
Information (SAI). In addition, there is no front-end sales charge on purchases
by certain persons related to the Fund or its service providers and certain
other persons listed in the Statement of Additional Information.
If you redeem shares that you purchased as part of the $1 million purchase
within one year, you will pay a contingent deferred sales charge (a sales charge
you pay when you redeem your shares) of 1% on the shares redeemed.
Each Fund (other than the Standby Income Fund) has adopted a distribution and
service plan under Rule 12b-1 of the Investment Company Act of 1940, as amended
(the 1940 Act) for its Class A shares. This plan allows each Fund to pay
distribution and other fees for the sale and distribution of its Class A shares
and for services provided to holders of Class A shares.
[ICON] Touchstone Family of Funds
<PAGE>
49
Investing With Touchstone
Under the plan, each Fund pays an annual fee of up to 0.25% of the average daily
net assets of the Fund that are attributable to Class A shares. Because these
fees are paid out of the Fund's assets on an ongoing basis, these fees will
increase the cost of your investment.
Class C Shares
The offering price of each Class C share is equal to its NAV. No front-end sales
charge is applied at the time of purchase. All of your investment money goes to
work for you immediately. However, a contingent deferred sales charge of 1% of
the offering price will be charged on shares redeemed within one year after you
purchased them.
No contingent deferred sales charge is applied if:
o The shares which you redeem were acquired through the
reinvestment of dividends or capital gains distributions
o The amount redeemed resulted from increases in the value of the
account above the amount of the total purchase payments
When we determine whether a contingent deferred sales charge is payable on a
redemption, we assume that:
o The redemption is made first from amounts free of any contingent
deferred sales charge; then
o From the earliest purchase payments(s) that remain invested in
the Funds
When we determine if amounts are available for redemption free of any contingent
deferred sales charge, we:
o Add together all of your original purchase payments
o Subtract any amounts previously withdrawn
o Check if there is any remaining amount free of any contingent
deferred sales charge that can be applied to the total of the
current value of the shares you have asked to redeem
There is no contingent deferred sales charge on purchases by certain persons
related to the Fund or its service providers and certain other parties.
Each Fund (other than the Standby Income Fund) has adopted a distribution and
service plan under Rule 12b-1 of the 1940 Act for its Class C shares. This plan
allows each Fund to pay distribution and other fees for the sale and
distribution of its Class C shares and for services provided to holders of Class
C shares.
Under the plan, each Fund pays an annual fee of up to 1.00% of the average daily
net assets of the Fund that are attributable to Class C shares. Because these
fees are paid out of the Fund's assets on an ongoing basis, these fees will
increase the cost of your investment and over time may cost you more than paying
other types of sales charges.
[ICON] Touchstone Family of Funds
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50
Investing With Touchstone
Purchasing Your Shares
You can invest in the Fund shares in the following ways:
Opening an account
o Please make your check (in U.S. dollars) payable to the
Touchstone Family of Funds.
o Send your check with the completed account application to the
address shown on the application or to your financial advisor.
Your application will be processed subject to your check
BY CHECK clearing.
- --------------------------------------------------------------------------------
o First, telephone Touchstone at 800.669.2796 (press 1) between the
hours of 8:00 a.m. and 4:00 p.m. Eastern time on a day when the
NYSE is open for regular trading. When you call, you will receive
an account number.
o Instruct your bank to transfer funds by wire to Touchstone at the
following address: Touchstone Family of Funds, c/o State Street
Bank and Trust Company, P.O. Box 8518, Boston, Massachusetts
02266-8518, ABA Number 011000028, DDA Number 9905-036-1,
Attention: Mutual Funds Division.
o Specify in the wire: (1) the name of the Fund, (2) the account
number which Touchstone assigned to you, and (3) your name. If
Touchstone receives the federal funds before the close of regular
trading of the NYSE on a day the NYSE is open for regular
BY WIRE trading, you may purchase Fund shares as of that day.
- --------------------------------------------------------------------------------
o First, you should follow the procedures under "By Check" or "By
Wire" in order to get an account number for Fund(s) which you do
not currently own shares of, but which you desire to exchange
shares into.
o You may exchange your Fund shares for shares of the same Class of
another Fund (or of the Standby Income Fund) described in this
Prospectus at their respective NAVs.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in this Prospectus
relating to the exchanged-for shares carefully before making an
BY EXCHANGE exchange of your Fund shares.
- --------------------------------------------------------------------------------
o You can begin the process of purchasing shares by wire or arrange
for an exchange of shares by calling Touchstone In-Touch,
Touchstone's automated response system, at 800.669.2796 and
speaking to a customer service representative (press 1,1,3).
o Touchstone In-Touch can also provide you with other information
BY TELEPHONE about the Funds such as daily share prices.
- --------------------------------------------------------------------------------
o You may invest in each Fund through various retirement plans. The
Funds' shares are designed for use with certain types of tax
qualified retirement plans including defined benefit and defined
contribution plans.
THROUGH o For further information about any of the plans, agreements,
RETIREMENT applications and annual fees, contact Touchstone or your
PLANS financial advisor.
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
51
Investing With Touchstone
Adding to your account
o Complete the investment form provided at the bottom of a recent
account statement.
o Make your check payable to the Touchstone Family of Funds.
o Write your account number and asset allocation model number, if
applicable, on the check.
o Either: (1) Mail the check with the investment form in the
envelope provided with your account statement; or (2) Mail your
check directly to your financial advisor at the address printed
on your account statement. Your financial advisor is responsible
BY CHECK for forwarding payment promptly to Touchstone.
- --------------------------------------------------------------------------------
o Refer to wire instructions for opening an account.
o Specify in the wire: (1) the name of the Fund, (2) the account
number which Touchstone assigned to you, and (3) your name. If
Touchstone receives the federal funds before the close of regular
trading of the New York Stock Exchange (NYSE) on a day the NYSE
is open for regular trading, you may purchase Fund shares as of
BY WIRE that day.
- --------------------------------------------------------------------------------
o You may exchange your Fund shares for shares of the same Class of
another Fund (or of the Standby Income Fund) described in this
Prospectus at their respective NAVs.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in this Prospectus
relating to the exchanged-for shares carefully before making an
BY EXCHANGE exchange of your Fund shares.
- --------------------------------------------------------------------------------
o You can arrange for an exchange of shares by calling Touchstone
In-Touch, Touchstone's automated response system, at 800.669.2796
and speaking to a customer service representative (press 1,1,3).
Touchstone In-Touch can also provide you with other information
BY TELEPHONE about the Funds such as daily share prices.
- --------------------------------------------------------------------------------
THROUGH o You may add to your account in each Fund through various
RETIREMENT retirement plans. For further information, contact Touchstone or
PLANS your financial advisor.
- --------------------------------------------------------------------------------
More Information About Wire Transfers.
You may invest in the Funds directly by wire transfers. Contact your bank and
request it to wire federal funds to Touchstone. Banks may charge a fee for
handling wire transfers. You should contact Touchstone or your financial advisor
for further instructions.
[ICON] Touchstone Family of Funds
<PAGE>
52
Investing With Touchstone
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
More Information About Exchanges.
For exchanges from the Standby Income Fund, which has no sales charge associated
with it, the applicable sales charges on the Fund being purchased will apply.
The exception would be if those Standby Income Fund shares were acquired by an
exchange from a Fund which does have a sales charge or by reinvestment or
cross-reinvestment of dividends or capital gains distributions.
More Information About Retirement Plans.
Retirement Plans may include the following:
Individual Retirement Plans
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE) IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Education Individual Retirement Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b) Tax Sheltered Accounts that employ as custodian a bank
acceptable to the Distributor
Employer Sponsored Retirement Plans
o Defined benefit plans
o Defined contribution plans (including 401K plans, profit sharing
plans and money purchase plans)
o 457 plans
Automatic Investment Options
The various ways that you can invest in the Funds are outlined below. Touchstone
does not charge any fees for these services.
Automatic Investment Plan. You can pre-authorize monthly or quarterly
investments of $50 or more in each Fund to be processed electronically from a
checking or savings account. You will need to complete the appropriate forms to
do this. See the account application for further details about this service or
call Touchstone at 800.669.2796 (press 1).
Reinvestment/Cross Reinvestment. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or another Fund within the
same class of shares without a fee or sales charge. Dividends and capital gains
will be reinvested in the Fund that pays them, unless you indicate otherwise on
your account application. You may also choose to have your dividends or capital
gains paid to you in cash.
[ICON] Touchstone Family of Funds
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53
Investing With Touchstone
Direct Deposit Purchase Plan. You may automatically invest Social Security
checks, private payroll checks, pension payouts or any other pre-authorized
government or private recurring payments in our Funds. This occurs on a monthly
basis and the minimum investment is $50.
Dollar Cost Averaging. Touchstone's Dollar Cost Averaging program allows you to
diversify your investments by investing the same amount on a regular basis. You
can set up periodic automatic transfers of at least $50 from one Touchstone Fund
to any other. The applicable sales charge, if any, will be assessed.
Processing Organizations. You may also purchase shares of the Funds through a
"processing organization", (e.g. a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Some of the Funds have authorized certain processing organizations to
receive purchase and sales orders on their behalf. Before investing in the Funds
through a processing organization, you should read any materials provided by the
processing organization in conjunction with this Prospectus.
When shares are purchased this way, there may be various differences. The
processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment
requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on
the Funds' behalf
Touchstone considers a purchase or sales order as received when an authorized
processing organization, or its authorized designee, receives the order in
proper form. These orders will be priced based on the Fund's NAV next computed
after such order is received in proper form.
Shares held through a processing organization may be transferred into your name
following procedures established by your processing organization and Touchstone.
Certain processing organizations may receive compensation from the Funds,
Touchstone, the Advisor or their affiliates.
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Investing With Touchstone
Selling Your Shares
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is received in proper form before the close of regular
trading on the NYSE, you will receive a price based on that day's NAV for the
shares you sell. Otherwise, the price you receive will be based on the NAV that
is next calculated.
o You can sell or exchange your shares over the telephone, unless
you have specifically declined this option. If you do not wish to
have this ability, you must mark the appropriate section of the
Investment Application.
o To sell your Fund shares by telephone, call Touchstone at
800.669.2796 (press 1) or, from outside the United States,
617.483.5000 ext. 6518. You can also send a fax to us at
617.483.2354 between the hours of 8:00 a.m. and 4:00 p.m. Eastern
BY TELEPHONE time on a day when the NYSE is open for regular trading.
- --------------------------------------------------------------------------------
o Write to Touchstone.
o Specify the name of the Fund.
o Indicate the number of shares or dollar amount to be sold.
BY MAIL o Include your name and account number.
- --------------------------------------------------------------------------------
o Complete the appropriate information on the Investment
Application or fill out a Touchstone Wire Transfer Form.
o If your proceeds are $1,000 or more, you may request that the
Transfer Agent wire them to your bank account.
o You may also request wire transfer of your proceeds in writing.
Written requests should include the name, location and ABA or
bank routing number (if known) of your designated bank and your
BY WIRE account number.
- --------------------------------------------------------------------------------
o If a corporation, partnership, trust or fiduciary requests the
BY A sale of shares, Touchstone will require proof of their authority
THIRD PARTY before shares are sold.
- --------------------------------------------------------------------------------
THROUGH o You may also sell shares by contacting your financial advisor,
YOUR who may charge you a fee for this service. Shares held in street
FINANCIAL name must be sold through your financial advisor or, if
ADVISOR applicable, the processing organization.
- --------------------------------------------------------------------------------
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55
Investing With Touchstone
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
Selling your shares may cause you to incur a taxable gain or loss.
o Investor Alert: Unless otherwise specified, proceeds will be sent
to the record owner at the address shown on Touchstone's records.
Signature Guarantees. Some circumstances require that the request for the sale
of shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public. Some circumstances requiring a signature guarantee
include:
o Proceeds from the sale of shares that exceed $50,000
o Proceeds to be paid to a person other than the record owner
o Proceeds to be sent to an address other than the address on the
Transfer Agent's records
o Proceeds to be paid to a corporation, partnership, trust or
fiduciary
Telephone Sales. If we receive your share sale request before 4:00 p.m. Eastern
time on a day when the NYSE is open for regular trading, the sale of your shares
will be processed that day. Otherwise it will occur on the next business day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to Touchstone.
In order to protect your investment assets, Touchstone intends to only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable for those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case it may be liable for any losses due
to unauthorized or fraudulent instructions. Some of these procedures include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown
on the Trust's records
o Mailing checks only to the account address shown on the Trust's
records
o Directing wires only to the bank account shown on the Trust's
records
o Providing written confirmation for transactions requested by
telephone
o Tape recording instructions received by telephone
Systematic Withdrawal Plan. You may elect to receive or send to a third party
monthly, quarterly or annual withdrawals of $50 or more if your account value is
at least $5,000. There is no special fee for this service and no minimum value
is required for retirement plans.
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Investing With Touchstone
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
Involuntary sales may result in the sale of your Fund shares at a loss or may
result in taxable investment gains.
Reinstatement Privilege. You may reinvest proceeds from a sale of Fund shares or
a dividend or capital gain distribution on Fund shares without a sales charge in
any of the Funds. You may do so by sending a written request and a check to
Touchstone within 90 days after the date of the sale, dividend or distribution.
Reinvestment will be at the next NAV calculated after Touchstone receives your
request.
Low Account Balances
Touchstone may sell your Fund shares if your account balance falls below $500 as
a result of redemptions that you have made (as opposed to a reduction from
market changes). This involuntary sale does not apply to retirement accounts or
custodian accounts under the Uniform Gift to Minors Act (UGTMA). Touchstone will
let you know that your shares are about to be sold and you will have 30 days to
increase your account balance to more than $500.
Receiving Sale Proceeds
Touchstone will forward the proceeds of your sale to you (or to your financial
advisor) within seven days.
Proceeds Sent to Financial Advisors
Proceeds which are sent to your financial advisor will not usually be
re-invested for you unless you provide specific instructions to do so.
Therefore, the financial advisor may benefit from the use of your money.
Fund Shares Purchased by Check
If you purchase Fund shares by personal check, the proceeds of a sale of those
shares will not be sent to you until the check has cleared, which may take up to
15 days. If you may need your money more quickly, you should purchase shares by
federal funds, bank wire, or with a certified or cashier's check.
It is possible that the payments of your sale proceeds could be postponed or
your right to sell your shares could be suspended during certain circumstances.
These circumstances can occur:
o When the NYSE is closed for other than customary weekends and
holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a Fund Sub-Advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of its net assets
o During any other time when the SEC, by order, permits.
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Investing With Touchstone
Check-Writing -- Standby Income Fund Only
You may establish check-writing privileges from your investment in the Standby
Income Fund. To do so, complete the check-writing authorization section of the
Investment Application and pay the $5 fee per checkbook. You will then receive
checks that you may use to draw against your account. You will be charged $1 for
each check presented for payment.
Checks may be payable to anyone you designate in the amount of $500 or more.
Checks must be signed as indicated on your check-writing signature card
contained in the account application. You cannot write a check for an amount
larger than the value of your account (at the time the check is written), or
your check will be returned. You will continue to earn monthly dividends on the
funds until the check is presented for payment.
Checks cannot be presented in person to Touchstone. When a check is presented
for payment, Touchstone will sell a sufficient number of shares in your account
to cover the amount of the check. The check-writing option can provide you with
easy access to your money, but it is not meant to be used as a regular checking
account.
o Special Tax Consideration: Since the share price of the Standby
Income Fund may fluctuate daily, use of the check-writing
privilege can result in the sale of your shares at a profit or a
loss from the time of your purchase. These sales of your Fund
share may be considered a taxable event.
o Investor Alert: You should use the telephone or mail redemption
procedures, rather than a check, to close your account.
o Investor Alert: The check-writing privilege may be modified or
terminated at any time by the Trust or Transfer Agent upon notice
to shareholders.
[ICON] Touchstone Family of Funds
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58
Distributions And Taxes
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
You should consult with your tax advisor to address your own tax situation.
Distributions And Taxes
Each Touchstone Fund intends to distribute to its shareholders substantially all
of its income and capital gains. The table below outlines when dividends are
declared and paid for each Fund:
Dividends Declared Dividends Paid
Standby Income Fund Daily Monthly
- --------------------------------------------------------------------------------
Income Opportunity Fund
and Bond Fund Monthly Monthly
- --------------------------------------------------------------------------------
Growth & Income Fund,
Value Plus Fund
and Balanced Fund Quarterly Quarterly
- --------------------------------------------------------------------------------
Emerging Growth Fund
and International Equity Fund Annually Annually
- --------------------------------------------------------------------------------
Distributions of any capital gains earned by a Fund will be made at least
annually.
Tax Information
Distributions. Each Fund will make distributions that may be taxed as ordinary
income or capital gains (which may be taxed at different rates depending on the
length of time a Fund holds its assets). Each Fund's distributions may be
subject to federal income tax whether you reinvest such dividends in additional
shares of a Fund or choose to receive cash.
Ordinary Income. Income and short-term capital gains that are distributed to you
are taxable as ordinary income for federal income tax purposes regardless of how
long you have held your Fund shares.
Long-Term Capital Gains. Long-term capital gains distributed to you are taxable
as long-term capital gains for federal income tax purposes regardless of how
long you have held your Fund shares.
Statements and Notices. You will receive an annual statement outlining the tax
status of your distributions. You will also receive written notices of certain
foreign taxes paid by the Funds and certain distributions paid by the Funds
during the prior taxable year.
[ICON] Touchstone Family of Funds
<PAGE>
59
Financial Highlights
Financial Highlights
These financial highlights tables are intended to help you understand the Funds'
financial performance for the past 5 years or, if shorter, the period of a
Fund's operations. Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned or lost on an investment in the Fund (assuming reinvestment of
all dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, are incorporated by reference in the Statement of Additional
Information, which is available upon request.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
The Emerging Growth Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.11 $11.52 $11.55 $13.85
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.16 (0.01) 0.01 (0.03) (0.04)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments 0.11 2.29 1.20 3.71 0.37
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.27 2.28 1.21 3.68 0.33
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.15) (0.03) (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains (0.01) (0.84) (1.17) (1.38) (0.78)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.16) (0.87) (1.18) (1.38) (0.78)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.11 $11.52 $11.55 $13.85 $13.40
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 2.72% 22.56% 10.56% 32.20% 2.57%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $1,038 $2,520 $2,873 $4,949 $8,335
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
Expenses 1.75%(f) 1.50% 1.50% 1.50% 1.50%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 6.10%(f) (0.05%) (0.12%) (0.30%) (0.41%)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 109% 117% 101% 78%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
60
FINANCIAL HIGHLIGHTS
<CAPTION>
- --------------------------------------------------------------------------------
The International Equity Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 9.12 $ 9.58 $10.63 $11.41
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) -- 0.21 0.05 0.02 0.00(g)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.88) 0.47 1.06 1.64 2.27
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.88) 0.68 1.11 1.66 2.27
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (0.22) (0.06) (0.02) (0.05)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- -- -- (0.86) (0.74)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions -- (0.22) (0.06) (0.88) (0.79)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.12 $ 9.58 $10.63 $11.41 $12.89
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) (8.80%) 5.29% 11.61% 15.57% 19.94%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $2,282 $2,617 $3,449 $4,761 $6,876
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.85%(f) 1.60% 1.60% 1.60% 1.60%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.36%)(f) 0.11% 0.42% 0.17% (0.03)%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 7% 90% 86% 151% 138%
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
The Income Opportunity Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 9.08 $ 9.83 $10.90 $ 9.89
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.22 1.19 1.12 1.24 0.90
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.94) 0.77 1.38 (0.23) (2.18)
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.72) 1.96 2.50 1.01 (1.28)
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.20) (1.21) (1.12) (1.22) (0.91)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- -- (0.31) (0.80) --
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.20) (1.21) (1.43) (2.02) (0.98)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.08 $ 9.83 $10.90 $ 9.89 $ 7.63
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) (7.20%) 23.19% 26.66% 9.49% (13.77)%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $ 926 $1,369 $4,579 $7,009 $6,658
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.45%(f) 1.20% 1.20% 1.20% 1.20%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 8.60%(f) 12.42% 11.29% 11.19% 10.02%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 144% 120% 222% 270% 283%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
61
FINANCIAL HIGHLIGHTS
<CAPTION>
- --------------------------------------------------------------------------------
The Value Plus Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/98(b)
Per Share Operating Performance
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.02
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments 0.41
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.43
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital (0.00)(g)
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.41
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 4.29%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $27,068
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.30%(f)
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.25%(f)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34%
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
The Growth & Income Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.02 $13.14 $14.03 $15.06
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.86 0.05 0.12 0.09 0.19
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.84) 3.46 2.12 2.78 0.84(h)
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.02 3.51 2.24 2.87 1.03
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (0.16) (0.12) (0.11) (0.20)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.23) (1.23) (1.73) (0.40)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions -- (0.39) (1.35) (1.84) (0.62)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.02 $13.14 $14.03 $15.06 $15.47
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 0.20% 35.14% 16.95% 20.70% 6.87%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 20 $1,500 $3,659 $5,980 $15,261
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.55%(f) 1.30% 1.30% 1.30% 1.30%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.56%(f) 0.56% 0.55% 0.67% 1.50%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 10% 102% 92% 170% 64%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
62
FINANCIAL HIGHLIGHTS
<CAPTION>
- --------------------------------------------------------------------------------
The Balanced Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 9.97 $11.34 $12.48 $12.42
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.08 0.31 0.30 0.27 0.25
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.05) 1.99 1.59 2.09 0.23
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.03 2.30 1.89 2.36 0.48
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.06) (0.33) (0.30) (0.30) (0.30)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.60) (0.45) (2.12) (0.51)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.06) (0.93) (0.75) (2.42) (0.81)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.97 $11.34 $12.48 $12.42 $12.09
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) (0.30%) 23.24% 16.86% 19.25% 3.98%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $1,001 $1,502 $2,085 $3,316 $4,636
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.60%(f) 1.35% 1.35% 1.35% 1.35%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 2.75%(f) 2.39% 2.19% 2.07% 2.11%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 7% 121% 88% 120% 59%
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
THE BOND FUND -- CLASS A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 9.88 $10.61 $10.17 $10.22
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 1.15 0.56 0.71 0.61 0.55
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (1.12) 1.07 (0.43) 0.11 0.30
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.03 1.63 0.28 0.72 0.85
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.15) (0.86) (0.70) (0.66) (0.57)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.04) (0.02) (0.01) (0.11)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.15) (0.90) (0.72) (0.67) (0.68)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.88 $10.61 $10.17 $10.22 $10.39
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 0.28% 16.95% 2.85% 7.30% 8.56%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $ 16 $ 523 $ 821 $1,685 $4,924
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.15%(f) 0.90% 0.90% 0.90% 0.90%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 5.58%(f) 6.21% 6.01% 6.08% 5.68%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 78% 64% 88% 170%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
<PAGE>
63
FINANCIAL HIGHLIGHTS
<CAPTION>
- --------------------------------------------------------------------------------
The Standby Income Fund
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.03 $10.01 $ 9.98 $ 9.97
- ------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.11 0.55 0.46 0.51 0.52
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss on Investments) 0.03 (0.02) 0.01 -- 0.01
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.14 0.53 0.47 0.51 0.53
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.11) (0.55) (0.50) (0.52) (0.52)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized Gain -- -- -- -- (0.00)(g)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.03 $10.01 $ 9.98 $ 9.97 $ 9.98
- ------------------------------------------------------------------------------------------------------------------------
Total Return (i) 1.40% 5.71% 4.80% 5.21% 5.49%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $5,048 $5,910 $6,456 $8,603 $11,257
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------
Expenses (j) 1.00%(f) 0.75% 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income 4.54%(f) 5.32% 4.88% 5.14% 5.17%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 0% 142% 20% 285% 683%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The outstanding shares of each series of Touchstone Series Trust
(formerly named Select Advisors Trust A), other than the Standby
Income Fund, were redesignated as Class A shares effective after the
close of business on December 31, 1998.
(a) The Fund commenced operations on October 3, 1994.
(b) The Fund commenced operations on May 1, 1998.
(c) Total return is calculated without the effects of a sales charge.
Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown.
(d) Includes the Fund's proportionate share of the corresponding
Portfolio's expenses. If the waiver and reimbursement had not been in
place for the periods listed, the ratios of expenses to average net
assets would have been higher.
(e) Per share amounts have been calculated using the average share method.
(f) Ratios are annualized.
(g) Amount rounds to less than $0.01.
(h) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of
sales and repurchases of Fund shares in relation to fluctuating market
values of the investments of the Fund.
(i) Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown.
(j) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been
higher.
[ICON] Touchstone Family of Funds
<PAGE>
64
For More Information
For More Information
For investors who want more information about the Funds, the following documents
are available free upon request:
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Funds and is legally a part of this prospectus.
Annual/Semi-Annual Reports: The Funds' annual and semi-annual reports provide
additional information about the Funds' investments. In each Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
You can get free copies of the SAI, the reports, other information and answers
to your questions about the Funds by contacting your financial advisor, or the
Funds at:
Touchstone Family of Funds
311 Pike Street
Cincinnati, Ohio 45202
800.669.2796 (Press 3)
http://www.touchstonefunds.com
You can view the Funds' SAI and the reports at the Public Reference Room of the
Securities and Exchange Commission.
For a fee, you can get text-only copies by writing to the Public Reference Room
of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-6009. You can also
call 800.SEC.0330.
You can also view the SAI and the reports free from the SEC's Internet website
at http://www.sec.gov.
Investment Company Act file no. 811-8380
Touchstone Family of Funds
o Touchstone Emerging
Growth Fund
o Touchstone International
Equity Fund
o Touchstone Income
Opportunity Fund
o Touchstone Value Plus Fund
o Touchstone Growth &
Income Fund
o Touchstone Balanced Fund
o Touchstone Bond Fund
o Touchstone Standby
Income Fund
Class A and Class C
Shares are Offered by
this Prospectus
<PAGE>
SUPPLEMENT TO PROSPECTUS
OF
TOUCHSTONE SERIES TRUST (THE "TRUST")
IN CONNECTION WITH
TOUCHSTONE INTERNATIONAL EQUITY FUND
THIS SUPPLEMENT IS DATED AS OF JULY 19, 1999
The following information replaces certain information contained in the
Prospectus of the Trust, dated May 1, 1999, and should be read in conjunction
with that Prospectus.
CHANGE IN PORTFOLIO MANAGEMENT TEAM
The second paragraph of the section entitled "Fund Sub-Advisor to the
International Equity Fund" located on page 44 of the Prospectus is hereby
replaced with the following:
The Fund is managed by the Credit Suisse International Equity Management Team.
The team consists of Larry Smith, Steven D. Bleiberg, Richard Watt, Alan
Zlater, Emily Alejos and Robert B. Hrabchak.
<PAGE>
SUPPLEMENT TO MAY 1, 1999, PROSPECTUS
OF
TOUCHSTONE SERIES TRUST (THE "TRUST")
DATED MARCH 10, 2000
The following information supplements certain information contained in the
Prospectus of the Trust, dated May 1, 1999, and should be read in conjunction
with that Prospectus.
As of March 15, 2000, Touchstone Balanced Fund, Touchstone Income Opportunity
Fund and Touchstone Standby Income Fund (the "Funds") are closed to new accounts
and are not available for purchase by shareholders who had not established an
account with Touchstone Series Trust on or before March 15, 2000. Shareholders
who are currently invested in any of the series of Touchstone Series Trust may
make additional investments in the Funds and make exchanges to the Funds.
<PAGE>
Annual Report
December 31, 1999
o Emerging Growth
o International Equity
o Income Opportunity
o Value Plus
o Growth & Income
o Balanced
o Bond
o Standby Income
[TOUCHSTONE LOGO HERE]
Touchstone
Family of Funds
[PHOTO OF BUSINESS MEETING]
<PAGE>
LETTER FROM THE PRESIDENT
Dear Fellow Touchstone Shareholder:
Thank you for owning a Touchstone fund. We are pleased to provide you with this
update of the investment activity and performance of the Touchstone Series Trust
for the year ended December 31, 1999.
LOOKING BACK
Shrugging off three interest rate increases implemented by the Federal Reserve
Board, all major U.S. equity markets indices finished 1999 in record territory.
However, drilling down into the indices reveals widely mixed results. Among
large companies, robust advances in a relatively narrow band of
technology-related sectors overwhelmed middling returns elsewhere. Mid cap and
small cap issues led by technology shares rebounded strongly from the previous
year. The leading international equity market index, the MSCI EAFE Index,
performed better than the S&P 500 Index for the first time in five years. Fixed
income markets meanwhile experienced flat or falling returns. The U.S. fixed
income market, in particular, endured one of the worst years in its history.
Movements in the various financial markets came against an extremely positive
domestic backdrop of continued high employment, modest inflation, fiscal and
monetary restraint and enhanced productivity boosted by advancing technology. As
the current economic expansion neared record length, real economic growth
remained strong and corporate earnings gains impressive.
THE VALUE OF DIVERSIFICATION
Performance disparities among asset classes, industry sectors and types of
stocks are hardly new. Nonetheless, they seldom have been as pronounced as in
recent years. Stocks have outperformed bonds dramatically. Technology stocks
have outdistanced the rest of the market - even those of new companies with
uncertain prospects and no earnings. Large stocks have outperformed small stocks
and growth stocks have outperformed value stocks over the past several years.
Despite this recent experience, historical trends show that performance of
investment sectors and styles runs in cycles. Traditionally, diversification
among asset classes possessing complementary returns has been shown to reduce a
portfolio's overall volatility. If market returns eventually revert to their
mean, as efficient market theory implies they will, then asset classes and
styles that have lagged may be poised to rebound. Now may be an opportune time
to review your asset allocation mix in light of the benefits of diversification.
As you pursue your wealth-building goals in today's investment world,
professional advice is more important than ever. The registered representative
who assisted you in the purchase of your Touchstone mutual fund can help you
assess your situation and options.
LOOKING AHEAD
Consumer confidence is high entering the new year as the U.S. economy continues
to demonstrate vigor. The impact of influences such as widely anticipated
interest rate hikes, rising energy prices and a widening U.S. trade deficit
remains to be determined in the months ahead. Other factors at work will include
a presidential election campaign domestically and generally improving economic
conditions abroad.
Regardless of what the future holds, companies that can perform on their own
merits will most likely be the ones offering the best opportunities. As they
assess the forces that drive the financial markets, our managers will remain
steadfastly focused on identifying the opportunities and the companies capable
of succeeding in any economic environment. Their overriding goal, as well as
ours, is to deliver superior long-term performance across all of our investment
options.
<PAGE>
Thank you again for the opportunity to work on your behalf. We appreciate your
continued confidence in Touchstone and, as always, pledge every effort to
continue to merit your trust.
Sincerely,
/s/ Jill T. McGruder
Jill T. McGruder
President and Chief Executive Officer
Touchstone Family of Funds and Variable Annuities
P.S. Please check out our new look and enhanced presence on the web at
WWW.TOUCHSTONEFUNDS.COM. We value your comments.
- ------------------------
THE TOUCHSTONE FAMILY OF FUNDS IS DISTRIBUTED BY TOUCHSTONE SECURITIES, INC.*
FOR A PROSPECTUS CONTAINING MORE INFORMATION, INCLUDING ALL FEES AND EXPENSES,
CALL 800.669.2796. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING OR
SENDING MONEY.
*MEMBER NASD/SIPC
<PAGE>
3
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE EMERGING GROWTH FUND
During the annual period ended December 31, 1999, several factors affected the
Touchstone Emerging Growth Fund. After experiencing a difficult period during
the third quarter of 1999, the equity markets surged in the fourth quarter to
finish the year very strongly. In fact, small cap stocks led the surge,
increasing their value by 18% (as measured by the Russell 2000 Index) during the
fourth quarter, eclipsing the performance of large cap stocks (as measured by
the S&P 500 Index) which were up 15%. Indeed, 1999 marked the first full
calendar year that the Russell 2000, the benchmark of the Emerging Growth Fund,
outperformed the S&P 500 since 1993, albeit by a very narrow margin (21.3% for
the Russell 2000 versus 21.0% for the S&P 500). The Emerging Growth Fund had a
37.5% return in 1999.
As the growth-style manager of the Touchstone Emerging Growth Fund, Westfield
Capital Management found that good stock selection and an overweight position in
technology, telecommunications and select health care stocks drove performance
in 1999. The growth-style portion of the portfolio was underweight in the
consumer and financial sectors as many companies in those sectors did not meet
the Westfield's minimum earnings growth criteria.
Though the strict valuation discipline eliminated the traditional internet and
dot.com companies, the portfolio invested heavily in internet infrastructure
stocks. Westfield views business-to-business e-commerce as an attractive sector
with outstanding growth prospects. Traditional businesses are developing
e-business models and Westfield invested in chip, software, telecommunication
and wireless stocks to take advantage of this major shift. In health care,
Westfield focused on a select group of outstanding companies in medical devices,
biotechnology and genomics.
The value-style manager of the Fund, David L. Babson & Company, reported that
1999 was a very difficult year for those small cap managers with a value
discipline. For all of 1999, the Russell 2000 Growth Index was up a very
impressive 43%, while the Russell 2000 Value Index was down nearly 2% -- the
widest differential in performance ever.
The Value portion of the Touchstone Emerging Growth Fund was hurt by increased
weightings in the Materials & Processing and Financial Services sectors - two of
the worst performing sectors in the Russell 2000, due to investors' concerns of
rising interest rates.
Nevertheless, the Fund did benefit from several investments that delivered
strong performance during the year. CommScope, the global leader in
manufacturing coaxial cable, saw its stock increase 150% during 1999, and nearly
four-fold from our original investment a couple of years ago due to excitement
surrounding increased spending by AT&T and other cable companies to upgrade
their cable services. Nabors Industries, the leading operator of oil rigs in
North America, saw its stock increase 129% during the year due to increased
drilling activity by its customers seeking to capitalize on the recent
improvements in oil prices. Finally, Scitex, a leading maker of printing
equipment, saw its stock increase 43% during the second half of 1999 (+24% for
the full year), as the gradual global economic recovery is encouraging the
company's overseas customers to begin ordering new equipment again.
While 1999 was a challenging year for the value side of the small cap market,
the Touchstone Emerging Growth Fund delivered superior results, demonstrating
once again the benefits of having both a value and growth discipline in one
fund. Babson and Westfield look forward to continuing to deliver strong
performance.
<PAGE>
4
EMERGING GROWTH FUND
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone
Emerging Russell 2000
Growth Index CDA/Wiesenberger
Fund A (Major Index) Small Cap - MF
- --------------------------------------------------------------------------------
9/94 9425 10000 10000
12/94 9681 9813 9950
3/95 10093 10265 10512
6/95 10735 11227 11450
9/95 11733 12336 12785
12/95 11865 12603 13072
3/96 12391 13246 13917
6/96 12947 13909 15025
9/96 12599 13956 15319
12/96 13119 14682 15758
3/97 12585 13923 14745
6/97 14811 16180 17262
9/97 17253 18588 20184
12/97 17343 17965 19162
3/98 18946 19772 21254
6/98 18232 18850 20421
9/98 14714 15053 16072
12/98 17803 17508 19081
3/99 17285 16558 17905
6/99 20485 19132 20706
9/99 20471 17923 20121
12/99 25966 21172 24981
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
37.5% 20.4% 20.0%
Cumulative Total Return
Since Inception
10/3/94
159.7%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone
Emerging Russell 2000
Growth Index CDA/Wiesenberger
Fund C (Major Index) Small Cap - MF
- --------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9701 9457 9384
6/99 11472 10928 10852
9/99 11442 10237 10545
12/99 14486 12093 13092
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
44.9% 44.9%
Cumulative Total Return
Since Inception
1/1/99
44.9%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
5
EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 97.2%
AUTOMOTIVE - 0.5%
9,700 Exide $ 80,631
- --------------------------------------------------------
BANKING - 1.3%
6,000 Dime Bancorp 90,750
6,200 Golden State Bancorp* 106,950
- --------------------------------------------------------
197,700
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 1.5%
14,400 DiMon 46,800
5,200 Ralcorp Holdings* 103,675
12,100 Vlasic Foods International* 68,819
- --------------------------------------------------------
219,294
- --------------------------------------------------------
BUILDING MATERIALS - 1.6%
12,100 Dal-Tile International* 122,513
2,600 Martin Marietta Materials 106,600
- --------------------------------------------------------
229,113
- --------------------------------------------------------
COMMERCIAL SERVICES - 18.1%
9,700 Administaff * 293,425
10,800 Applied Analytical Industries* 98,550
4,700 A.C. Nielson* 115,738
6,000 Career Education* 230,250
3,900 CDI* 94,088
8,000 DeVry* 149,000
8,850 Diamond Technology Partners* 760,541
4,500 Forrester Research* 309,938
2,400 PerkinElmer 100,050
9,700 Safety-Kleen* 109,731
12,000 Stericycle* 225,750
8,100 Unova* 105,300
5,400 Wallace Computer Services 89,775
- --------------------------------------------------------
2,682,136
- --------------------------------------------------------
COMMUNICATIONS - 12.2%
11,600 Advanced Fibre Communications* 518,375
8,000 AudioCodes* 736,000
3,200 Ditech Communications* 299,200
4,000 Powerwave Technologies* 233,500
- --------------------------------------------------------
1,787,075
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 11.7%
8,500 CBT Group, ADR* 284,750
11,200 Mail.com* 210,000
12,600 Natural MicroSystems* 589,838
10,300 Perot Systems, Class A* 195,700
4,300 Policy Management System* 109,919
9,000 Scientific Learning* 328,500
- --------------------------------------------------------
1,718,707
- --------------------------------------------------------
COMPUTERS & INFORMATION - 1.4%
5,400 Gerber Scientific 118,463
5,600 Scitex* 81,550
- --------------------------------------------------------
200,013
- --------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.0%
9,100 Magnetek* 69,956
4,000 Ucar International* 71,250
- --------------------------------------------------------
141,206
- --------------------------------------------------------
Value
Shares (Note 1)
ELECTRONICS - 1.1%
4,100 Dionex* $ 168,869
- --------------------------------------------------------
ENTERTAINMENT & LEISURE - 2.2%
7,000 Cinar, Class B* 171,500
4,350 SFX Entertainment, Class A* 157,416
- --------------------------------------------------------
328,916
- --------------------------------------------------------
FINANCIAL SERVICES - 1.2%
10,200 First Sierra Financial* 174,675
- --------------------------------------------------------
FOOD RETAILERS - 0.7%
7,000 Pantry (The)* 98,875
- --------------------------------------------------------
HEALTH CARE PROVIDERS - 1.4%
5,000 Syncor International* 145,625
9,800 Total Renal Care Holdings* 65,538
- --------------------------------------------------------
211,163
- --------------------------------------------------------
HEAVY CONSTRUCTION - 0.6%
9,300 Foster Wheeler 82,538
- --------------------------------------------------------
HEAVY MACHINERY - 2.7%
8,900 Helix Technology 398,831
- --------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.2%
2,000 LA-Z-Boy Chair 33,625
- --------------------------------------------------------
HOUSEHOLD PRODUCTS - 0.6%
3,300 Snap-on 87,656
- --------------------------------------------------------
INSURANCE - 1.6%
8,800 HCC Insurance Holdings 116,050
3,400 HSB Group 114,963
- --------------------------------------------------------
231,013
- --------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 6.6%
8,000 American Tower Systems, Class A* 244,500
2,800 Central Newspapers, Class A 110,250
8,400 Hollinger International 108,675
13,500 Information Holdings* 392,344
3,600 Lee Enterprises 114,975
- --------------------------------------------------------
970,744
- --------------------------------------------------------
MEDICAL SUPPLIES - 4.2%
3,200 Arthocare* 195,200
5,500 Novoste* 90,750
3,000 Roper Industries 113,438
9,600 Varian* 216,000
- --------------------------------------------------------
615,388
- --------------------------------------------------------
METALS - 2.0%
4,100 Belden 86,100
3,400 Harsco 107,950
5,500 Ryerson Tull 106,906
- --------------------------------------------------------
300,956
- --------------------------------------------------------
OIL & GAS - 7.0%
2,700 Equitable Resources 90,113
3,306 Friede Goldman Halter* 22,935
6,900 Hanover Compressor* 260,475
7,100 Helmerich & Payne 154,869
3,700 Nabors Industries* 114,469
15,400 Santa Fe Snyder* 123,200
9,500 Stolt Comex Seaway* 105,094
22,400 Energy Services* 151,200
- --------------------------------------------------------
1,022,355
- --------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
6
EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
PHARMACEUTICALS - 9.1%
6,200 Albany Molecular Research* $ 189,100
10,200 ILEX Oncology* 246,075
4,000 Millennium Pharmaceuticals* 488,000
11,200 Taro Pharmaceutical Industries* 162,400
13,300 Titan Pharmaceuticals* 252,700
- --------------------------------------------------------
1,338,275
- --------------------------------------------------------
REAL ESTATE - 0.6%
4,000 Prentiss Properties Trust, REIT 84,000
- --------------------------------------------------------
RETAILERS - 3.0%
7,300 Enesco Group 80,756
10,000 Tweeter Home Entertainment Group* 355,000
- --------------------------------------------------------
435,756
- --------------------------------------------------------
TEXTILES, CLOTHING & FABRICS - 1.7%
5,439 Albany International 84,299
10,000 Stride Rite 65,000
8,200 Unifi* 100,963
- --------------------------------------------------------
250,262
- --------------------------------------------------------
TRANSPORTATION - 1.4%
9,400 Fritz Companies* 98,700
6,400 Yellow* 107,600
- --------------------------------------------------------
206,300
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $10,753,698) $14,296,072
- --------------------------------------------------------
Value
Shares (Note 1)
WARRANTS - 0.0%
BANKING - 0.0%
2,200 Golden State Bancorp* $ 1,925
- --------------------------------------------------------
TOTAL WARRANTS
(COST $9,438) $ 1,925
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 97.2%
(COST $10,763,136) (A) $14,297,997
CASH AND OTHER ASSETS
NET OF LIABILITIES - 2.8% 409,704
- --------------------------------------------------------
NET ASSETS - 100.0% $14,707,701
- --------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$10,764,988 resulting in gross unrealized appreciation and depreciation of
$4,889,804 and $1,356,795, respectively, and net unrealized appreciation of
$3,533,009.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
<PAGE>
7
INTERNATIONAL EQUITY FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE INTERNATIONAL EQUITY FUND
The Touchstone International Equity Fund portfolio finished the year well ahead
of its benchmark, the MSCI EAFE Index. While the MSCI EAFE Index ended 1999 with
a 27.3% return, the International Equity Fund had a 31.4% return. According to
the manager of the Touchstone International Equity Fund, Credit Suisse Asset
Management, performance lagged in the first quarter because the Fund was
underweight in Japan and the manager was too defensive in investing in European
and Japanese stocks. Performance was strong in the second half of the year due
to the positive impact of regional allocations and stock selections.
In Japan, the economic recovery appeared to gather momentum in the second half
of 1999 and corporate restructuring activity remained strong. During this
period, Credit Suisse moved from a benchmark neutral weight to overweight. The
most prominent Japanese sector overweights were in consumer finance and
telecommunications as well as an exposure to smaller companies in consumer and
technology related businesses. These decisions helped performance.
In Continental Europe, Credit Suisse moved from a slight underweight to an over
weight position during the fourth quarter in the midst of a favorable economic
environment, strong mergers and acquisition activity and a benign inflation
outlook. The Fund's overweights in Finland and France proved especially
beneficial due to large holdings in technology/telecommunications names like
Nokia and ST Microelectronics.
Elsewhere, regional allocations and stock selection also boosted performance.
The Fund was underweight in the U.K. because Credit Suisse believed there was a
likelihood of further rate increases by the Bank of England. This underweight
had a positive impact on performance as did stock selection in the U.K. which
emphasized companies such as GEC Marconi, an old defense company in the process
of reinventing itself as a telecommunications equipment manufacturer, and BP
Amoco, the global oil and gas giant.
Finally, the Fund's modest allocation to the Emerging Markets also had a
positive impact on performance; particularly in Brazil, Mexico, Korea, and
Taiwan -- those countries poised to benefit most from a pick-up in global growth
and rebound in commodity prices.
<PAGE>
8
INTERNATIONAL EQUITY FUND
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone MSCI CDA/Wiesenberger
International EAFE Non-US
Equity Fund A Index Equity - MF
- --------------------------------------------------------------------------------
9/94 9425 10000 10000
12/94 8596 9905 9452
3/95 8256 10097 9153
6/95 8615 10178 9585
9/95 9001 10611 10007
12/95 9050 11049 10114
3/96 9598 11377 10648
6/96 9806 11565 11047
9/96 9731 11559 10952
12/96 10101 11752 11317
3/97 10253 11576 11455
6/97 11479 13087 12691
9/97 12011 13003 12549
12/97 11674 11994 11089
3/98 13638 13767 12443
6/98 14375 13923 11847
9/98 12411 11952 10061
12/98 14002 14432 11763
3/99 13763 14643 12085
6/99 14241 15025 13358
9/99 15088 15695 13705
12/99 19532 18372 17396
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
31.4% 16.4% 13.6%
Cumulative Total Return
Since Inception
10/3/94
95.3%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone MSCI CDA/Wiesenberger
International EAFE Non-US
Equity Fund A Index Equity - MF
- ------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9808 10146 10273
6/99 10136 10411 11355
9/99 10711 10875 11651
12/99 13844 12730 14788
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
38.4% 38.4%
Cumulative Total Return
Since Inception
1/1/99
38.4%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
9
INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.2%
AUSTRALIA - 0.0%
60 Southcorp $ 211
- -------------------------------------------------------
BRAZIL - 1.6%
1,700 Petroleo Brasileiro, ADR 43,602
1,584 Telecomunicacoes Brasileiras
(Telebras), ADR 203,544
- -------------------------------------------------------
247,146
- -------------------------------------------------------
CHINA - 0.3%
525 China Steel, 144A, ADR 7,770
4,400 China Telecom* 27,509
100 China Telecom, ADR* 12,856
- -------------------------------------------------------
48,135
- -------------------------------------------------------
FINLAND - 3.8%
2,545 Nokia Oyj 461,834
3,113 UPM-Kymmene 125,535
- -------------------------------------------------------
587,369
- -------------------------------------------------------
FRANCE - 13.4%
1,037 Alcatel Alsthom 238,363
2,439 Alstom 81,389
5 Aventis 291
1,216 AXA 169,666
2,412 Banque Nationale de Paris 222,740
1,089 Carrefour Supermarche 201,021
3,651 Credit Lyonnais* 167,106
573 Groupe Danone 135,175
661 Pinault-Printemps-Redoute 174,593
2,458 Renault 118,599
1,800 Scor 79,483
2,202 Total Fina, Class B 294,143
2,125 Vivendi 192,059
- -------------------------------------------------------
2,074,628
- -------------------------------------------------------
GERMANY - 11.1%
504 Allianz Holdings 169,454
2,244 BASF 115,377
3,611 Deutsche Bank 305,250
1,667 Dresdner Bank 90,500
1,767 Mannesmann 426,646
569 Muenchener
Rueckversicherungs-Gasellschaft 144,442
2,364 Preussag 131,795
213 SAP 104,147
1,154 Siemens 146,938
1,791 Veba 87,120
- -------------------------------------------------------
1,721,669
- -------------------------------------------------------
GREAT BRITAIN - 9.5%
22,984 BP Amoco 231,661
4,566 British Aerospace 30,014
5,990 British Telecommunications 143,351
5,113 Glaxo Wellcome 145,011
11,460 J Sainsbury 65,707
17,600 Legal & General Group 47,936
8,880 Lloyds TSB Group 110,291
10,650 Marconi 188,942
4,330 Peninsular and Oriental
Steam Navigation 72,206
4,020 Reuters Group 55,837
Value
Shares (Note 1)
GREAT BRITAIN - CONTINUED
7,100 Shell Transport & Trading $ 59,200
11,013 SmithKline Beecham 140,340
2,238 South African Breweries 22,780
1 Unilever 7
33,740 Vodafone Group 166,222
- -------------------------------------------------------
1,479,505
- -------------------------------------------------------
GREECE - 0.2%
141 Alpha Credit Bank 11,050
140 Intracom 6,414
600 National Bank of Greece, GDR 8,438
- -------------------------------------------------------
25,902
- -------------------------------------------------------
HONG KONG - 0.0%
53 Hang Seng Bank 605
- -------------------------------------------------------
INDIA - 0.4%
700 Larsen & Toubro, GDR 23,275
1,400 State Bank of India, GDR 14,461
1,000 Videsh Sanchar Nigam, GDR 20,785
- -------------------------------------------------------
58,521
- -------------------------------------------------------
ITALY - 4.0%
4,233 Assicurazione Generali 140,571
7,610 Concessioni e Costruzioni
Autostrade* 51,801
21,403 ENI 117,446
7,503 Istituto Bancario
San Paolo di Torino 101,768
23,500 Istituto Nazionale
delle Assicurazioni 62,593
39,197 Tecnost* 147,871
- -------------------------------------------------------
622,050
- -------------------------------------------------------
JAPAN - 34.1%
300 Advantest 79,233
2,000 Alps Electric 30,500
6,600 Bank of Tokyo 91,934
1,000 Bridgestone 22,009
1,000 Canon 39,714
4,000 Daikin Industries 54,387
6,000 Daiwa Securities 93,847
200 Don Quijote 31,302
1,200 Fanuc 152,714
10,000 Fuji Bank Limited (The) 97,134
620 Fuji Soft ABC 48,518
4 Fuji Television Network 54,778
1,000 Fujisawa Pharmaceutical 24,259
2,000 Fujitsu 91,167
4,000 Fukuyama Transporting 28,759
3,600 Hitachi Credit 73,071
1,000 Hitachi Maxell 29,443
3,000 House Foods 45,486
3,000 Industrial Bank of Japan 28,905
1,400 ITO Yokado 152,010
3,000 Kaneka 38,355
2,000 Kao 57,028
1,000 Kirin Brewery 10,516
20,000 Kubota 76,494
1,600 Kyocera 414,751
3,000 Matsushita Electric 83,048
3,000 Minebea 51,443
The accompanying notes are an integral part of the financial statements.
<PAGE>
10
INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
JAPAN - CONTINUED
7,000 Mitsubishi $ 54,025
8,900 Mitsui Chemicals 71,649
1,000 Mitsumi Electric 31,302
2,000 Mori Seiki 26,802
3,000 NEC 71,457
100 NIDEC 29,248
3,000 Nikko Securities Co. (The) 37,944
500 Nintendo 82,314
3,000 Nippon Meat Packers 38,883
17 Nippon Telegraph & Telephone 291,010
3,000 Nomura Securities 54,143
4 NTT Data 91,950
2 NTT Mobile Communication
Network 76,885
700 Orix 157,625
300 Rohm Company 123,251
17,000 Sakura Bank 98,445
5,000 Sanwa Bank (The) 60,794
1,000 Secom 110,046
4,000 Sekisui House 35,410
1,000 Seven-Eleven Japan 158,466
2,000 Sharp 51,159
2,000 Shin-Etsu Chemical 86,080
73 Softbank 69,837
875 Sony 259,342
3,000 Sumitomo Bank 41,054
8,000 Sumitomo Chemical 37,562
4,000 Sumitomo Marine & Fire
Insurance Co. (The) 24,650
7,000 Sumitomo Realty & Development 23,281
10,000 Sumitomo Trust & Banking 67,495
1,000 Taisho Pharmaceutical 29,346
1,000 Taiyo Yuden 59,278
1,000 Takeda Chemical Industries 49,398
500 TDK 69,011
4,000 Tokyo Broadcasting System 135,381
1,000 Tokyo Electron 136,946
2,000 Tostem 35,899
5,000 Toyota Motor 242,101
500 WORLD 61,137
1,000 Yamanouchi Pharmaceutical 34,921
2,000 Yamato Transport 77,472
- -------------------------------------------------------
5,293,804
- -------------------------------------------------------
MEXICO - 0.9%
830 Cemex SA de CV, ADR* 23,136
400 Grupo Televisa, GDR* 27,300
850 Telefonos de Mexico, Class L, ADR 95,625
- -------------------------------------------------------
146,061
- -------------------------------------------------------
NETHERLANDS - 7.3%
1,821 Akzo Nobel 91,425
1,402 Equant* 159,293
2,595 Fortis 93,527
2,950 ING Groep 178,264
Value
Shares (Note 1)
NETHERLANDS - CONTINUED
1,684 Koninklijke (Royal)
Philips Electronics $ 229,193
1,928 STMicroelectronics 296,999
1,580 Verenigde Nederlandse 83,116
- -------------------------------------------------------
1,131,817
- -------------------------------------------------------
PORTUGAL - 1.2%
16,560 Portugal Telecom 181,808
134 PT Multimedia - Servicos de
Telecomunicaceous e Multimedia
SGPS* 7,629
- -------------------------------------------------------
189,437
- -------------------------------------------------------
SOUTH AFRICA - 0.1%
4,200 Standard Bank Investment Corp. 17,449
- -------------------------------------------------------
SOUTH KOREA - 0.8%
2,100 Korea Electric Power, ADR 35,175
700 Korea Telecom, ADR 52,325
657 Pohang Iron & Steel 22,995
74 Samsung Electronics, 144A, GDR 9,047
- -------------------------------------------------------
119,542
- -------------------------------------------------------
SPAIN - 3.2%
11,070 Banco Santander Central Hispano 125,441
14,554 Telefonica 363,881
- -------------------------------------------------------
489,322
- -------------------------------------------------------
SWEDEN - 1.4%
2,486 Ericsson 160,113
2,048 Skandia Forsakrings 61,973
- -------------------------------------------------------
222,086
- -------------------------------------------------------
SWITZERLAND - 4.3%
873 ABB 106,828
88 Novartis 129,277
14 Roche Holding 166,258
518 Union Bank of Switzerland 139,956
223 Zurich Allied 127,228
- -------------------------------------------------------
669,547
- -------------------------------------------------------
TAIWAN - 0.6%
2,164 Taiwan Semiconductor
Manufacturing, ADR 97,380
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $11,645,725) $15,242,186
- -------------------------------------------------------
INVESTMENT TRUST - 0.2%
TAIWAN - 0.2%
190 Morgan Stanley Taiwan OPALS,
Series B, 144A (b) 27,509
- -------------------------------------------------------
TOTAL INVESTMENT TRUST
(COST $23,708) $ 27,509
- -------------------------------------------------------
PREFERRED STOCKS - 0.8%
GERMANY - 0.8%
202 SAP 121,780
- -------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $84,148) $ 121,780
- -------------------------------------------------------
WARRANTS - 0.0%
FRANCE - 0.0%
390 Banque Nationale de Paris 1,801
- -------------------------------------------------------
TOTAL WARRANTS (COST $0) $ 1,801
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
11
INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 0.0%
GREAT BRITAIN - 0.0%
$ 1,442 British Aerospace 7.45% 11/30/03 $ 23
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $32) $ 23
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 99.2%
(COST $11,753,613) (A) $15,393,299
CASH AND OTHER ASSETS
NET OF LIABILITIES - 0.8% 124,868
- -------------------------------------------------------
NET ASSETS - 100.0% $15,518,167
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$11,837,296, resulting in gross unrealized appreciation and depreciation of
$3,925,294 and $369,291, respectively, and net unrealized appreciation of
$3,556,003.
(b) Board valued security
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $44,326, or 0.3% of net assets.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
OPALS - Optimised Portfolios As Listed Securities
Industry sector diversification of the International Equity Fund's investments
as a percentage of net assets as of December 31, 1999 was as follows:
Industry Percentage
Sector Net Assets
Banking 12.77%
Communications 9.60%
Electronics 8.58%
Telephone Systems 8.31%
Electrical Equipment 7.88%
Insurance 5.41%
Heavy Machinery 5.14%
Oil & Gas 4.81%
Pharmaceuticals 4.63%
Retailers 4.62%
Commercial Services 4.45%
Financial Services 3.60%
Chemicals 3.35%
Computer Software & Processing 2.46%
Transportation 2.33%
Automotive 2.32%
Media - Broadcasting & Publishing 1.94%
Beverages, Food & Tobacco 1.63%
Multiple Utilities 1.47%
Forest Products & Paper 0.81%
Entertainment & Leisure 0.53%
Metals 0.43%
Food Retailers 0.42%
Textiles, Clothing & Fabrics 0.39%
Construction 0.23%
Electric Utilities 0.23%
Aerospace & Defense 0.19%
Computers & Information 0.19%
Miscellaneous 0.18%
Real Estate 0.15%
Building Materials 0.15%
Containers & Packaging 0.00%
Other assets in excess of liabilities 0.80%
- -----------------------------------------------------------
100.00%
- -----------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
12
INCOME OPPORTUNITY FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE INCOME OPPORTUNITY FUND
For the twelve months ended December 31, 1999, the Touchstone Income Opportunity
Fund underperformed the index. The Fund's benchmark was the Lehman Brothers
Corporate Bond Index, which produced a return of (2.1%). The Income Opportunity
Fund had a (3.6%) return in 1999.
Emerging assets, however, closed the year on a very strong note with the JP
Morgan Emerging Market Bond Plus Mutual Fund Index returning 5.41% in December,
bringing the year-to-date gain to 25.97%. At the end of the year, the emerging
market percentage was 40% of the Fund. The manager of the Touchstone Income
Opportunity Fund, Alliance Capital Management, moved the emphasis of the
portfolio in 1999 from corporate assets to sovereign debt because they believe
that sovereign debt will outperform corporate debt due to its greater liquidity.
During the second half of the year, Alliance increased the weighting in Russia
by about 1.25%, which proved to be positive for the Fund. Russian debt was the
outperforming asset for both the month of December and the year, returning
14.84% and 165.70% respectively. The Income Opportunity Fund also continued to
hold a large position in Mexico, which was upgraded this year by Moody's to Ba1,
one notch below investment grade, and performed well, returning 15.30% for the
year.
Alliance reduced the position in emerging market corporates from about 10% to
roughly 5.7%. Two defaulted positions, FSW International and NTS Steel, were
sold. During the second half of the year, Alliance also elected to sell the
position in Paging Network Brazil. The company, located in Brazil, had been
negatively impacted by the devaluation of the Brazilian currency and the
decreasing demand for paging services due to the popularity of cellular phones.
The high yield market is completing its second straight year of low single-digit
returns. The Merrill Lynch High Yield Index returned 1.573% for the year. This
is the first occurrence in the history of the high yield market of sub-coupon
returns in a non-recessionary economic environment. Alliance believes this poor
performance is a function of significant spread widening brought about by
reduced liquidity following the global dislocation of 1998 (i.e., Asia, Russia,
Brazil) and a persistently rising high yield default rate. According to Moody's,
defaults are currently averaging about 6%. During the second half of the year,
Alliance began to actively reduce exposure to possible problem/restructuring
scenarios when credit fundamentals suggested that it was warranted and market
prices repre sented fair value. Alliance elected to sell several assets
including Aqua Chem, Eagle Geophysical, Orion Network and TVN Entertainment.
These securities were sold due to credit concerns and Alliance's belief that the
money could be invested in better performing assets. During the month of
December, two other assets posted large price declines due to poor operating
performance. These securities include Pen Tab and Republic Technologies. Pen Tab
was downgraded in early December to Caa2 by Moody's due to their weaker than
expected operating performance and heightened liquidity concerns. There has been
little support from the underwriter and the bonds moved down in price from the
mid 80s to $25.00.
Another security in the portfolio which posted a price decline was Republic
Technologies. The company missed earnings expectations and the bonds rapidly
declined in price from the low 90s to its year end price of $65.00.
Alliance has been in contact with both the company and sponsor, and continues to
hold the security, believing it will improve.
<PAGE>
13
INCOME OPPORTUNITY FUND
In general for the high yield market, primary activity slowed during 1999 from
1998 levels, although $94.7 billion in new issues came to market. Media and
telecommunications continued to be the dominant suppliers of new issuance,
accounting for 69.6% ($12.1 billion of $17.4 billion issued) of the supply in
the fourth quarter. One big change in the high yield market this year was the
lack of demand from mutual funds, which saw redemptions for most of the year.
This has left structured products, insurance, pension, and crossover accounts as
the major participants in the market, which has in turn led to lower trading
volumes and reduced demand for new issuance.
<TABLE>
<CAPTION>
Touchstone Lehman Brothers
Income Corporate CDA/Wiesenberger CDA/Wiesenberger
Opportunity Bond Index International Corporate High Yield
Fund A (Major Index) Bond Average - MF Average - MF
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/94 9525 10000 10000 10000
12/94 8838 10043 9881 9155
3/95 8357 10638 10316 7945
6/95 9708 11429 10650 9305
9/95 10334 11699 11180 9834
12/95 10888 12277 11515 10643
3/96 11474 11960 11811 11072
6/96 12149 12014 12036 12215
9/96 13125 12254 12582 13736
12/96 13791 12681 13030 14770
3/97 14037 12553 13103 15060
6/97 14953 13070 13764 16479
9/97 15718 13582 14483 17368
12/97 15100 13978 14674 16421
3/98 15843 14193 15263 17217
6/98 15149 14548 15304 15861
9/98 12650 15077 14209 11357
12/98 13089 15168 14567 12685
3/99 13126 15028 14926 13268
6/99 13116 14790 14992 14032
9/99 12915 14846 14753 14069
12/99 13240 14843 15085 15789
</TABLE>
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
(3.6%) 7.4% 5.5%
Cumulative Total Return
Since Inception
10/3/94
32.4%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
14
INCOME OPPORTUNITY FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
<TABLE>
<CAPTION>
Touchstone Lehman Brothers
Income Corporate CDA/Wiesenberger CDA/Wiesenberger
Opportunity Bond Index International Corporate High Yield
Fund A (Major Index) Bond Average - MF Average - MF
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1/99 10000 10000 10000 10000
3/99 10022 9951 10246 10460
6/99 9993 9794 10292 11062
9/99 9829 9831 10128 11091
12/99 10049 9829 10356 12447
</TABLE>
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
0.5% 0.5%
Cumulative Total Return
Since Inception
1/1/99
0.5%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
15
INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 60.4%
AUTOMOTIVE - 5.9%
$250,000 Sonic Automotive,
Series B 11.00% 08/01/08 $ 247,500
250,000 Tenneco
Automotive,
144A 11.625% 10/15/09 255,000
- -------------------------------------------------------
502,500
- -------------------------------------------------------
COMMERCIAL SERVICES - 4.0%
250,000 Building One
Services 10.50% 05/01/09 240,000
200,000 Dialog, Series A,
Yankee Dollar 11.00% 11/15/07 96,000
- -------------------------------------------------------
336,000
- -------------------------------------------------------
COMMUNICATIONS - 14.7%
250,000 Netia Holdings,
Series B, 144A 13.125% 06/15/09 257,500
250,000 Nextel
Communications,
144A 9.375% 11/15/09 245,000
250,000 Northeast Optic
Network 12.75% 08/15/08 267,500
200,000 Turkcell, 144A 12.75% 08/01/05 207,250
United Pan-Europe
Communications,
144A 11.25% 11/01/09 256,563
- -------------------------------------------------------
1,233,813
- -------------------------------------------------------
ENTERTAINMENT & LEISURE - 3.0%
250,000 Bell Sports,
Series B 11.00% 08/15/08 250,000
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 3.1%
250,000 LifePoint Hospitals
Holdings,
Series B 10.75% 05/15/09 258,750
- -------------------------------------------------------
HEAVY MACHINERY - 5.7%
250,000 Generac Portable
Products 11.25% 07/01/06 255,000
250,000 Pentacon,
Series B 12.25% 04/01/09 225,000
- -------------------------------------------------------
480,000
- -------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 0.7%
250,000 Pen-Tab Industries,
Series B 10.875% 02/01/07 62,500
- -------------------------------------------------------
MEDICAL SUPPLIES - 3.7%
300,000 Kelso & Company,
144A 12.75% 10/01/09 310,500
- -------------------------------------------------------
METALS - 2.0%
250,000 Republic Technologies
International,
144A 13.75% 07/15/09 165,000
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
OIL & GAS - 6.1%
$250,000 EOTT Energy
Partners 11.00% 10/01/09 $ 258,750
250,000 Western Gas
Resources 10.00% 06/15/09 256,250
- -------------------------------------------------------
515,000
- -------------------------------------------------------
TELEPHONE SYSTEMS - 11.5%
250,000 Exodus
Communications,
144A 10.75% 12/15/09 254,375
200,000 Global Crossing
Holdings, 144A 9.125% 11/15/06 197,750
250,000 Metromedia
Fiber Network 10.00% 12/15/09 256,250
250,000 Worldwide
Fiber, 144A 12.00% 08/01/09 257,500
- -------------------------------------------------------
965,875
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $5,351,893) $5,079,938
- -------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS - 34.9%
ARGENTINA - 1.9%
176,000 Republic of
Argentina,
Brady Bond (b) 6.813% 03/31/05 $ 159,157
- -------------------------------------------------------
BRAZIL - 5.8%
300,000 Republic
of Brazil 11.625% 04/15/04 300,000
250,000 Republic of Brazil,
Brady Bond (b) 6.938% 04/15/24 189,688
- -------------------------------------------------------
489,688
- -------------------------------------------------------
BULGARIA - 3.3%
350,000 Government
of Bulgaria,
Brady Bond,
IAB, PDI (b) 6.50% 07/28/11 276,063
- -------------------------------------------------------
COLOMBIA - 2.8%
250,000 Republic of
Colombia 9.75% 04/23/09 232,500
- -------------------------------------------------------
MEXICO - 6.2%
500,000 United Mexican
States 10.375% 02/17/09 532,498
- -------------------------------------------------------
MOROCCO - 2.7%
250,000 Kingdom of
Morocco,
Series A (b) 6.844% 01/01/09 225,625
- -------------------------------------------------------
PERU - 1.8%
250,000 Republic of Peru,
Brady Bond,
FLIRB (b) 3.75% 03/07/17 154,688
- -------------------------------------------------------
PHILIPPINE ISLANDS - 2.4%
200,000 Republic of
Philippines 9.875% 01/15/19 197,750
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
16
INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
SOVEREIGN GOVERNMENT OBLIGATIONS - CONTINUED
RUSSIA - 2.8%
$400,000 Russian Federation,
Euro-Dollar 8.75% 07/24/05 $ 237,000
- -------------------------------------------------------
TURKEY - 3.2%
250,000 Republic of
Turkey 12.375% 06/15/09 268,125
- -------------------------------------------------------
VENEZUELA - 2.0%
250,000 Venezuela 9.25% 09/15/27 165,000
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT OBLIGATIONS
(COST $2,711,508) $2,938,094
- -------------------------------------------------------
Value
Units (Notes 1)
WARRANTS - 0.1%
COMMUNICATIONS - 0.0%
400 Paging do Brazil,
Class B, 144A* $ 0
- -------------------------------------------------------
NIGERIA - 0.0%
250 Central Bank of Nigeria* 0
- -------------------------------------------------------
TELEPHONE SYSTEMS - 0.1%
3,375 Conecel Holdings* 0
200 Primus Telecommunications* 5,000
- -------------------------------------------------------
5,000
- -------------------------------------------------------
TOTAL WARRANTS
(COST $0) $ 5,000
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 95.4%
(COST $8,063,401) (A) $8,023,032
CASH AND OTHER ASSETS
NET OF LIABILITIES - 4.6% 383,116
- -------------------------------------------------------
NET ASSETS - 100.0% $8,406,148
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$8,072,399, resulting in gross unrealized appreciation and depreciation of
$355,986 and $405,353 respectively, and net unrealized depreciation of
$49,367.
(b) Interest rate shown reflects current rate on instrument with variable or
floating rates.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $2,406,438, or 28.6% of net assets.
Brady Bond - U.S. dollar denominated bonds of developing countries that
were exchanged, in a restructuring, for commercial bank loans in
default. The bonds are collateralized by U.S. Treasury zero-coupon
bonds to ensure principal.
Euro-Dollar - Bonds issued offshore that pay interest and principal in U.S.
dollars.
FLIRB - Front-Load Interest Reduction Bonds
IAB - Interest Arrears Bonds
PDI - Past Due Interest Bonds
Yankee Dollar - U.S. dollar denominated bonds issued by non-U.S. companies in
the U.S.
The accompanying notes are an integral part of the financial statements.
<PAGE>
17
VALUE PLUS FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE VALUE PLUS FUND
Fort Washington Investment Advisors, the manager of the Touchstone Value Plus
Fund, and a disciplined value manager, uses the S&P/Barra Value Index as their
style benchmark. The S&P Barra Value Index had a 12.0% return in 1999, compared
to 8.8% for the Value Plus Fund. Fort Washington states that they were in the
top-performing quartile of large value equity managers for 1999.
The U.S. stock market finished 1999 with a flourish to record another big year.
Despite the protestations of countless naysayers, stocks recorded their fifth
straight year of twenty plus percent returns, as measured by the S&P 500 Index.
Yet once again this performance was concentrated in a relative handful of large
capitalization, mostly technology stocks. The market's "underbelly" is very
soft; since April 1998, 70% of the roughly 6,000 U.S. common stocks are down in
price. In fact, over one half of the stocks in the S&P 500 Index had a negative
absolute return for 1999.
As most of the biggest gains in last year's stock market were in technology
stocks, the Touchstone Value Plus Fund, due to its diversification, had returns
less than those of the S&P 500 Index. Less than a quarter of the portfolio was
invested in computer-related and electronics stocks, so the Fund wasn't as
strongly impacted by the tremendous increase in technology stocks.
The best performing sectors in the portfolio for the last quarter were Consumer
Staples and Communication Services. Leading the performance in these sectors
were Sysco and Frontier Corp (now Global Crossings). Other notable performers in
the quarter were Nortel Networks and Amgen. Consumer Cyclicals was the worst
performing sector with Stewart Enterprises showing the worst underperformance.
GROWTH OF A $10,000 INVESTMENT - Class A Shares
<TABLE>
<CAPTION>
Touchstone S&P 500 S&P/Barra Wilshire Large
Value Plus Index Value Index Cap Value
Fund A (Major Index) (Minor Index) (Minor Index)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/98 9525 10000 10000 10000
6/98 9303 10227 9934 9968
9/98 8134 9210 8651 8853
12/98 9829 11171 10159 10075
3/99 10208 11571 10449 10073
6/99 11001 12347 11577 10862
9/99 10046 11538 10509 9771
12/99 11354 13216 11379 10433
</TABLE>
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 5/1/98
8.8% 7.9%
Cumulative Total Return
Since Inception
5/1/98
13.5%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
18
VALUE PLUS FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
<TABLE>
<CAPTION>
Touchstone S&P 500 S&P/Barra Wilshire Large
Value Plus Index Value Index Cap Value
Fund C (Major Index) (Minor Index) (Minor Index)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1/99 10000 10000 10000 10000
3/99 10331 10500 10282 9998
6/99 11111 11240 11395 10781
9/99 10127 10537 10344 9698
12/99 11424 12105 11201 10355
</TABLE>
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
14.2% 14.2%
Cumulative Total Return
Since Inception
1/1/99
14.2%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
19
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 96.7%
ADVERTISING - 2.2%
12,100 Interpublic Group of
Companies (The) $ 698,019
- -------------------------------------------------------
AEROSPACE & DEFENSE - 2.1%
11,800 Honeywell International 680,713
- -------------------------------------------------------
AUTOMOTIVE - 1.7%
13,000 Magna International, Class A 550,875
- -------------------------------------------------------
BANKING - 3.2%
13,706 Bank One 439,449
4,000 Chase Manhattan 310,750
16,500 North Fork Bancorporation 288,750
- -------------------------------------------------------
1,038,949
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.8%
15,800 McCormick & Company 470,050
21,200 Pepsico 747,300
- -------------------------------------------------------
1,217,350
- -------------------------------------------------------
COMMUNICATIONS - 3.5%
11,200 Nortel Networks 1,131,200
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 8.5%
29,500 Ceridian* 636,094
9,400 Computer Associates
International 657,413
32,100 Compuware* 1,195,716
5,400 First Data 266,288
- -------------------------------------------------------
2,755,511
- -------------------------------------------------------
COMPUTERS & INFORMATION - 9.2%
6,400 Hewlett-Packard 729,200
6,700 International Business Machines 723,600
10,200 Lexmark International Group,
Class A* 923,100
8,200 Sun Microsystems* 634,988
- -------------------------------------------------------
3,010,888
- -------------------------------------------------------
ELECTRIC UTILITIES - 1.6%
16,600 CMS Energy 517,713
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.7%
6,600 Thomas & Betts 210,375
- -------------------------------------------------------
ELECTRONICS - 2.1%
8,200 Intel 674,963
- -------------------------------------------------------
FINANCIAL SERVICES - 7.1%
14,550 Citigroup 808,434
5,600 Federal Home Loan Mortgage
Corporation 263,550
11,600 Federal National Mortgage
Association 724,275
11,500 SLM Holding 485,875
- -------------------------------------------------------
2,282,134
- -------------------------------------------------------
FOOD RETAILERS - 1.4%
13,860 Albertson's 446,985
- -------------------------------------------------------
Value
Shares (Note 1)
FOREST PRODUCTS & PAPER - 5.4%
16,400 Kimberly-Clark $ 1,070,100
15,700 Mead 681,969
- -------------------------------------------------------
1,752,069
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 1.3%
26,400 Manor Care* 422,400
- -------------------------------------------------------
HEAVY MACHINERY - 2.9%
3,300 Applied Materials* 418,069
9,400 Ingersoll-Rand 517,588
- -------------------------------------------------------
935,657
- -------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 2.0%
4,200 General Electric 649,950
- -------------------------------------------------------
INSURANCE - 4.6%
5,000 Aetna 279,063
18,600 AXA Financial 630,075
14,800 Reliastar Financial 579,975
- -------------------------------------------------------
1,489,113
- -------------------------------------------------------
MEDICAL SUPPLIES - 2.2%
4,500 Baxter International 282,656
16,300 Becton Dickinson & Company 436,025
- -------------------------------------------------------
718,681
- -------------------------------------------------------
METALS - 1.9%
24,000 Masco 609,000
- -------------------------------------------------------
OIL & GAS - 7.8%
22,800 Conoco, Class A 564,300
7,857 Exxon Mobil 632,980
7,900 Schlumberger 444,375
17,300 Tosco 470,344
1,529 Transocean Sedco Forex 51,523
11,500 Williams Companies (The) 351,469
- -------------------------------------------------------
2,514,991
- -------------------------------------------------------
PHARMACEUTICALS - 7.1%
14,600 Abbott Laboratories 530,163
10,600 Amgen* 636,663
11,900 Cardinal Health 569,713
8,200 Merck 549,913
- -------------------------------------------------------
2,286,452
- -------------------------------------------------------
RETAILERS - 3.1%
8,500 Federated Department Stores* 429,781
51,000 Office Depot* 557,813
- -------------------------------------------------------
987,594
- -------------------------------------------------------
TELEPHONE SYSTEMS - 10.2%
9,600 Alltel 793,800
9,100 Bell Atlantic 560,219
13,810 Global Crossing* 690,500
10,800 MCI WorldCom* 573,075
14,900 SBC Communications 726,375
- -------------------------------------------------------
3,343,969
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
20
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
TRANSPORTATION - 1.1%
3,700 US Freightways $ 177,138
13,700 Wisconsin Central Transport* 184,094
- -------------------------------------------------------
361,232
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $27,959,720) $31,286,783
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 96.7%
(COST $27,959,720) (A) $31,286,783
CASH AND OTHER ASSETS
NET OF LIABILITIES - 3.3% 1,069,218
- -------------------------------------------------------
NET ASSETS - 100.0% $32,356,001
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$27,966,854 resulting in gross unrealized appreciation and depreciation of
$6,266,546 and $2,946,617, respectively, and net unrealized appreciation of
$3,319,929.
The accompanying notes are an integral part of the financial statements.
<PAGE>
21
GROWTH & INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE GROWTH & INCOME FUND
The S&P 500 Index, the benchmark for the Growth & Income Fund, posted an
unprecedented fifth consecutive year of 20+% returns in 1999 to end a phenomenal
decade of U.S. equity market performance. 1999 was similar to 1998 in that the
overall market exceeded even the most optimistic predictions, a narrow group
of technology and growth stocks dominated market index returns, and the
dispersion of returns between growth and value styles has never been greater.
The Growth & Income Fund posted a (3.3)% return for 1999, compared to 21.1% for
the S&P 500 Index.
Despite three interest rate hikes by the Federal Reserve and record valuations
among technology stocks, the broad market posted solid returns in the first half
of the year, declined sharply in the third quarter and fully recovered by year
end to reach new highs. However, only a narrow group of stocks in the broad
market index participated in this record setting performance.
For the second consecutive year, growth managers fully participated in this
narrow market, while value managers generally remained on the sidelines. The
dominance of technology and the underperformance of the finance sector led to
the largest ever performance dispersion between the large cap style indices as
measured by the Russell 1000 Value Index (+7.4%) and the Russell 1000 Growth
Index (+33.2%). For the year, only 31% of the stocks in the S&P 500 outperformed
the index and 50% of the stocks had negative returns. The Russell 1000 Value
Index had similarly poor breadth, with only 35% of its stocks outperforming the
index, and 50% of its stocks declining. The majority of active large cap value
managers underperformed the value benchmark.
The manager of the Touchstone Growth & Income Fund, Scudder Kemper Investments,
observed that the Fund's performance relative to the benchmark and their peer
group suffered in the second half of the year. A number of portfolio holdings
declined sharply after posting negative revenue or earnings surprises. The
market, which typically is more forgiving of disappointments among low
price/earnings stocks, punished these underperformers nonetheless. A handful of
stocks including Xerox, Lockheed Martin, American Home Products, and First Union
were the most significant detractors from performance for the fourth quarter
and full year.
The most significant positive contributors to fourth quarter performance were
telecommunications and telecommunications equipment holdings, led by Corning
(the portfolio's largest position), which rallied 80% on continuing positive
news coming out of its fiber and photonics businesses. Global Crossing rose 83%
following its successful closure of the Frontier acquisition. Sprint received a
takeover bid from Worldcom and leapt 27% in the quarter. In the cyclical arena,
the portfolio benefited from its holdings in Georgia Pacific and Weyerhaeuser,
which both rallied 23% on news of a tight supply/demand balance in pulp and
container board. American Airlines (+21%) was the best performing of the major
airlines during the quarter, announcing the spin-off of Sabre Group earlier than
expected. In the technology sector, Philips Electronics posted a 30% gain, as it
benefited from the tight capacity in semiconductor contract manufacturing
(through its ownership of Taiwan Semiconductor). In the financial sector, the
Fund was rewarded by evidence of the turn in the property and casualty insurance
cycle, as Marsh & McLennan (+38%) and St. Paul (+22%) contributed most
significantly. Morgan Stanley Dean Witter (+58%) and Lehman Brothers (+45%) also
added value, as they both posted positive surprises on the heels of strong
investment banking results.
<PAGE>
22
GROWTH & INCOME FUND
As a disciplined value investor, Scudder will adhere to the value process that
they have historically followed. They believe that the portfolio is positioned
to ensure participation when the style shift occurs.
GROWTH OF A $10,000 INVESTMENT - Class A Shares
<TABLE>
<CAPTION>
Touchstone
Growth & S&P 500 CDA/Wiesenberger
Income Index Growth &
Fund A (Major Index) Income - MF
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9/94 9425 10000 10000
12/94 9444 9998 9837
3/95 10406 10972 10594
6/95 11160 12019 11428
9/95 12049 12974 12248
12/95 12763 13756 12823
3/96 13676 14494 13525
6/96 14114 15144 13969
9/96 14419 15612 14370
12/96 14927 16914 15415
3/97 14278 17367 15583
6/97 15959 20399 17768
9/97 17460 21927 19305
12/97 18016 22557 19484
3/98 20253 25703 21658
6/98 19780 26552 21739
9/98 17264 23911 19232
12/98 19253 29002 22466
3/99 19355 30452 22839
6/99 21497 32598 24815
9/99 19011 30561 22992
12/99 19740 35108 25305
</TABLE>
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
(3.3%) 14.5% 13.8%
Cumulative Total Return
Since Inception
10/3/94
97.4%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
23
GROWTH & INCOME FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone
Growth & S&P 500 CDA/Wiesenberger
Income Index Growth &
Fund C (Major Index) Income - MF
- ------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 10038 10500 10166
6/99 11134 11240 11045
9/99 9820 10537 10234
12/99 10180 12105 11264
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
1.8% 1.8%
Cumulative Total Return
Since Inception
1/1/99
1.8%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class Y Shares
Touchstone
Growth & S&P 500 CDA/Wiesenberger
Income Index Growth &
Fund Y (Major Index) Income - MF
- -------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 10058 10500 10166
6/99 11185 11240 11045
9/99 9892 10537 10234
12/99 10271 12105 11264
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
2.7% 2.7%
Cumulative Total Return
Since Inception
1/1/99
2.7%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
24
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.0%
AEROSPACE & DEFENSE - 2.8%
17,600 Lockheed Martin $ 385,000
5,500 Northrop Grumman 297,344
7,200 Rockwell International 344,700
- -------------------------------------------------------
1,027,044
- -------------------------------------------------------
AIRLINES - 0.6%
3,400 AMR* 227,800
- -------------------------------------------------------
AUTOMOTIVE - 1.9%
7,200 Ford Motor 384,750
8,500 Meritor Automotive 164,688
3,500 Paccar 155,094
- -------------------------------------------------------
704,532
- -------------------------------------------------------
BANKING - 8.7%
12,000 Bank of America 602,250
9,500 Chase Manhattan 738,031
8,962 First Union 294,066
14,700 FleetBoston Financial 511,744
13,500 PNC Bank 600,750
17,300 US Bancorp 411,956
- -------------------------------------------------------
3,158,797
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.5%
8,500 Heinz (H. J.) 338,406
19,500 Pepsico 687,375
10,500 Philip Morris 243,469
- -------------------------------------------------------
1,269,250
- -------------------------------------------------------
CHEMICALS - 1.3%
5,900 Air Products & Chemicals 198,019
1 Du Pont (E.I.) De Nemours 66
21,500 Lyondell Petro Chemical 274,125
- -------------------------------------------------------
472,210
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 3.4%
8,900 Cadence Design Systems* 213,600
14,600 Computer Associates
International 1,021,088
- -------------------------------------------------------
1,234,688
- -------------------------------------------------------
COSMETICS & PERSONAL CARE - 1.2%
6,400 Colgate-Palmolive 416,000
- -------------------------------------------------------
ELECTRIC UTILITIES - 2.8%
5,600 Cinergy 135,100
10,672 ScottishPower, ADR 298,816
17,000 Unicom 569,500
- -------------------------------------------------------
1,003,416
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.9%
5,700 Emerson Electric 327,038
- -------------------------------------------------------
ELECTRONICS - 2.5%
6,700 Koninklijke (Royal) Philips
Electronics (NY Reg.) 904,500
- -------------------------------------------------------
FINANCIAL SERVICES - 9.6%
17,600 Citigroup 977,900
10,400 Federal National Mortgage
Association 649,350
3,000 J.P. Morgan 379,875
6,100 Lehman Brothers Holdings 516,594
4,000 Morgan Stanley Dean Witter 571,000
8,500 SLM Holding 359,125
- -------------------------------------------------------
3,453,844
- -------------------------------------------------------
Value
Shares (Note 1)
FOOD RETAILERS - 0.7%
7,963 Albertson's $ 256,807
- -------------------------------------------------------
FOREST PRODUCTS & PAPER - 2.1%
4,900 Georgia-Pacific 248,675
7,100 Weyerhaeuser 509,869
- -------------------------------------------------------
758,544
- -------------------------------------------------------
HEAVY MACHINERY - 1.7%
11,700 Parker Hannifin 600,356
- -------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.7%
3,900 General Electric 603,525
- -------------------------------------------------------
HOUSEHOLD PRODUCTS - 5.5%
15,300 Corning 1,972,744
- -------------------------------------------------------
INSURANCE - 7.9%
19,800 Allstate Corporation (The) 475,200
18,200 Lincoln National 728,000
5,800 Marsh & McLennan Companies 554,988
15,600 St. Paul Companies (The) 525,525
10,870 XL Capital, Class A 563,881
- -------------------------------------------------------
2,847,594
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.6%
9,500 McGraw-Hill Companies (The) 585,438
- -------------------------------------------------------
METALS - 0.8%
9,050 Allegheny Technologies 203,059
10,200 Oregon Steel Mills 80,963
- -------------------------------------------------------
284,022
- -------------------------------------------------------
OIL & GAS - 11.4%
9,700 Burlington Resources 320,706
12,300 Conoco, Class A 304,425
11,546 Conoco, Class B 287,207
18,240 Exxon Mobil 1,469,453
7,000 Royal Dutch Petroleum 423,063
9,600 Texaco 521,400
8,233 Total Fina S.A., ADR 570,135
7,600 Williams Companies (The) 232,275
- -------------------------------------------------------
4,128,664
- -------------------------------------------------------
PHARMACEUTICALS - 3.8%
17,400 American Home Products 686,213
5,300 Bristol-Myers Squibb 340,194
6,400 Glaxo Wellcome, ADR 357,600
- -------------------------------------------------------
1,384,007
- -------------------------------------------------------
RETAILERS - 1.2%
6,000 Dayton Hudson 440,625
- -------------------------------------------------------
TELEPHONE SYSTEMS - 17.6%
8,100 Alltel 669,769
16,300 AT&T 827,225
20,900 Bell Atlantic 1,286,656
22,600 BellSouth 1,057,963
6,540 Global Crossing* 327,000
7,600 GTE 536,275
21,332 SBC Communications 1,039,935
8,700 Sprint 585,619
- -------------------------------------------------------
6,330,442
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
25
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
TRANSPORTATION - 2.8%
11,200 Canadian National Railway $ 294,700
16,500 CSX 517,688
9,000 Norfolk Southern 184,500
- -------------------------------------------------------
996,888
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $35,518,105) $35,388,775
- -------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.5%
CHEMICALS - 0.5%
5,900 Monsanto, ACES $ 195,438
- -------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $266,258) $ 195,438
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 98.5%
(COST $35,784,363) (A) $35,584,213
CASH AND OTHER ASSETS
NET OF LIABILITIES - 1.5% 546,605
- -------------------------------------------------------
NET ASSETS - 100.0% $36,130,818
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$35,785,695 resulting in gross unrealized appreciation and depreciation of
$4,489,147 and $4,690,629, respectively, and net unrealized depreciation of
$201,482.
ACES - Adjustable Conversion-Rate Equity Security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
<PAGE>
26
BALANCED FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE BALANCED FUND
The U.S. stock market continued its strong performance in 1999, completing five
consecutive years of sharply rising prices. Meanwhile, it was a rough year for
bonds and, by some measures, it was the worst year ever. At year end, bonds and
fixed income securities represented 40% of the Balanced Fund's assets. The
Touchstone Balanced Fund had a return of 3.3% for 1999. Its benchmark, the
Lehman Brothers Aggregate Index, had a return of (0.8)%.
The U.S. economy remains strong and there are indications of excessive optimism
in the stock market. The three rate increases implemented by the Federal Reserve
since June of 1999 have been taken in stride, and even welcomed, by the stock
market. The stock market was characterized throughout 1999 -- and especially in
the fourth quarter -- by two extremely contradictory trends: the rapid
escalation of many technology stocks and only modest gains or even price
declines for stocks across most other industry sectors. Many technology stocks
did not generate any earnings, yet increased dramatically, driven by the
prospect of continued rapid growth for e-commerce and the Internet. On the other
hand, many "bricks and mortar" stocks with solid earnings and favorable business
prospects declined in price.
The manager of the Touchstone Balanced Fund, OpCap Advisors, observed that as
technology stocks soared, many non-tech issues were left behind. A full
one-third of NYSE stocks declined 20% or more in 1999. Even stocks of
traditional companies with excellent competitive positions and strong earnings
growth tended to fare poorly in this technology-focused market environment.
Performance disparities among industry sectors and types of stocks are hardly
new. Nonetheless, few such disparities have been as dramatic as that which
occurred during 1999 between the technology stocks and the rest of the market.
OpCap remained focused on generating excellent long-term results with
below-market risk by investing in companies with superior fundamentals and
inexpensive valuations.
Among the Fund's equity holdings, Oak Industries, a leading manufacturer of
cable TV and telecommunications infrastructure products, was a top contributor
to performance. In November, Corning agreed to acquire Oak for approximately
$75 per share, a 51% premium to market, confirming OpCap's assessment of the
inherent worth of Oak's valuable franchises. Another major contributor to
performance was Molex, the second largest electronics connector manufacturer in
the world. The company's stock appreciated significantly during the last few
months of the year, reflecting the recovery of Asian markets and the company's
strong position in cell phone components. Emmis, a major broadcasting company
focused on large media markets, continues to be rewarded by the market for
strong performance in radio and television.
The five largest equity holdings at December 31, 1999 were AMFM, a broadcasting
company, representing 2.9% of the Fund's net assets; Computer Associates, a
developer of software products, 2.0%; Federal Home Loan Mortgage Corp., 1.7% of
the Fund's net assets; Minnesota Mining & Manufacturing (3M), a diversified
manufacturer, 1.5% of net assets and Citigroup, a diversified financial services
company, 1.4% of net assets.
In addition to its holdings of common stocks, bonds and fixed income securities,
the Fund was invested in cash and cash equivalents. The fixed income portion of
the portfolio lagged along with the bond market at large.
<PAGE>
27
BALANCED FUND
GROWTH OF A $10,000 INVESTMENT - Class A Shares
<TABLE>
<CAPTION>
Lehman Blend 60% CDA/Wiesenberger
Touchstone S&P Brothers S&P 500, 40% Balanced
Balanced 500 Aggregate Index Lehman Brothers Domestic
Fund A Index (Major Index) Aggregate Average - MF
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/94 9425 10000 10000 10000 10000
12/94 9453 9998 10038 9973 9893
3/95 9965 10972 10544 10713 10501
6/95 10922 12019 11187 11539 11245
9/95 11582 12974 11406 12113 11849
12/95 11654 13756 11892 12734 12337
3/96 12065 14494 11681 13006 12656
6/96 12209 15144 11748 13339 12954
9/96 12606 15612 11965 13644 13300
12/96 13618 16914 12324 14446 13973
3/97 13575 17367 12256 14611 13964
6/97 15028 20399 12707 16290 15380
9/97 15929 21927 13131 17203 16397
12/97 16240 22557 13514 17666 16572
3/98 17364 25703 13723 19198 17828
6/98 17443 26552 14045 19717 18014
9/98 15631 23911 14638 18852 16835
12/98 16885 29002 14687 21182 18708
3/99 16968 30452 14613 21729 18858
6/99 18090 32598 14484 22525 19704
9/99 17225 30561 14583 21693 18840
12/99 18508 35108 14565 23543 20267
</TABLE>
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
3.3% 13.0% 12.5%
Cumulative Total Return
Since Inception
10/3/94
85.1%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class C Shares
<TABLE>
<CAPTION>
Lehman Blend 60% CDA/Wiesenberger
Touchstone S&P Brothers S&P 500, 40% Balanced
Balanced 500 Aggregate Index Lehman Brothers Domestic
Fund C Index (Major Index) Aggregate Average - MF
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/99 10000 10000 10000 10000 10000
3/99 10032 10500 9949 10258 10081
6/99 10673 11240 9861 10634 10533
9/99 10145 10537 9929 10241 10071
12/99 10878 12105 9917 11115 10834
</TABLE>
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
8.8% 8.8%
Cumulative Total Return
Since Inception
1/1/99
8.8%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
28
BALANCED FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 54.1%
ADVERTISING - 2.2%
700 Lamar Advertising* $ 42,394
900 WPP Group 74,813
600 Young & Rubicam 42,450
- -------------------------------------------------------
159,657
- -------------------------------------------------------
AEROSPACE & DEFENSE - 0.9%
1,500 Boeing 62,344
- -------------------------------------------------------
AIRLINES - 1.2%
1,300 AMR* 87,100
- -------------------------------------------------------
BANKING - 4.0%
600 Chase Manhattan 46,613
2,221 FleetBoston Financial 77,319
1,800 Household International 67,050
2,500 Wells Fargo 101,094
- -------------------------------------------------------
292,076
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 2.2%
2,255 Diageo, ADR 72,160
2,200 McDonald's 88,688
- -------------------------------------------------------
160,848
- -------------------------------------------------------
BUILDING MATERIALS - 0.1%
1,422 Huttig Building Products* 7,022
- -------------------------------------------------------
CHEMICALS - 2.0%
1,500 Du Pont (E.I.) De Nemours 98,813
1,200 Monsanto 42,750
- -------------------------------------------------------
141,563
- -------------------------------------------------------
COMMERCIAL SERVICES - 1.6%
1,450 PerkinElmer 60,447
3,300 Waste Management 56,719
- -------------------------------------------------------
117,166
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 2.0%
2,050 Computer Associates International 143,372
- -------------------------------------------------------
COMPUTERS & INFORMATION - 0.9%
2,400 Compaq Computer 64,950
- -------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
2,000 American National Can Group 26,000
- -------------------------------------------------------
COSMETICS & PERSONAL CARE - 0.7%
1,600 Avon Products 52,800
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.2%
1,500 Emerson Electric 86,063
- -------------------------------------------------------
ELECTRONICS - 2.2%
2,000 Arrow Electronics* 50,750
900 Avnet 54,450
900 Molex 51,019
- -------------------------------------------------------
156,219
- -------------------------------------------------------
FINANCIAL SERVICES - 3.5%
1,875 Citigroup 104,180
1,100 Countrywide Credit 27,775
2,600 Federal Home Loan
Mortgage Corporation 122,363
- -------------------------------------------------------
254,318
- -------------------------------------------------------
FOOD RETAILERS - 1.2%
4,700 Kroger Company (The)* 88,713
- -------------------------------------------------------
Value
Shares (Note 1)
HEAVY MACHINERY - 4.5%
1,800 Applied Power, Class A $ 66,150
1,750 Caterpillar 82,359
1,500 Dover 68,063
1,600 Parker Hannifin 82,100
600 W.W. Grainger 28,688
- -------------------------------------------------------
327,360
- -------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 2.4%
1,900 Carlisle Companies 68,400
1,100 Minnesota Mining &
Manufacturing (3M) 107,663
- -------------------------------------------------------
176,063
- -------------------------------------------------------
INSURANCE - 3.7%
1,200 AFLAC 56,625
1,557 Conseco 27,831
1,800 Everest Reinsurance Holdings 40,163
1,000 PartnerRe 32,438
1,500 Protective Life 47,719
1,200 XL Capital, Class A 62,250
- -------------------------------------------------------
267,026
- -------------------------------------------------------
LODGING - 1.0%
35,400 Homestead Village* 75,217
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 4.0%
2,700 AMFM* 211,275
600 Emmis Communications, Class A* 74,784
- -------------------------------------------------------
286,059
- -------------------------------------------------------
METALS - 1.8%
800 Alcoa 66,400
3,200 Crane 63,600
- -------------------------------------------------------
130,000
- -------------------------------------------------------
OIL & GAS - 0.8%
1,700 Anadarko Petroleum 58,013
- -------------------------------------------------------
PHARMACEUTICALS - 2.2%
1,700 American Home Products 67,044
1,250 Teva Pharmaceutical Industries, ADR 89,609
- -------------------------------------------------------
156,653
- -------------------------------------------------------
REAL ESTATE - 1.0%
3,600 Prologis Trust, REIT 69,300
- -------------------------------------------------------
RESTAURANTS - 0.4%
2,000 Bob Evans Farms 30,875
- -------------------------------------------------------
RETAILERS - 1.1%
1,100 CVS 43,931
1,100 May Department Stores 35,475
- -------------------------------------------------------
79,406
- -------------------------------------------------------
TELEPHONE SYSTEMS - 3.0%
800 Bell Atlantic 49,250
1,425 MCI WorldCom* 75,614
1,350 Sprint 90,872
- -------------------------------------------------------
215,736
- -------------------------------------------------------
TRANSPORTATION - 1.9%
2,200 Air Express International 71,088
1,250 Sabre Group Holdings* 64,063
- -------------------------------------------------------
135,151
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $3,808,179) $ 3,907,070
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
29
BALANCED FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
PREFERRED STOCKS - 0.9%
ENTERTAINMENT & LEISURE - 0.9%
2,000 News Corporation Limited
(The), ADR $ 66,875
- -------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $50,643) $ 66,875
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
ASSET-BACKED SECURITIES - 0.1%
FINANCIAL SERVICES - 0.1%
$ 4,111 Merrill Lynch
Mortgage Investors,
Series 1991-I,
Class A 7.65% 01/15/12 $ 4,113
- -------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $4,211) $ 4,113
- -------------------------------------------------------
CORPORATE BONDS - 20.4%
BANKING - 4.7%
150,000 Associates
Corporation of
North America 5.75% 11/01/03 142,819
100,000 BB&T 7.25% 06/15/07 96,789
100,000 Chase Manhattan 7.25% 06/01/07 98,043
308 Nykredit 6.00% 10/01/26 39
- -------------------------------------------------------
337,690
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 0.8%
60,000 Coca-Cola Femsa 8.95% 11/01/06 60,150
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 1.3%
100,000 Computer Associates
International 6.375% 04/15/05 93,036
- -------------------------------------------------------
ELECTRIC UTILITIES - 5.8%
95,000 Financiera
Energy 9.375% 06/15/06 80,257
200,000 Tennessee Valley
Authority 5.00% 12/18/03 187,556
150,000 Wisconsin Electric
Power 6.625% 12/01/02 148,686
- -------------------------------------------------------
416,499
- -------------------------------------------------------
FINANCIAL SERVICES - 4.4%
150,000 AT&T Capital 7.50% 11/15/00 150,734
100,000 GMAC 7.125% 05/01/01 100,177
69,000 Paine Webber
Group 7.00% 03/01/00 69,049
- -------------------------------------------------------
319,960
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.3%
100,000 CSC Holdings 7.625% 07/15/18 93,000
- -------------------------------------------------------
METALS - 1.4%
100,000 AK Steel 9.125% 12/15/06 101,750
- -------------------------------------------------------
OIL & GAS - 0.7%
50,000 Petroleos
Mexicanos 8.85% 09/15/07 47,875
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $1,540,369) $ 1,469,960
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
MORTGAGE-BACKED SECURITIES - 9.1%
$ 20,000 Federal Home
Loan Mortgage
Corporation 6.00% 03/15/08 $ 19,668
45,000 Federal National
Mortgage
Association 6.15% 10/25/07 44,375
150,000 Federal National
Mortgage
Association 6.00% 05/15/08 140,193
100,000 Federal National
Mortgage
Association 6.50% 04/29/09 93,694
139,159 Federal National
Mortgage
Association 6.00% 01/01/14 132,099
75,277 Federal National
Mortgage
Association 6.50% 07/18/28 70,016
40,000 General Electric
Capital Mortgage
Services, Series
1993-14, Class A7 6.50% 11/25/23 34,928
44,500 General Electric
Capital Mortgage
Services, Series
1994-10,
Class A10 6.50% 03/25/24 42,329
40,000 Merrill Lynch
Mortgage Investors,
Series 1995-C3,
Class A3 7.089% 12/26/25 39,333
50,000 Prudential Home
Mortgage Securities,
Series 1994-17,
Class A6 6.25% 04/25/24 41,609
- -------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $697,092) $ 658,244
- -------------------------------------------------------
MUNICIPAL BONDS - 1.9%
HOUSING - 1.4%
40,000 Baltimore Community
Development
Financing 8.20% 08/15/07 $ 41,504
4,092 Denver Colorado
City & County
Single Family 7.25% 12/01/10 3,949
30,000 New York State
Housing Finance
Agency Service 7.50% 09/15/03 30,197
25,000 Ohio Housing
Financial Agency 7.90% 10/01/14 25,526
- -------------------------------------------------------
101,176
- -------------------------------------------------------
TRANSPORTATION - 0.5%
30,000 Oklahoma City
Airport 9.40% 11/01/10 32,908
- -------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $130,110) $ 134,084
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
30
BALANCED FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
SOVEREIGN GOVERNMENT OBLIGATIONS - 2.8%
SOUTH AFRICA - 1.7%
ZAR 774,000 Republic
of South
Africa 13.00% 08/31/10 $ 120,954
- -------------------------------------------------------
UNITED KINGDOM - 1.1%
GBP 37,000 United
Kingdom
Treasury 8.00% 12/07/15 79,789
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $220,336) $ 200,743
- -------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 4.1%
180,000 U.S. Treasury
Note 5.875% 02/15/04 $ 177,019
65,000 U.S. Treasury
Bond 6.25% 04/30/01 65,061
50,000 U.S. Treasury
Bond 7.25% 08/15/22 52,719
- -------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $303,273) $ 294,799
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 93.4%
(COST $6,754,213) (A) $ 6,735,888
CASH AND OTHER ASSETS
NET OF LIABILITIES - 6.6% 473,725
- -------------------------------------------------------
NET ASSETS - 100.0% $ 7,209,613
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is $6,757,066
resulting in gross unrealized appreciation and depreciation of $679,190 and
$700,368, respectively, and net unrealized depreciation of $21,178.
ADR - American Depository Receipt
REIT - Real Estate Investment Trust
GBP - Great Britain Pound
ZAR - South African Rand
The accompanying notes are an integral part of the financial statements.
<PAGE>
31
BOND FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE BOND FUND
The bond market ended its final quarter of the century on a down note,
generating a negative return in December and locking in an equally poor return
for the quarter. The Federal Reserve induced sell-off continued and produced
only the second negative total return for bonds in a year since 1975. There are
few places to hide in the fixed income market when the Federal Reserve begins to
tighten the money supply. The benchmark for the Bond Fund, the Lehman Brothers
Aggregate Index, had a (0.8%) return in 1999. The Bond Fund return for the same
period was (6.4%).
This environment wasn't conducive to an outstanding bond portfolio performance.
While the Touchstone Bond Fund is structured to produce above market income as a
defensive measure, lower prices have offset this tactic causing returns to
closely track the index. Performance for the Fund gross of fees for the fourth
quarter and the year were -0.21% and -0.97% versus -0.12% and -0.83% for the
Lehman Brothers Aggregate Index.
Fixed income has not been the investment asset of choice for the past several
years when compared to the stellar returns in the equity market. The manager of
the Touchstone Bond Fund, Fort Washington Investment Advisors, believes that
there could continue to be rough sledding in the bond market.
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone Lehman Brothers CDA/Wiesenberger
Bond Aggregate Index Corporate-Investment
Fund A (Major Index) Grade - MF
- -------------------------------------------------------------------------------
9/94 9525 10000 10000
12/94 9551 10038 9985
3/95 10046 10544 10418
6/95 10571 11187 11104
9/95 10742 11406 11331
12/95 11172 11892 11867
3/96 10937 11681 11588
6/96 10982 11748 11629
9/96 11175 11965 11842
12/96 11490 12324 12223
3/97 11450 12256 12134
6/97 11818 12707 12571
9/97 12197 13131 12999
12/97 12329 13514 13302
3/98 12583 13723 13491
6/98 12853 14045 13788
9/98 13202 14638 14188
12/98 13384 14687 14257
3/99 13287 14613 14171
6/99 13162 14484 13976
9/99 13203 14583 14040
12/99 13160 14565 14015
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
(6.4%) 5.6% 5.4%
Cumulative Total Return
Since Inception
10/3/94
31.6%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
32
BOND FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone Lehman Brothers CDA/Wiesenberger
Bond Aggregate Index Corporate-Investment
Fund C (Major Index) Grade - MF
- --------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9910 9949 9940
6/99 9799 9861 9803
9/99 9810 9929 9847
12/99 9759 9917 9830
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
(2.4%) (2.4%)
Cumulative Total Return
Since Inception
1/1/99
(2.4%)
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class Y Shares
Touchstone Lehman Brothers CDA/Wiesenberger
Bond Aggregate Index Corporate-Investment
Fund Y (Major Index) Grade - MF
- --------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9935 9949 9940
6/99 9848 9861 9803
9/99 9889 9929 9847
12/99 9856 9917 9830
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
(1.4%) (1.4%)
Cumulative Total Return
Since Inception
1/1/99
(1.4%)
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
33
BOND FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS - 3.4%
CENTRAL AMERICA - 2.1%
$ 120,000 Central America
International
Development,
Series F+ 10.00% 12/01/11 $ 132,586
120,000 Central America
International
Development,
Series G+ 10.00% 12/01/11 132,586
120,000 Central America
International
Development,
Series H+ 10.00% 12/01/11 132,586
- -------------------------------------------------------
397,758
- -------------------------------------------------------
HONDURAS - 1.3%
100,000 Republic of Honduras
International
Development,
Series C+ 13.00% 06/01/06 118,494
100,000 Republic of Honduras
International
Development,
Series D+ 13.00% 06/01/11 133,383
- -------------------------------------------------------
251,877
- -------------------------------------------------------
TOTAL AGENCY FOR INTERNATIONAL
DEVELOPMENT BONDS (COST $681,852) $ 649,635
- -------------------------------------------------------
ASSET-BACKED SECURITIES - 6.8%
FINANCIAL SERVICES - 6.8%
28,690 Chase Manhattan
Grantor Trust,
Series 1996-A,
Class A 5.20% 02/15/02 $ 28,595
750,000 Chemical Credit
Card Master Trust,
Series 1996-2,
Class A 5.98% 09/15/08 712,838
72,833 Navistar Financial
Corp. Owner Trust,
Series 1996-A,
Class A2 6.35% 11/15/02 72,795
492,133 World Omni Auto
Lease, Series
1997-B, Class A3 6.18% 11/25/03 492,015
- -------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $1,345,825) $1,306,243
- -------------------------------------------------------
CORPORATE BONDS - 40.0%
BANKING - 3.1%
225,000 Credit Suisse First
Boston - London 7.90% 05/01/07 $ 214,078
350,000 First Union 6.55% 10/15/35 332,532
49,276 Mercantile Safe
Deposit+ 12.125% 01/02/01 49,399
- -------------------------------------------------------
596,009
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
BEVERAGES, FOOD & TOBACCO - 2.3%
$ 500,000 Pepsi Bottling,
144A 5.625% 02/17/09 $ 441,478
- -------------------------------------------------------
CHEMICALS - 4.5%
900,000 Du Pont (E.I.)
De Nemours 6.875% 10/15/09 870,483
- -------------------------------------------------------
COMMUNICATIONS - 2.6%
500,000 Harris Corporation
6.65% 08/01/06 497,730
- -------------------------------------------------------
ELECTRIC UTILITIES - 2.4%
500,000 Consumers Energy,
Series B 6.50% 06/15/18 465,235
- -------------------------------------------------------
ELECTRONICS - 4.9%
1,000,000 Raytheon 5.70% 11/01/03 938,371
- -------------------------------------------------------
FINANCIAL SERVICES - 3.4%
750,000 Safeco Capital 8.072% 07/15/37 659,612
- -------------------------------------------------------
FOREST PRODUCTS & PAPER - 1.4%
250,000 Georgia-Pacific 9.50% 05/15/22 264,531
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 3.1%
650,000 Columbia/HCA
Health 6.73% 07/15/45 604,937
- -------------------------------------------------------
HOUSEHOLD PRODUCTS - 3.6%
750,000 Owens-Illinois 7.15% 05/15/05 696,290
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.4%
250,000 News America
Holdings 10.125% 10/15/12 275,052
- -------------------------------------------------------
OIL & GAS - 1.3%
250,000 Husky Oil 8.90% 08/15/28 249,649
- -------------------------------------------------------
TELEPHONE SYSTEMS - 2.2%
400,000 MCI WorldCom 8.875% 01/15/06 417,948
- -------------------------------------------------------
TRANSPORTATION - 3.8%
750,000 Norfolk Southern 7.35% 05/15/07 733,254
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $8,170,971) $7,710,579
- -------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 28.8%
119,271 Federal Home
Loan Mortgage
Corporation 6.00% 05/01/09 $ 114,965
419,767 Federal Home
Loan Mortgage
Corporation 6.00% 08/01/10 403,376
35,889 Federal Home
Loan Mortgage
Corporation 6.00% 10/01/10 34,488
1,000,000 Federal National
Mortgage
Association 5.75% 04/15/03 970,904
1,223,815 Federal National
Mortgage
Association 6.50% 07/01/28 1,153,521
983,939 Federal National
Mortgage
Association 7.00% 08/01/29 951,614
The accompanying notes are an integral part of the financial statements.
<PAGE>
34
BOND FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
MORTGAGE-BACKED SECURITIES - CONTINUED
$ 342,954 Government
National Mortgage
Association 7.00% 06/15/09 $ 341,999
227,027 Government
National Mortgage
Association 9.00% 08/15/19 238,338
279,577 Government
National Mortgage
Association 6.50% 01/15/24 265,224
72,037 Government
National Mortgage
Association 7.50% 12/15/27 71,287
803,018 Government
National Mortgage
Association 7.00% 05/15/28 775,999
242,869 Government
National Mortgage
Association 6.50% 09/15/28 228,145
- -------------------------------------------------------
TOTAL-MORTGAGE BACKED
SECURITIES (COST $5,805,865) $5,549,860
- -------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS - 5.2%
CANADA - 5.2%
1,000,000 Province of
Ontario 7.375% 01/27/03 $1,010,650
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $1,081,178) $1,010,650
- -------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 5.2%
1,000,000 U.S. Treasury
Note 5.875% 10/31/01 $ 993,438
- -------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $994,547) $ 993,438
- -------------------------------------------------------
Shares Value
(Note 1)
PREFERRED STOCKS - 4.5%
ELECTRIC UTILITIES - 2.1%
9,600 Appalachian Power,
8.25% Cumulative $ 213,600
8,700 Ohio Power, Series A,
8.16% Cumulative 193,575
- -------------------------------------------------------
407,175
- -------------------------------------------------------
OIL & GAS - 2.4%
20,000 Transcanada Pipelines,
8.75% Cumulative 451,250
- -------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $989,416) $ 858,425
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 93.9%
(COST $19,069,654) (A) $18,078,830
CASH AND OTHER ASSETS
NET OF LIABILITIES - 6.1% 1,177,309
- -------------------------------------------------------
NET ASSETS - 100.0% $19,256,139
- -------------------------------------------------------
Notes to the Schedule of Investments:
+ Restricted and Board valued security (Note 5).
(a) The aggregate identified cost for federal income tax purposes is
$19,069,654, resulting in gross unrealized appreciation and depreciation of
$8,172 and $998,996, respectively, and net unrealized depreciation of
$990,824.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $441,478, or 2.3% of net assets.
The accompanying notes are an integral part of the financial statements.
<PAGE>
35
STANDBY INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE STANDBY INCOME FUND
The Touchstone Standby Income Fund continued to achieve success in 1999. Fort
Washington Investment Advisors, the manager of the Touchstone Standby Income
Fund, attributed this to their investment philosophy of sector rotation and
trend analysis. The Fund's benchmark, the Merrill Lynch 91-Day Treasury Index,
posted a 4.8% return for 1999. The Standby Income Fund achieved a 4.6% return
for the year.
Fort Washington began 1999 with a near balanced allocation to the Commercial
Paper, corporate bond and ABS markets and an index matched average maturity. As
the year concluded, the Fund had a significantly higher Commercial Paper
allocation, effectively unwinding the position that had helped them to achieve
success in 1998. ABS and corporate spreads, which had reached historically wide
levels in 1998, began to tighten adding to the Fund's total return. This,
coupled with the increasing likelihood that the Federal Reserve was becoming
more hostile to the bond market, caused Fort Washington to shorten duration and
seek the liquidity provided by the Commercial Paper market.
Fort Washington's defensive posture allowed the success to continue into 1999,
even as the bond market experienced its second worst year ever. The Fund's 4.6%
return again placed the Touchstone Standby Income Fund in the top quartile of
the Morningstar Ultra Short Index.
GROWTH OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
Merrill Lynch 30-Day
Touchstone 91-Day Money Market Smith Barney
Standby Income Treasury Index Yield Index 3-Month
Fund* (Major Index) (Minor Index) Treasury Bill
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/94 10000 10000 10000 10000
12/94 10115 10133 10117 10130
3/95 10248 10285 10254 10272
6/95 10400 10439 10396 10422
9/95 10527 10588 10535 10569
12/95 10692 10744 10673 10713
3/96 10804 10876 10805 10851
6/96 10937 11016 10934 10988
9/96 11078 11168 11066 11132
12/96 11206 11314 11201 11276
3/97 11346 11458 11336 11419
6/97 11492 11614 11478 11566
9/97 11646 11769 11623 11716
12/97 11792 11917 11770 11868
3/98 11950 12072 11914 12021
6/98 12103 12227 12064 12173
9/98 12273 12401 12216 12327
12/98 12440 12540 12358 12468
3/99 12579 12673 12494 12485
6/99 12708 12822 12629 12622
9/99 12845 12984 12773 12766
12/99 13007 13146 12930 12926
</TABLE>
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
4.6% 5.2% 5.1%
Cumulative Total Return
Since Inception
10/3/94
30.1%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
<PAGE>
36
STANDBY INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
ASSET-BACKED SECURITIES - 12.9%
$ 252,317 Auto Finance Group
Receivables Trust,
Series 1997-A,
Class A 6.35% 10/15/02 $ 251,540
325,681 Auto Finance Group
Receivables Trust,
Series 1997-B,
Class A 6.20% 02/15/03 323,782
247,281 Capital Asset
Research Funding,
Series 1998-A,
Class A, 144A 5.905% 12/15/05 247,976
500,000 Chase Credit Card
Master Trust,
Series 1998-6,
Class B (a) 6.973% 09/15/04 501,175
540,000 Citibank Credit Card
Master Trust,
Series 1997-3,
Class A 6.839% 02/10/04 539,341
410,756 Mellon Auto
Grantor Trust,
Series 1999-1,
Class B 5.76% 10/17/05 405,527
18,832 Newcourt Equipment
Trust Securities,
Series 1998-1,
Class A2 5.17% 09/20/00 18,832
406,539 Onyx Acceptance
Auto Trust, Series
1998-1, Class A 5.95% 07/15/04 402,941
172,246 Summit Acceptance
Auto Trust,
Series 1996-A,
Class A1, 144A 7.01% 07/15/02 172,784
255,840 UCFC Home
Equity Loan,
Series 1998-D,
Class AF1 6.105% 04/15/13 254,878
- -------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $3,134,708) $3,118,776
- -------------------------------------------------------
COMMERCIAL PAPER - 63.3%
1,000,000 Centennial Energy
Holdings,
Sec. 4(2) 7.20% 01/21/00 $ 995,000
1,000,000 Consolidated
Natural Gas 7.05% 01/21/00 995,104
520,000 Consolidation
Coal 6.43% 01/21/00 515,170
7,550,000 Inter-American
Development
Bank 5.78% 7,530,603
1,000,000 Merrill Lynch 6.37% 01/31/00 993,807
1,000,000 PHH 7.15% 01/21/00 995,035
Principal Interest Maturity Value
Amount Rate Date (Note 1)
COMMERCIAL PAPER - CONTINUED
$ 570,000 Popular North
America 6.30% 01/24/00 $ 564,713
565,000 South Carolina
Electric & Gas 6.60% 02/01/00 560,857
600,000 Tandy 6.45% 02/08/00 595,378
1,000,000 Toyota Credit
(Puerto Rico) 6.55% 01/20/00 995,633
570,000 UOP, Sec. 4(2) 6.75% 01/28/00 564,443
- -------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $15,305,743) $15,305,743
- -------------------------------------------------------
CORPORATE BONDS - 14.8%
BANKING - 4.6%
570,000 MBNA, MTN (a) 6.58% 07/07/03 $ 564,784
540,000 Popular, Series 3,
MTN 6.40% 08/25/00 538,560
- -------------------------------------------------------
1,103,344
- -------------------------------------------------------
ELECTRIC UTILITIES - 2.1%
500,000 SCANA,
MTN (a) 6.813% 07/14/00 499,863
- -------------------------------------------------------
FINANCIAL SERVICES - 2.1%
500,000 Potomac Capital
Investment,
144A 7.55% 11/19/01 501,257
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 0.6%
150,000 Cox
Communications 6.375% 06/15/00 150,148
- -------------------------------------------------------
REAL ESTATE - 2.1%
500,000 Federal Realty
Investment Trust,
REIT 8.875% 01/15/00 500,253
- -------------------------------------------------------
RESTAURANTS - 1.0%
239,000 ARA Services 10.625% 08/01/00 242,061
- -------------------------------------------------------
RETAILERS - 2.3%
550,000 Dayton Hudson 10.00% 12/01/00 565,089
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,592,162) $ 3,562,015
- -------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 4.5%
600,000 Federal Home
Loan Bank 5.73% 01/14/00 $ 597,326
500,000 Federal Home
Loan Mortgage
Corportation,
Series UB 6.00% 11/15/08 493,195
- -------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST $1,100,764) $ 1,090,521
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 95.5%
(COST $23,133,377) (B) $23,077,055
CASH AND OTHER ASSETS
NET OF LIABILITIES - 4.5% 1,084,721
- -------------------------------------------------------
NET ASSETS - 100.0% $24,161,776
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
37
STANDBY INCOME FUND
SCHEDULE OF INVESTMENTS CONTINUED
Notes to the Schedule of Investments:
(a) Interest rate shown reflects current rate on instrument with variable rate.
(b) The aggregate identified cost for federal income tax purposes is
$23,133,377, resulting in gross unrealized appreciation and depreciation of
$3,650 and $59,972, respectively, and net unrealized depreciation of
$56,322.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $922,017, or 3.8% of net assets.
Sec. 4(2) - Securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Directors. At December
31, 1999, these securities were valued at $1,559,443, or 6.5% of net
assets.
MTN - Medium Term Note
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
<PAGE>
38
TOUCHSTONE SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
EMERGING INTERNATIONAL INCOME VALUE GROWTH & TOUCHSTONE TOUCHSTONE STANDBY
GROWTH EQUITY OPPORTUNITY PLUS INCOME BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND(E)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value
(Note1)(a) $14,297,997 $15,393,299 $8,023,032 $31,286,783 $35,584,213 $6,735,888 $18,078,830 $23,077,055
Cash 332,115 -- 39,203 1,142,975 684,758 320,743 880,807 903,916
Foreign currency (b) -- -- -- -- -- 2,391 -- --
Receivables for:
Investments sold 22,738 142,567 -- -- -- -- -- --
Fund shares sold 1,416 2,455 324 43 780 624 6 --
Dividends 6,882 4,672 -- 33,720 63,622 1,625 17,590 --
Foreign tax reclaims -- 9,390 -- 367 3,455 -- 1,094 --
Interest 2,556 1,017 230,899 5,983 3,475 35,096 247,247 100,729
Unrealized appreciation
on foreign forward
currency contracts -- -- -- -- -- 326 -- --
Receivable from
Investment
Advisor (Note 6) 94,851 168,044 164,514 -- -- 152,264 120,542 111,499
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 14,758,555 15,721,444 8,457,972 32,469,871 36,340,303 7,248,957 19,346,116 24,193,199
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Investments
purchased 1,730 142,185 -- -- -- -- -- --
Fund shares
redeemed 6,947 1,005 8,471 -- 2,342 2,185 500 2,059
Unrealized depreciation
on foreign forward
currency contracts -- 1,049 -- -- -- -- -- --
Payable to Investment
Advisor (Note 6) -- -- -- 68,346 96,816 -- -- --
Other accrued expenses 42,177 59,038 43,353 45,524 110,327 37,159 89,477 29,364
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 50,854 203,277 51,824 113,870 209,485 39,344 89,977 31,423
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS(C) $14,707,701 $15,518,167 $8,406,148 $32,356,001 $36,130,818 $7,209,613 $19,256,139 $24,161,776
- ------------------------------------------------------------------------------------------------------------------------------
COMPUTATION OF NET ASSET VALUE, REDEMPTION VALUE AND OFFERING PRICE PER SHARE:
Net assets
- Class A $10,743,308 $ 9,043,060 $5,329,689 $31,807,545 $12,573,988 $4,248,477 $ 4,309,853 $24,161,776
Shares outstanding
- Class A 633,546 547,386 778,365 2,702,538 871,043 356,241 455,338 2,445,173
Net asset value and
redemption price per
share -
Class A $ 16.96 $ 16.52 $ 6.85 $ 11.77 $ 14.44 $ 11.93 $ 9.47 $ 9.88
Offering price per share
- Class A (d) $ 17.99 $ 17.53 $ 7.19 $ 12.49 $ 15.32 $ 12.66 $ 9.94 $ 9.88
Net assets
- Class C $ 3,964,393 $6,475,107 $3,076,459 $ 548,456 $ 2,108,577 $2,961,136 $ 997,953 $ --
Shares outstanding
- Class C 243,392 406,736 463,383 47,763 159,131 257,042 109,081 --
Net asset value, offering
price and redemption
price per share
- Class C $ 16.29 $ 15.92 $ 6.64 $ 11.48 $ 13.25 $ 11.52 $ 9.15 $ --
Net assets
- Class Y $ -- $ -- $ -- $ -- $21,448,253 $ -- $13,948,333 $ --
Shares outstanding
- Class Y -- -- -- -- 1,074,730 -- 1,067,830 --
Net asset value, offering
price and redemption
price per share
- Class Y $ -- $ -- $ -- $ -- $ 19.96 $ -- $ 13.06 $ --
- ------------------------------------------------------------------------------------------------------------------------------
(a) Cost of
investments
of: $10,763,136 $11,753,613 $8,063,401 $27,959,720 $35,784,363 $6,754,213 $19,069,654 $23,133,377
(b) Cost of foreign
currency of: $ -- $ -- $ -- $ -- $ -- $ 2,367 $ -- $ --
(c) See the Statement of Changes in Net Assets for components of net assets.
(d) The offering price per share is calculated as follows: Net Asset Value Per Share/(1-maximum sales load).
(e) The Fund does not offer classes of shares. All Fund information is shown in the spaces corresponding to Class A.
The accompanying notes are an integral part of the financial statements.
<PAGE>
39
TOUCHSTONE SERIES TRUST
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
EMERGING INTERNATIONAL INCOME VALUE GROWTH & TOUCHSTONE TOUCHSTONE STANDBY
GROWTH EQUITY OPPORTUNITY PLUS INCOME BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
INVESTMENT INCOME
(NOTE 1):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 29,477 $ 12,301 $1,108,296 $ 55,207 $ 25,966 $ 204,810 $1,261,883 $ 709,187
Dividend income(a) 70,954 175,337 -- 359,297 866,148 49,724 86,248 --
- ------------------------------------------------------------------------------------------------------------------------------
Total investment
income 100,431 187,638 1,108,296 414,504 892,114 254,534 1,348,131 709,187
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory
fees (Note 3) 96,269 117,039 59,613 224,988 305,915 59,339 108,553 28,605
Sponsor fees (Note 3) 24,067 24,640 18,342 59,997 76,479 14,835 39,474 22,884
Custody, administration
and fund accounting
fees 87,024 168,151 88,315 89,091 122,537 83,985 104,707 69,820
Transfer agent fees 95,027 92,283 94,610 58,906 103,972 88,008 75,287 65,195
Registration fees 16,660 23,623 22,123 25,029 22,299 22,965 20,949 14,511
Professional fees 11,638 11,406 12,608 19,383 22,951 9,891 15,018 10,203
Printing fees 24,855 28,768 23,797 48,287 51,569 19,285 22,974 24,749
Trustee fees 978 956 1,259 1,938 3,077 890 1,635 1,170
Distribution fees
- Class A 21,608 17,648 14,568 73,078 34,869 10,887 11,783 --
Distribution fees
- Class C 32,920 51,644 32,752 5,161 24,394 30,290 10,142 --
Amortization of
organization costs 7,393 7,393 7,393 -- 7,393 7,393 7,393 9,789
Miscellaneous 1,698 1,773 1,536 4,004 2,641 1,169 887 1,631
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 420,137 545,324 376,916 609,862 778,096 348,937 418,802 248,557
Reimbursement
or waiver from
Investment
Advisor
(Note 6) (215,188) (309,722) (242,471) (216,639) (317,320) (226,438) (268,587) (162,742)
- -------------------------------------------------------------------------------------------------------------------------------
Net expenses 204,949 235,602 134,445 393,223 460,776 122,499 150,215 85,815
- -------------------------------------------------------------------------------------------------------------------------------
Net investment
income (loss) (104,518) (47,964) 973,851 21,281 431,338 132,035 1,197,916 623,372
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 2,394,962 2,822,986 (3,040,680) 2,709,639 128,669 637,223 (347,955) (46,908)
Foreign currency
transactions -- (58,523) -- -- -- (7,726) -- --
- -------------------------------------------------------------------------------------------------------------------------------
2,394,962 2,764,463 (3,040,680) 2,709,639 128,669 629,497 (347,955) (46,908)
- -------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments 2,521,564 1,714,220 2,175,422 1,607,624 524,230 (106,165) (1,153,862) (58,658)
Foreign currency
translations -- (1,369) -- -- -- 563 -- --
- -------------------------------------------------------------------------------------------------------------------------------
2,521,564 1,712,851 2,175,422 1,607,624 524,230 (105,602) (1,153,862) (58,658)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED
GAIN (LOSS): 4,916,526 4,477,314 (865,258) 4,317,263 652,899 523,895 (1,501,817) (105,566)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $4,812,008 $4,429,350 $ 108,593 $4,338,544 $1,084,237 $ 655,930 $ (303,901) $ 517,806
- -------------------------------------------------------------------------------------------------------------------------------
(a) Net of foreign tax
withholding of: $ -- $ 17,180 $ -- $ 1,830 $ 2,936 $ 368 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
40
TOUCHSTONE SERIES TRUST
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
TOUCHSTONE EMERGING TOUCHSTONE INTERNATIONAL TOUCHSTONE INCOME
GROWTH FUND EQUITY FUND OPPORTUNITY FUND
--------------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998 1999 1998
OPERATIONS:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ (104,518) $ (27,765) $ (47,964) $ (1,691) $ 973,851 $ 714,488
Net realized gain (loss) 2,394,962 363,157 2,764,463 345,939 (3,040,680) (670,556)
Net change in unrealized appreciation
(depreciation) 2,521,564 (340,021) 1,712,851 643,481 2,175,422 (1,110,683)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,812,008 (4,629) 4,429,350 987,729 108,593 (1,066,751)
- -------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A -- -- (16,101) (6,819) (634,236) (727,740)
Class C -- -- -- -- (341,850) --
Class Y -- -- -- -- -- --
Realized capital gains
Class A (1,429,950) (407,884) (690,064) (373,319) -- --
Class C (532,042) -- (511,346) -- -- --
Class Y -- -- -- -- -- --
Distributions in excess of net investment income
Class A -- -- (14,483) (20,277) (81,498) --
Class C -- -- -- -- (45,806) --
Class Y -- -- -- -- -- --
Distributions in excess of realized capital gains
Class A -- (50,275) -- -- -- --
Class C -- -- -- -- -- --
Class Y -- -- -- -- -- --
Return of capital distributions
Class A -- -- -- -- -- (56,290)
Class C -- -- -- -- -- --
Class Y -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1,961,992) (458,159) (1,231,994) (400,415) (1,103,390) (784,030)
- -------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS
Capital Contribution - Class C (Note 7) 3,284,020 -- 5,226,105 -- 3,798,163 --
Capital Contribution - Class Y (Note 7) -- -- -- -- -- --
Proceeds from shares sold 1,738,718 5,012,537 1,242,946 1,630,252 1,334,627 3,476,133
Reinvestment of dividends and distributions 1,716,110 418,391 1,227,418 398,640 942,415 623,322
Cost of shares redeemed (3,216,309) (1,581,667) (2,251,174) (501,457) (3,332,584) (2,599,216)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from share
transactions 3,522,539 3,849,261 5,445,295 1,527,435 2,742,621 1,500,239
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 6,372,555 3,386,473 8,642,651 2,114,749 1,747,824 (350,542)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 8,335,146 4,948,673 6,875,516 4,760,767 6,658,324 7,008,866
- -------------------------------------------------------------------------------------------------------------------------------
End of period $14,707,701 $8,335,146 $15,518,167 $6,875,516 $ 8,406,148 $6,658,324
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $10,901,854 $7,715,214 $10,442,829 $5,804,081 $13,013,011 $8,978,000
Undistributed (distributions in excess of)
net investment income -- -- 35,589 (32,893) (117,424) --
Accumulated net realized gain (loss) 270,986 (47,580) 1,400,906 27,664 (4,449,070) (909,681)
Net unrealized appreciation (depreciation) 3,534,861 667,512 3,638,843 1,076,664 (40,369) (1,409,995)
- -------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $14,707,701 $8,335,146 $15,518,167 $6,875,516 $ 8,406,148 $6,658,324
- -------------------------------------------------------------------------------------------------------------------------------
(a) Commencement of operations: The Fund commenced operations on May 1, 1998.
(b) The Fund does not offer classes of shares. All Fund information is shown in the spaces corresponding to Class A.
The accompanying notes are an integral part of the financial statements.
<PAGE>
41
TOUCHSTONE SERIES TRUST
<CAPTION>
TOUCHSTONE VALUE TOUCHSTONE GROWTH TOUCHSTONE
PLUS FUND & INCOME FUND BALANCED FUND
-----------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED(A) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER
1999 1998 1999 1998 1999 31, 1998
OPERATIONS:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 21,281 $ 40,182 $ 431,338 $ 181,174 $ 132,035 $ 88,739
Net realized gain (loss) 2,709,639 (608,840) 128,669 220,365 629,497 225,430
Net change in unrealized appreciation
(depreciation) 1,607,624 1,699,825 524,230 (338,911) (105,602) (183,060)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,338,544 1,131,167 1,084,237 62,628 655,930 131,109
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (33,255) (40,182) (165,297) (183,340) (105,330) (93,863)
Class C -- -- (7,313) -- (36,471) --
Class Y -- -- (261,137) -- -- --
Realized capital gains
Class A (638,617) -- (24,828) (304,181) (324,326) (185,895)
Class C (11,183) -- (4,407) -- (232,046) --
Class Y -- -- (30,551) -- -- --
Distributions in excess of net investment income
Class A -- -- (2,012) (6,836) -- (11,391)
Class C -- -- (89) -- -- --
Class Y -- -- (3,179) -- -- --
Distributions in excess of realized capital gains
Class A -- -- -- (70,773) -- --
Class C -- -- -- -- -- --
Class Y -- -- -- -- -- --
Return of capital distributions
Class A -- (3,702) (969,080) (13,429) -- --
Class C -- -- (171,468) -- -- --
Class Y -- -- (1,193,905) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (683,055) (43,884) (2,833,266) (578,559) (698,173) (291,149)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS
Capital Contribution - Class C (Note 7) 318,185 -- 2,753,186 -- 3,339,459 --
Capital Contribution - Class Y (Note 7) -- -- 20,868,632 -- -- --
Proceeds from shares sold 1,447,308 25,939,165 1,928,120 13,903,526 765,540 2,065,886
Reinvestment of dividends and distributions 674,160 43,452 2,824,251 569,460 695,607 286,919
Cost of shares redeemed (806,675) (2,366) (5,755,291) (4,676,332) (2,184,837) (872,443)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from share transactions 1,632,978 25,980,251 22,618,898 9,796,654 2,615,769 1,480,362
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 5,288,467 27,067,534 20,869,869 9,280,723 2,573,526 1,320,322
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period $27,067,534 $ -- $15,260,949 $ 5,980,226 $4,636,087 $3,315,765
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $32,356,001 $27,067,534 $36,130,818 $15,260,949 $7,209,613 $4,636,087
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF: $27,595,607 $25,976,551 $36,332,300 $15,278,502 $7,083,151 $4,521,372
Paid-in capital
Undistributed (distributions in excess of)
net investment income -- -- 1,598 -- (3,313) 1,963
Accumulated net realized gain (loss) 1,433,331 (608,842) (2,930) (66,551) 149,136 74,357
Net unrealized appreciation (depreciation) 3,327,063 1,699,825 (200,150) 48,998 (19,361) 38,395
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $32,356,001 $27,067,534 $36,130,818 $15,260,949 $7,209,613 $4,636,087
<CAPTION>
TOUCHSTONE TOUCHSTONE STANDBY
BOND FUND INCOME FUND(B)
----------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income (loss) $ 1,197,916 $ 218,403 $ 623,372 $ 536,968
Net realized gain (loss) (347,955) 66,845 (46,908) 15,437
Net change in unrealized appreciation
(depreciation) (1,153,862) 37,207 (58,658) 2,467
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (303,901) 322,455 517,806 554,872
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (314,128) (219,500) (626,405) (541,711)
Class C (63,775) -- -- --
Class Y (832,231) -- -- --
Realized capital gains
Class A (31) (53,127) -- (2,087)
Class C (7) -- -- --
Class Y (73) -- -- --
Distributions in excess of net investment income
Class A (1,716) (4,091) -- --
Class C (348) -- -- --
Class Y (4,547) -- -- --
Distributions in excess of realized capital gain
Class A -- -- -- --
Class C -- -- -- --
Class Y -- -- -- --
Return of capital distributions
Class A (33,705) -- -- --
Class C (8,180) -- -- --
Class Y (78,615) -- -- --
- ----------------------------------------------------------------------------------------------------
Total dividends and distributions (1,337,356) (276,718) (626,405) (543,798)
- ----------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS
Capital Contribution - Class C (Note 7) 1,139,586 -- -- --
Capital Contribution - Class Y (Note 7) 14,150,014 -- -- --
Proceeds from shares sold 1,713,920 4,527,950 15,760,941 8,443,462
Reinvestment of dividends and distributions 1,327,271 271,637 623,651 543,405
Cost of shares redeemed (2,356,902) (1,606,439) (3,371,225) (6,343,864)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) from share transactions 15,973,889 3,193,148 13,013,367 2,643,003
- ----------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 14,332,632 3,238,885 12,904,768 2,654,077
- ----------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period $ 4,923,507 $1,684,622 $11,257,008 $ 8,602,931
- ----------------------------------------------------------------------------------------------------
End of period $19,256,139 $4,923,507 $24,161,776 $11,257,008
- ----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF: $20,599,903 $4,840,284 $24,249,371 $11,238,577
Paid-in capital
Undistributed (distributions in excess of)
net investment income -- 3,657 16,536 7,490
Accumulated net realized gain (loss) (352,940) 10,547 (47,809) 8,605
Net unrealized appreciation (depreciation) (990,824) 69,019 (56,322) 2,336
- ----------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $19,256,139 $4,923,507 $24,161,776 $11,257,008
</TABLE>
<PAGE>
42
FINANCIAL HIGHLIGHTS
TOUCHSTONE SERIES TRUST
CLASS A
SELECTED DATA FOR A SHARE OUTSTANDING:
<TABLE>
<CAPTION>
TOUCHSTONE EMERGING GROWTH FUND
-------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.40 $13.85 $11.55 $11.52 $10.11
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.09) (0.04) (0.03) 0.01 (0.01)
Net realized and unrealized gain (loss) on investments 6.18 0.37 3.71 1.20 2.29
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 6.09 0.33 3.68 1.21 2.28
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- (0.01) (0.03)
Realized capital gains (2.53) (0.78) (1.38) (1.17) (0.84)
Return of capital -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.53) (0.78) (1.38) (1.18) (0.87)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.96 $13.40 $13.85 $11.55 $11.52
- ----------------------------------------------------------------------------------------------------------------------------------
Total return(a) 45.85% 2.57% 32.20% 10.56% 22.56%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 10,743 $8,335 $4,949 $2,873 $2,520
Ratios to average net assets:
Expenses (b) 1.50% 1.50% 1.50% 1.50% 1.50%
Net investment income (loss) (0.66)% (0.41)% (0.30)% (0.12)% (0.05)%
Portfolio turnover 97% 78% 101% 117% 109%
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total returns would have been lower had certain expenses not
been reimbursed or waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods listed, the ratios of expenses to average net assets
would have been as follows:
3.29% 4.11% 5.94% 6.58% 7.09%
(c) Amount rounds to less than $0.01.
The accompanying notes are an integral part of the financial statements.
<PAGE>
43
TOUCHSTONE SERIES TRUST
<CAPTION>
TOUCHSTONE INTERNATIONAL EQUITY FUND
-------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <S> <C> <C> <C> <C>
Net asset value, beginning of period $12.89 $11.41 $10.63 $ 9.58 $ 9.12
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.00(c) 0.00(c) 0.02 0.05 0.21
Net realized and unrealized gain (loss) on investments 5.06 2.27 1.64 1.06 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.06 2.27 1.66 1.11 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.06) (0.05) (0.02) (0.06) (0.22)
Realized capital gains (1.37) (0.74) (0.86) -- --
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.43) (0.79) (0.88) (0.06) (0.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.52 $12.89 $11.41 $10.63 $ 9.58
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(a) 39.50% 19.94% 15.57% 11.61% 5.29%
RATIOS AND SUPPLEMENTAL DATA: -------------------------------------------------------------
Net assets at end of period (000s) $9,043 $6,876 $4,761 $3,449 $ 2,617
Ratios to average net assets:
Expenses (b) 1.60% 1.60% 1.60% 1.60% 1.60%
Net investment income (loss) (0.08)% (0.03)% 0.17% 0.42% 0.11%
Portfolio turnover 155% 138% 151% 86% 90%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total returns would have been lower had certain expenses not
been reimbursed or waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods listed, the ratios of expenses to average net assets
assets would have been as follows:
4.11% 5.18% 7.07% 6.63% 7.30%
(c) Amount rounds to less than $0.01.
<CAPTION>
TOUCHSTONE INCOME OPPORTUNITY FUND
----------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.63 $ 9.89 $10.90 $ 9.83 $ 9.08
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.80 0.90 1.24 1.12 1.19
Net realized and unrealized gain (loss) on investments (0.68) (2.18) (0.23) 1.38 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.12 (1.28) 1.01 2.50 1.96
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.90) (0.91) (1.22) (1.12) (1.21)
Realized capital gains -- -- (0.80) (0.31) --
Return of capital -- (0.07) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.90) (0.98) (2.02) (1.43) (1.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.85 $ 7.63 $ 9.89 $10.90 $ 9.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(a) 1.16% (13.77)% 9.49% 26.66% 23.19%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $5,330 $6,658 $7,009 $4,579 $1,369
Ratios to average net assets:
Expenses (b) 1.20% 1.20% 1.20% 1.20% 1.20%
Net investment income (loss) 10.90% 10.02% 11.19% 11.29% 12.42%
Portfolio turnover 227% 283% 270% 222% 120%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total returns would have been lower had certain expenses not
been reimbursed or waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods listed, the ratios of expenses to average net assets
assets would have been as follows:
3.84% 3.77% 4.07% 6.74% 11.03%
(c) Amount rounds to less than $0.01.
</TABLE>
<PAGE>
44
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
CLASS A - CONTINUED
SELECTED DATA FOR A SHARE OUTSTANDING:
<TABLE>
<CAPTION>
TOUCHSTONE VALUE PLUS FUND(A)
----------------------------
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
12/31/99 12/31/98
<S> <C> <C>
Net asset value, beginning of period $ 10.41 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.01 0.02
Net realized and unrealized gain (loss) on investments 1.60 0.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.61 0.43
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.01) (0.02)
Realized capital gains (0.24) --
Return of capital -- 0.00(e)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.25) (0.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.77 $ 10.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total return(b) 15.51% 4.29%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $31,808 $27,068
Ratios to average net assets:
Expenses(c) 1.30% 1.30%(d)
Net investment income (loss) 0.08% 0.25%(d)
Portfolio turnover 60% 34%
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1998.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.02% 2.25%(d)
(d) Ratios are annualized.
(e) Amount rounds to less than $0.01.
(f) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
The accompanying notes are an integral part of the financial statements.
<PAGE>
45
TOUCHSTONE SERIES TRUST
<CAPTION>
TOUCHSTONE GROWTH & INCOME FUND
----------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <S> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.47 $ 15.06 $14.03 $13.14 $10.02
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.17 0.19 0.09 0.12 0.05
Net realized and unrealized gain (loss) on investments 0.21 0.84(f) 2.78 2.12 3.46
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.38 1.03 2.87 2.24 3.51
- --------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (0.20) (0.11) (0.12) (0.16)
Realized capital gains (0.03) (0.40) (1.73) (1.23) (0.23)
Return of capital (1.18) (0.02) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.41) (0.62) (1.84) (1.35) (0.39)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.44 $ 15.47 $15.06 $14.03 $13.14
- --------------------------------------------------------------------------------------------------------------------------
Total return(b) 2.53% 6.87% 20.70% 16.95% 35.14%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $12,574 $15,261 $5,980 $3,659 $1,500
Ratios to average net assets:
Expenses(c) 1.30% 1.30% 1.30% 1.30% 1.30%
Net investment income (loss) 1.04% 1.50% 0.67% 0.55% 0.56%
Portfolio turnover 66% 64% 170% 92% 102%
- --------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1998.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.13% 2.70% 4.34% 5.31% 16.35%
(d) Ratios are annualized.
(e) Amount rounds to less than $0.01.
(f) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
<CAPTION>
TOUCHSTONE BALANCED FUND
------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.09 $12.42 $12.48 $11.34 $ 9.97
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.27 0.25 0.27 0.30 0.31
Net realized and unrealized gain (loss) on investments 0.76 0.23 2.09 1.59 1.99
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.03 0.48 2.36 1.89 2.30
- ------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.31) (0.30) (0.30) (0.30) (0.33)
Realized capital gains (0.88) (0.51) (2.12) (0.45) (0.60)
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.19) (0.81) (2.42) (0.75) (0.93)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.93 $12.09 $12.42 $12.48 $11.34
- ------------------------------------------------------------------------------------------------------------------
Total return(b) 9.61% 3.98% 19.25% 16.86% 23.24%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $4,248 $4,636 $3,316 $2,085 $1,502
Ratios to average net assets:
Expenses(c) 1.35% 1.35% 1.35% 1.35% 1.35%
Net investment income (loss) 2.09% 2.11% 2.07% 2.19% 2.39%
Portfolio turnover 70% 59% 120% 88% 121%
- ------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1998.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
4.40% 4.93% 7.53% 8.52% 9.83%
(d) Ratios are annualized.
(e) Amount rounds to less than $0.01.
(f) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
</TABLE>
<PAGE>
46
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
CLASS A - CONTINUED
SELECTED DATA FOR A SHARE OUTSTANDING:
<TABLE>
<CAPTION>
TOUCHSTONE BOND FUND
------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.39 $10.22 $10.17 $10.61 $ 9.88
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.59 0.55 0.61 0.71 0.56
Net realized and unrealized gain (loss) on investments (0.76) 0.30 0.11 (0.43) 1.07
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.17) 0.85 0.72 0.28 1.63
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.68) (0.57) (0.66) (0.70) (0.86)
Realized capital gains -- (0.11) (0.01) (0.02) (0.04)
Return of capital (0.07) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.75) (0.68) (0.67) (0.72) (0.90)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.47 $10.39 $10.22 $10.17 $10.61
- ----------------------------------------------------------------------------------------------------------------------------------
Total return(a) (1.68)% 8.56% 7.30% 2.85% 16.95%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $4,310 $4,924 $1,685 $ 821 $ 523
Ratios to average net assets:
Expenses(b) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income (loss) 5.92% 5.68% 6.08% 6.01% 6.21%
Portfolio turnover 57% 170% 88% 64% 78%
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.26% 4.13% 7.13% 13.61% 29.29%
(c) Amount rounds to less than $0.01.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
47
TOUCHSTONE SERIES TRUST
<TABLE>
<CAPTION>
TOUCHSTONE STANDBY INCOME FUND
-----------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.98 $ 9.97 $ 9.98 $10.01 $10.03
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.54 0.52 0.51 0.46 0.55
Net realized and unrealized gain (loss) on investments (0.10) 0.01 -- 0.01 (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.44 0.53 0.51 0.47 0.53
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.54) (0.52) (0.52) (0.50) (0.55)
Realized capital gains -- (0.00)(c) -- -- --
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.54) (0.52) (0.52) (0.50) (0.55)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.88 $ 9.98 $ 9.97 $ 9.98 $10.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(a) 4.56% 5.49% 5.21% 4.80% 5.71%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $24,162 $11,257 $8,603 $6,456 $5,910
Ratios to average net assets:
Expenses(b) 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income (loss) 5.46% 5.17% 5.14% 4.88% 5.32%
Portfolio turnover 65% 683% 285% 20% 142%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.17% 2.37% 3.51% 2.80% 2.80%
(c) Amount rounds to less than $0.01.
</TABLE>
<PAGE>
48
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CLASS C (A)
SELECTED DATA FOR A SHARE OUTSTANDING:
TOUCHSTONE TOUCHSTONE
EMERGING TOUCHSTONE INCOME TOUCHSTONE TOUCHSTONE TOUCHSTONE
GROWTH INTERNATIONAL OPPORTUNITY VALUE PLUS GROWTH & BALANCE TOUCHSTONE
FUND EQUITY FUND FUND FUND INCOME FUND FUND BOND FUND
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $13.04 $12.51 $ 7.42 $10.26 $14.26 $11.65 $10.08
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income (loss) (0.19) (0.11) 0.72 (0.07) 0.04 0.17 0.51
Net realized and unrealized
gain (loss) on investments 5.97 4.89 (0.66) 1.53 0.21 0.73 (0.75)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.78 4.78 0.06 1.46 0.25 0.90 (0.24)
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income -- -- (0.84) -- (0.05) (0.15) (0.62)
Realized capital gains (2.53) (1.37) -- (0.24) (0.03) (0.88) --
Return of capital -- -- -- -- (1.18) -- (0.07)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.53) (1.37) (0.84) (0.24) (1.26) (1.03) (0.69)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.29 $15.92 $ 6.64 $11.48 $13.25 $11.52 $ 9.15
- ---------------------------------------------------------------------------------------------------------------------------------
Total return(b) 44.86% 38.44% 0.49% 14.24% 1.80% 8.78% (2.41)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $3,964 $6,475 $3,076 $ 548 $2,109 $2,961 $ 998
Ratios to average net assets(c)
Expenses 2.25% 2.35% 1.95% 2.05% 2.05% 2.10% 1.65%
Net investment income (loss) (1.41)% (0.81)% 10.14% (0.65) % 0.30% 1.33% 5.18%
Portfolio turnover 97% 155% 227% 60% 99% 70% 120%
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The Class commenced operations on January 1, 1999.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
4.03% 4.86% 4.59% 2.76% 2.87% 5.15% 3.01%
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
49
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1999
CLASS Y (A)
SELECTED DATA FOR A SHARE OUTSTANDING:
<TABLE>
<CAPTION>
TOUCHSTONE GROWTH TOUCHSTONE
& INCOME FUND BOND FUND
-------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 20.87 $ 14.15
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.23 0.64
Net realized and unrealized gain (loss) on investments 0.34 (0.84)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.57 (0.20)
- ------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.26) (0.82)
Realized capital gains (0.03) --
Return of capital (1.19) (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.48) (0.89)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.96 $ 13.06
- ------------------------------------------------------------------------------------------------------------------------
Total return (b) 2.71% (1.44)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 21,448 $ 13,948
Ratios to average net assets (c)
Expenses 1.05% 0.65%
Net investment income (loss) 1.28% 6.18%
Portfolio turnover 99% 120%
- ------------------------------------------------------------------------------------------------------------------------
(a) The Class commenced operations on January 1, 1999.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
1.88% 2.01%
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
50
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Touchstone Series Trust (the "Trust"), formerly Select Advisors Trust A, was
organized as a Massachusetts business trust on February 7, 1994 and is
registered under the Investment Company Act of 1940, as amended ("the Act"), as
an open-end management investment company. The Trust consists of eight Funds,
each having distinct investment objectives and policies: Touchstone Emerging
Growth Fund ("Emerging Growth Fund"), Touchstone International Equity Fund
("International Equity Fund"), Touchstone Income Opportunity Fund ("Income
Opportunity Fund"), Touchstone Value Plus Fund ("Value Plus Fund"), Touchstone
Growth & Income Fund ("Growth & Income Fund"), Touchstone Balanced Fund
("Balanced Fund"), Touchstone Bond Fund ("Bond Fund") and Touchstone Standby
Income Fund ("Standby Income Fund") (each a "Fund" and collectively, the
"Funds").
Each Fund, other than the Growth & Income Fund, Bond Fund and Standby Income
Fund, is divided into two classes of shares: class A shares ("Class A Shares")
and class C shares ("Class C Shares"). Each class of shares charges different
sales charges and distribution or service fees. The amount of sales charges and
other fees you pay will depend on which class of shares you own. The Growth &
Income Fund and the Bond Fund also offer class Y shares ("Class Y Shares"),
which are not available for sale to the public. The Standby Income Fund does not
offer classes of shares and it does not charge sales charges, distribution fees
or service fees.
As of December 31, 1999, Touchstone Advisors, Inc., an indirect subsidiary of
the Western-Southern Life Assurance Company ("Western-Southern"), and
Western-Southern together owned 20.6%, 4.8%, 6.8%, 1.5%, 48.6%, 7.0% and 40.6%
of the outstanding Class A Shares and 0.1%, 0.1%, 0.1%, 0%, 0.2%, 0%, and 0% of
the outstanding Class C Shares of the Emerging Growth Fund, the International
Equity Fund, the Income Opportunity Fund, the Value Plus Fund, the Growth &
Income Fund, the Balanced Fund, and the Bond Fund, respectively. Touchstone
Advisors, Inc. and Western-Southern owned 6.3% of the outstanding shares of the
Standby Income Fund as of December 31, 1999.
The accounting policies are in conformity with generally accepted accounting
principles ("GAAP") for investment companies. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the related amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
The following is a summary of the significant accounting policies of the Funds.
INVESTMENT VALUATION. Securities for which market quotations are readily
available are valued at the last sale price on a national securities exchange,
or, in the absence of recorded sales, at the readily available closing bid price
in the over-the-counter market. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. Debt securities are
valued by a pricing service which determines valuations based upon market
transactions for normal, institutional-size trading units of similar securities.
Securities or other assets for which market quotations are not readily available
are valued at fair value in good faith under consistently applied procedures in
accordance with procedures established by the Trustees of the Trust. Such
procedures include the use of independent pricing services, which use prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. All portfolio securities with a remaining maturity of less than 60
days are valued at amortized cost, which approximates market.
<PAGE>
51
TOUCHSTONE SERIES TRUST
FOREIGN CURRENCY VALUE TRANSLATION. The accounting records of the Funds are
maintained in U.S. dollars. The market value of investment securities, other
assets and liabilities and forward contracts denominated in foreign currencies
are translated into U.S. dollars at the prevailing exchange rates at the end of
the period. Purchases and sales of securities, income receipts, and expense
payments are translated at the exchange rate prevailing on the respective dates
of such transactions. Reported net realized gains and losses on foreign currency
transactions represent net gains and losses from sales and maturities of forward
currency contracts, disposition of foreign currencies, currency gains and losses
realized between the trade and settlement dates on securities transactions and
the difference between the amount of net investment income accrued and the U.S.
dollar amount actually received.
The effects of changes in foreign currency exchange rates on investments in
securities are not segregated in the Statement of Operations from the effects of
changes in market prices of these securities, but are included with net realized
and unrealized gain or loss on investments.
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date except
that certain dividends from foreign securities where the ex-dividend date has
passed are recorded as soon as the Trust is informed of the ex-dividend date.
Interest income, which includes the amortization of premium and accretion of
discount, if any, is recorded on an accrual basis. Dividend and interest income
is recorded net of foreign taxes where recovery of such taxes is not assured.
DIVIDENDS AND DISTRIBUTIONS. Substantially all of the net investment income of
the Income Opportunity Fund and the Bond Fund is declared as dividends and paid
monthly. Substantially all of the net investment income of the Value Plus Fund
and the Balanced Fund is declared as dividends and paid quarterly. Substantially
all of the net investment income of the Growth & Income Fund is currently
declared as dividends and paid quarterly. For the months of January 1999 through
March 1999, the Growth & Income Fund declared and paid dividends monthly.
Substantially all of the net investment income of the Emerging Growth Fund and
the International Equity Fund is declared as dividends and paid annually. It is
the policy of the Standby Income Fund to record income dividends daily and
distribute them monthly. Distributions to shareholders of net realized capital
gains, if any, are declared and paid annually. Dividends and distributions are
recorded on the ex-dividend date and are reinvested at net asset value.
Income and realized capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to non-deductible organization costs,
passive foreign investment companies, foreign currency transactions, losses
deferred due to wash sales, and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid-in capital. Undistributed net
investment income and accumulated net realized gain or loss from the Funds may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
ORGANIZATION EXPENSE. Organization expenses attributable to the Funds were
deferred and are being amortized by each Fund on a straight-line basis over a
five-year period from commencement of operations. The amount paid by the Trust
on any redemption by Touchstone Advisors, Inc. or any other then-current holder
<PAGE>
52
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
of the organizational seed capital shares ("Initial Shares") of the Fund will be
reduced by a portion of any unamortized organization expenses of the Fund,
determined by the proportion of the number of the Initial Shares of the Fund
redeemed to the number of the Initial Shares of the Fund then outstanding after
taking into account any prior redemptions of the Initial Shares of the Fund. The
amount of such reduction in excess of the unamortized organization expenses of
the Fund, if any, shall be contributed by the Fund.
FEDERAL TAXES. Each Fund of the Trust is treated as a separate entity for
federal income tax purposes. Each Fund's policy is to comply with the provisions
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income, and net
realized capital gains, if any, within the prescribed time periods. Therefore,
no provision has been made for federal income taxes. It is intended that each
Fund's assets will be managed in such a way that an investor in the Fund will be
able to satisfy the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended.
WRITTEN OPTIONS. Each Fund may enter into written option agreements. The premium
received for a written option is recorded as an asset with an equivalent
liability. The liability is marked-to-market based on the option's quoted daily
settlement price. When an option expires or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security
and the liability related to such option is eliminated. When a written call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. If a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased.
FORWARD FOREIGN CURRENCY AND SPOT CONTRACTS. Each Fund may enter into forward
foreign currency and spot contracts to protect securities and related
receivables and payables against fluctuations in foreign currency rates. A
forward contract is an agreement to buy or sell currencies of different
countries on a specified future date at a specified rate.
Risks associated with such contracts include the movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the counterparty
to perform. The market value of the contract will fluctuate with changes in
currency exchange rates. Contracts are valued daily based on procedures
established by and under the general supervision of the Trustees of the Trust
and the change in the market value is recorded by the Funds as unrealized
appreciation and depreciation of forward foreign currency contracts. As of
December 31, 1999, the following Funds had the following open forward foreign
currency and spot contracts:
<TABLE>
<CAPTION>
Unrealized
Contracts to Appreciation/
Portfolio Name Maturity Date Deliver/Receive In Exchange For Value (Depreciation)
Balanced Fund:
<S> <C> <C> <C> <C> <C>
Sales 02/01/2000 GBP 41,520 $ 68,124 $ 67,069 $ 1,055
03/13/2000 ZAR 565,000 91,141 91,870 (729)
- -----------------------------------------------------------------------------------------------------------------
$ 326
- -----------------------------------------------------------------------------------------------------------------
GBP Great Britain Pound
ZAR South African Rand
<PAGE>
53
TOUCHSTONE SERIES TRUST
<CAPTION>
Unrealized
Contracts to Appreciation/
Portfolio Name Maturity Date Deliver/Receive In Exchange For Value (Depreciation)
International Equity Fund:
<S> <C> <C> <C> <C> <C>
Sales 01/04/2000 EUR 141,036 $143,222 $142,229 $ (993)
01/04/2000 GBP 88,271 142,514 142,570 (56)
01/04/2000 ZAR 893 145 145 --
- -----------------------------------------------------------------------------------------------------------------
$(1,049)
- -----------------------------------------------------------------------------------------------------------------
EUR European Monetary Unit (Euro)
GBP Great Britain Pound
ZAR South African Rand
</TABLE>
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, which are
agreements pursuant to which securities are acquired by the Fund from a third
party with the commitment that they will be repurchased by the seller at a fixed
price on an agreed upon date. Each Fund may enter into repurchase agreements
with banks or lenders meeting the creditworthiness standards established by the
Trustees of the Fund Trust. The Fund, through its custodian, receives as
collateral, delivery of the underlying securities, whose market value is
required to be at least 100% of the resale price at the time of purchase. The
resale price reflects the purchase price plus an agreed upon rate of interest.
In the event of counterparty default, the Fund has the right to use the
collateral to offset losses incurred.
SECURITY TRANSACTIONS. Securities transactions are recorded on a trade date
basis. For financial and tax reporting purposes, realized gains and losses are
determined on the basis of specific lot identification.
EXPENSES. Expenses incurred by the Trust with respect to any two or more Funds
in the Trust are prorated to each Fund in the Trust, except where allocations of
direct expenses to each Fund can otherwise be made fairly. Expenses directly
attributable to a Fund are charged to that Fund. Expenses directly attributable
to a class are charged to that class. Other expenses of each Fund are further
allocated to each class of shares based on their relative net asset values.
2. RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Some of the Funds may invest in securities of foreign issuers. Investing in
securities issued by companies whose principal business activities are outside
the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing, and financial reporting
requirements and standards of practice comparable to those applicable to
domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Fund, political or financial instability or diplomatic and
other developments which could affect such investments. Foreign stock markets,
while growing in volume and sophistication, are generally not as developed as
those in the United States, and securities of some foreign issuers (particularly
those located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. companies. In general, there is less overall
governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the U.S.
<PAGE>
54
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISOR. The Trust has an investment advisory agreement with
Touchstone Advisors, Inc. (the "Advisor"), an indirect subsidiary of
Western-Southern Life Assurance Company ("Western-Southern"). Under the terms of
the investment advisory agreement, each Fund pays an investment advisory fee
that is computed daily and paid monthly. For the year ended December 31, 1999,
each Fund incurred the following investment advisory fees equal on an annual
basis to the following percentages of the average daily net assets of the Fund.
<TABLE>
<CAPTION>
Emerging International Income Value Growth & Standby
Growth Equity Opportunity Plus Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate 0.80% 0.95% 0.65% 0.75% 0.80% 0.80% 0.55% 0.25%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Subject to review and approval by the Board of Trustees, the Advisor has entered
into certain sub-advisory agreements for the investment advisory services in
connection with the management of each of the Funds. The Advisor pays each
sub-advisor a fee for services provided using an annual rate, as specified
below, that is computed daily and paid monthly based on average daily net
assets. As of December 31, 1999, the following sub-advisory agreements were in
place:
EMERGING GROWTH FUND
David L. Babson & Company, Inc. 0.50%
Westfield Capital Management Company, Inc. 0.45% on the first $10 million
0.40% on the next $40 million
0.35% thereafter
INTERNATIONAL EQUITY FUND
Credit Suisse Asset Management 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
INCOME OPPORTUNITY FUND
Alliance Capital Management L.P. 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
VALUE PLUS FUND
Fort Washington Investment Advisors, Inc. 0.45%
GROWTH & INCOME FUND
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
BALANCED FUND
OpCap Advisors, Inc. 0.60% on the first $20 million*
0.50% on the next $30 million*
0.40% thereafter*
BOND FUND
Fort Washington Investment Advisors, Inc. 0.30%
STANDBY INCOME FUND
Fort Washington Investment Advisors, Inc. 0.15%
* Includes assets of the Balanced Fund of the Trust and the Balanced Fund of
the Touchstone Variable Series Trust (for which OpCap Advisors, Inc. also
acts in a sub-advisory capacity).
Fort Washington Investment Advisors, Inc., is an affiliate of the Advisor.
<PAGE>
55
TOUCHSTONE SERIES TRUST
DISTRIBUTION AND SERVICE PLAN. Under the Trust's Distribution and Service Plan
in accordance with Rule 12b-1 under the Act, the Trust retains Touchstone
Securities, Inc. ("Distributor"), an indirect subsidiary of Western-Southern, as
a service agent of the Trust and as the principal underwriter of the shares of
each Fund. Under the Distribution Plan, Class C Shares of each Fund pay a fee to
the Distributor in an amount computed at an annual rate of 0.75% of the average
daily net assets of the Fund to finance activity that is principally intended to
result in the sale of Class C Shares of the Fund. Under the Service Plan, Class
A Shares and Class C Shares of each Fund pay a fee to the Distributor in an
amount computed at an annual rate of 0.25% of the average daily net assets of
the Fund for the provision of certain services to the holders of Class A Shares
and Class C Shares.
SPONSOR. The Trust, on behalf of each Fund, has entered into a Sponsor Agreement
with the Advisor. The Advisor provides oversight of the various service
providers to the Trust, including the Trust's administrator, custodian and
transfer agent. The Advisor receives a fee from each Fund equal on an annual
basis to 0.20% of the average daily net assets of that Fund. The Advisor waived
all fees under the Sponsor Agreement through December 31, 1999. In the last
amendment to the Sponsor Agreement, the Advisor also agreed to continue to waive
all fees until April 30, 2000. The Sponsor Agreement may be terminated by the
Sponsor or by the Trust on not less than 30 days prior written notice.
TRUSTEES. Each Trustee who is not an "interested person" (as defined in the Act)
of the Trust receives an aggregate of $5,000 annually plus $1,000 per meeting
attended, as well as reimbursement for reasonable out-of-pocket expenses from
the Trust and from Touchstone Variable Series Trust which is included in a
separate annual report. For the year ended December 31, 1999 the Trust incurred
$11,903 in Trustee fees which was prorated to each Fund.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
Investment transactions (excluding purchases and sales of U.S. government agency
obligations and excluding short-term investments) for the year ended December
31, 1999 were as follows:
Cost of Purchases Proceeds from Sales
Emerging Growth Fund $10,881,802 $12,034,258
International Equity Fund 18,436,152 18,763,995
Income Opportunity Fund 19,695,435 21,307,289
Value Plus Fund 17,640,821 17,077,526
Growth & Income Fund 24,461,076 28,062,562
Balanced Fund 4,405,934 5,713,658
Bond Fund 4,177,018 3,033,546
Standby Income Fund 9,405,343 4,215,180
The following Funds had transactions in U.S. government and U.S. government
agency obligations:
Cost of Purchases Proceeds from Sales
Growth & Income Fund $ 520,576 $ 384,660
Balanced Fund 536,732 445,979
Bond Fund 6,855,778 7,675,939
Standby Income Fund 1,117,792 1,165,442
<PAGE>
56
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. RESTRICTED SECURITIES
Restricted securities may be difficult to dispose of and involve time-consuming
negotiation and expense. Prompt sale of these securities may involve the seller
taking a discount to the security's stated market value. As of December 31,
1999, the Bond Fund held restricted securities valued by the trustees of the
Trust at $699,034, representing 3.63% of net assets. Acquisition date and cost
of each are as follows:
Acquisition Date Cost
Mercantile Safe Deposit 3/28/85 $ 49,459
Central America, Series F 8/1/86 139,864
Central America, Series G 8/1/86 139,864
Central America, Series H 8/1/86 139,864
Republic of Honduras, Series C 5/1/88 122,571
Republic of Honduras, Series D 5/1/88 139,689
The Bond Fund received these securities from The Western & Southern Life
Insurance Company Separate Account A on October 4, 1994, in exchange for a
proportionate interest in the Bond Portfolio. As part of a subsequent
reorganization, these securities were redeemed in kind and acquired by the Bond
Fund. (Note 7)
6. EXPENSE REIMBURSEMENTS
The Sponsor has agreed to reimburse each Fund so that, following such
reimbursement, the aggregate total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) of each Fund are not
greater, on an annual basis, than the percentage of average daily net assets of
the Fund listed below for the year ended December 31, 2000.
<TABLE>
<CAPTION>
Emerging International Income Value Growth & Standby
Growth Equity Opportunity Plus Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Voluntary Expense Limit -
Class A 1.50% 1.60% 1.20% 1.30% 1.30% 1.35% 0.90% 0.75%
Voluntary Expense Limit -
Class C 2.25% 2.35% 1.95% 2.05% 2.05% 2.10% 1.65% --
Voluntary Expense Limit -
Class Y -- -- -- -- 1.05% -- 0.65% --
Aggregate Amount of
Reimbursement to Fund $215,188 $309,722 $242,471 $216,639 $317,320 $226,438 $268,587 $162,742
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
7. CAPITAL CONTRIBUTION
Effective immediately after the close of business on December 31, 1998, each
series of Select Advisors Trust C and each series of Select Advisors Trust A
withdrew its assets (net of liabilities) from the corresponding series of Select
Advisors Portfolios. Each Select Advisors Trust A Fund then acquired all of the
assets (net of the liabilities) of the corresponding Select Advisors Trust C
Fund in a tax-free exchange for Class C shares of such Select Advisors Trust A
Fund. In addition, where applicable, The Western & Southern Life Insurance
Company Separate Account A, in a taxable exchange, withdrew its assets from each
Portfolio of Select Advisors Portfolios in which it invested and reinvested such
assets in Class Y shares of the corresponding Select Advisors Trust A Fund.
Select Advisors Trust A was renamed Touchstone Series Trust at the time of these
transactions. Thus, an initial capital contribution to each Fund of Touchstone
Series Trust equal to the amount of the respective Select Advisors Trust C
Fundand The Western & Southern Life Insurance Company Separate Account A's net
assets was made at that time.
<PAGE>
57
TOUCHSTONE SERIES TRUST
The following is a summary by Fund of unrealized appreciation (depreciation)
acquired from each series of Select Advisors Trust C as of the acquisition date,
as well as the number of shares issued from each class from the transaction:
Touchstone Unrealized Class C Class Y
Series Trust Fund Appreciation/ Shares Shares
(Survivor Fund) (Depreciation) Issued Issued
- -------------- ------------ ------------ -------------
Emerging Growth $345,785 $251,885
International Equity 849,328 417,774 --
Income Opportunity (805,796) 511,577 --
Value Plus 19,614 31,018 --
Growth & Income 91,423 193,065 1,000,000
Balanced 47,846 286,552 --
Bond 20,632 113,070 1,000,000
As of January 1, 1999, the Income Opportunity Fund had a capital loss carryover
of $495,541. There is an annual limitation of $178,514 on this capital loss
carry-forward.
8. CAPITAL SHARE TRANSACTIONS
Transactions in capital stock were as follows for the following periods and
classes of each Fund:
TOUCHSTONE EMERGING GROWTH FUND
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 97,013 $ 1,411,794 343,695 $5,012,537
Reinvestment of dividends and
distributions 71,583 1,184,076 32,355 418,391
- -------------------------------------------------------------------------------------------------------
168,596 2,595,870 376,050 5,430,928
Shares redeemed (157,019) (2,291,937) (111,410) (1,581,667)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 11,577 $ 303,933 264,640 $3,849,261
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 23,001 $ 326,924 -- $ --
Reinvestment of dividends and
distributions 33,503 532,034 -- --
- -------------------------------------------------------------------------------------------------------
56,504 858,958 -- --
Shares redeemed (64,997) (924,372) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (8,493) $ (65,414) -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE INTERNATIONAL EQUITY FUND
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 70,684 $ 940,653 123,496 $1,630,252
Reinvestment of dividends and
distributions 44,305 716,077 30,828 398,640
- -------------------------------------------------------------------------------------------------------
114,989 1,656,730 154,324 2,028,892
Shares redeemed (100,888) (1,381,046) (38,129) (501,457)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 14,101 $ 275,684 116,195 $1,527,435
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 23,528 $ 302,293 -- $ --
Reinvestment of dividends and
distributions 32,842 511,341 -- --
- -------------------------------------------------------------------------------------------------------
56,370 813,634 -- --
Shares redeemed (67,408) (870,128) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (11,038) $ (56,494) -- $ --
- -------------------------------------------------------------------------------------------------------
<PAGE>
58
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
<CAPTION>
TOUCHSTONE INCOME OPPORTUNITY FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 134,505 $ 986,761 374,781 $ 3,476,133
Reinvestment of dividends and
distributions 86,330 618,750 71,619 623,322
- -------------------------------------------------------------------------------------------------------
220,835 1,605,511 446,400 4,099,455
Shares redeemed (314,603) (2,302,822) (283,285) (2,599,216)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (93,768) $ (697,311) 163,115 $ 1,500,239
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 48,569 $ 347,865 -- $ --
Reinvestment of dividends and
distributions 46,506 323,665 -- --
- -------------------------------------------------------------------------------------------------------
95,075 671,530 -- --
Shares redeemed (143,269) (1,029,761) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (48,194) $ (358,231) -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE VALUE PLUS FUND
<CAPTION>
Year Ended Period Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 88,299 $ 988,307 2,605,472 $25,939,165
Reinvestment of dividends and
distributions 56,984 663,608 4,677 43,452
- -------------------------------------------------------------------------------------------------------
145,283 1,651,915 2,610,149 25,982,617
Shares redeemed (43,587) (508,020) (9,307) (2,366)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 101,696 $ 1,143,895 2,600,842 $25,980,251
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 43,709 $ 459,000 -- $ --
Reinvestment of dividends and
distributions 928 10,553 -- --
- -------------------------------------------------------------------------------------------------------
44,637 469,553 -- --
Shares redeemed (27,892) (298,655) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 16,745 $ 170,898 -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE GROWTH & INCOME FUND
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 86,582 $ 1,384,357 840,694 $13,903,526
Reinvestment of dividends and
distributions 80,184 1,155,576 36,887 569,460
- -------------------------------------------------------------------------------------------------------
166,766 2,539,933 877,581 14,472,986
Shares redeemed (282,426) (4,495,609) (287,905) (4,676,332)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (115,660) $(1,955,676) 589,676 $ 9,796,654
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 36,922 $ 543,763 -- $ --
Reinvestment of dividends and
distributions 13,727 179,904 -- --
- -------------------------------------------------------------------------------------------------------
50,649 723,667 -- --
Shares redeemed (84,583) (1,259,682) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (33,934) $ (536,015) -- $ --
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class Y):
Shares sold -- $ -- -- $ --
Reinvestment of dividends and
distributions 74,730 1,488,771 -- --
- -------------------------------------------------------------------------------------------------------
74,730 1,488,771 -- --
Shares redeemed -- -- -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 74,730 $ 1,488,771 -- $ --
- -------------------------------------------------------------------------------------------------------
<PAGE>
59
TOUCHSTONE SERIES TRUST
TOUCHSTONE BALANCED FUND
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 41,173 $ 513,685 161,051 $2,065,886
Reinvestment of dividends and
distributions 35,999 427,794 23,854 286,919
- -------------------------------------------------------------------------------------------------------
77,172 941,479 184,905 2,352,805
Shares redeemed (104,320) (1,306,240) (68,591) (872,443)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (27,148) $ (364,761) 116,314 $1,480,362
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 20,873 $ 251,855 -- $
distributions 23,421 267,813 -- --
- -------------------------------------------------------------------------------------------------------
44,294 519,668 -- --
Shares redeemed (73,804) (878,597) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (29,510) $ (358,929) -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE BOND FUND
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding (Class A):
Shares sold 137,197 $ 1,368,199 436,841 $4,527,950
Reinvestment of dividends and
distributions 34,756 341,765 26,120 271,637
- -------------------------------------------------------------------------------------------------------
171,953 1,709,964 462,961 4,799,587
Shares redeemed (190,712) (1,898,035) (153,703) (1,606,439)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (18,759) $ (188,071) 309,258 $3,193,148
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 35,660 $ 345,721 -- $ --
Reinvestment of dividends and
distributions 7,353 70,040 -- --
- -------------------------------------------------------------------------------------------------------
43,013 415,761 -- --
Shares redeemed (47,002) (458,867) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (3,989) $ (43,106) -- $ --
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class Y):
Shares sold -- $ -- -- $ --
Reinvestment of dividends and
distributions 67,830 915,466 -- --
- -------------------------------------------------------------------------------------------------------
67,830 -- --
Shares redeemed -- -- -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 67,830 915,466 -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE STANDBY INCOME FUND
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares Outstanding:
Shares sold 1,593,735 $15,760,608 846,688 $8,443,462
Reinvestment of dividends and
distributions 62,866 623,984 54,478 543,405
- -------------------------------------------------------------------------------------------------------
1,656,601 16,384,592 901,166 8,986,867
Shares redeemed (339,513) (3,371,225) (635,946) (6,343,864)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 1,317,088 $13,013,367 265,220 $2,643,003
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
60
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
9. SUBSEQUENT EVENT
On February 15, 2000, the Board of Trustees of Touchstone Series Trust (the
"Trust") approved an Agreement and Plan of Reorganization (the "CST Agreement")
between the Trust and Countrywide Strategic Trust (the "Strategic Trust").
Pursuant to the CST Agreement, Touchstone Emerging Growth Fund and Touchstone
International Equity Fund will be merged into separate new series of Strategic
Trust. In addition, Touchstone Value Plus Fund and Touchstone Growth & Income
Fund will be merged into one new series of Strategic Trust. On the same date,
the Trust's Board of Trustees approved an Agreement and Plan of Reorganization
(the "CIT Agreement") between the Trust and Countrywide Investment Trust
("Investment Trust"). Pursuant to the CIT Agreement, Touchstone Bond Fund will
be merged into Intermediate Bond Fund of Investment Trust. Each merger is
subject to approval by the shareholders of the relevant Touchstone Fund.
As of the effective time of the reorganization, each of the Touchstone Funds
that has received shareholder approval (each an "Acquired Fund") will transfer
all of its assets, subject to liabilities, to the corresponding Countrywide Fund
(each an "Acquiring Fund") in exchange solely for shares of the Acquiring Fund.
As soon as practicable after the Closing Date, each Acquired Fund will
distribute pro rata to its shareholders of record the shares of the Acquiring
Fund received in the exchange. After the reorganization, a shareholder of an
Acquired Fund will own shares of the corresponding class of the Acquiring Fund
equal in value to the shares of the Acquired Fund owned by the shareholder
before the reorganization.
The mergers are part of the consolidation of the Touchstone and Countrywide
mutual fund complexes resulting from the acquisition by Fort Washington
Investment Advisors, Inc., an affiliate of the Advisor, of all of the
outstanding stock of the parent of Countrywide Investments, Inc. which serves as
the investment advisor to each fund in the Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust. In connection with
this consolidation, it is anticipated that the following Touchstone Funds will
be terminated: Touchstone Income Opportunity Fund, Touchstone Balanced Fund and
Touchstone Standby Income Fund. When the consolidation is completed and all
assets of the Trust have been transferred in a merger or distributed to
shareholders, the Trust will be terminated.
FEDERAL TAX INFORMATION (UNAUDITED)
At December 31, 1999, the following Funds had available, for Federal income tax
purposes, unused capital losses which may be applied against any realized net
taxable gains of each succeeding year until fully utilized or until the
expiration date noted:
Amount Expiration Date
-------- --------------
Income Opportunity Fund $1,324,985* 12/31/2006
2,842,233 12/31/2007
Bond Fund 286,914 12/31/2007
Standby Income Fund 45,214 12/31/2007
* $495,541 of which the Fund is limited to using no more than $178,514 per year.
<PAGE>
61
TOUCHSTONE SERIES TRUST
From November 1, 1999 to December 31, 1999, the following Funds incurred the
following net realized losses. The Funds intend to elect to defer these losses
and treat them arising on January 1, 2000:
Amount
--------
International Equity Fund $ 13,062
Income Opportunity Fund 272,855
Balanced Fund 2,301
Bond Fund 66,026
Standby Income Fund 2,595
For corporate shareholders, a portion of the ordinary dividends paid during the
Funds' year ended December 31, 1999 qualified for the dividends received
deduction, as follows:
Amount
--------
Value Plus Fund 100%
Growth & Income Fund 100%
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following as capital gain dividends for the year ended December 31, 1999, of
which 100% represents 20% rate gains:
Capital Gains Dividend
----------------------
Emerging Growth Fund $287,366
International Equity Fund 747,674
Value Plus Fund 515,377
Growth & Income Fund 59,785
Balanced Fund 518,705
Bond Fund 111
The Touchstone International Equity Fund paid foreign taxes of $17,180, or $0.02
per share, and the Fund recognized $189,795, or $0.20 per share, of foreign
source income during the year ended December 31, 1999.
<PAGE>
62
TOUCHSTONE SERIES TRUST
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS TOUCHSTONE SERIES TRUST
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Touchstone Series Trust (comprised of
Emerging Growth Fund, International Equity Fund, Income Opportunity Fund, Value
Plus Fund, Growth & Income Fund, Balanced Fund, Bond Fund, and Standby Income
Fund) (the Funds) as of December 31, 1999, and the related statements of
operations, the statements of changes in net assets, and the financial
highlights presented herein for the year ended December 31, 1999. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
statements of changes in net assets presented herein for the years or periods
ended December 31, 1998 and the financial highlights presented herein for each
of the respective years or periods ended December 31, 1998 were audited by other
auditors whose report dated February 18, 1999 expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds constituting the Touchstone Series Trust as of December
31, 1999, the results of their operations, the changes in their net assets and
financial highlights for the year then ended, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Cincinnati, Ohio
February 16, 2000
<PAGE>
63
TOUCHSTONE SERIES TRUST
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
A special meeting of the shareholders of Touchstone Growth & Income Fund (the
"Fund") of Touchstone Series Trust was held on January 28, 1999. At the meeting,
the shareholders of the Fund voted on a proposal to approve a new sub-advisory
agreement between Touchstone Advisors, Inc., the investment advisor to the Fund
(the "Advisor"), and Scudder Kemper Investments, Inc. ("Scudder Kemper"),
pursuant to which Scudder Kemper would act as sub-advisor with respect to the
assets of the Fund. The result of the votes taken among shareholders on the
proposal is listed below:
695,166.656 shares were represented in person or by proxy, or 62.06% of the
outstanding shares of the Fund.
# of Shares Voted % of Shares Voted
Affirmative 691,843.016 99.52%
Against 614.369 0.09%
Abstain 2,709.271 0.39%
TOTAL 695,166.656 100.00%
The new agreement replaced the portfolio advisory agreement dated September 7,
1998 and is identical in all substantive respects to that portfolio advisory
agreement, except for different effective and termination dates.
<PAGE>
NOTES
<PAGE>
Distributor
- -----------
Touchstone Securities, Inc.
311 Pike Street
Cincinnati, Ohio 45202
800.638.8194 Broker-Dealers
800.285.2858 Financial Institutions
Investment Advisor of each Portfolio
- ------------------------------------
Touchstone Advisors, Inc.
311 Pike Street
Cincinnati, Ohio 45202
Transfer Agent
- --------------
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
Administrator, Custodian & Fund Accounting Agent
- ------------------------------------------------
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116-9130
Independent Accountants
- -----------------------
Ernst & Young LLP
1300 Chiquita Center
250 East Fifth Street
Cincinnati, Ohio 45202
Legal Counsel
- -------------
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
[TOUCHSTONE LOGO HERE]
Touchstone
The Mark of Excellence in Investment ManagementSM
<PAGE>
Income
PROSPECTUS
Intermediate Bond Fund
February 1, 2000
These securities have not been approved or disapproved by the Securities and
Exchange Commission, nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.
This Prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
<PAGE>
PROSPECTUS
February 1, 2000
COUNTRYWIDE INVESTMENT TRUST
312 WALNUT STREET, 21ST FLOOR
CINCINNATI, OHIO 45202
800-543-0407
INTERMEDIATE BOND FUND
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
RISK/RETURN SUMMARY ..........................................................
RISK/RETURN SUMMARY: FEE TABLE................................................
INVESTMENT OBJECTIVE, INVESTMENT STRATEGIES AND RELATED RISKS.................
HOW TO PURCHASE SHARES........................................................
HOW TO REDEEM SHARES..........................................................
HOW TO EXCHANGE SHARES........................................................
DIVIDENDS AND DISTRIBUTIONS...................................................
TAXES.........................................................................
OPERATION OF THE FUND.........................................................
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE..........................
FINANCIAL HIGHLIGHTS..........................................................
FOR FURTHER INFORMATION OR ASSISTANCE IN OPENING AN ACCOUNT, PLEASE CONTACT YOUR
BROKER OR CALL US AT THE ABOVE NUMBER.
<PAGE>
RISK/RETURN SUMMARY
- -------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to provide as high a level of current income as is consistent
with the preservation of capital.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Fund invests substantially all of its assets in corporate debt securities,
U.S. Government securities and mortgage-backed securities. Under normal market
conditions, the Fund will invest at least 65% of its total assets in bonds and
will maintain a dollar-weighted average maturity of between 3 and 10 years.
The Fund will invest at least 60% of its total assets in bonds rated in the 3
highest rating categories and may invest up to 40% of its assets in bonds rated
below the 3 highest categories. The Fund may also invest up to 20% of its assets
in securities rated below investment-grade, commonly referred to as junk bonds.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
The Fund's share price, yield and return will fluctuate due to changes in
interest rates and other economic developments affecting the performance of the
bond market. In general, bond prices fall when interest rates rise. This effect
is usually more pronounced for longer-term securities, such as those which may
be held by the Fund.
The Fund may invest in mortgage-backed securities which may respond to interest
rate changes differently than other fixed-income securities due to the
possibility of prepayment of mortgages. When interest rates decline, mortgage
holders may prepay the mortgages underlying mortgage-backed obligations. This
could negatively affect the Fund's share price, yield and return.
The Fund may purchase securities on a to-be-announced basis where it commits to
purchasing securities that it does not know all specific information about,
particularly the face amount in transactions involving mortgage-related
securities. These securities are also subject to the risk that the yield
obtained in the transaction will be less than that available in the market when
delivery takes place.
A deterioration in the condition of an issuer of a security held by the Fund
could result in a default by the issuer on its payments of interest and
principal, which could cause a decrease in the Fund's share price. The Fund may
purchase securities which are rated below investment-grade, commonly referred to
as junk bonds. These securities have speculative characteristics and are less
likely than higher-grade securities to pay interest and repay principal during
an economic downturn.
-2-
<PAGE>
The Fund is non-diversified and may invest in a smaller number of issuers than a
diversified fund. Therefore, an investment in the Fund may be riskier than an
investment in other types of bond funds.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. As with any investment in the bond market, there is a risk that you may
lose money by investing in the Fund.
PERFORMANCE SUMMARY
The bar chart and performance table shown below provide an indication of the
risks of investing in the Fund by showing the changes in the Fund's performance
from year to year during the Fund's operations and by showing how the average
annual returns of the Fund compare to those of a broad-based securities market
index. The Fund's past performance is not necessarily an indication of its
future performance.
(BAR CHART)
4.67% 9.62% 6.86% -3.73%
1996 1997 1998 1999
The total returns shown above do not reflect the sales load on Class A shares
and, if included, returns would be less than those shown.
During the period shown in the bar chart, the highest return for a quarter was
4.10% during the quarter ended September 30, 1998 and the lowest return for a
quarter was -1.52% during the quarter ended June 30, 1999.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DECEMBER 31, 1999:
Since
Inception
One Year (10-3-95)
-------- ---------
Intermediate Bond Fund -8.30% 3.38%
Lehman Brothers Intermediate
Government/Corporate Bond
Index* 0.39% 5.68%
* The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index generally representative of intermediate term U.S.
Government and corporate obligations.
-3-
<PAGE>
RISK/RETURN SUMMARY: FEE TABLE
- ------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Class A Class C
Shares Shares*
------ -------
Maximum Sales Load.......................................... 4.75% 2.25%
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)......................... 4.75% 1.25%
Maximum Deferred Sales Load
(as a percentage of original purchase price
or the amount redeemed, whichever is less).................. ** 1.00%
Sales Load Imposed on Reinvested Dividends.................. None None
Redemption Fee ............................................. *** ***
Exchange Fee................................................ None None
Check Redemption Processing Fee (per check):
First six checks per month .............................. None None
Additional checks per month.............................. $0.25 $0.25
* As of the date of this Prospectus, this class has not yet commenced
operations.
** If you purchase $1 million or more shares and do not pay a front-end sales
load, you may be subject to a deferred sales load of 1% if the shares are
redeemed within one year of their purchase and a dealer's commission was
paid on the shares.
*** You will be charged $8 for each wire redemption. This fee is subject to
change.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
Class A Class C
Shares Shares
Management Fees........................................... .50% .50%
Distribution (12b-1) Fees................................. .04% .75%
Other Expenses............................................ .73% .73%(B)
----- -----
Total Annual Fund Operating Expenses ..................... 1.27%(A) 1.98%
===== =====
(A) After waivers of management fees by the Adviser, total operating expenses
were .95% for the fiscal year ended September 30, 1999. The Adviser may
discontinue these fee waivers at any time.
(B) Other Expenses are based on estimated amounts for the current fiscal year.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the
-4-
<PAGE>
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
Class A Class C
Shares Shares
------ ------
1 Year $ 598 $ 423
3 Years 859 739
5 Years 1,139 1,179
10 Years 1,936 2,402
You would pay the following expenses if you did not redeem your shares:
Class A Class C
Shares Shares
------ ------
1 Year $ 598 $ 323
3 Years 859 739
5 Years 1,139 1,179
10 Years 1,936 2,402
-5-
<PAGE>
INVESTMENT OBJECTIVE, INVESTMENT STRATEGIES AND RELATED RISKS
- -------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund seeks to provide as high a level of current income as is consistent
with the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund will invest at least 65% of its total
assets in bonds and at least 60% of its total assets (measured at the time of
purchase) in the following types of securities which are rated, where
applicable, in the 3 highest rating categories by a rating agency, or unrated
securities that are determined to be of equivalent quality:
o Corporate debt securities, such as bonds, which represent obligations
of corporations to pay interest and repay principal.
o U.S. Government securities, including direct obligations of the U.S.
Treasury (such as Treasury bills, notes and bonds), inflation-indexed
bonds issued by the U.S. Treasury whose principal value is
periodically adjusted according to the rate of inflation, and
securities issued by agencies or instrumentalities of the U.S.
Government. U.S. Government securities may be backed by the full faith
and credit of the U.S. Treasury or backed only by the credit of the
agency or instrumentality issuing the security.
o Mortgage-backed securities of governmental issuers or private issuers.
Mortgage-backed securities issued by governmental issuers include GNMA
Certificates which are guaranteed by the Government National Mortgage
Association, FNMA Certificates which are guaranteed by the Federal
National Mortgage Association and FHLMC Certificates which are
guaranteed by the Federal Home Loan Mortgage Corporation.
Mortgage-backed securities which are issued by private issuers include
mortgage pass-through certificates or mortgage-backed bonds.
o Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduits ("REMICs") are types of mortgage-backed securities
which provide an investor with a specified interest in the cash flow
from a pool of mortgage loans or other mortgage-backed securities. The
Fund may invest in CMOs and REMICs issued or guaranteed by U.S.
Government agencies or instrumentalities or by private label issuers.
CMOs and REMICs are issued in two or more classes with varying
maturity dates and interest rates. A REMIC is a private entity formed
to hold a fixed pool of mortgages
-6-
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secured by an interest in real property. A REMIC is a type of CMO that
qualifies for special tax treatment under the Internal Revenue Code.
The Fund may invest in securities of any maturity and will adjust its average
weighted maturity in response to market conditions. Under normal market
conditions, the Fund expects that it will invest primarily in intermediate-term
(3-10 years) and long-term (over 10 years) securities and will have a
dollar-weighted average maturity of between 3 and 10 years.
MUNICIPAL SECURITIES. The Fund may also invest in taxable and tax-exempt
municipal securities, which are issued to finance public works, to repay
outstanding obligations, to raise funds for general operating expenses and to
lend money to other public institutions. The two types of municipal securities
are general obligation and revenue bonds. General obligation bonds are secured
by the issuer's full faith and credit and taxing power, while revenue bonds are
backed only by the revenues of the specific project.
TO-BE-ANNOUNCED SECURITIES. The Fund may also invest in to-be-announced
securities which are paid for and delivered within 15 to 45 days from their date
of purchase. In a to-be-announced transaction, the Fund commits to purchasing or
selling securities that it does not know all specific information about,
particularly the face amount of the securities. The Fund will maintain a
segregated account of cash or liquid securities to pay for its to-be-announced
securities and this account will be valued daily in order to account for market
fluctuations in the value of its to-be-announced commitments.
LOWER-RATED SECURITIES. The Fund may invest up to 40% of its assets in debt
securities rated below A and may invest up to 20% of its assets in debt
securities rated below investment grade, commonly referred to as junk bonds, or
unrated securities of equivalent quality.
TEMPORARY DEFENSIVE PURPOSES. For defensive purposes, the Fund may temporarily
invest all or part of its assets in cash and/or short-term obligations (such as
variable rate demand notes, commercial paper, certificates of deposit, bankers'
acceptances, repurchase agreements and U.S. Government obligations). When taking
such a temporary defensive position, the Fund may not achieve its investment
objective.
-7-
<PAGE>
PRINCIPAL RISK CONSIDERATIONS.
INTEREST RATE RISK. The Fund's yield, share price and total return will
fluctuate due to changes in interest rates and other economic developments.
Generally, the Fund's share price will increase when interest rates decrease and
will decrease when interest rates increase. This effect is usually more
pronounced for longer-term securities, such as those which may be held by the
Fund.
SPECIAL RISKS OF INVESTING IN MORTGAGE-BACKED SECURITIES. Mortgage-backed
securities are sensitive to changes in interest rates, but may respond to these
changes differently than other fixed-income securities due to the possibility of
prepayment of the underlying mortgage loans. As a result, it may not be possible
to determine in advance the actual maturity date or average life of a
mortgage-backed security.
As interest rates fall, homeowners may refinance their mortgages and prepay
their current mortgage. The Fund must then reinvest these prepayment proceeds in
a declining interest rate environment, which will reduce the Fund's earnings.
Prepayments on mortgage-backed securities may even result in a loss to the Fund
if it acquired the security at a discount from par. Prepayments of
mortgage-backed securities make it difficult to determine their actual maturity
and to calculate how the securities will respond to changes in interest rates.
As interest rates rise, prepayments of mortgage-backed securities may occur more
slowly than expected, which may result in an increase in the Fund's portfolio
maturity and greater volatility in the Fund's share price.
CREDIT RISK. A deterioration in the financial condition of an issuer of a
security or a deterioration in general economic conditions could cause the
issuer to default on its obligation to pay interest and repay principal. This
could cause the Fund's share price to decrease. The Fund's ability to achieve
its investment objective depends to a great extent on the ability of an issuer
of a security to meet its scheduled payments of principal and interest.
The Fund may purchase securities which are rated below investment-grade,
commonly known as junk bonds. While lower rated securities generally have higher
yields than securities with higher ratings, they are considered speculative
because they have more price volatility and risk than higher rated securities.
The prices of lower rated securities are less sensitive to changes in interest
rates than higher rated securities. However, lower-rated securities have a
greater risk of default by the
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<PAGE>
issuer on its payments of principal and interest and they are more sensitive to
economic conditions. Lower rated securities are generally traded among a smaller
number of broker-dealers, making them not as liquid as other types of
securities. Because investors may perceive that there are greater risks
associated with lower-rated securities, the yields and prices of these
securities may fluctuate more than higher-rated securities. The Adviser believes
that the risks of investing in lower-rated securities may be minimized through
careful analysis of prospective issuers and the Adviser relies primarily on its
own credit analysis. As a result, the Fund's ability to achieve its investment
objective may depend to a greater extent on the Adviser's own credit analysis
than is otherwise the case with a fund that invests exclusively in higher rated
securities.
NON-DIVERSIFICATION RISK. The Fund is a non-diversified fund, which means that
it may invest more than 5% of its assets in the securities of one issuer. This
may cause the Fund's share price to be more sensitive to any single economic,
business, political or regulatory occurrence than the share price of a
diversified fund.
HOW TO PURCHASE SHARES
- ----------------------
You may open an account with the Fund by investing the minimum amount required
for the type of account you open. You may invest additional amounts in an
existing account at any time. For more information about how to purchase shares,
call Countrywide Fund Services, Inc. (the "Transfer Agent") (Nationwide call
toll-free 800-543-0407; in Cincinnati call 629-2050). The different account
options and minimum investment requirements are listed below.
ACCOUNT OPTIONS
Regular Accounts
- ----------------
The minimum amount required to open a regular account is $1,000. There are no
minimum requirements for additional investments.
Accounts for Countrywide Affiliates
- -----------------------------------
If you (or anyone in your immediate family) are an employee, shareholder or
customer of Countrywide Credit Industries, Inc. or any of its affiliated
companies, you may open an account for $50. There are no minimum requirements
for additional investments.
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<PAGE>
Tax-Deferred Retirement Plans
- -----------------------------
The minimum amount required to open a tax-deferred retirement plan is $250.
There are no minimum requirements for additional investments. You may invest in
one of the tax-deferred retirement plans described below if you meet the IRS
qualifications for your plan.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAs"). An IRA is a special type of
account that offers tax advantages. You should consult your financial
professional to help decide which type of IRA is right for you.
Traditional IRA - Assets grow tax-deferred and contributions may be
deductible. Distributions are taxable in the year made.
Spousal IRA - An IRA in the name of a non-working spouse by a working
spouse.
Roth IRA - An IRA with tax-free growth of assets and tax-free
distributions, if certain conditions are met. Contributions are not deductible.
Education IRA - An IRA with tax-free growth of assets and tax-free
withdrawals for qualified higher education expenses. Contributions are not
deductible.
KEOGH PLANS. A tax-deferred plan for self-employed individuals.
QUALIFIED PENSION AND PROFIT-SHARING PLANS FOR EMPLOYEES. These include
profit-sharing plans with a 401(k) provision.
403(b)(7) CUSTODIAL ACCOUNTS. A tax-deferred account for employees of
public school systems, hospitals, colleges and other non-profit organizations
meeting certain requirements of the Internal Revenue Code.
INVESTMENT PLANS
Automatic Investment Plan
- -------------------------
You may make automatic monthly investments in the Fund from your bank, savings
and loan or other depository institution account. The minimum initial and
subsequent investments must be $50 under the plan. The Transfer Agent pays the
costs of your transfers, but reserves the right, upon 30 days' written notice,
to make reasonable charges for this service.
Direct Deposit Plan
- -------------------
Your employer may offer a direct deposit plan which will allow you to have all
or a portion of your paycheck transferred
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<PAGE>
automatically to purchase shares of the Fund. Social security recipients may
have all or a portion of their social security check transferred automatically
to purchase shares of the Fund.
MINIMUM INVESTMENT REQUIREMENTS
Initial Additional
------- ----------
Regular Accounts $1,000 None
Accounts for Countrywide Affiliates $ 50 None
Tax-Deferred Retirement Plans $ 250 None
Automatic Investment Plan $ 50 $ 50
Direct Deposit Plan $1,000 None
OPENING A NEW ACCOUNT
You may open an account directly with the Fund or through your broker-dealer. To
open an account directly with the Fund, please follow the steps outlined below.
1. Complete the Account Application included in this Prospectus.
2. Write a check for your initial investment to the "Intermediate Bond Fund."
Mail your completed Account Application and your check to the following
address:
COUNTRYWIDE FUND SERVICES, INC.
P.O. BOX 5354
CINCINNATI, OHIO 45201-5354
You may also open an account through your broker-dealer. It is the
responsibility of broker-dealers to send properly completed orders. If you open
an account through your broker-dealer, you may be charged a fee by your
broker-dealer.
ADDING TO YOUR ACCOUNT. You may make additional purchases to your account at any
time. Additional purchases may be made by mail to the address listed above, by
wire or through your broker-dealer. For more information about purchases by
wire, please telephone the Transfer Agent (Nationwide call toll-free
800-543-0407; in Cincinnati call 629-2050). Your bank may charge a fee for
sending your wire. Each additional purchase must contain the account name and
number in order to properly credit your account.
POLICIES AND PROCEDURES. In connection with all purchases of Fund shares, we
observe the following policies and procedures:
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<PAGE>
o We price direct purchases based upon the next public offering price
(net asset value plus any applicable sales load) after your order is
received. Direct purchase orders received by the Transfer Agent by the
close of the regular session of trading on the New York Stock Exchange
on any business day, generally 4:00 p.m., Eastern time, are processed
at that day's public offering price. Purchase orders received from
broker-dealers before the close of the regular session of trading on
the New York Stock Exchange on any business day, generally 4:00 p.m.,
Eastern time, and transmitted to the Adviser by 5:00 p.m., Eastern
time that day, are processed at that day's public offering price.
o We mail you confirmations of all purchases or redemptions of Fund
shares.
o Certificates for shares are not issued.
o We reserve the right to limit the amount of investments and to refuse
to sell to any person.
o If an order to purchase shares is canceled because your check does not
clear, you will be responsible for any resulting losses or fees
incurred by the Fund or the Transfer Agent in the transaction.
o We may open accounts for less than the minimum investment or change
minimum investment requirements at any time.
o There is no fee for purchases made by wire, but we may charge you for
this service upon 30 days' prior notice.
The Fund's account application contains provisions in favor of the Fund, the
Transfer Agent and certain of their affiliates, excluding such entities from
certain liabilities (including, among others, losses resulting from unauthorized
shareholder transactions) relating to the various services (for example,
telephone redemptions and exchanges and check redemptions) made available to
investors.
Choosing a Share Class
- ----------------------
The Fund offers Class A and Class C shares. Each class represents an interest in
the same portfolio of investments and has the same rights, but differs primarily
in sales loads and distribution expense amounts. Shares of the Fund purchased
before August 1, 1999 are Class A shares. Before choosing a class, you should
consider the following factors, as well as any other relevant facts and
circumstances:
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<PAGE>
The decision as to which class of shares is more beneficial to you depends on
the amount of your investment, the intended length of your investment and the
quality and scope of the value-added services provided by financial advisers who
may work with a particular sales load structure as compensation for their
services. If you qualify for reduced sales loads or, in the case of purchases of
$1 million or more, no initial sales load, you may find Class A shares
attractive because similar sales load reductions are not available for Class C
shares. Moreover, Class A shares are subject to lower ongoing expenses than
Class C shares over the term of the investment. As an alternative, Class C
shares are sold with a lower initial sales load so more of the purchase price is
immediately invested in the Fund. If you do not plan to hold your shares in the
Fund for a long time (less than 5 years), it may be better to purchase Class C
shares so that more of your purchase is invested directly in the Fund, although
you will pay higher distribution fees. If you plan to hold your shares in the
Fund for more than 5 years, it may be better to purchase Class A shares, since
after 5 years your accumulated distribution fees may be more than the sales load
paid on your purchase.
When determining which class of shares to purchase, you may want to consider the
services provided by your financial adviser and the compensation provided to
financial advisers under each share class. The Adviser works with many
experienced and very qualified financial advisers throughout the country that
may provide valuable assistance to you through ongoing education, asset
allocation programs, personalized financial planning reviews or other services
vital to your long-term success. The Adviser believes that these value-added
services can greatly benefit you through market cycles and will work diligently
with your chosen financial adviser. The Adviser has a financial adviser referral
service available, at no cost, to help you choose a financial adviser in your
area, if you do not have one.
Set forth below is a chart comparing the sales loads and distribution fees
applicable to each class of shares:
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<PAGE>
- --------------------------------------------------------------------------------
CLASS SALES LOAD DISTRIBUTION
(12b-1) FEE
- --------------------------------------------------------------------------------
A Maximum of 4.75% initial sales 0.35%
load reduced for purchases of
$50,000 and over; shares sold
without an initial sales load may
be subject to a 1.00% contingent
deferred sales load during first
year if a commission was paid to
a dealer
C 1.25% initial sales load; 1.00% 1.00%
contingent deferred sales load
during first year
If you are investing $1 million or more, it is generally more beneficial for you
to buy Class A shares because there is no front-end sales load and the annual
expenses are lower.
Class A Shares
--------------
Class A shares are sold at net asset value ("NAV") plus an initial sales load.
In some cases, reduced initial sales loads for the purchase of Class A shares
may be available, as described below. Investments of $1 million or more are not
subject to a sales load at the time of purchase but may be subject to a
contingent deferred sales load of 1.00% on redemptions made within 1 year after
purchase if a commission was paid by the Adviser to a participating unaffiliated
dealer. Class A shares are also subject to an annual 12b-1 distribution fee of
up to .35% of the Fund's average daily net assets allocable to Class A shares.
The following table illustrates the initial sales load breakpoints for the
purchase of Class A shares for accounts opened after July 31, 1999:
Percentage Of Which Dealer
Offering Price Equals this Reallowance
Deducted Percentage as Percentage
for Sales of Your Net of Offering
Amount of Investment Load Investment Price
- -------------------- ---------- ---------- ----------
Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less than $100,000 4.50 4.72 3.75
$100,000 but less than $250,000 3.50 3.63 2.75
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.25 2.31 1.75
$1,000,000 or more None None
The following table illustrates the initial sales load breakpoints for the
purchase of Class A shares for accounts opened before August 1, 1999:
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<PAGE>
Percentage Of Which Dealer
Offering Price Equals this Reallowance
Deducted Percentage as Percentage
for Sales of Your Net of Offering
Amount of Investment Load Investment Price
- -------------------- ---------- ---------- ----------
Less than $100,000 2.00% 2.04% 1.80%
$100,000 but less than $250,000 1.50 1.52 1.35
$250,000 but less than $500,000 1.00 1.01 .90
$500,000 but less than $1,000,000 .75 .76 .65
$1,000,000 or more None None
Under certain circumstances, the Adviser may increase or decrease the
reallowance to selected dealers. In addition to the compensation otherwise paid
to securities dealers, the Adviser may from time to time pay from its own
resources additional cash bonuses or other incentives to selected dealers in
connection with the sale of shares of the Fund. On some occasions, such bonuses
or incentives may be conditioned upon the sale of a specified minimum dollar
amount of shares of the Fund and/or other funds in the Countrywide Family of
Funds during a specific period of time. Such bonuses or incentives may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising,
sales campaigns and other dealer-sponsored programs or events.
For initial purchases of Class A shares of $1 million or more and subsequent
purchases further increasing the size of the account, participating unaffiliated
dealers will receive first year compensation of up to 1.00% of such purchases
from the Adviser. In determining a dealer's eligibility for such commission,
purchases of Class A shares of the Fund may be aggregated with simultaneous
purchases of Class A shares of other funds in the Countrywide Family of Funds.
Dealers should contact the Adviser for more information on the calculation of
the dealer's commission in the case of combined purchases.
An exchange from other Countrywide Funds will not qualify for payment of the
dealer's commission unless the exchange is from a Countrywide Fund with assets
as to which a dealer's commission or similar payment has not been previously
paid. No commission will be paid if the purchase represents the reinvestment of
a redemption from a Fund made during the previous twelve months. Redemptions of
Class A shares may result in the imposition of a contingent deferred sales load
if the dealer's commission described in this paragraph was paid in connection
with the purchase of such shares. See "Contingent Deferred Sales Load for
Certain Purchases of Class A Shares" below.
REDUCED SALES LOAD. You may use the Right of Accumulation to combine the cost or
current NAV (whichever is higher) of your existing Class A shares of any
Countrywide Fund sold with a sales
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<PAGE>
load with the amount of any current purchases in order to take advantage of the
reduced sales loads set forth in the tables above. Purchases made in any
Countrywide load fund under a Letter of Intent may also be eligible for the
reduced sales loads. The minimum initial investment under a Letter of Intent is
$10,000. The Countrywide Funds which are sold with a sales load are listed in
the "How to Exchange Shares" section of this Prospectus. You should contact the
Transfer Agent for information about the Right of Accumulation and Letter of
Intent.
PURCHASES AT NET ASSET VALUE. Class A shares of the Fund may be purchased at NAV
by pension and profit-sharing plans, pension funds and other company-sponsored
benefit plans that (1) have plan assets of $500,000 or more, or (2) have, at the
time of purchase, 100 or more eligible participants, or (3) certify that they
project to have annual plan purchases of $200,000 or more, or (4) are provided
administrative services by certain third-party administrators that have entered
into a special service arrangement with the Adviser relating to such plan.
Banks, bank trust departments and savings and loan associations, in their
fiduciary capacity or for their own accounts, may purchase Class A shares of the
Fund at NAV. To the extent permitted by regulatory authorities, a bank trust
department may charge fees to clients for whose account it purchases shares at
NAV. Federal and state credit unions may also purchase shares at NAV.
In addition, Class A shares of the Fund may be purchased at NAV by
broker-dealers who have a sales agreement with the Adviser and their registered
personnel and employees, including members of the immediate families of such
registered personnel and employees.
Clients of investment advisers may also purchase Class A shares of the Fund at
NAV if their investment adviser or broker-dealer has made appropriate
arrangements with the Trust. The investment adviser must notify the Transfer
Agent that an investment qualifies as a purchase at NAV.
Associations and affinity groups and their members may purchase Class A shares
of the Fund at NAV provided that management of these groups or their financial
adviser has made arrangements to permit them to do so. Investors or their
financial adviser must notify the Transfer Agent that an investment qualifies as
a purchase at NAV.
Employees, shareholders and customers of Countrywide Credit Industries, Inc. or
any affiliated company, including members of the immediate families of such
individuals and employee benefit plans established by such entities, may also
purchase Class A shares of the Fund at NAV.
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<PAGE>
CONTINGENT DEFERRED SALES LOAD FOR CERTAIN PURCHASES OF CLASS A SHARES. A
contingent deferred sales load is imposed upon certain redemptions of Class A
shares of the Fund (or shares into which such Class A shares were exchanged)
purchased at NAV in amounts totaling $1 million or more, if the dealer's
commission described above was paid by the Adviser and the shares are redeemed
within one year from the date of purchase. The contingent deferred sales load
will be paid to the Adviser and will be equal to the commission percentage paid
at the time of purchase as applied to the lesser of (1) the NAV at the time of
purchase of the Class A shares being redeemed, or (2) the NAV of the Class A
shares at the time of redemption. If a purchase of Class A shares is subject to
the contingent deferred sales load, you will be notified on the confirmation you
receive for your purchase. Redemptions of Class A shares of the Fund held for at
least one year will not be subject to the contingent deferred sales load.
Class C Shares
--------------
Class C shares are sold with an initial sales load of 1.25% and are subject to a
contingent deferred sales load of 1.00% on redemptions of Class C shares made
within one year of their purchase. The contingent deferred sales load will be a
percentage of the dollar amount of shares redeemed and will be assessed on an
amount equal to the lesser of (1) the NAV at the time of purchase of the Class C
shares being redeemed, or (2) the NAV of the Class C shares being redeemed. A
contingent deferred sales load will not be imposed upon redemptions of Class C
shares held for at least one year. Class C shares are subject to an annual 12b-1
fee of up to 1.00% of the Fund's average daily net assets allocable to Class C
shares. The Adviser intends to pay a commission of 2.00% of the purchase amount
to your broker at the time you purchase Class C shares.
Additional Information on the Contingent Deferred Sales Load
- ------------------------------------------------------------
The contingent deferred sales load is waived for any partial or complete
redemption following death or disability (as defined in the Internal Revenue
Code) of a shareholder (including one who owns the shares with his or her spouse
as a joint tenant with rights of survivorship) from an account in which the
deceased or disabled is named. The Adviser may require documentation prior to
waiver of the load, including death certificates, physicians' certificates, etc.
All sales loads imposed on redemptions are paid to the Adviser. In determining
whether the contingent deferred sales load is payable, it is assumed that shares
not subject to the contingent deferred sales load are the first redeemed
followed by other shares held for the longest period of time. The contingent
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<PAGE>
deferred sales load will not be imposed upon shares representing reinvested
dividends or capital gains distributions, or upon amounts representing share
appreciation.
The following example will illustrate the operation of the contingent deferred
sales load. Assume that you open an account and purchase 1,000 shares at $10 per
share and that six months later the NAV per share is $12 and, during such time,
you have acquired 50 additional shares through reinvestment of distributions. If
at such time you should redeem 450 shares (proceeds of $5,400), 50 shares will
not be subject to the load because of dividend reinvestment. With respect to the
remaining 400 shares, the load is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$4,000 of the $5,400 redemption proceeds will be charged the load. At the rate
of 1.00%, the contingent deferred sales load would be $40. In determining
whether an amount is available for redemption without incurring a deferred sales
load, the purchase payments made for all Class C shares in your account are
aggregated.
DISTRIBUTION PLANS
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted two separate
plans of distribution under which the Fund's two classes of shares may directly
incur or reimburse the Adviser for certain expenses related to the distribution
of its shares, including payments to securities dealers and other persons,
including the Adviser and its affiliates, who are engaged in the sale of shares
of the Fund and who may be advising investors regarding the purchase, sale or
retention of Fund shares; expenses of maintaining personnel who engage in or
support distribution of shares or who render shareholder support services not
otherwise provided by the Transfer Agent or the Trust; expenses of formulating
and implementing marketing and promotional activities, including direct mail
promotions and mass media advertising; expenses of preparing, printing and
distributing sales literature and prospectuses and statements of additional
information and reports for recipients other than existing shareholders of the
Fund; expenses of obtaining such information, analyses and reports with respect
to marketing and promotional activities as the Trust may, from time to time,
deem advisable; and any other expenses related to the distribution of each class
of shares.
The annual limitation for payment of expenses pursuant to the Class A Plan is
.35% of the Fund's average daily net assets allocable to Class A shares. The
annual limitation for payment of expenses pursuant to the Class C Plan is 1.00%
of the Fund's average daily net assets allocable to Class C shares. The payments
permitted by the Class C Plan fall into two categories. First, the Class C
shares may directly incur or reimburse the Adviser in an amount not to exceed
.75% per year of the Fund's
-18-
<PAGE>
average daily net assets allocable to Class C shares for certain
distribution-related expenses as described above. The Class C Plan also provides
for the payment of an account maintenance fee of up to .25% per year of the
Fund's average daily net assets allocable to Class C shares, which may be paid
to dealers based on the average value of Fund shares owned by clients of such
dealers. Because these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales loads. In the event a Plan is
terminated by the Trust in accordance with its terms, the Fund will not be
required to make any payments for expenses incurred after the date the Plan
terminates. The Adviser may make payments to dealers and other persons in an
amount up to .75% per annum of the average value of Class C shares owned by
their clients, in addition to the .25% account maintenance fee described above.
HOW TO REDEEM SHARES
- --------------------
BY WRITTEN REQUEST. You may send a written request to the Transfer Agent with
your name, your account number and the amount to be redeemed. You must sign your
request exactly as your name appears on our account records. Mail your written
request to:
COUNTRYWIDE FUND SERVICES, INC.
P.O. BOX 5354
CINCINNATI, OHIO 45201-5354
BY TELEPHONE. If the amount of your redemption is less than $25,000, you may
redeem your shares by telephone. To redeem shares by telephone, call the
Transfer Agent (Nationwide call toll-free 800-543-0407; in Cincinnati call
629-2050). Your redemption proceeds may be mailed to the address stated on your
Account Application, wired to your bank or brokerage account as stated on your
Account Application or deposited via an Automated Clearing House (ACH)
transaction. The telephone redemption privilege is automatically available to
you, unless you specifically notify the Transfer Agent not to honor telephone
redemptions for your account. IRA accounts may not be redeemed by telephone.
THROUGH YOUR BROKER-DEALER. You may also redeem shares by placing a wire
redemption request through your broker-dealer. Your broker-dealer is responsible
for ensuring that redemption requests are transmitted to us in proper form in a
timely manner.
BY CHECK. You may open a checking account with the Fund and redeem shares by
check. The Transfer Agent will redeem the appropriate number of shares in your
account to cover the amount of your check. Checks will be processed at the NAV
on the day
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the check is received by the Custodian for payment. Shareholders who write
checks should keep in mind that the Fund's NAV fluctuates daily. You should be
aware that writing a check is a taxable event. Checks may be payable to anyone
for any amount, but checks may not be certified.
If the amount of your check is more than the value of the shares held in your
account, the check will be returned. The Transfer Agent charges shareholders its
costs for each check returned for insufficient funds and for each stop payment.
If you do not write more than six checks during a month, you will not be charged
a fee for your checking account. If you write more than six checks during a
month, you will be charged $.25 for each additional check written that month.
However, there is no charge for any checks written by employees, shareholders
and customers (including members of their immediate family) of Countrywide
Credit Industries, Inc. or any of its affiliates.
AUTOMATIC WITHDRAWAL PLAN. If the shares in your account have a value of at
least $5,000, you (or another person you have designated) may receive monthly or
quarterly payments in a specified amount of not less than $50 each. There is no
charge for this service. Purchases of additional shares of the Fund while the
plan is in effect are generally undesirable because an initial sales load is
incurred whenever purchases are made.
PROCESSING OF REDEMPTIONS
If you request a redemption by wire, you will be charged an $8 processing fee.
We reserve the right to change the processing fee, upon 30 days' notice. All
charges will be deducted from your account by redeeming shares in your account.
Your bank or brokerage firm may also charge you for processing the wire.
Redemption proceeds will only be wired to a commercial bank or brokerage firm in
the United States. If it is impossible or impractical to wire funds, the
redemption proceeds will be sent by mail to the designated account.
If you would like your redemption proceeds deposited free of charge directly
into your account with a commercial bank or other depository institution via an
ACH transaction, contact the Transfer Agent for more information.
We redeem shares based on the next determined NAV on the day we receive a proper
request for redemption, less any contingent deferred sales load on the redeemed
shares. Be sure to review "How to Purchase Shares" above to determine whether
your redemption is subject to a contingent deferred sales load.
-20-
<PAGE>
A SIGNATURE GUARANTEE helps protect against fraud. You can obtain one from most
banks or securities dealers, but not from a notary public. For joint accounts,
each signature must be guaranteed. Please call us to ensure that your signature
guarantee will be submitted correctly.
A SIGNATURE GUARANTEE is required for (1) any redemption which is $25,000 or
more (2) any redemption when the name(s) or the address on the account has been
changed within 30 days of your redemption request.
REDEMPTION POLICIES AND PROCEDURES. In connection with all redemptions of shares
of the Fund, we observe the following policies and procedures:
o We may refuse any redemption request involving recently purchased
shares until your check for the recently purchased shares has cleared.
To eliminate this delay, you may purchase shares of the Fund by
certified check or wire.
o We may refuse any telephone redemption request if the name(s) or the
address on the account has been changed within 30 days of your
redemption request.
o We may delay mailing redemption proceeds for more than 3 business days
(redemption proceeds are normally mailed within 3 days after receipt
of a proper request).
o We will consider all written and verbal instructions as authentic and
will not be responsible for processing instructions received by
telephone which are reasonably believed to be genuine or for
processing redemption proceeds by wire. We will use reasonable
procedures to determine that telephone instructions are genuine, such
as requiring forms of personal identification before acting upon
telephone instructions, providing written confirmation of the
transactions and/or tape recording telephone instructions. If we do
not use such procedures, we may be liable for losses due to
unauthorized or fraudulent instructions.
o Due to the high costs of maintaining small accounts, we may ask that
you increase your account balance if your account falls below the
minimum amount required for your account. If the account balance
remains below our minimum requirements for 30 days after we notify you
(based on the amount of your investment, not on market fluctuations),
we may close your account and send you the proceeds, less any
applicable contingent deferred sales load.
-21-
<PAGE>
o If you have redeemed shares of the Fund, you may reinvest all or part
of the proceeds without paying a sales load. You must make your
reinvestment within 90 days of your redemption and you may only use
this privilege once a year.
HOW TO EXCHANGE SHARES
- ----------------------
Shares of the Fund and of any other fund in the Countrywide Family of Funds may
be exchanged for each other.
Class A shares of the Fund which do not have a contingent deferred sales load
may be exchanged for Class A shares of any other fund and for shares of a fund
which offers only one class of shares (provided these shares do not have a
contingent deferred sales load). If you paid a sales load on the shares being
exchanged, this amount will be credited towards the sales load (if any) on the
shares being acquired.
Class C shares of the Fund and Class A shares of the Fund which have a
contingent deferred sales load, may be exchanged, based on their per share NAV,
for shares of any other fund which has a contingent deferred sales load and for
shares of any fund which is a money market fund. You will receive credit for the
period of time you held the shares being exchanged when determining whether a
contingent deferred sales load will apply, unless your shares were held in a
money market fund.
The Countrywide Family of Funds consists of the following funds. Funds which may
have a front-end or a contingent deferred sales load are marked with an
asterisk.
GROWTH FUNDS GROWTH & INCOME FUNDS
- ------------ ---------------------
*Growth/Value Fund *Equity Fund
*Aggressive Growth Fund *Utility Fund
TAXABLE BOND FUNDS TAX-FREE BOND FUNDS
- ------------------ -------------------
Adjustable Rate U.S. Government *Tax-Free Intermediate Term
Securities Fund Fund
*Intermediate Bond Fund *Ohio Insured Tax-Free Fund
*Intermediate Term Government
Income Fund
TAXABLE MONEY MARKET FUNDS TAX-FREE MONEY MARKET FUNDS
- -------------------------- ---------------------------
Short Term Government Income Fund Tax-Free Money Fund
Institutional Government Income Fund Ohio Tax-Free Money Fund
Money Market Fund California Tax-Free Money
Fund
Florida Tax-Free Money
Fund
-22-
<PAGE>
You may exchange shares by written request or by telephone. You must sign your
written request exactly as your name appears on our account records. If you are
unable to exchange shares by telephone due to such circumstances as unusually
heavy market activity, you can exchange shares by mail or in person. Your
exchange will be processed at the next determined NAV (or offering price, if
there is a sales load) after the Transfer Agent receives your request.
You may only exchange shares into a fund which is authorized for sale in your
state of residence and you must meet that fund's minimum initial investment
requirements. The Board of Trustees may change or discontinue the exchange
privilege after giving shareholders 60 days' prior notice. An exchange will be
treated as a sale of shares and any gain or loss on an exchange of shares is a
taxable event. Before making an exchange, contact the Transfer Agent to request
information about the other funds in the Countrywide Family of Funds.
DIVIDENDS AND DISTRIBUTIONS
- ---------------------------
The Fund expects to distribute substantially all of its net investment income
monthly and any net realized long-term capital gains at least annually.
Management will determine when to distribute any net realized short-term capital
gains.
Your distributions will be paid under one of the following options:
Share Option - all distributions are reinvested in additional shares.
Income Option - income and short-term capital gains are paid in cash;
long-term capital gains are reinvested in additional
shares.
Cash Option - all distributions are paid in cash.
Please mark on your Account Application the option you have selected. If you do
not select an option, you will receive the Share Option. If you select the
Income Option or the Cash Option and the post office cannot deliver your checks
or if you do not cash your checks within six months, your dividends may be
reinvested in your account at the then-current NAV and your account will be
converted to the Share Option. You will not receive interest on the amount of
your uncashed checks until the checks have been reinvested in your account.
Distributions will be based on the Fund's NAV on the payable date. If you have
received a cash distribution from the Fund, you may reinvest it at NAV (without
paying a sales load) at the next determined NAV on the date of your
reinvestment. You must make your reinvestment within 30 days of the distribution
date
-23-
<PAGE>
and you must notify the Transfer Agent that your distribution is being
reinvested under this provision.
TAXES
- -----
The Fund has qualified in all prior years and intends to continue to qualify for
the special tax treatment afforded a "regulated investment company" under
Subchapter M of the Internal Revenue Code so that it does not pay federal taxes
on income and capital gains distributed to shareholders. The Fund intends to
distribute substantially all of its net investment income and any net realized
capital gains to its shareholders. Distributions of net investment income as
well as from net realized short-term capital gains, if any, are taxable as
ordinary income. Since the Fund's investment income is derived from interest
rather than dividends, no portion of such distributions is eligible for the
dividends received deduction available to corporations.
Distributions of net capital gains (i.e., the excess of net long-term capital
gains over net short-term capital losses) by the Fund to its shareholders are
taxable to the recipient shareholders as capital gains, without regard to the
length of time a shareholder has held Fund shares. Capital gains distributions
may be taxable at different rates depending on the length of time the Fund holds
its assets. Redemptions of shares of the Fund are taxable events on which a
shareholder may realize a gain or loss.
The Fund will mail to each of its shareholders a statement indicating the amount
and federal income tax status of all distributions made during the year. In
addition to federal taxes, shareholders of the Fund may be subject to state and
local taxes on distributions. Shareholders should consult their tax advisors
about the tax effect of distributions and withdrawals from the Fund, exchanges
among the Countrywide Funds and the use of the Automatic Withdrawal Plan. The
tax consequences described in this section apply whether distributions are taken
in cash or reinvested in additional shares.
OPERATION OF THE FUND
- ---------------------
The Fund is a non-diversified series of Countrywide Investment Trust, an
open-end management investment company organized as a Massachusetts business
trust. Like other mutual funds, the Trust retains various organizations to
perform specialized services for the Fund.
INVESTMENT ADVISER. The Trust retains Countrywide Investments, Inc. (the
"Adviser"), 312 Walnut Street, Cincinnati, Ohio 45202 to manage the Fund's
investments and its business affairs. The Adviser was organized in 1974 and is
the investment adviser to all funds in the Countrywide Family of Funds. The
Adviser is an indirect wholly-owned subsidiary of The Western-Southern Life
-24-
<PAGE>
Insurance Company which provides life and health insurance, annuities, mutual
funds, asset management and related financial services. The Fund pays the
Adviser a fee at the annual rate of .5% of its average daily net assets up to
$50 million; .45% of such assets from $50 million to $150 million; .4% of such
assets from $150 million to $250 million and .375% of such assets in excess of
$250 million.
PORTFOLIO MANAGER. Scott Weston, Assistant Vice President-Investments of the
Adviser, is primarily responsible for managing the portfolio of the Fund. Mr.
Weston has been employed by the Adviser since 1992 and has been managing the
Fund's portfolio since September 1997.
UNDERWRITER. The Adviser is the principal underwriter for the Fund and the
exclusive agent for the distribution of shares of the Fund. The Adviser receives
the entire sales load on all direct initial investments in the Fund and on all
investments which are not made through a broker.
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
On each day that the Trust is open for business, the public offering price (NAV
plus applicable sales load) of the shares of the Fund is determined as of the
close of the regular session of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time). The Trust is open for business on each day the New
York Stock Exchange is open for business and on any other day when there is
sufficient trading in the Fund's investments that its NAV might be materially
affected. The NAV per share of the Fund is calculated by dividing the sum of the
value of the securities held by the Fund plus cash or other assets minus all
liabilities (including estimated accrued expenses) by the total number of shares
outstanding of the Fund, rounded to the nearest cent. The price at which a
purchase or redemption of Fund shares is processed is based on the next
calculation of NAV after the order is placed.
The value of the securities held by the Fund is determined as follows: (1)
Securities which have available market quotations are priced according to the
most recent bid price quoted by one or more of the major market makers; (2)
Securities that do not have available market prices are priced at their fair
value using consistent procedures established in good faith by the Board of
Trustees.
-25-
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
The financial highlights table is intended to help you understand the financial
performance of Class A shares of the Fund during its operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost on an investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for periods ending after August 31, 1996 has
been audited by Arthur Andersen LLP, whose report, along with the Fund's
financial statements, is included in the Statement of Additional Information,
which is available upon request. Information for the period ending August 31,
1996 was audited by other independent accountants.
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30 AUGUST 31, AUGUST 31,
1999 1998 1997(A) 1997 1996(B)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.50 $ 10.09 $ 10.00 $ 9.75 $ 10.00
--------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.59 0.62 0.05 0.62 0.57(C)
Net realized and unrealized gains
(losses) on investments (0.97) 0.41 0.09 0.28 (0.25)(C)
--------------------------------------------------------------------------
Total from investment operations (0.38) 1.03 0.14 0.90 0.32
--------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (0.59) (0.62) (0.05) (0.62) (0.57)
Distributions from net realized
gains (0.08) -- -- (0.03) --
--------------------------------------------------------------------------
Total distributions (0.67) (0.62) (0.05) (0.65) (0.57)
--------------------------------------------------------------------------
Net asset value at end of period $ 9.45 $ 10.50 $ 10.09 $ 10.00 $ 9.75
==========================================================================
Total return(D) (3.71)% 10.54% 1.41% 9.48% 3.23%
==========================================================================
Net assets at end of period (000's) $ 11,687 $ 23,718 $ 15,671 $ 15,114 $ 13,357
==========================================================================
Ratio of net expenses to
average net assets(E) 0.95% 0.95% 0.95%(F) 0.85% 0.68%(F)
Ratio of net investment income to
average net assets 5.96% 6.08% 6.18%(F) 6.26% 6.31%(F)
Portfolio turnover rate 92% 63% 0% 41% 12%
(A) Effective as of the close of business on August 29, 1997, the Fund was reorganized and its fiscal year-end,
subsequent to August 31, 1997, was changed to September 30.
(B) Represents the period from the commencement of operations (October 3, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratios of expenses to average net assets would have
been 1.27%, 0.98%, 1.38%(F), 1.53% and 2.04%(F) for the periods ended September 30, 1999, 1998 and 1997,
and August 31, 1997 and 1996, respectively.
(F) Annualized.
</TABLE>
-26-
<PAGE>
<TABLE>
<S> <C>
ACCOUNT NO. ____________________________
(For Fund Use Only)
Please mail account application to:
Countrywide Fund Services, Inc.
P.O. Box 5354 FOR BROKER/DEALER USE ONLY
Cincinnati, Ohio 45201-5354 Firm Name:______________________________________
INTERMEDIATE BOND FUND Home Office Address:____________________________
Branch Address:_________________________________
[ ] A Shares (93) $____________________ Rep Name & No.:_________________________________
[ ] C Shares (95) $____________________ Rep Signature:__________________________________
___________________________________________________________________________________________________________________
Initial Investment of $_____________
[ ] Check or draft enclosed payable to the Fund.
[ ] Bank Wire From: _________________________________________________________________________________________________
[ ] Exchange From: _________________________________________________________________________________________________
(Fund Name) (Fund Account Number)
Account Name S.S. #/Tax I.D.#
_________________________________________________________________ _________________________________________________
Name of Individual, Corporation, Organization, or Minor, etc. (In case of custodial account
please list minor's S.S.#)
_________________________________________________________________ Citizenship: [ ] U.S.
Name of Joint Tenant, Partner, Custodian [ ] Other ______________________
Address Phone
_________________________________________________________________ (_____)__________________________________________
Street or P.O. Box Business Phone
_________________________________________________________________ (_____)__________________________________________
City State Zip Home Phone
Check Appropriate Box: [ ] Individual [ ] Joint Tenant (Right of survivorship presumed) [ ] Partnership
[ ] Corporation [ ] Trust [ ] Custodial [ ] Non-Profit [ ] Other
Occupation and Employer Name/Address __________________________________________________________________________________
Are you an associated person of an NASD member? [ ] Yes [ ] No
___________________________________________________________________________________________________________________
DISTRIBUTIONS (If no election is checked the SHARE OPTION will be assigned.)
[ ] Share Option _ Income distributions and capital gains distributions automatically reinvested in additional shares.
[ ] Income Option _ Income distributions and short term capital gains distributions paid in cash, long term capital gains
distributions reinvested in additional shares.
[ ] Cash Option _ Income distributions and capital gains distributions paid in cash
[ ] By Check [ ] By ACH to my bank checking or savings account. Please attach a voided check.
- --------------------------------------------------------------------------------------------------------------------------------
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
Right of Accumulation: I apply for Right of Accumulation subject to the Agent's confirmation of the following holdings of eligible
load funds of Countrywide Investments.
Account Number/Name Account Number/Name
___________________________________________________________- ________________________________________________________
___________________________________________________________- ________________________________________________________
<PAGE>
Letter of Intent: (Complete the Right of Accumulation section if related accounts are being applied to your
Letter of Intent.)
[ ] I agree to the Letter of Intent in the current Prospectus of Countrywide Investment Trust. Although I am not obligated to
purchase, and the Trust is not obligated to sell, I intend to invest over a 13 month period beginning ______________________
19 _______ (Purchase Date of not more than 90 days prior to this Letter) an aggregate amount in the load funds of
Countrywide Investments at least equal to (check appropriate box):
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT SECURITY
For increased security, Countrywide Fund Services, Inc. requires that you establish a Personal Identification Number [ ][ ][ ][ ]
(PIN). You will need to use this PIN when requesting account information and placing transactions. For institutional
accounts, please use a four digit number. For retail accounts, please use the first four letters of your mother's
maiden name.
- ------------------------------------------------------------------------------------------------------------------------------------
SIGNATURE AND TIN CERTIFICATION
I certify that I have full right and power, and legal capacity to purchase shares of the Funds and affirm that I have received a
current prospectus and understand the investment objectives and policies stated therein. The investor hereby ratifies any
instructions given pursuant to this Application and for himself and his successors and assigns does hereby release Countrywide
Fund Services, Inc., Countrywide Investment Trust, Countrywide Investments, Inc., and their respective officers, employees, agents
and affiliates from any and all liability in the performance of the acts instructed herein. Neither the Trust, Countrywide Fund
Services, Inc., nor their respective affiliates will be liable for complying with telephone instructions they reasonably believe
to be genuine or for any loss, damage, cost or expense in acting on such telephone instructions. The investor(s) will bear the
risk of any such loss. The Trust or Countrywide Fund Services, Inc., or both, will employ reasonable procedures to determine
that telephone instructions are genuine. If the Trust and/or Countrywide Fund Services, Inc. do not employ such procedures,
they may be liable for losses due to unauthorized or fraudulent instructions. These procedures may include, among others,
requiring forms of personal identification prior to acting upon telephone instructions, providing written confirmation of the
transactions and/or tape recording telephone instructions. I certify under the penalities of perjury that (1) the Social
Security Number or Tax Identification Number shown is correct and (2) I am not subject to backup withholding. The certifications
in this paragraph are required from all non-exempt persons to prevent backup withholding of 31% of all taxable distributions and
gross redemption proceeds under the federal income tax law. The Internal Revenue Service does not require my consent to any
provision of this document other than the certifications required to avoid backup withholding. (Check here if you are subject to
backup withholding.) [ ]
___________________________________ __________________________________
Applicant Date Joint Applicant Date
___________________________________ ___________________________________
Other Authorized Signatory Date Other Authorized Signatory Date
NOTE: Corporations, trusts and other organizations must provide a copy of the resolution form on the reverse side.
Unless otherwise specified, each joint owner shall have full authority to act on behalf of the account.
- ------------------------------------------------------------------------------------------------------------------------------------
SIGNATURE AUTHORIZATION - FOR USE BY CORPORATIONS, TRUSTS, PARTNERSHIPS AND OTHER INSTITUTIONS
Please retain a copy of this document for your files. Any modification of the information contained in this section will
require an Amendment to this Application Form.
[ ] New Application [ ] Amendment to previous Application dated ________ Account No. _______________
Name of Registered Owner ________________________________________________________________________________
The following named person(s) are currently authorized signatories of the Registered Owner. Any ____ of them is/are authorized
under the applicable governing document to act with full power to sell, assign or transfer securities of Countrywide Tax-Free
Trust for the Registered Owner and to execute and deliver any instrument necessary to effectuate the authority hereby conferred:
Name Title Signature
___________________ ____________________ ___________________
___________________ ____________________ ___________________
___________________ ____________________ ___________________
COUNTRYWIDE INVESTMENT TRUST, or any agent of the Trust may, without inquiry, rely upon the instruction of any person(s)
purporting to be an authorized person named above, or in any Amendment received by the Trust or its agent. The Trust
and its Agent shall not be liable for any claims, expenses or losses resulting from having acted upon any instruction reasonably
believed to be genuine.
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
SPECIAL INSTRUCTIONS
REDEMPTION INSTRUCTIONS
I understand that the telephone redemption privilege is automatically available to me unless I indicate otherwise below.
(See the prospectus for limitations on this option.)
[ ] I do not wish to have the telephone redemption privilege on my account.
REDEMPTION OPTIONS
[ ] Please mail redemption proceeds to the name and address of record.
[ ] Please wire redemptions to the commercial bank account indicated below (subject to a minimum wire transfer of $1,000 and an
$8.00 fee. For wire redemptions please attach a voided check from the account below).
[ ] Checkwriting - Call 1-800-543-0407 for checkwriting application and signature card.
AUTOMATIC INVESTMENT (For Automatic Investment please attach a voided check from the account below.)
Please purchase shares of the Intermediate Bond Fund by withdrawing from the commercial bank account below, per the
instructions below:
Amount $_________(minimum $50)
______________________________ is hereby authorized to charge to my account the bank draft amount here indicated. I
understand the payment of this draft is subject to all provisions of the contract as stated on my
bank account signature card.
Please make my automatic investment on:
[ ] the last business day of each month [ ] the 15th day of each month [ ] both the 15th and last business day
_________________________________________________________________
(Signature as your name appears on the bank account to be drafted)
Name as it appears on the account __________________________________________________
Commerical bank account #___________________________________________________________
ABA Routing #_______________________________________________________________________
City, State and Zip in which bank is located _______________________________________
Indemnification to Depositor's Bank
In consideration of your participation in a plan which Countrywide Fund Services, Inc. ("CFS") has put into effect, by which
amounts, determined by your depositor, payable to the Fund, for purchase of shares of the Fund, are collected by CFS, CFS hereby
agrees:
CFS will indemnify and hold you harmless from any liability to any person or persons whatsoever arising out of the payment by
you of any amount drawn by the Fund to its own order on the account of your depositor or from any liability to any person
whatsoever arising out of the dishonor by you whether with or without cause or intentionally or inadvertently, of any such
checks. CFS will defend, at its own cost and expense, any action which might be brought against you by any person or persons
whatsoever because of your actions taken pursuant to the foregoing request or in any manner arising by reason of your
participation in this arrangement. CFS will refund to you any amount erroneously paid by you to the Fund on any such check if
the claim for the amount of such erroneous payment is made by you within six (6) months from the date of such erroneous payment;
your participation in this arrangement and that of the Fund may be terminated by thirty (30) days written notice from either
party to the other.
- ---------------------------------------------------------------------------------------------------------------------------------
AUTOMATIC WITHDRAWAL PLAN (Complete for Withdrawals from the Fund)
This is an authorization for you to withdraw $_________________ from my mutual fund account beginning the last business day of the
month of _____________________.
Please Indicate Withdrawal Schedule (Check One):
[ ] Monthly - Withdrawals will be made on the last business day of each month.
[ ] Quarterly - Withdrawals will be made on or about 3/31, 6/30, 9/30 and 12/31.
[ ] Annually - Please make withdrawals on the last business day of the month of:____________________
Please Select Payment Method (Check One):
[ ] Exchange: Please exchange the withdrawal proceeds into another Countrywide account number: ___ ___ _ ___ ___ ___ ___
[ ] Check: Please mail a check for my withdrawal proceeds to the mailing address on this account.
[ ] ACH Transfer: Please send my withdrawal proceeds via ACH transfer to my bank checking or savings account as indicated below.
I understand that the transfer will be completed in two to three business days and that there is no charge.
[ ] Bank Wire: Please send my withdrawal proceeds via bank wire, to the account indicated below. I understand that the wire
will be completed in one business day and that there is an $8.00 fee.
Please attach a voided _______________________________________________________________________________________
check for ACH or bank wire Bank Name Bank Address
_______________________________________________________________________________________
Bank ABA# Account # Account Name
[ ] Send to special payee (other than applicant): Please mail a check for my withdrawal proceeds to the mailing
address below:
Name of payee_____________________________________________________________________________________________________________
Please send to: __________________________________________________________________________________________________________
Street address City State Zip
____________________________________________________________________________________________________________________________
</TABLE>
<PAGE>
Countrywide Investment Trust
- ----------------------------
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
Nationwide (Toll-Free) 800-543-8721
Cincinnati 513-629-2000
Board of Trustees
- -----------------
William O. Coleman
Phillip R. Cox
H. Jerome Lerner
Robert H. Leshner
Jill T. McGruder
Oscar P. Robertson
Nelson Schwab, Jr.
Robert E. Stautberg
Joseph S. Stern, Jr.
Investment Adviser
- ------------------
Countrywide Investments, Inc.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
Transfer Agent
- --------------
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
Shareholder Service
- -------------------
Nationwide: (Toll-Free) 800-543-0407
Cincinnati: 513-629-2050
Additional information about the Fund is included in the Statement of Additional
Information ("SAI") which is incorporated by reference in its entirety.
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
To obtain a free copy of the SAI, the annual and semiannual reports or other
information about the Fund, or to make inquiries about the Fund, please call
1-800-543-0407 (Nationwide) or 629-2050 (in Cincinnati).
Information about the Fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's public reference room in Washington, D.C.
Information about the operation of the public reference room can be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the Fund are available on the Commission's Internet site at http://www.sec.gov.
Copies of information on the Commission's Internet site can be obtained for a
fee by writing to: Securities and Exchange Commission, Public Reference Section,
Washington, D.C. 20549-0102, or by e-mailing a request to: public [email protected]
File No. 811-2538
-27-
<PAGE>
INCOME
TOTAL RETURN
ANNUAL
REPORT
September 30, 1999 Countrywide Investments
Short Term Government
Income Fund
Institutional Government
Income Fund
Money Market Fund
Intermediate Bond Fund
Intermediate Term Government
Income Fund
Adjustable Rate U.S. Government
Securities Fund
LOGO: COUNTRYWIDE INVESTMENTS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter from the President.....................................................3
Management Discussion and Analysis..........................................4-6
Statements of Assets and Liabilities........................................7-8
Statements of Operations...................................................9-10
Statements of Changes in Net Assets.......................................11-13
Financial Highlights......................................................14-19
Notes to Financial Statements.............................................20-24
Portfolios of Investments:
Short Term Government Income Fund...................................25
Institutional Government Income Fund.............................26-27
Money Market Fund................................................28-29
Intermediate Bond Fund...........................................30-31
Intermediate Term Government Income Fund............................32
Adjustable Rate U.S. Government Securities Fund.....................33
Notes to Portfolios of Investments...........................................34
Report of Independent Public Accountants.....................................35
Results of Special Meeting of Shareholders...................................36
2 - Countrywide Investments
<PAGE>
LETTER FROM THE PRESIDENT
- --------------------------------------------------------------------------------
PICTURE OF ROBERT H. LESHNER
Dear Fellow Shareholders:
We are pleased to present Countrywide Investment Trust's Annual Report for the
fiscal year ended September 30, 1999. This report provides financial data and
performance information for the Short Term Government Income Fund, Institutional
Government Income Fund, Money Market Fund, Intermediate Bond Fund, Intermediate
Term Government Income Fund and Adjustable Rate U.S. Government Securities Fund.
These Funds represent the six taxable money market and bond products currently
offered among the 16 mutual funds which comprise the Countrywide Family of
Funds.
We are pleased to announce that on October 29, 1999, Fort Washington Investment
Advisors, Inc., a registered investment advisory firm and part of the
Western-Southern Enterprise, completed the acquisition of Countrywide Financial
Services, Inc. The Western-Southern Enterprise, a dynamic financial services
group, includes The Western and Southern Life Insurance Company,
Western-Southern Life Assurance Company, Columbus Life Insurance Company,
Touchstone Advisors, Capital Analysts and Eagle Realty Group. With this
acquisition, Western-Southern Enterprise assets owned or under management have
passed the $20 billion mark. In cooperation with Fort Washington Investment
Advisors, we look forward to offering shareholders enhanced flexibility,
responsiveness and product diversity.
In spite of recent market volatility, the economy remains remarkably strong. We
attribute this to increased activity in the manufacturing sector, low
unemployment, healthy sales in the housing market, strong GDP growth, negligible
inflation and unwavering consumer confidence. Markets suffered losses during the
quarter ended September 30, 1999, but this was indicative of a market correction
rather than a persistent trend.
Interest rate increases during the year put downward price pressure on bonds.
Consequently, the bond market endured its worst year since 1994 and the second
worst year on record. Negatives for bonds were many. The Federal Reserve raised
interest rates in June and August, the domestic U.S. economy continued to be
very strong, commodity prices rose, the U.S. dollar fell and corporate bond
supply was heavy. Continued strength in the global economy, including Asia's
recovery, Europe's growing economic momentum and strength in Latin America also
weighed negatively on the U.S. bond market.
For fixed-income investors, we see attractive opportunities in the corporate,
mortgage-backed and government agency sectors of the market. All of these
sectors currently provide attractive spreads relative to Treasuries with the
potential for additional return should spreads begin to narrow.
Countrywide Investments remains committed to providing products and services
that help investors meet their financial goals. Our success has been built on
the confidence investors have extended to us. We thank you for your support and
look forward to offering continued service to you in the future.
Sincerely,
/s/ Robert H. Leshner
Robert H. Leshner
President
Countrywide Investments - 3
<PAGE>
INTERMEDIATE BOND FUND
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
During the fiscal year, the Intermediate Bond Fund continued to shift its focus
from an income orientation to a total return orientation. While we have worked
to change the profile of the Fund, it has been difficult to move out of certain
securities. As a result, the Fund at fiscal year-end maintained a substantial
position in high yielding, intermediate to longer-maturity premium corporate
bonds, a segment that has lagged the general improvement experienced by
investment grade corporate bonds. For the year ended September 30, 1999, the
Fund's total return (excluding the impact of applicable sales loads) was -3.71%,
as compared to 0.63% for the Lehman Brothers Intermediate Government/Corporate
Bond Index.
Since the beginning of the fiscal year, we have sold almost $8 million in
corporate securities, some of which fit the income-oriented profile. While we
have reduced our overall exposure to corporates by over 30%, many of the
remaining positions still have an income orientation. It is our intention to
continue to cycle out of most of these positions so that we may purchase
corporate securities with better total return profiles.
Interest rate spreads in the investment grade, fixed-income arena ended the
fiscal year mostly unchanged. Day-to-day volatility, however, was not for the
faint of heart. Spread performance in the corporate sector was similar to that
of the mortgage sector with spreads widening dramatically early in the fiscal
year, then narrowing through December and January as volatility declined and
interest rates settled into a range. In late June, a vigilant Federal Reserve,
concerned over tight labor markets and a robust economy, pushed interest rates
higher. This, combined with fresh memories of the 1998 liquidity crisis,
fostered uncertainty and resulted in much wider spreads. With such wide swings
in relative valuation, sector positioning was critical to performance during the
year.
Late in the fiscal year, we slightly reduced the Fund's duration, bringing it in
line with our peers. The Fund currently maintains a slight overweight in the
mortgage-backed sector, at approximately 33% versus a target weighting of 30%.
Going forward, we will look to reallocate our exposure to mortgage-backed
securities, selling 30-year collateral for a position in hybrid adjustable-rate
mortgages where there is compelling relative value. We also plan to continue to
work out of income-oriented corporate bonds in favor of high-quality, global
corporate deals where liquidity and performance appears greatest. We expect to
maintain a neutral to slightly short duration as the overall trend in interest
rates remains bearish.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE
BOND FUND AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX
Intermediate Bond Fund
Average Annual Total Returns
1 Year Since Inception*
(8.28)% 3.83%
Lehman Brothers Intermediate
Government/Corporate Bond Index Intermediate Bond Fund
- --------------------------------------------------------------------------------
10/95 10000 9525
10352 9756
10266 9730
10331 9816
9/96 10515 9921
10772 10212
10760 10161
11078 10564
9/97 11377 10917
11620 11194
11802 11351
12025 11593
9/98 12565 12068
12601 11962
12577 11782
12527 11603
9/99 12642 11621
Past performance is not predictive of future performance.
*Fund inception was October 3, 1995.
4 - Countrywide Investments
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND MANAGEMENT
DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Fiscal year 1999 was a difficult year in the fixed-income markets as
intermediate-term Treasury yields increased by approximately 1.5%. During this
period, however, there were many opportunities to capitalize on trades of
relative value, as sector volatility was extremely high. Generally,
short-duration funds fared well while the spike in interest rates pressured
intermediate and long-term funds. For the fiscal year ended September 30, 1999,
the Intermediate Term Government Income Fund's total return (excluding the
impact of applicable sales loads) was -1.93%, as compared to 0.78% for the
Lehman Brothers Intermediate Government Bond Index.
During the fiscal year, we witnessed dramatic changes in the basis, or spread,
of mortgage-backed securities (MBS), corporate securities and agency debentures.
Option-adjusted spreads on MBS widened from 80 basis points (bps) to 160 bps
early in the year, then recovered to 80 bps by May of 1999, one example of the
dramatic change in relative value in the non-Treasury sectors. With such wide
swings in relative valuation, sector positioning was critical to performance
during the fiscal year.
The Fund's prospectus was amended to provide for greater use of government MBS.
We began allocating assets to the mortgage sector early in 1999, but missed a
substantial portion of the rally experienced in this sector. This reallocation,
combined with the Fund's slightly longer duration relative to its peer group,
hindered performance in mid-1999 as interest rates continued to climb and
spreads on MBS temporarily widened. Since then, we have shortened the Fund's
duration and further bolstered our exposure to the mortgage sector. The Fund
currently maintains an exposure of approximately 26% to MBS, just shy of our
target exposure of 30%.
With inflation showing signs of life, consumption strong and the Federal Reserve
now maintaining a tightening bias, Treasuries are likely to remain under
pressure. Recent uncertainty regarding the Fed has fostered volatility in the
fixed-income markets. With the tremendous performance in the mortgage market, we
will now look to reduce our exposure, most likely investing the proceeds in
agency debentures, both callable and non-callable. We have our eye on the hybrid
adjustable rate mortgage (ARM) market and are looking to add exposure to this
sector with a modest widening of spreads.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE
TERM GOVERNMENT INCOME FUND AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND
INDEX
Intermediate Term Government Income Fund
Average Annual Total Returns:
1 Year 5 Years 10 Years
(6.59)% 5.33% 6.13%
Lehman Brothers Intermediate Intermediate Term Government
Government Bond Index Income Fund
- --------------------------------------------------------------------------------
"9/89" 10000 9525
10341 9800
10327 9670
10651 9938
"9/90" 10857 10031
11329 10484
11578 10686
11774 10819
"9/91" 12333 11454
12927 12065
12791 11795
13288 12296
"9/92" 13870 12975
13823 12861
14340 13516
14621 13888
"9/93" 14929 14292
14952 14190
14675 13613
14593 13357
"9/94" 14705 13325
14690 13295
15302 13978
16016 14810
"9/95" 16264 14994
16808 15537
16693 15223
16805 15240
"9/96" 17094 15525
17489 15930
17486 15840
17973 16289
"9/97" 18434 16728
18841 17081
19125 17323
19479 17682
"9/98" 20389 18491
20440 18442
20385 18268
20344 18061
"9/99" 20549 18135
Past performance is not predictive of future performance.
Countrywide Investments - 5
<PAGE>
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES FUND
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest rates rose steadily during the Adjustable Rate U.S. Government
Securities Fund's fiscal year with short-term rates up roughly 0.50% and
intermediate to long-term rates up approximately 1.50%. The Federal Reserve, in
response to the international liquidity crisis, cut the fed funds rate twice
from 5.25% to 4.75%, then raised the fed funds rate twice, returning it to 5.25%
and effectively "taking back" the added liquidity. This change in policy was
prompted by the global economic recovery and, more specifically, by above-trend
economic growth domestically. The Fund performed well during this period of
uncertainty returning 5.22%, as compared to 4.30% for the Lehman Brothers
Adjustable Rate Mortgage (ARM) Index.
The Fund's performance was enhanced by its focus on the seasoned, one-year
constant maturity Treasury (CMT) sector, which performed well during the fiscal
year. The market for these securities firmed as the general increase in interest
rates and steepening of the yield curve worked to slow prepayments on ARMs. With
ARMs back in vogue at the origination level, the supply of ARM securities has
picked up and enhanced liquidity in the sector.
We continue to find relative value in low gross margin GNMA ARMs with October
reset dates. These securities generally have 6.75% coupons, prepay more slowly
than newer issuance and can be purchased at slight premiums. Another area that
is especially attractive from an income perspective is fixed-rate collateralized
mortgage obligations (CMOs) with short average lives where we can typically pick
up 0.50% in yield over one-year CMT ARMs. And, regarding our core holding of
one-year CMT ARMs, the additional supply, combined with a slower and more stable
prepayment outlook, should allow prices to continue firming.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ADJUSTABLE RATE
U.S. GOVERNMENT SECURITIES FUND AND THE LEHMAN BROTHERS ARM INDEX
Adjustable Rate U.S. Government Securities Fund
Average Annual Total Returns:
1 Year 5 Years Since Inception*
5.22% 5.41% 4.82%
Adjustable Rate U.S. Government
Lehman Brothers ARM Index Securities Fund
- --------------------------------------------------------------------------------
"2/93" 10000 10000
10045 10048
10235 10168
"9/93" 10346 10274
10399 10371
10353 10435
10312 10469
"9/94" 10383 10489
10400 10423
10836 10682
11173 10897
"9/95" 11362 11048
11618 11240
11746 11428
11879 11569
"9/96" 12102 11746
12397 11945
12563 12092
12824 12327
"9/97" 13074 12490
13290 12636
13492 12761
13683 12853
"9/98" 13884 12975
13984 13067
14209 13348
14305 13533
"9/99" 14481 13653
Past performance is not predictive of future performance.
*Fund inception was February 10, 1993.
6 - Countrywide Investments
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
SHORT TERM INSTITUTIONAL MONEY
GOVERNMENT GOVERNMENT MARKET
(000's) INCOME FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities:
At acquisition cost...............$ 31,205 $ 37,415 $ 23,007
===================================================
At amortized cost.................$ 31,101 $ 37,379 $ 22,975
===================================================
At market value (Note 2)..........$ 31,101 $ 37,379 $ 22,975
Repurchase agreements (Note 2)......... 78,600 12,000 --
Cash................................... -- 77 1
Interest receivable.................... 449 429 231
Organization costs, net (Note 2)....... -- -- 6
Other assets........................... 15 5 11
---------------------------------------------------
TOTAL ASSETS........................... 110,165 49,890 23,224
---------------------------------------------------
LIABILITIES
Bank overdraft......................... 3 -- --
Dividends payable...................... 4 19 4
Payable to affiliates (Note 4)......... 68 7 4
Other accrued expenses and liabilities. 30 16 18
TOTAL LIABILITIES...................... 105 42 26
NET ASSETS.............................$ 110,060 $ 49,848 $ 23,198
NET ASSETS CONSIST OF:
Paid-in capital........................$ 110,060 $ 49,870 $ 23,209
Accumulated net realized losses from
security transactions............. -- (22) (11)
----------------------------------------------------
NET ASSETS.............................$ 110,060 $ 49,848 $ 23,198
===================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5)............ 110,060 49,870 23,209
===================================================
Net asset value, offering price and redemption
price per share (Note 2)..........$ 1.00 $ 1.00 $ 1.00
===================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 7
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000'S) Fund Income Fund Fund
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities:
At acquisition cost $ 11,887 $ 45,330 $ 8,692
=======================================================================
At amortized cost $ 11,887 $ 45,289 $ 8,692
=======================================================================
At market value (Note 2) $ 11,527 $ 44,615 $ 8,705
Cash -- 1 1
Interest and principal paydowns receivable 168 649 68
Receivable for capital shares sold 2 11 5
Receivable from affiliates (Note 4) 1 -- 6
Organization costs, net (Note 2) 6 -- --
Other assets 10 12 10
-----------------------------------------------------------------------
TOTAL ASSETS 11,714 45,288 8,795
-----------------------------------------------------------------------
LIABILITIES
Dividends payable 9 22 4
Payable for capital shares redeemed 6 164 119
Payable to affiliates (Note 4) -- 23 --
Other accrued expenses and liabilities 12 19 12
-----------------------------------------------------------------------
TOTAL LIABILITIES 27 228 135
-----------------------------------------------------------------------
NET ASSETS $ 11,687 $ 45,060 $ 8,660
=======================================================================
NET ASSETS CONSIST OF:
Paid-in capital $ 12,477 $ 48,088 $ 9,960
Accumulated net realized losses from
security transactions (430) (2,354) (1,313)
Net unrealized appreciation (depreciation)
on investments (360) (674) 13
-----------------------------------------------------------------------
NET ASSETS $ 11,687 $ 45,060 $ 8,660
=======================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5) 1,236 4,357 895
=======================================================================
Net asset value and redemption price
per share (Note 2) $ 9.45 $ 10.34 $ 9.68
=======================================================================
Maximum offering price per share (Note 2) $ 9.92 $ 10.86 $ 9.68
=======================================================================
</TABLE>
See accompanying notes to financial statements.
8 - Countrywide Investments
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
SHORT TERM INSTITUTIONAL MONEY
GOVERNMENT GOVERNMENT MARKET
(000's) INCOME FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income $ 5,413 $ 2,316 $ 1,450
----------------------------------------------------------
EXPENSES
Investment advisory fees (Note 4) 522 91 137
Transfer agent fees (Note 4) 171 18 33
Distribution expenses (Note 4) 148 3 5
Postage and supplies 62 8 27
Accounting services fees (Note 4) 36 25 24
Custodian fees 25 18 15
Registration fees 22 7 21
Professional fees 19 14 13
Standard & Poor's rating expense 13 13 --
Trustees' fees and expenses 8 8 8
Reports to shareholders 10 1 6
Amortization of organization
costs (Note 2) -- -- 6
Other expenses 13 9 11
----------------------------------------------------------
TOTAL EXPENSES 1,049 215 306
Fees waived by the Adviser (Note 4) -- (33) (128)
NET EXPENSES 1,049 182 178
----------------------------------------------------------
NET INVESTMENT INCOME 4,364 2,134 1,272
----------------------------------------------------------
NET REALIZED LOSSES FROM SECURITY
TRANSACTIONS -- -- (5)
----------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 4,364 $ 2,134 $ 1,267
==========================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 9
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000'S) FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------
<S> <C> C> <C>
INVESTMENT INCOME
Interest income $ 1,076 3,043 $ 584
---------------------------------------------------------
EXPENSES
Investment advisory fees (Note 4) 78 231 49
Accounting services fees (Note 4) 24 24 30
Distribution expenses (Note 4) 5 62 4
Transfer agent fees (Note 4) 12 39 12
Professional fees 19 24 18
Registration fees 19 17 17
Postage and supplies 7 26 11
Trustees' fees and expenses 8 8 8
Custodian fees 6 9 8
Reports to shareholders 5 8 5
Standard & Poor's rating expense -- -- 8
Amortization of organization costs (Note 2) 6 -- --
Other expenses 8 10 6
---------------------------------------------------------
TOTAL EXPENSES 197 458 176
Fees waived and/or expenses reimbursed
by the Adviser (Note 4) (49) -- (102)
---------------------------------------------------------
NET EXPENSES 148 458 74
---------------------------------------------------------
NET INVESTMENT INCOME 928 2,585 510
---------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) from
security transactions (223) 390 (3)
Net change in unrealized appreciation/
depreciation on investments (1,386) (3,884) (22)
---------------------------------------------------------
NET REALIZED AND UNREALIZED LOSSES
ON INVESTMENTS (1,609) (3,494) (25)
---------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ (681) $ (909) $ 485
=========================================================
</TABLE>
See accompanying notes to financial statements.
10 - Countrywide Investments
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
SHORT TERM INSTITUTIONAL
GOVERNMENT GOVERNMENT
INCOME FUND INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 4,364 $ 4,475 $ 2,134 $ 2,598
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
>From net investment income (4,364)
(4,475) (2,134) (2,598)
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 354,333 301,198 83,427 179,615
Reinvested distributions 4,260 4,351 1,889 2,188
Payments for shares redeemed (351,014) (299,865) (80,265) (198,254)
----------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 7,579 5,684 5,051 (16,451)
----------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 7,579 5,684 5,051 (16,451)
NET ASSETS
Beginning of year 102,481 96,797 44,797 61,248
----------------------------------------------------------------------
End of year $ 110,060 $ 102,481 $ 49,848 $ 44,797
======================================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 11
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
MONEY INTERMEDIATE
MARKET BOND
FUND FUND
- ----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 1,272 $ 3,176 $ 928 $ 1,372
Net realized losses from
security transactions (5) (2) (223) (13)
Net change in unrealized
appreciation/depreciation
on investments -- -- (1,386) 809
-----------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS 1,267 3,174 (681) 2,168
-----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
>From net investment income (1,272) (3,176) (932) (1,368)
>From net realized gains -- -- (138) --
-----------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (1,272) (3,176) (1,070) (1,368)
-----------------------------------------------------------------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 68,597 317,726 7,494 19,933
Reinvested distributions 781 674 711 530
Payments for shares redeemed (64,667) (373,727) (18,485) (13,216)
-----------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 4,711 (55,327) (10,280) 7,247
-----------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 4,706 (55,329) (12,031) 8,047
NET ASSETS
Beginning of year 18,492 73,821 23,718 15,671
-----------------------------------------------------------------------
End of year $ 23,198 $ 18,492 $ 11,687 $ 23,718
=======================================================================
UNDISTRIBUTED NET INVESTMENT
INCOME $ -- $ -- $ -- $ 4
=======================================================================
</TABLE>
See accompanying notes to financial statements.
12 - Countrywide Investments
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
INTERMEDIATE TERM ADJUSTABLE RATE
GOVERNMENT U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
- ----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 2,585 $ 2,844 $ 510 $ 788
Net realized gains (losses) from
security transactions 390 157 (3) (59)
Net change in unrealized
appreciation/depreciation
on investments (3,884) 2,055 (22) (153)
----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS (909) 5,056 485 576
----------------------------------------------------------------------------------
Distributions to Shareholders
>From net investment income (2,585) (2,844) (510) (788)
----------------------------------------------------------------------------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 12,477 14,138 4,152 8,357
Reinvested distributions 2,271 2,508 467 717
Payments for shares redeemed (17,362) (20,723) (6,550) (21,448)
----------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
FROM CAPITAL SHARE TRANSACTIONS (2,614) (4,077) (1,931) (12,374)
----------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (6,108) (1,865) (1,956) (12,586)
NET ASSETS
Beginning of year 51,168 53,033 10,616 23,202
----------------------------------------------------------------------------------
End of year $ 45,060 $ 51,168 $ 8,660 $ 10,616
==================================================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 13
<PAGE>
SHORT TERM GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income 0.040 0.046 0.044 0.044 0.046
Dividends from net investment income (0.040) (0.046) (0.044) (0.044) (0.046)
=====================================================================================
Net asset value at end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return 4.02% 4.74% 4.53% 4.51% 4.69%
=====================================================================================
Net assets at end of year (000's) $ 110,060 $ 102,481 $ 96,797 $ 91,439 $ 87,141
=====================================================================================
Ratio of net expenses to
average net assets(A) 0.95% 0.91% 0.97% 0.99% 0.99%
Ratio of net investment income to
average net assets 3.95% 4.63% 4.43% 4.42% 4.59%
</TABLE>
(A) Absent fee waivers by the Adviser, the ratio of expenses to average net
assets would have been 0.94% for the year ended September 30, 1998.
See accompanying notes to financial statements.
14 - Countrywide Investments
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income 0.047 0.052 0.051 0.051 0.053
-------------------------------------------------------------------------------------
Dividends from net investment income (0.047) (0.052) (0.051) (0.051) (0.053)
-------------------------------------------------------------------------------------
Net asset value at end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================================================
Total return 4.78% 5.30% 5.17% 5.18% 5.42%
=====================================================================================
Net assets at end of year (000's) $ 49,848 $ 44,797 $ 61,248 $ 39,382 $ 36,009
=====================================================================================
Ratio of net expenses to
average net assets(A) 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to
average net assets 4.68% 5.17% 5.07% 5.06% 5.30%
(A) Absent fee waivers by the Adviser, the ratios of expenses to average net
assets would have been 0.47%, 0.45%, 0.45%, 0.49%, and 0.42% for the years ended
September 30, 1999, 1998, 1997, 1996 and 1995, respectively (Note 4).
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 15
<PAGE>
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30 AUGUST 31, AUGUST 31,
1999 1998 1997(A) 1997 1996(B)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Net investment income 0.046 0.050 0.004 0.050 0.046(C)
------------------------------------------------------------------------------
Dividends from net investment income (0.046) (0.050) (0.004) (0.050) (0.046)
------------------------------------------------------------------------------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================
Total return 4.74% 5.07% 4.99%(E) 5.14% 4.70%
==============================================================================
Net assets at end of period (000's) $ 23,198 $ 18,492 $ 73,821 $ 94,569 $ 76,363
==============================================================================
Ratio of net expenses to
average net assets(D) 0.65% 0.79% 0.80%(E) 0.65% 0.65%(E)
Ratio of net investment income to
average net assets 4.63% 4.95% 4.99%(E) 5.03% 4.94%(E)
(A) Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997, was changed
to September 30.
(B) Represents the period from the commencement of operations
(September 29, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 1.11%, 0.79% and 0.99%(E) for the periods
ended September 30, 1999, and August 31, 1997 and 1996, respectively (Note 4).
(E) Annualized.
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 16
<PAGE>
INTERMEDIATE BOND FUND -- CLASS A
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30 AUGUST 31, AUGUST 31,
1999 1998 1997(A) 1997 1996(B)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.50 $ 10.09 $ 10.00 $ 9.75 $ 10.00
--------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.59 0.62 0.05 0.62 0.57(C)
Net realized and unrealized gains
(losses) on investments (0.97) 0.41 0.09 0.28 (0.25)(C)
--------------------------------------------------------------------------
Total from investment operations (0.38) 1.03 0.14 0.90 0.32
--------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (0.59) (0.62) (0.05) (0.62) (0.57)
Distributions from net realized
gains (0.08) -- -- (0.03) --
--------------------------------------------------------------------------
Total distributions (0.67) (0.62) (0.05) (0.65) (0.57)
--------------------------------------------------------------------------
Net asset value at end of period $ 9.45 $ 10.50 $ 10.09 $ 10.00 $ 9.75
==========================================================================
Total return(D) (3.71)% 10.54% 1.41% 9.48% 3.23%
==========================================================================
Net assets at end of period (000's) $ 11,687 $ 23,718 $ 15,671 $ 15,114 $ 13,357
==========================================================================
Ratio of net expenses to
average net assets(E) 0.95% 0.95% 0.95%(F) 0.85% 0.68%(F)
Ratio of net investment income to
average net assets 5.96% 6.08% 6.18%(F) 6.26% 6.31%(F)
Portfolio turnover rate 92% 63% 0% 41% 12%
(A) Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997, was
changed to September 30.
(B) Represents the period from the commencement of
operations (October 3, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 1.27%, 0.98%, 1.38%(F), 1.53% and 2.04%(F)
for the periods ended September 30, 1999, 1998 and 1997, and August 31, 1997 and
1996, respectively (Note 4).
(F) Annualized.
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 17
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 11.15 $ 10.67 $ 10.49 $ 10.73 $ 10.14
---------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.60 0.61 0.61 0.61 0.64
Net realized and unrealized gains
(losses) on investments (0.81) 0.48 0.18 (0.24) 0.59
---------------------------------------------------------------------------------------
Total from investment operations (0.21) 1.09 0.79 0.37 1.23
---------------------------------------------------------------------------------------
Dividends from net investment income (0.60) (0.61) (0.61) (0.61) (0.64)
---------------------------------------------------------------------------------------
Net asset value at end of year $ 10.34 $ 11.15 $ 10.67 $ 10.49 $ 10.73
=======================================================================================
Total return(A) (1.93)% 10.54% 7.74% 3.55% 12.52%
=======================================================================================
Net assets at end of year (000's) $ 45,060 $ 51,168 $ 53,033 $ 56,095 $ 56,969
=======================================================================================
Ratio of net expenses to
average net assets 0.99% 0.99% 0.99% 0.99% 0.99%
Ratio of net investment income to
average net assets 5.59% 5.64% 5.78% 5.75% 6.17%
Portfolio turnover rate 58% 29% 49% 70% 58%
</TABLE>
(A) Total returns shown exclude the effect of applicable sales loads.
See accompanying notes to financial statements.
18 - Countrywide Investments
<PAGE>
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 9.69 $ 9.85 $ 9.81 $ 9.78 $ 9.82
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.50 0.53 0.57 0.57 0.55
Net realized and unrealized gains
(losses) on investments (0.01) (0.16) 0.04 0.03 (0.04)
-----------------------------------------------------------------------------------------
Total from investment operations 0.49 0.37 0.61 0.60 0.51
-----------------------------------------------------------------------------------------
Dividends from net investment income (0.50) (0.53) (0.57) (0.57) (0.55)
-----------------------------------------------------------------------------------------
Net asset value at end of year $ 9.68 $ 9.69 $ 9.85 $ 9.81 $ 9.78
=========================================================================================
Total return(A) 5.22% 3.88% 6.34% 6.32% 5.33%
=========================================================================================
Net assets at end of year (000's) $ 8,660 $ 10,616 $ 23,202 $ 11,732 $ 20,752
=========================================================================================
Ratio of net expenses to
average net assets(B) 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of net investment income to
average net assets 5.22% 5.47% 5.73% 5.91% 5.57%
Portfolio turnover rate 42% 45% 58% 44% 115%
</TABLE>
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios
of expenses to average net assets would have been 1.80%, 1.37%, 1.47%, 1.46%
and 1.21% for the years ended September 30, 1999, 1998, 1997, 1996 and 1995,
respectively (Note 4).
See accompanying notes to financial statements.
Countrywide Investments - 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Short Term Government Income Fund, Institutional Government Income Fund,
Money Market Fund, Intermediate Bond Fund, Intermediate Term Government Income
Fund and Adjustable Rate U.S. Government Securities Fund (individually, a Fund
and, collectively, the Funds) are each a series of Countrywide Investment Trust
(the Trust). The Trust is registered under the Investment Company Act of 1940 as
an open-end management investment company. The Trust was organized as a
Massachusetts business trust under a Declaration of Trust dated December 7,
1980. The Declaration of Trust, as amended, permits the Trustees to issue an
unlimited number of shares of each Fund.
The Short Term Government Income Fund seeks high current income, consistent with
protection of capital, by investing primarily in short-term obligations issued
or guaranteed as to principal and interest by the U.S. Government, its agencies
or instrumentalities and backed by the "full faith and credit" of the United
States.
The Institutional Government Income Fund seeks high current income, consistent
with protection of capital, by investing primarily in short-term obligations
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities. The Fund is designed primarily for institutions
as an economical and convenient means for the investment of short-term funds.
The Money Market Fund seeks high current income, consistent with liquidity and
stability of principal. The Fund invests primarily in high-quality U.S.
dollar-denominated money market instruments.
The Intermediate Bond Fund seeks to provide as high a level of current income as
is consistent with the preservation of capital. The Fund invests in marketable
corporate debt securities, U.S. Government securities, mortgage-related
securities, other asset-backed securities and cash or money market instruments.
The maturity composition of the Fund's portfolio of fixed-income securities is
adjusted in response to market conditions and expectations.
The Intermediate Term Government Income Fund seeks high current income,
consistent with protection of capital, by investing primarily in U.S. Government
obligations having an effective maturity of twenty years or less with a
dollar-weighted effective average portfolio maturity under normal market
conditions of between three and ten years. To the extent consistent with the
Fund's primary objective, capital appreciation is a secondary objective.
The Adjustable Rate U.S. Government Securities Fund seeks high current income,
consistent with lower volatility of principal, by investing primarily in
adjustable rate mortgage securities or other securities collateralized by or
representing an interest in mortgages which have interest rates that reset at
periodic intervals. The Fund invests in mortgage-related securities only if they
are issued or guaranteed by the United States Government, its agencies or
instrumentalities.
Effective August 1, 1999, the Intermediate Bond Fund is authorized to offer two
classes of shares: Class A shares (sold subject to a maximum 4.75% front-end
sales load and a distribution fee of up to 0.35% of average daily net assets)
and Class C shares (sold subject to a 1.25% front-end sales load, a 1%
contingent deferred sales load for a one-year period and a distribution fee of
up to 1% of average daily net assets). Each Class A and Class C share of the
Fund represents identical interests in the Fund's investment portfolio and has
the same rights, except that (i) Class C shares bear the expenses of higher
distribution fees, which will cause Class C shares to have a higher expense
ratio and to pay lower dividends than those related to Class A shares; (ii)
certain other class specific expenses will be borne solely by the class to which
such expenses are attributable; and (iii) each class has exclusive voting rights
with respect to matters relating to its own distribution arrangements. As of
September 30, 1999, the public offering of Class C shares of the Fund had not
commenced.
20 - Countrywide Investments
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Funds' significant accounting policies:
Securities valuation -- Investment securities in the Short Term Government
Income Fund, Institutional Government Income Fund and Money Market Fund are
valued on the amortized cost basis, which approximates market value. This
involves initially valuing a security at its original cost and thereafter
assuming a constant amortization to maturity of any discount or premium. This
method of valuation is expected to enable these Funds to maintain a constant net
asset value per share. Investment securities in the Intermediate Bond Fund,
Intermediate Term Government Income Fund and Adjustable Rate U.S. Government
Securities Fund for which market quotations are readily available are valued at
their most recent bid prices as obtained from one or more of the major market
makers for such securities by an independent pricing service. Securities for
which market quotations are not readily available are valued at their fair
values as determined in good faith in accordance with consistently applied
procedures approved by and under the general supervision of the Board of
Trustees.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' custodian, at the Federal
Reserve Bank of Cleveland. At the time each Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying securities,
including accrued interest, will at all times be equal to or exceed the face
amount of the repurchase agreement.
Share valuation -- The net asset value per share of each Fund is calculated
daily by dividing the total value of a Fund's assets, less liabilities, by the
number of shares outstanding.
The offering price per share of the Short Term Government Income Fund,
Institutional Government Income Fund, Money Market Fund and, effective August 1,
1999, the Adjustable Rate U.S. Government Securities Fund is equal to the net
asset value per share. Also effective August 1, 1999, the maximum offering price
per share of Class A shares of the Intermediate Bond Fund and shares of the
Intermediate Term Government Income Fund is equal to the net asset value per
share plus a sales load equal to 4.99% of the net asset value (or 4.75% of the
offering price). Prior to August 1, 1999, the maximum offering price per share
of the Intermediate Bond Fund, Intermediate Term Government Income Fund and
Adjustable Rate U.S. Government Securities Fund was equal to the net asset value
per share plus a sales load equal to 2.04% of the net asset value (or 2% of the
offering price). The redemption price per share of each Fund is equal to the net
asset value per share.
Investment income -- Interest income is accrued as earned. Discounts and
premiums on securities purchased are amortized in accordance with income tax
regulations which approximate generally accepted accounting principles.
Distributions to shareholders -- Dividends arising from net investment income
are declared daily and paid on the last business day of each month to
shareholders of each Fund. With respect to each Fund, net realized short-term
capital gains, if any, may be distributed throughout the year and net realized
long-term capital gains, if any, are distributed at least once each year. Income
dividends and capital gain distributions are determined in accordance with
income tax regulations.
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are determined on a specific identification basis.
Organization costs -- Costs incurred by the Money Market Fund and Intermediate
Bond Fund in connection with their organization and registration of shares, net
of certain expenses, have been capitalized and are being amortized on a
straight-line basis over a five year period beginning with each Fund's
commencement of operations.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Countrywide Investments - 21
<PAGE>
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
As of September 30, 1999, the Institutional Government Income Fund, Money Market
Fund, Intermediate Term Government Income Fund and Adjustable Rate U.S.
Government Securities Fund had capital loss carryforwards for federal income tax
purposes of $22,343, $6,403, $2,354,472 and $1,309,556, respectively. In
addition, the Money Market Fund, Intermediate Bond Fund and Adjustable Rate U.S.
Government Securities Fund elected to defer until its subsequent tax year
$4,941, $429,852 and $3,127, respectively, of capital losses incurred after
October 31, 1998. These capital loss carryforwards and "post-October" losses may
be utilized in future years to offset net realized capital gains, if any, prior
to distributing such gains to shareholders.
The following information is based upon the federal income tax cost of portfolio
investments as of September 30, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000's) FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation $ 8 $ 271 $ 38
Gross unrealized depreciation (368) (945) (25)
----------------------------------------------------
Net unrealized appreciation (depreciation) $ (360) $ (674) $ 13
====================================================
Federal income tax cost $ 11,887 $ 45,289 $ 8,692
====================================================
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) were as follows for the year ended
September 30, 1999:
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000's) FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of investment securities $ 13,539 $ 25,963 $ 3,775
====================================================
Proceeds from sales and maturities of
investment securities $ 24,045 $ 27,717 $ 5,767
====================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
4. TRANSACTIONS WITH AFFILIATES
The President and certain other officers of the Trust are also officers of
Countrywide Financial Services, Inc., or its subsidiaries which include
Countrywide Investments, Inc. (the Adviser), the Trust's investment adviser and
principal underwriter, and Countrywide Fund Services, Inc. (CFS), the Trust's
administrator, transfer agent and accounting services agent. Countrywide
Financial Services, Inc. is a wholly-owned subsidiary of Fort Washington
Investment Advisors, Inc., which is a wholly-owned subsidiary of The Western and
Southern Life Insurance Company.
22 - Countrywide Investments
<PAGE>
MANAGEMENT AGREEMENT
Each Fund's investments are managed by the Adviser under the terms of a
Management Agreement. Under the Management Agreement, the Short Term Government
Income Fund, Money Market Fund, Intermediate Bond Fund, Intermediate Term
Government Income Fund and Adjustable Rate U.S. Government Securities Fund each
pay the Adviser a fee, which is computed and accrued daily and paid monthly, at
an annual rate of 0.50% of its respective average daily net assets up to $50
million; 0.45% of such net assets from $50 million to $150 million; 0.40% of
such net assets from $150 million to $250 million; and 0.375% of such net assets
in excess of $250 million. The Institutional Government Income Fund pays the
Adviser a fee, which is computed and accrued daily and paid monthly, at an
annual rate of 0.20% of its average daily net assets.
In order to voluntarily reduce operating expenses during the year ended
September 30, 1999, the Adviser waived $33,050 of its advisory fees for the
Institutional Government Income Fund; waived $127,666 of its advisory fees for
the Money Market Fund; waived $49,390 of its advisory fees for the Intermediate
Bond Fund; and waived its advisory fees of $48,923 and reimbursed other
operating expenses of $53,400 for the Adjustable Rate U.S. Government Securities
Fund.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement between the Trust and CFS, CFS maintains the records of
each shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $25 per shareholder account from each of the Short Term Government
Income Fund, Institutional Government Income Fund and Money Market Fund and $21
per shareholder account from each of the Intermediate Bond Fund, Intermediate
Term Government Income Fund and Adjustable Rate U.S. Government Securities Fund,
subject to a $1,000 minimum monthly fee for each Fund. In addition, each Fund
pays CFS out-of-pocket expenses including, but not limited to, postage and
supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement between the Trust and CFS,
CFS calculates the daily net asset value per share and maintains the financial
books and records of each Fund. For these services, CFS receives a monthly fee,
based on current net asset levels, of $3,000 from the Short Term Government
Income Fund, $2,000 from each of the Institutional Government Income Fund, Money
Market Fund, Intermediate Bond Fund and Intermediate Term Government Income Fund
and $2,500 from the Adjustable Rate U.S. Government Securities Fund. In
addition, each Fund pays CFS certain out-of-pocket expenses incurred by CFS in
obtaining valuations of such Fund's portfolio securities.
UNDERWRITING AGREEMENT
The Adviser is the Funds' principal underwriter and, as such, acts as exclusive
agent for distribution of the Funds' shares. Under the terms of the Underwriting
Agreement between the Trust and the Adviser, the Adviser earned $2,862, $6,683
and $1,550 from underwriting and broker commissions on the sale of shares of the
Intermediate Bond Fund, Intermediate Term Government Income Fund and Adjustable
Rate U.S. Government Securities Fund, respectively, for the year ended September
30, 1999.
PLANS OF DISTRIBUTION
The Trust has a Plan of Distribution under which shares of each Fund may
directly incur or reimburse the Adviser for expenses related to the distribution
and promotion of shares. The annual limitation for payment of such expenses
under the Plan is 0.35% of average daily net assets attributable to such shares,
except for the Institutional Government Income Fund and Class C shares of the
Intermediate Bond Fund for which the annual limitation is 0.10% and 1.00% of
average daily net assets, respectively.
Countrywide Investments -23
<PAGE>
5. CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold and payments for shares redeemed as shown in the
Statements of Changes in Net Assets are the result of the following capital
share transactions for the years shown:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
INTERMEDIATE TERM ADJUSTABLE RATE
INTERMEDIATE BOND GOVERNMENT U.S. GOVERNMENT
FUND - CLASS A INCOME FUND SECURITIES FUND
- -----------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 750 1,948 1,170 1,313 429 852
Shares reinvested 72 51 213 232 48 73
Shares redeemed (1,844) (1,295) (1,614) (1,927) (677) (2,186)
-----------------------------------------------------------------------
Net increase (decrease) in
shares outstanding (1,022) 704 (231) (382) (200) (1,261)
-----------------------------------------------------------------------
Shares outstanding,
beginning of year 2,258 1,554 4,588 4,970 1,095 2,356
-----------------------------------------------------------------------
Shares outstanding,
end of year 1,236 2,258 4,357 4,588 895 1,095
- -----------------------------------------------------------------------------------------------
</TABLE>
Share transactions for the Short Term Government Income Fund, Institutional
Government Income Fund and Money Market Fund are identical to the dollar value
of those transactions as shown in the Statements of Changes in Net Assets.
6. FEDERAL TAX INFORMATION FOR SHAREHOLDERS (UNAUDITED)
On October 31, 1998, the Intermediate Bond Fund declared and paid a short-term
capital gain distribution of $0.007 per share and a long-term capital gain
distribution of $0.074 per share. In January of 1999, shareholders were provided
with Form 1099-DIV which reported the amounts and tax status of such capital
gain distributions paid during calendar year 1998.
24 - Countrywide Investments
<PAGE>
SHORT TERM GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) U.S. TREASURY OBLIGATIONS -- 28.3% (000's)
- --------------------------------------------------------------------------------
$ 5,000 U.S. Treasury Notes, 5.875%, 11/15/99 $ 5,007
5,000 U.S. Treasury Notes, 5.625%, 11/30/99 5,007
3,000 U.S. Treasury Notes, 5.625%, 12/31/99 3,005
2,000 U.S. Treasury Notes, 5.375%, 1/31/00 2,005
4,000 U.S. Treasury Notes, 5.50%, 2/29/00 4,010
3,000 U.S. Treasury Notes, 6.875%, 3/31/00 3,023
3,000 U.S. Treasury Notes, 6.375%, 5/15/00 3,018
4,000 U.S. Treasury Notes, 5.875%, 6/30/00 4,015
2,000 U.S. Treasury Notes, 6.125%, 7/31/00 2,011
- ------------ -------------------
$ 31,000 TOTAL U.S. TREASURY OBLIGATIONS
============ (Amortized Cost $31,101) $ 31,101
--------------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000's) REPURCHASE AGREEMENTS (NOTE A) -- 71.4% (000's)
- --------------------------------------------------------------------------------
$ 27,000 Morgan Stanley Dean Witter, Inc., 5.37%,
dated 9/30/99, due 10/01/99,
repurchase proceeds $27,004 $ 27,000
27,000 Prudential Securities, Inc.,
5.33%, dated 9/30/99, due 10/01/99,
repurchase proceeds $27,004 27,000
20,000 Nesbitt Burns Securities, Inc.,
5.30%, dated 9/30/99, due 10/01/99,
repurchase proceeds $20,003 20,000
4,600 Nesbitt Burns Securities, Inc., 4.75%,
- ------------- dated 9/30/99, due 10/01/99,
repurchase proceeds $4,601 4,600
---------------
$ 78,600 TOTAL REPURCHASE AGREEMENTS
============= (Cost $78,600) $ 78,600
---------------
TOTAL INVESTMENT SECURITIES AND
REPURCHASE AGREEMENTS -- 99.7% $ 109,701
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.3% 359
===============
NET ASSETS -- 100.0% $ 110,060
===============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 25
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) Investment Securities -- 75.0% (000's)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES -- 70.2%
$ 2,815 FHLB Discount Notes, 10/01/99 $ 2,815
450 FNMA Medium Term Notes, 5.81%, 10/01/99 450
750 FRMC Discount Notes, 10/05/99 750
2,000 FHLB Discount Notes, 10/06/99 1,999
250 FHLMC Discount Notes, 10/06/99 250
600 FNMA Discount Notes, 10/07/99 599
500 FFCB Discount Notes, 10/08/99 500
2,558 FHLB Discount Notes, 10/12/99 2,554
615 FFCB Discount Notes, 10/13/99 614
1,000 FNMA Medium Term Notes, 4.63%, 10/14/99 1,000
315 FNMA Medium Term Notes, 5.73%, 10/14/99 315
1,525 FHLB, 5.87%, 10/22/99 1,525
500 FHLB, 8.375%, 10/25/99 501
250 FHLB, 4.92%, 10/27/99 250
500 FHLB, 5.00%, 10/28/99 500
500 FHLB, 5.03%, 10/29/99 500
650 FFCB Discount Notes, 11/04/99 647
475 FNMA Discount Notes, 11/04/99 473
345 FNMA Medium Term Notes, 5.95%, 11/05/99 345
500 FNMA Discount Notes, 11/09/99 497
1,863 FNMA, 8.35%, 11/10/99 1,869
540 FHLMC, 6.60%, 11/12/99 541
140 FNMA Medium Term Notes, 5.83%, 11/12/99 140
235 FHLB, 5.825%, 11/19/99 235
500 FNMA, 7.68%, 11/22/99 501
200 FHLB, 5.825%, 11/26/99 200
195 FFCB, 4.85%, 12/01/99 195
250 FNMA Discount Notes, 12/01/99 248
500 FFCB Medium Term Notes, 5.63%, 12/09/99 501
100 FNMA Medium Term Notes, 5.74%, 12/09/99 100
100 FHLB, 5.00%, 12/29/99 100
400 FFCB, 4.76%, 1/18/00 399
1,000 SLMA Floating Rate Notes, 5.286%, 1/20/00 (Note B) 999
500 FHLMC, 7.90%, 1/27/00 503
1,000 FHLB Floating Rate Notes, 5.406%, 1/28/00 (Note B) 1,000
485 FHLB, 6.173%, 1/28/00 485
320 FNMA, 6.10%, 2/10/00 321
1,000 FHLB Floating Rate Notes, 5.556%, 2/25/00 (Note B) 1,000
500 FHLB, 5.04%, 3/03/00 499
125 FHLB, 5.645%, 3/06/00 125
165 FHLB, 5.16%, 3/08/00 165
550 FNMA Medium Term Notes, 5.57%, 3/17/00 550
500 FHLMC, 5.875%, 3/22/00 501
500 FNMA Medium Term Notes, 5.53%, 3/23/00 500
250 FHLB, 5.655%, 3/30/00 250
165 FHLB, 5.00%, 4/05/00 164
1,000 FHLB Floating Rate Notes,
5.346%, 4/14/00 (Note B) 1,000
26 - Countrywide Investments
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000'S) INVESTMENT SECURITIES -- 75.0% (CONTINUED) (000'S)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES -- 70.2% (CONTINUED)
$ 480 FHLB, 4.97%, 4/20/00 $ 478
200 FHLB, 6.84%, 4/25/00 201
265 FHLMC, 6.395%, 5/16/00 266
200 FHLB, 5.125%, 5/19/00 199
500 FNMA Medium Term Notes, 6.41%, 5/22/00 501
400 FNMA Medium Term Notes, 5.72%, 5/22/00 400
390 FHLB, 5.625%, 6/02/00 390
494 FNMA Medium Term Notes, 6.20%, 6/06/00 495
215 FHLB, 5.415%, 6/14/00 215
1,000 SLMA Floating Rate Notes, 5.394%, 6/30/00 (Note B) 1,000
500 FHLB, 5.89%, 7/24/00 500
160 FNMA Medium Term Notes, 5.50%, 7/26/00 160
- ------------ --------------
$ 34,985 TOTAL U.S. GOVERNMENT AGENCY ISSUES
- ------------ (Amortized Cost $34,980) $ 34,980
--------------
COMMERCIAL PAPER -- 3.0%
$ 1,500 Nebraska Higher Education Loan Program,
- ------------ 10/04/99, Guarantor SLMA
(Amortized Cost $1,499) $ 1,499
--------------
VARIABLE RATE DEMAND NOTES (NOTE C) -- 1.8%
$ 900 Illinois Student Loan Assistance Commission,
- ------------ Student Loan Rev., Ser. C, 5.33%, 12/01/22,
Guarantor SLMA
(Amortized Cost $900) $ 900
--------------
$ 37,385 TOTAL INVESTMENT SECURITIES
============ (Amortized Cost $37,379) $ 37,379
--------------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000's) REPURCHASE AGREEMENTS (NOTE A) -- 24.1% (000's)
- --------------------------------------------------------------------------------
$ 12,000 Morgan Stanley Dean Witter, Inc., 5.37%,
============ dated 9/30/99, due 10/01/99,
repurchase proceeds $12,002
(Cost $12,000) $ 12,000
--------------
TOTAL INVESTMENT SECURITIES AND
REPURCHASE AGREEMENTS -- 99.1% $ 49,379
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.9% 469
--------------
NET ASSETS -- 100.0% $ 49,848
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 27
<PAGE>
MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 99.0% (000's)
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (NOTE C) -- 59.1%
$ 240 Monroe Co., NY, IDA Rev.,
Ser. B, 5.50%, 10/01/00 $ 240
500 Brownsburg, IN, EDR (Zanetis Ent.),
5.70%, 6/01/03 500
855 HDR Power Systems, Inc., 5.59%, 6/01/03 855
1,380 Nassau Co., NY, IDA Rev., 5.50%, 5/17/05 1,380
601 Illinois Development Finance Auth. IDR
(Landcomp Corp.), 5.55%, 7/01/05 601
215 Schenectady, NY, IDR (JMR Development Co.),
5.55%, 12/01/07 215
765 Diamond Development Group, Inc.,
Ser. 1996, 5.62%, 9/01/08 765
1,250 North Greenbush, NY, IDA Rev., 5.70%, 11/01/08 1,250
805 Vista Funding Corp., 5.54%, 9/01/11 805
1,600 Westwood Baptist Church, OH, 5.49%, 5/01/24 1,600
1,200 Waukesha, WI, Health Systems Rev.,
5.45%, 8/15/26 1,200
500 Ontario, CA, Rev. (Mission Oaks), 5.60%, 10/01/26 500
1,500 ABAG Fin. Auth. for Nonprofit Corp., CA,
COP, Ser. D, 5.55%, 10/01/27 1,500
1,300 Illinois HFA Rev., Ser. 1998B
(Elmhurst Memorial), 5.60%, 1/01/28 1,300
550 American Healthcare Funding, 5.45%, 3/01/29 550
455 California Statewide Cmntys.
Dev. Auth. Rev., 5.50%, 5/01/29 455
- ------------ --------------
$ 13,716 TOTAL VARIABLE RATE DEMAND NOTES
- ------------ (Amortized Cost $13,716) $ 13,716
--------------
FIXED RATE REVENUE BONDS -- 7.2%
$ 400 Chicago Tax Increment Allocation
(Near South Proj.), 5.20%, 11/15/99 $ 400
250 Lehigh Co., PA, General Purpose Rev.
(St. Francis College), 5.50%,12/15/99 250
200 Umatilla Indian Reservation, OR,
Ser. 1999B, 5.60%, 2/01/00 200
500 Hamilton, OH, Parking Garage Rev., 5.66%, 3/22/00 501
315 New Britain, CT, GO, 5.32%, 5/01/00 315
- ------------ --------------
$ 1,665 TOTAL FIXED RATE REVENUE BONDS
- ------------ (Amortized Cost $1,666) $ 1,666
--------------
CORPORATE NOTES -- 27.8%
$ 130 Transamerica Financial Corp.,
8.75%, 10/01/99 $ 130
100 Wal-Mart Stores, 6.125%, 10/01/99 100
130 American General Corp., 7.70%, 10/15/99 130
100 Associates Corp., NA, 6.75%, 10/15/99 100
227 Ford Motor Co., 7.50%, 11/15/99 228
420 Merrill Lynch & Co., 8.25%, 11/15/99 421
400 Huntington Bancshares, 6.10%, 11/29/99 400
375 Associates Corp., NA, 8.25%, 12/01/99 377
250 BP America, Inc., 6.50%, 12/15/99 251
300 American General Finance, 7.00%, 12/30/99 301
250 GMAC, 5.70%, 1/10/00 250
200 AIG, 6.375%, 1/18/00 200
200 Ford Motor Credit Co., 5.83%, 2/28/00 200
100 Associates Corp., NA, 7.78%, 3/01/00 101
181 GMAC, 7.00%, 3/01/00 182
499 Associates Corp., NA, 6.00%, 3/15/00 500
150 Morgan Stanley, Dean Witter,
Discover & Co., 6.25%, 3/15/00 150
250 KeyCorp., 7.43%, 3/28/00 253
28 - Countrywide Investments
<PAGE>
MONEY MARKET FUND (CONTINUED)
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 99.0% (CONTINUED) (000's)
- --------------------------------------------------------------------------------
CORPORATE NOTES -- 27.8% (CONTINUED)
$ 245 GMAC, 6.625%, 4/24/00 $ 246
165 Gannett Co., 5.85%, 5/01/00 165
330 American General Finance, 6.78%, 5/15/00 332
150 Duke Energy Corp., 7.00%, 6/01/00 151
315 Mellon Financial Co., 6.30%, 6/01/00 315
100 GMAC, 7.50%, 6/09/00 101
262 Citigroup, Inc., 6.125%, 6/15/00 262
350 Beneficial Corp., 6.45%, 6/19/00 351
250 Bear Stearns & Co., Inc., 6.75%, 8/15/00 251
- ------------ --------------
$ 6,429 TOTAL CORPORATE NOTES
- ------------ (Amortized Cost $6,448) $ 6,448
--------------
COMMERCIAL PAPER -- 4.9%
$ 880 GTE, 10/01/99 $ 880
265 Gannett Co., 10/05/99 265
- ------------ --------------
$ 1,145 TOTAL COMMERCIAL PAPER
- ------------ (Amortized Cost $1,145) $ 1,145
--------------
$ 22,955 TOTAL INVESTMENT SECURITIES -- 99.0%
============ (Amortized Cost $22,975) $ 22,975
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.0% 223
--------------
NET ASSETS -- 100.0% $ 23,198
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 29
<PAGE>
INTERMEDIATE BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 98.6% (000's)
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 10.4%
$ 1,200 U.S. Treasury Notes, 6.00%, 8/15/09
- ------------ (Amortized Cost $1,221) $ 1,209
--------------
U.S. GOVERNMENT AGENCY ISSUES -- 13.0%
$ 1,600 FHLMC, 6.45%, 4/29/09
- ------------ (Amortized Cost $1,599) $ 1,524
--------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 32.7%
$ 52 SBA #1987-20A, 8.45%, 1/01/07 $ 52
985 FNMA #313386, 7.00%, 3/01/12 985
948 GNMA #780777, 7.00%, 4/15/28 934
977 FHLMC #C21763, 6.00%, 2/01/29 912
981 GNMA #482725, 6.50%, 3/15/29 939
- ------------ --------------
$ 3,943 TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
- ------------ (Amortized Cost $3,924) $ 3,822
--------------
CORPORATE BONDS -- 37.2%
$ 175 Pacific Gas & Electric Co.,
6.625%, 6/01/00 $ 175
350 Florida Residential Property & Casualty Co.,
7.25%, 7/01/02 350
259 May Department Stores Co., 9.875%, 12/01/02 283
380 Bankers Trust Corp., 7.25%, 1/15/03 383
68 U.S. Leasing International, Inc., 6.625%, 5/15/03 67
500 AT&T Corp., 5.625%, 3/15/04 479
66 Kaiser Permanente, 9.55%, 7/15/05 73
510 Honeywell, Inc., 8.625%, 4/15/06 549
500 Union Oil of California Corp.
Medium Term Notes, 6.70%, 10/15/07 479
50 Berkley (W.R.) Corp., 9.875%, 5/15/08 57
575 General Electric Capital Corp.
Medium Term Notes, 7.50%, 6/15/09 593
10 Union Camp Corp., 8.625%, 4/15/16 10
35 Kraft, Inc., 8.50%, 2/15/17 36
150 Deere & Co., 8.95%, 6/15/19 167
115 Rohm & Haas Co., 9.80%, 4/15/20 134
165 Questar Pipeline Co., 9.375%, 6/01/21 178
120 Jersey Central Power & Light Co., 9.20%, 7/01/21 125
85 Southwestern Public Service Co., 8.20%, 12/01/22 85
130 Union Electric Co., 8.00%, 12/15/22 129
- ------------ --------------
$ 4,243 TOTAL CORPORATE BONDS
- ------------ (Amortized Cost $4,523) $ 4,352
--------------
30 - Countrywide Investments
<PAGE>
INTERMEDIATE BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 98.6% (CONTINUED) (000's)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 5.3%
$ 620 GTE, 10/01/99
- ------------ (Amortized Cost $620) $ 620
--------------
$ 11,606 TOTAL INVESTMENT SECURITIES -- 98.6%
============ (Amortized Cost $11,887) $ 11,527
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.4% 160
--------------
Net Assets -- 100.0% $ 11,687
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 31
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 99.0% (000's)
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 9.3%
$ 1,000 U.S. Treasury Notes, 7.75%, 2/15/01 $ 1,028
2,000 U.S. Treasury Notes, 7.50%, 11/15/01 2,071
1,000 U.S. Treasury Bonds, 7.50%, 11/15/16 1,108
- ------------ --------------
$ 4,000 TOTAL U.S. TREASURY OBLIGATIONS
- ------------ (Amortized Cost $4,151) $ 4,207
--------------
U.S. GOVERNMENT AGENCY ISSUES -- 63.5%
$ 230 FNMA Discount Notes, 10/01/99 $ 230
1,000 SLMA Medium Term Notes, 7.50%, 7/02/01 1,023
2,000 FHLB Notes, 7.31%, 7/06/01 2,042
2,000 FHLB Medium Term Notes, 8.43%, 8/01/01 2,081
2,000 FNMA Notes, 7.55%, 4/22/02 2,062
1,000 FNMA Notes, 5.125%, 2/13/04 952
2,000 FHLMC Notes, 6.80%, 7/09/04 1,990
2,000 FHLMC Notes, 8.53%, 11/18/04 2,007
2,000 FHLMC Notes, 7.65%, 5/10/05 2,011
1,400 FNMA Notes, 6.26%, 1/24/06 1,350
2,500 FNMA Notes, 6.21%, 1/26/06 2,405
2,000 FNMA Notes, 6.06%, 2/03/06 1,914
1,000 FHLMC Notes, 6.345%, 2/15/06 967
2,203 RFCO STRIPS, 10/15/08 1,241
1,000 FNMA Notes, 6.50%, 4/29/09 957
3,500 FNMA Notes, 6.375%, 6/15/09 3,423
2,000 FNMA Notes, 6.96%, 9/05/12 1,942
- ------------ --------------
$ 29,833 TOTAL U.S. GOVERNMENT AGENCY ISSUES
- ------------ (Amortized Cost $28,866) $ 28,597
--------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 26.2%
$ 1,657 FNMA #380592, 6.17%, 8/01/08 $ 1,592
2,688 FNMA #381464, 6.11%, 4/01/09 2,565
1,213 FNMA #1997-25E, 7.00%, 12/18/22 1,218
1,856 GNMA #455136, 7.00%, 6/15/28 1,823
1,925 FHLMC #C19286, 6.00%, 12/01/28 1,797
2,943 GNMA #482725, 6.50%, 3/15/29 2,816
- ------------ --------------
$ 12,282 TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
- ------------ (Amortized Cost $12,272) $ 11,811
--------------
$ 46,115 TOTAL INVESTMENT SECURITIES -- 99.0%
============ (Amortized Cost $45,289) $ 44,615
Other assets in excess of liabilities -- 1.0% 445
--------------
NET ASSETS -- 100.0% $ 45,060
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
32 - Countrywide Investments
<PAGE>
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 100.5% (000's)
- --------------------------------------------------------------------------------
ADJUSTABLE RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (NOTE D) -- 76.1%
$ 736 FNMA #70907, 6.687%, 3/01/18 $ 750
855 FHLMC #605793, 6.489%, 5/01/18 873
744 FNMA #70614, 6.377%, 10/01/18 758
212 FNMA #70635, 6.515%, 6/01/20 215
946 FHLMC #846013, 7.067%, 6/01/22 974
1,005 GNMA #8217, 6.375%, 6/20/23 1,015
863 FNMA #70176, 6.497%, 8/01/27 884
1,103 FNMA #70243, 6.504%, 3/01/28 1,125
- ------------ --------------
$ 6,464 TOTAL ADJUSTABLE RATE U.S. GOVERNMENT AGENCY
- ------------ MORTGAGE-BACKED SECURITIES
(Amortized Cost $6,572) $ 6,594
FIXED RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES -- 13.1%
$ 1,121 FNMA #1997-42H, 7.00%, 12/17/19
- ------------ (Amortized Cost $1,141) $ 1,132
--------------
U.S. GOVERNMENT AGENCY ISSUES -- 11.3%
$ 979 FNMA Discount Notes, 10/01/99
- ------------ (Amortized Cost $979) $ 979
--------------
$ 8,564 TOTAL INVESTMENT SECURITIES -- 100.5%
============ (Amortized Cost $8,692) $ 8,705
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.5%) (45)
--------------
NET ASSETS -- 100.0% $ 8,660
--------------
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 33
<PAGE>
NOTES TO PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
A. REPURCHASE AGREEMENTS
Repurchase agreements are fully collateralized by U.S. Government obligations.
B. FLOATING RATE NOTES
A floating rate note is a security whose terms provide for the periodic
readjustment of its interest rate whenever a specified interest rate index
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. The interest rates shown represent the
effective rates as of the report date. The dates shown represent the scheduled
maturity dates.
C. VARIABLE RATE DEMAND NOTES
A variable rate demand note is a security payable on demand at par whose terms
provide for the periodic readjustment of its interest rate on set dates and
which, at any time, can reasonably be expected to have a market value that
approximates its par value. The interest rates shown represent the effective
rates as of the report date. The dates shown represent the scheduled maturity
dates.
D. ADJUSTABLE RATE U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
Adjustable rate U.S. Government agency mortgage-backed securities are
mortgage-related securities created from pools of adjustable rate mortgages
which are issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities. Such adjustable rate mortgage
securities have interest rates that reset at periodic intervals based on a
specified interest rate index. The interest rates shown represent the effective
rates as of the report date. The dates shown represent the scheduled maturity
date.
PORTFOLIO ABBREVIATIONS:
COP - Certificate of Participation
EDR - Economic Development Revenue
FFCB - Federal Farm Credit Bank
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
FRMC - Federal Agricultural Mortgage Corporation
GNMA - Government National Mortgage Association
HFA - Housing Finance Authority
IDA - Industrial Development Authority
IDR - Industrial Development Revenue
RFCO - Resolution Funding Corporation
SBA - Small Business Administration
SLMA - Student Loan Marketing Association
STRIPS - Separate Trading of Registered Interest and Principal of Securities
34 - Countrywide Investments
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP
To the Shareholders and Board of Trustees of Countrywide Investment Trust:
We have audited the statements of assets and liabilities, including the
portfolios of investments, of Countrywide Investment Trust (a Massachusetts
business trust) (comprising, respectively, the Short Term Government Income
Fund, the Institutional Government Income Fund, the Intermediate Term Government
Income Fund, the Adjustable Rate U.S. Government Securities Fund, the
Intermediate Bond Fund, and the Money Market Fund) as of September 30, 1999, and
(i) for the Short Term Government Income Fund, the Institutional Government
Income Fund, the Intermediate Term Government Income Fund, and the Adjustable
Rate U.S. Government Securities Fund, the related statements of operations, the
statements of changes in net assets, and the financial highlights for the
periods indicated thereon and (ii) for the Intermediate Bond Fund and the Money
Market Fund the related statements of operations for the year ended September
30, 1999, the statements of changes in net assets for the year ended September
30, 1999 and 1998, and the financial highlights for the year ended September 30,
1999, September 30, 1998, the one-month period ended September 30, 1997 and the
year ended August 31, 1997. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights of the Intermediate Bond Fund and the
Money Market Fund for the period ended August 31, 1996 were audited by other
auditors whose report dated October 18, 1996, expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights audited by us
and referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting the Countrywide
Investment Trust as of September 30, 1999, the results of their operations, the
changes in their net assets, and their financial highlights for the periods
referred to above, in conformity with generally accepted accounting principles.
/S/ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
October 27, 1999
Countrywide Investments - 35
<PAGE>
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 27, 1999
- --------------------------------------------------------------------------------
On October 27, 1999, a Special Meeting of Shareholders of Countrywide Investment
Trust (the Trust) was held (1) to approve or disapprove new investment advisory
agreements with Countrywide Investments, Inc., (2) to elect nine trustees and
(3) to ratify or reject the selection of Arthur Andersen LLP as the Trust's
independent public accountants for the fiscal year ending September 30, 1999.
The total number of shares of the Trust present by proxy represented 71.0% of
the shares entitled to vote at the meeting. Each of the matters submitted to
shareholders was approved.
The results of the voting for or against the approval of the new investment
advisory agreements by each Fund was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NUMBER OF SHARES
-------------------------------------------------
FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short Term Government Income Fund 72,836,904.320 286,367.840 734,314.720
Institutional Government Income Fund 41,605,539.090 4,381.000 109,630.000
Money Market Fund 14,514,612.020 23,969.180 350,416.280
Intermediate Bond Fund 1,091,218.018 307.360 15,433.220
Intermediate Term
Government Income Fund 2,440,232.201 7,260.051 15,378.104
Adjustable Rate U.S. Government
Securities Fund 454,113.683 4,696.673 2,503.947
- ----------------------------------------------------------------------------------------
The results of the voting for the election of trustees was as follows:
- ----------------------------------------------------------------------------------------
Withhold
Nominees For Election Authority Status
- ----------------------------------------------------------------------------------------
William O. Coleman 134,157,859.548 339,418.159 New Trustee
Phillip R. Cox 134,158,024.888 339,252.819 New Trustee
H. Jerome Lerner 134,156,259.548 341,018.159 Incumbent
Robert H. Leshner 134,157,859.548 339,418.159 Incumbent
Jill T. McGruder 134,087,307.318 409,970.389 New Trustee
Oscar P. Robertson 133,840,125.822 657,151.885 Incumbent
Nelson Schwab, Jr. 134,001,063.367 496,214.340 New Trustee
Robert E. Stautberg 134,137,874.548 359,403.159 New Trustee
Joseph S. Stern, Jr. 134,024,040.715 473,236.992 New Trustee
- ----------------------------------------------------------------------------------------
The results of the voting for or against the ratification of Arthur Andersen LLP
as independent public accountants by each Fund was as follows:
- ----------------------------------------------------------------------------------------
NUMBER OF SHARES
-------------------------------------------------
FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------
Short Term Government Income Fund 73,092,196.420 99,972.790 665,417.670
Institutional Government Income Fund 41,601,925.090 11,452.000 106,173.000
Money Market Fund 14,628,812.900 517.810 259,666.770
Intermediate Bond Fund 1,106,774.674 -- 183.924
Intermediate Term
Government Income Fund 2,451,133.555 736.839 10,999.962
Adjustable Rate U.S. Government
Securities Fund 453,814.109 4,780.059 2,720.135
- ----------------------------------------------------------------------------------------
</TABLE>
36 - Countrywide Investments
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
- --------------------------------------------------------------------------------
312 Walnut St., 21st Floor
Cincinnati, Ohio 45202-4094
www.countrywideinvestments.com
Nationwide: (Toll Free) 800-543-8721
Cincinnati: 629-2000
Rate Line: 579-0999
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Nationwide: (Toll Free) 800-543-0407
Cincinnati: 629-2050
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
William O. Coleman
Phillip R. Cox
H. Jerome Lerner
Robert H. Leshner
Jill T. McGruder
Oscar P. Robertson
Nelson Schwab, Jr.
Robert E. Stautberg
Joseph S. Stern, Jr.
INVESTMENT ADVISER/MANAGER
- --------------------------------------------------------------------------------
Countrywide Investments, Inc.
312 Walnut St., 21st Floor
Cincinnati, Ohio 45202-4094
TRANSFER AGENT
- --------------------------------------------------------------------------------
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
This report is authorized for distribution only when it is accompanied or
preceded by a current prospectus of Countrywide Investment Trust.
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
312 Walnut Street
Cincinnati, Ohio 45202
800-543-0407
STATEMENT OF ADDITIONAL INFORMATION
April 3, 2000
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Proxy Statement/Prospectus dated April 3, 2000. You
can obtain a copy of the Proxy Statement/Prospectus by contacting us at the
above address or telephone number.
<PAGE>
TABLE OF CONTENTS
Statement of Additional Information of Countrywide Investment
Trust--February 1, 2000
Statement of Additional Information of Touchstone Series Trust--May 1, 1999
Annual Report of Countrywide Investment Trust--September 30, 1999, which is
filed herewith in Part A of this Form N-14
Annual Report of Touchstone Series Trust--December 31, 1999, which is filed
herewith in Part A of this Form N-14
Pro Forma Financial Information as of September 30, 1999
----------------------------------------------------------------------
Each of the documents listed in the Table of Contents is incorporated by
reference into this Statement of Additional Information.
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
----------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
February 1, 2000
Short Term Government Income Fund
Intermediate Term Government Income Fund
Institutional Government Income Fund
Adjustable Rate U.S. Government Securities Fund
Money Market Fund
Intermediate Bond Fund
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of the applicable Fund of Countrywide
Investment Trust dated February 1, 2000. A copy of a Fund's Prospectus can be
obtained by writing the Trust at 312 Walnut Street, 21st Floor, Cincinnati, Ohio
45202-4094, or by calling the Trust nationwide toll-free 800-543-0407, in
Cincinnati 629-2050.
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STATEMENT OF ADDITIONAL INFORMATION
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Countrywide Investment Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
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THE TRUST.................................................................... 3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS................................ 5
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS.................................. 27
INVESTMENT LIMITATIONS....................................................... 33
TRUSTEES AND OFFICERS........................................................ 42
THE INVESTMENT ADVISER AND UNDERWRITER....................................... 44
DISTRIBUTION PLANS........................................................... 48
SECURITIES TRANSACTIONS...................................................... 50
PORTFOLIO TURNOVER........................................................... 52
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE......................... 53
OTHER PURCHASE INFORMATION................................................... 55
TAXES........................................................................ 57
REDEMPTION IN KIND........................................................... 58
HISTORICAL PERFORMANCE INFORMATION........................................... 58
PRINCIPAL SECURITY HOLDERS................................................... 63
CUSTODIAN.................................................................... 64
AUDITORS..................................................................... 64
TRANSFER AGENT............................................................... 64
ANNUAL REPORT................................................................ 66
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THE TRUST
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Countrywide Investment Trust (the "Trust"), formerly Midwest Trust, was
organized as a Massachusetts business trust on December 7, 1980. The Trust
currently offers six series of shares to investors: the Short Term Government
Income Fund, the Intermediate Term Government Income Fund, the Institutional
Government Income Fund, the Adjustable Rate U.S. Government Securities Fund, the
Money Market Fund and the Intermediate Bond Fund (referred to individually as a
"Fund" and collectively as the "Funds"). Each Fund has its own investment
objective(s) and policies.
Shares of each Fund have equal voting rights and liquidation rights. Each
Fund shall vote separately on matters submitted to a vote of the shareholders
except in matters where a vote of all series of the Trust in the aggregate is
required by the Investment Company Act of 1940 or otherwise. Each class of
shares of a Fund shall vote separately on matters relating to its plan of
distribution pursuant to Rule 12b-1. When matters are submitted to shareholders
for a vote, each shareholder is entitled to one vote for each full share owned
and fractional votes for fractional shares owned. The Trust does not normally
hold annual meetings of shareholders. The Trustees shall promptly call and give
notice of a meeting of shareholders for the purpose of voting upon the removal
of any Trustee when requested to do so in writing by shareholders holding 10% or
more of the Trust's outstanding shares. The Trust will comply with the
provisions of Section 16(c) of the Investment Company Act of 1940 in order to
facilitate communications among shareholders.
Pursuant to an Agreement and Plan of Reorganization dated May 31, 1997, the
Money Market Fund and the Intermediate Bond Fund, on August 29, 1997, each
succeeded to the assets and liabilities of another mutual fund of the same name
(referred to individually as a "Predecessor Fund," and collectively as the
"Predecessor Funds"), each of which was an investment series of Trans Adviser
Funds, Inc. The investment objective, policies and restrictions of the Money
Market Fund and the Intermediate Bond Fund and its Predecessor Fund are
substantially identical and the financial data and information for periods ended
prior to September 1, 1997 relates to the Predecessor Funds.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
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shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and equitable. Generally, the
Trustees allocate such expenses on the basis of relative net assets or number of
shareholders. No shareholder is liable to further calls or to assessment by the
Trust without his express consent.
Both Class A shares and Class C shares of the Intermediate Bond Fund
represent an interest in the same assets of the Fund, have the same rights and
are identical in all material respects except that (i) Class C shares bear the
expenses of higher distribution fees; (ii) certain other class specific expenses
will be borne solely by the class to which such expenses are attributable,
including transfer agent fees attributable to a specific class of shares,
printing and postage expenses related to preparing and distributing materials to
current shareholders of a specific class, registration fees incurred by a
specific class of shares, the expenses of administrative personnel and services
required to support the shareholders of a specific class, litigation or other
legal expenses relating to a class of shares, Trustees' fees or expenses
incurred as a result of issues relating to a specific class of shares and
accounting fees and expenses relating to a specific class of shares; and (iii)
each class has exclusive voting rights with respect to matters relating to its
own distribution arrangements. The Board of Trustees may classify and reclassify
the shares of a Fund into additional classes of shares at a future date.
Under Massachusetts law, under certain circumstances, shareholders of a
Massachusetts business trust could be deemed to have the same type of personal
liability for the obligations of the Trust as does a partner of a partnership.
However, numerous investment companies registered under the Investment Company
Act of 1940 have been formed as Massachusetts business trusts and the Trust is
not aware of an instance where such result has occurred. In addition, the Trust
Agreement disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement also provides for the indemnification out of the Trust
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Moreover, it provides that the Trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment thereon. As a
result, and particularly because the Trust assets are readily marketable and
ordinarily substantially exceed liabilities,
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management believes that the risk of shareholder liability is slight and limited
to circumstances in which the Trust itself would be unable to meet its
obligations. Management believes that, in view of the above, the risk of
personal liability is remote.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
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A more detailed discussion of some of the terms used and investment
policies described in the Prospectuses (see "Investment Objectives and
Policies") appears below:
WHEN-ISSUED SECURITIES AND SECURITIES PURCHASED ON A TO-BE-ANNOUNCED BASIS.
The Funds will only make commitments to purchase securities on a when-issued or
to-be-announced ("TBA") basis with the intention of actually acquiring the
securities. A Fund may sell the securities before the settlement date if it is
otherwise deemed advisable as a matter of investment strategy or in order to
meet its obligations, although it would not normally expect to do so.
When-issued securities are securities purchased for delivery beyond the normal
settlement date at a stated price and yield and thereby involve the risk that
the yield obtained in the transaction will be less than that available in the
market when delivery takes place. In a to-be-announced transaction, a Fund has
committed to purchasing or selling securities for which all specific information
is not yet known at the time of the trade, particularly the face amount in
transactions involving mortgage-related securities.
The Funds may purchase securities on a when-issued or TBA basis only if
delivery and payment for the securities takes place within 120 days after the
date of the transaction. In connection with these investments, each Fund will
direct the Custodian to place cash or liquid securities in a segregated account
in an amount sufficient to make payment for the securities to be purchased. When
a segregated account is maintained because a Fund purchases securities on a
when-issued or TBA basis, the assets deposited in the segregated account will be
valued daily at market for the purpose of determining the adequacy of the
securities in the account. If the market value of such securities declines,
additional cash or securities will be placed in the account on a daily basis so
that the market value of the account will equal the amount of a Fund's
commitments to purchase securities on a when-issued or TBA basis. To the extent
funds are in a segregated account, they will not be available for new investment
or to meet redemptions. Securities purchased on a when-issued or TBA basis and
the securities held in a Fund's portfolio are subject to changes in market value
based upon changes in the level of interest rates (which will generally result
in all of those securities changing in value in the same way, i.e., all those
securities experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, if in order to achieve higher
returns, a Fund
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remains substantially fully invested at the same time that it has purchased
securities on a when-issued or TBA basis, there will be a possibility that the
market value of the Fund's assets will experience greater fluctuation. The
purchase of securities on a when-issued or TBA basis may involve a risk of loss
if the seller fails to deliver after the value of the securities has risen.
When the time comes for a Fund to make payment for securities purchased on
a when-issued or TBA basis, the Fund will do so by using then available cash
flow, by sale of the securities held in the segregated account, by sale of other
securities or, although it would not normally expect to do so, by directing the
sale of the securities purchased on a when-issued or TBA basis themselves (which
may have a market value greater or less than the Fund's payment obligation).
The Institutional Government Income Fund does not currently intend to
invest more than 5% of its net assets in securities purchased on a when-issued
or to-be-announced basis. The Intermediate Term Government Income Fund will not
invest more than 20% of its net assets in securities purchased on a when-issued
or to-be-announced basis. Each of the Adjustable Rate U.S. Government Securities
Fund, the Money Market Fund and the Intermediate Bond Fund expects that
commitments to purchase when-issued securities will not exceed 25% of the value
of its total assets.
STRIPS. STRIPS are U.S. Treasury bills, notes, and bonds that have been
issued without interest coupons or stripped of their unmatured interest coupons,
interest coupons that have been stripped from such U.S. Treasury securities, and
receipts or certificates representing interests in such stripped U.S. Treasury
securities and coupons. A STRIPS security pays no interest in cash to its holder
during its life although interest is accrued for federal income tax purposes.
Its value to an investor consists of the difference between its face value at
the time of maturity and the price for which it was acquired, which is generally
an amount significantly less than its face value. Investing in STRIPS may help
to preserve capital during periods of declining interest rates. For example, if
interest rates decline, GNMA Certificates owned by a Fund which were purchased
at greater than par are more likely to be prepaid, which would cause a loss of
principal. In anticipation of this, a Fund might purchase STRIPS, the value of
which would be expected to increase when interest rates decline.
STRIPS do not entitle the holder to any periodic payments of interest prior
to maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be
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reinvested prior to maturity, STRIPS eliminate the reinvestment risk and lock in
a rate of return to maturity. Current federal tax law requires that a holder of
a STRIPS security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund received no interest payment
in cash on the security during the year.
As a matter of current policy that may be changed without shareholder
approval, neither the Intermediate Term Government Income Fund nor the
Adjustable Rate U.S. Government Securities Fund will purchase STRIPS with a
maturity date that is more than 10 years from the settlement of the purchase.
CUBES. In addition to STRIPS, the Intermediate Bond Fund may also purchase
separately traded interest and principal component parts of obligations that are
transferable through the Federal book entry system, known as Coupon Under Book
Entry Safekeeping ("CUBES"). These instruments are issued by banks and brokerage
firms and are created by depositing Treasury notes and Treasury
bonds into a
special account at a custodian bank; the Custodian holds the interest and
principal payments for the benefit of the registered owner of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS"). STRIPS, CUBES, TRs,
TIGRs and CATS are sold as zero coupon securities, which means that they are
sold at a substantial discount and redeemed at face value at their maturity date
without interim cash payments of interest or principal. This discount is
amortized over the life of the security, and such amortization will constitute
the income earned on the security for both accounting and tax purposes. Because
of these features, these securities may be subject to greater interest rate
volatility than interest-paying U.S. Treasury obligations. The Fund will limit
its investment in such instruments to 20% of its net assets.
GNMA CERTIFICATES. The term "GNMA Certificates" refers to mortgage-backed
securities representing part ownership of a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations and insured by either the Federal Housing Administration or the
Farmer's Home Administration or guaranteed by the Veteran's Administration. GNMA
Certificates are guaranteed by the Government National Mortgage Association and
are backed by the full faith and credit of the United States.
1. THE LIFE OF GNMA CERTIFICATES. The average life of GNMA Certificates is
likely to be substantially less than the original maturity of the mortgage pools
underlying the GNMA Certificates due to prepayments, refinancing and payments
from foreclosures. Thus, the greatest part of principal will usually be paid
well before the maturity of the mortgages in the pool. As prepayment rates of
individual mortgage pools will vary widely, it is not possible to accurately
predict the average life
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of a particular issue of GNMA Certificates. However, statistics published by the
FHA are normally used as an indicator of the expected average life of GNMA
Certificates. These statistics indicate that the average life of single-family
dwelling mortgages with 25-30 year maturities, the type of mortgages backing the
vast majority of GNMA Certificates, is approximately 12 years. However,
mortgages with high interest rates have experienced accelerated prepayment rates
which would indicate a shorter average life.
2. YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the GNMA Certificates, but only by the
amount of the fees paid to the GNMA and the issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, the GNMA receives an
annual fee of 0.06 of 1% of the outstanding principal for providing its
guarantee, and the issuer is paid an annual fee of 0.44 of 1% for assembling the
mortgage pool and for passing through monthly payments of interest and principal
to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for the following reasons:
(a) GNMA Certificates may be issued at a premium or discount, rather
than at par.
(b) After issuance, GNMA Certificates may trade in the secondary
market at a premium or discount.
(c) Interest is earned monthly, rather than semi-annually as for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
(d) The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors pay off their mortgages early, the principal returned to
Certificate holders may be reinvested at more or less favorable rates.
3. MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
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FHLMC CERTIFICATES. The term "FHLMC Certificates" refers to mortgage-backed
securities representing part ownership of a pool of mortgage loans, which are
guaranteed by the Federal Home Loan Mortgage Corporation. The Federal Home Loan
Mortgage Corporation is the leading seller of conventional mortgage securities
in the United States. FHLMC Certificates are not guaranteed by the United States
or by any Federal Home Loan Bank and do not constitute debts or obligations of
the United States or any Federal Home Loan Bank.
Mortgage loans underlying FHLMC Certificates will consist of fixed rate
mortgages with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first liens on one-family or
two-to-four family residential properties. Mortgage interest rates may be mixed
in a pool. The seller/ servicer of each mortgage retains a minimum three-eighths
of 1% servicing fee, and any remaining excess of mortgage rate over coupon rate
is kept by the Federal Home Loan Mortgage Corporation. The coupon rate of a
FHLMC Certificate does not by itself indicate the yield which will be earned on
the Certificate for the reasons discussed above in connection with GNMA
Certificates.
FNMA CERTIFICATES. The term "FNMA Certificates" refers to mortgage-backed
securities representing part ownership of a pool of mortgage loans, which are
guaranteed by the Federal National Mortgage Association.
The FNMA, despite having U.S. Government agency status, is also a private,
for-profit corporation organized to provide assistance in the housing mortgage
market. The only function of the FNMA is to provide a secondary market for
residential mortgages. Mortgage loans underlying FNMA Certificates reflect a
considerable diversity and are purchased from a variety of mortgage originators.
They are typically collateralized by conventional mortgages (not FHA-insured or
VA-guaranteed). FNMA Certificates are highly liquid and usually trade in the
secondary market at higher yields than GNMA Certificates. The coupon rate of a
FNMA Certificate does not by itself indicate the yield which will be earned on
the Certificate for the reasons discussed above in connection with GNMA
Certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Intermediate Term Government
Income Fund, the Adjustable Rate U.S. Government Securities Fund and the
Intermediate Bond Fund may invest in Collateralized Mortgage Obligations
("CMOs"). CMOs are fully-collateralized bonds which are the general obligations
of the issuer thereof. The key feature of the CMO structure is the
prioritization of the cash flows from a pool of mortgages among the several
classes of CMO holders, thereby creating a series of obligations with varying
rates and maturities appealing to a wide range of investors. CMOs generally are
secured by an assignment to a trustee under the indenture pursuant to which the
bonds are
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issued for collateral consisting of a pool of mortgages. Payments with respect
to the underlying mortgages generally are made to the trustee under the
indenture. Payments of principal and interest on the underlying mortgages are
not passed through to the holders of the CMOs as such (that is, the character of
payments of principal and interest is not passed through and therefore payments
to holders of CMOs attributable to interest paid and principal repaid on the
underlying mortgages do not necessarily constitute income and return of capital,
respectively, to such holders), but such payments are dedicated to payment of
interest on and repayment of principal of the CMOs. CMOs are issued in two or
more classes or series with varying maturities and stated rates of interest
determined by the issuer. Because interest and principal payments on the
underlying mortgages are not passed through to holders of CMOs, CMOs of varying
maturities may be secured by the same pool of mortgages, the payments on which
are used to pay interest on each class and to retire successive maturities in
sequence. CMOs are designed to be retired as the underlying mortgages are
repaid. In the event of sufficient early prepayments on such mortgages, the
class or series of CMO first to mature generally will be retired prior to
maturity. Therefore, although in most cases the issuer of CMOs will not supply
additional collateral in the event of such prepayments, there will be sufficient
collateral to secure CMOs that remain outstanding.
In 1983, the Federal Home Loan Mortgage Corporation began issuing CMOs.
Since FHLMC CMOs are the general obligations of the FHLMC, it will be obligated
to use its general funds to make payments thereon if payments generated by the
underlying mortgages are insufficient to pay principal and interest in its CMOs.
In addition, CMOs are issued by private entities, such as financial
institutions, mortgage bankers and subsidiaries of homebuilding companies. The
structural features of privately issued CMOs will vary considerably from issue
to issue, and the Adviser will consider such features, together with the
character of the underlying mortgage pool and the liquidity and credit rating of
the issue. The Adviser will consider privately issued CMOs as possible
investments only when the underlying mortgage collateral is insured, guaranteed
or otherwise backed by the U.S. Government or one or more of its agencies or
instrumentalities.
Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities; the
first three classes pay interest at their stated rates beginning with the issue
date and the final class is typically an accrual class (or Z bond). The cash
flows from the underlying mortgage collateral are applied first to pay interest
and then to retire securities. The classes of securities are retired
sequentially. All principal payments are directed first to the shortest-maturity
class (or A bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity security (or B bond).
This process continues until all of the classes have been
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paid off. Because the cash flow is distributed sequentially instead of pro rata
as with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors into
the longer- maturity classes receive no principal paydowns.
One or more tranches of a CMO may have coupon rates that reset periodically
at a specified increment over an index, such as the London Interbank Offered
Rate ("LIBOR"). These adjustable rate tranches, known as "floating-rate CMOs,"
will be treated as adjustable rate mortgage securities by the Adjustable Rate
U.S. Government Securities Fund. Floating-rate CMOs may be backed by fixed-rate
or adjustable-rate mortgages. Floating-rate CMOs are typically issued with
lifetime "caps" on the coupon rate. These caps, similar to the caps on ARMS,
represent a ceiling beyond which the coupon rate may not be increased,
regardless of increases in the underlying interest rate index.
As a matter of current policy that may be changed without shareholder
approval, the Intermediate Term Government Income Fund and the Adjustable Rate
U.S. Government Securities Fund will invest in a CMO tranche either for (1)
interest rate hedging purposes subject to the adoption of monitoring and
reporting procedures or (2) other purposes where the average tranche life would
not change more than 6 years based upon a hypothetical change in time of
purchase and on any subsequent test dates (at least annually) thereafter.
Testing models employed must assume market interest rates and prepayment speeds
at the time the standard is applied. Adjustable rate CMO tranches are exempted
from the average life requirements if (i) the rate is reset at least annually,
(ii) the maximum rate is at least 3% higher than the rate at the time of
purchase, and (iii) the rate varies directly with the index on which it is based
and is not reset as a multiple of the change in such index.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, adjustable rate mortgages
have a specified maturity date and amortize principal over their life. In
periods of declining interest rates there is a reasonable likelihood that ARMS
will experience increased rates of prepayment of principal. However, the major
difference between ARMS and fixed-rate mortgage securities is that the interest
rate can and does change in accordance with movements in a particular,
pre-specified, published interest rate index. There are two main categories of
indices: those based on U.S. Treasury obligations and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. The amount of interest on an adjustable rate mortgage is
calculated by adding a specified amount to the applicable index, subject to
limitations on the maximum and minimum interest that is charged during the life
of the mortgage or to maximum and minimum changes to that interest rate during a
given period.
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The underlying mortgages which collateralize the ARMS in which the
Adjustable Rate U.S. Government Securities Fund invests will frequently have
caps and floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down (1) per reset or adjustment interval
and (2) over the life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These payment caps
may result in negative amortization. The value of mortgage-related securities in
which the Fund invests may be affected if market interest rates rise or fall
faster and farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the interest rates on the
underlying residential mortgages are adjustable, amortization and prepayments
may occur, thereby causing the effective maturities of the mortgage-related
securities in which the Fund invests to be shorter than the maturities stated in
the underlying mortgages.
INFLATION-INDEXED BONDS. The Intermediate Term Government Income Fund and
the Intermediate Term Bond Fund may invest in inflation-indexed bonds, which are
fixed-income securities whose principal value is periodically adjusted according
to the rate of inflation. Such bonds generally are issued at an interest rate
lower than typical bonds, but are expected to retain their principal value over
time. The interest rate on these bonds is fixed at issuance, but over the life
of the bond this interest may be paid on an increasing principal value, which
has been adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semiannual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semiannually), and inflation over the first six months were
1%, the mid-year par value of the bond would be $1,010 and the first semiannual
interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year reached 3%, the end-of-year par value of the bond would
be $1,030 and the second semiannual interest payment would be $15.45 ($1,030
times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also
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invest in other inflation related bonds which may or may not provide a similar
guarantee. If a guarantee of principal is not provided, the adjusted principal
value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions when
it would not be advantageous to do so. There also can be no assurance that the
U.S. Treasury will issue any particular amount of inflation-indexed bonds.
Certain foreign governments, such as the United Kingdom, Canada and Australia,
have a longer history of issuing inflation-indexed bonds, and there may be a
more liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
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Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which a
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
of the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. To minimize these possibilities,
each Fund intends to enter into repurchase agreements only with its Custodian,
with banks having assets in excess of $10 billion and with broker-dealers who
are recognized as primary dealers in U.S. Government obligations by the Federal
Reserve Bank of New York. The Funds will enter into repurchase agreements which
are collateralized by U.S. Government obligations. Collateral for repurchase
agreements is held in safekeeping in the customer-only account of the Funds'
Custodian at the Federal Reserve Bank. At the time a Fund enters into a
repurchase agreement, the value of the collateral, including accrued interest,
will equal or exceed the value of the repurchase agreement and, in the case of a
repurchase agreement exceeding one day, the seller agrees to maintain sufficient
collateral so that the value of the underlying collateral, including accrued
interest, will at all times equal or exceed the value of the repurchase
agreement. The Short Term Government Income Fund, the Intermediate Term
Government Income Fund, the Institutional Government Income Fund and the Money
Market Fund will not enter into a repurchase agreement not terminable within
seven days if, as result thereof, more than 10% of the value of its net assets
would be invested in such securities and other illiquid securities. The
Adjustable Rate U.S. Government Securities Fund and the Intermediate Bond Fund
will not enter into a repurchase agreement not terminable within seven days if,
as a result thereof, more than 15% of the value of its net assets would be
invested in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security.
For purposes of the Investment Company Act of 1940, a repurchase agreement
is deemed to be a loan from a Fund to the seller subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to
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loans. It is not clear whether a court would consider the securities purchased
by a Fund subject to a repurchase agreement as being owned by that Fund or as
being collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the securities before repurchase of the security under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
security. If a court characterized the transaction as a loan and a Fund has not
perfected a security interest in the security, that Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at the risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt obligation purchased for a Fund, the Adviser seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case, the seller. Apart from the risk
of bankruptcy or insolvency proceedings, there is also the risk that the seller
may fail to repurchase the security, in which case a Fund may incur a loss if
the proceeds to that Fund of the sale of the security to a third party are less
than the repurchase price. However, if the market value of the securities
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund involved will direct the seller of the security
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement will equal or exceed the repurchase price.
It is possible that a Fund will be unsuccessful in seeking to enforce the
seller's contractual obligation to deliver additional securities.
LOANS OF PORTFOLIO SECURITIES. The Institutional Government Income Fund,
the Adjustable Rate U.S. Government Securities Fund, the Money Market Fund and
the Intermediate Bond Fund may each lend its portfolio securities. Each of the
Institutional Government Income Fund and the Adjustable Rate U.S. Government
Securities Fund may make short-term loans of its portfolio securities to banks,
brokers and dealers and will limit the amount of its loans to no more than 25%
of its net assets. Each of the Money Market Fund and the Intermediate Bond Fund
will not make loans to other persons if, as a result, more than one-third of the
value of its total assets would be subject to such loans. Each Fund's lending
policies may not be changed without the affirmative vote of a majority of its
outstanding shares.
Lending portfolio securities exposes a Fund to the risk that the borrower
may fail to return the loaned securities or may not be able to provide
additional collateral or that the Fund may experience delays in recovery of the
loaned securities or loss of rights in the collateral if the borrower fails
financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash and/or
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liquid securities, with the Fund's Custodian in an amount at least equal to the
market value of the loaned securities.
Under applicable regulatory requirements (which are subject to change), the
loan collateral must, on each business day, at least equal the value of the
loaned securities. To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by a Fund if the demand meets the terms
of the letter. Such terms and the issuing bank must be satisfactory to the Fund.
The Fund receives amounts equal to the interest on loaned securities and also
receives one or more of (a) negotiated loan fees, (b) interest on securities
used as collateral, or (c) interest on short-term debt securities purchased with
such collateral; either type of interest may be shared with the borrower. The
Funds may also pay fees to placing brokers as well as custodian and
administrative fees in connection with loans. Fees may only be paid to a placing
broker provided that the Trustees determine that the fee paid to the placing
broker is reasonable and based solely upon services rendered, that the Trustees
separately consider the propriety of any fee shared by the placing broker with
the borrower, and that the fees are not used to compensate the Adviser or any
affiliated person of the Trust or an affiliated person of the Adviser or other
affiliated person. The terms of the Funds' loans must meet applicable tests
under the Internal Revenue Code and permit the Fund to reacquire loaned
securities on five days' notice or in time to vote on any important matter.
BORROWING AND PLEDGING. As a temporary measure for extraordinary or
emergency purposes, the Short Term Government Income Fund, the Intermediate Term
Government Income Fund and the Adjustable Rate U.S. Government Securities Fund
may each borrow money from banks or other persons in an amount not exceeding 10%
of its total assets. Each Fund may pledge assets in connection with borrowings
but will not pledge more than 15% of its total assets. Each Fund will not make
any additional purchases of portfolio securities if outstanding borrowings
exceed 5% of the value of its total assets.
Each of the Short Term Government Income Fund and the Intermediate Term
Government Income Fund may borrow money from banks or other persons in an amount
not exceeding 10% of its total assets, as a temporary measure for extraordinary
or emergency purposes. Each Fund may pledge assets in connection with borrowings
but will not pledge more than 15% of its total assets. Each Fund will not make
any additional purchases of portfolio securities if outstanding borrowings
exceed 5% of the value of its total assets.
The Institutional Government Income may borrow money from banks (provided
there is 300% asset coverage) or from banks or other persons for temporary
purposes (in an amount not exceeding 5% of its total assets). The Fund will not
make any borrowing
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which would cause its outstanding borrowings to exceed one-third of the value of
its total assets. The Fund may pledge assets in connection with borrowings but
will not pledge more than one-third of its total assets. The Fund will not make
any additional purchases of portfolio securities if outstanding borrowings
exceed 5% of the value of its total assets.
The Money Market Fund and the Intermediate Bond Fund may each borrow from
banks or from other lenders (provided there is 300% asset coverage) for
temporary or emergency purposes and to meet redemptions and may pledge assets to
secure such borrowings. The Money Market Fund will not make any borrowing which
would cause its outstanding borrowings to exceed one-third of the value of its
total assets. As a matter of operating policy, the Money Market Fund does not
intend to purchase securities for investment during periods when the sum of bank
borrowings exceed 5% of its total assets. This operating policy is not
fundamental and may be changed without shareholder notification.
Borrowing magnifies the potential for gain or loss on a Fund's portfolio
securities and, therefore, if employed, increases the possibility of fluctuation
in its net asset value. This is the speculative factor known as leverage. To
reduce the risks of borrowing, each Fund will limit its borrowings as described
above. Each Fund's policies on borrowing and pledging are fundamental policies
which may not be changed without the affirmative vote of a majority of its
outstanding shares.
The Investment Company Act of 1940 requires the Funds to maintain asset
coverage of at least 300% for all borrowings, and should such asset coverage at
any time fall below 300%, the Fund would be required to reduce its borrowings
within three days to the extent necessary to meet the requirements of the 1940
Act. To reduce its borrowings, a Fund might be required to sell securities at a
time when it would be disadvantageous to do so. In addition, because interest on
money borrowed is a Fund expense that it would not otherwise incur, a Fund may
have less net investment income during periods when its borrowings are
substantial. The interest paid by a Fund on borrowings may be more or less than
the yield on the securities purchased with borrowed funds, depending on
prevailing market conditions.
BANK DEBT INSTRUMENTS. Bank debt instruments in which the Funds may invest
consist of certificates of deposit, bankers' acceptances and time deposits
issued by national banks and state banks, trust companies and mutual savings
banks, or of banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time (usually from fourteen days to one year) at a stated or
variable interest rate. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft which has been
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drawn on it by a customer, which instruments reflect the obligation both of the
bank and of the drawer to pay the face amount of the instrument upon maturity.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Investments in time
deposits maturing in more than seven days will be subject to each Fund's
restrictions on illiquid investments (see "Investment Limitations").
The Money Market Fund and the Intermediate Bond Fund may also invest in
certificates of deposit, bankers' acceptances and time deposits issued by
foreign branches of national banks. Eurodollar certificates of deposit are
negotiable U.S. dollar denominated certificates of deposit issued by foreign
branches of major U.S. commercial banks. Eurodollar bankers' acceptances are
U.S. dollar denominated bankers' acceptances "accepted" by foreign branches of
major U.S. commercial banks. Investments in the obligations of foreign branches
of U.S. commercial banks may be subject to special risks, including future
political and economic developments, imposition of withholding taxes on income,
establishment of exchange controls or other restrictions, less governmental
supervision and the lack of uniform accounting, auditing and financial reporting
standards that might affect an investment adversely. Payment of interest and
principal upon these obligations may also be affected by governmental action in
the country of domicile of the branch (generally referred to as sovereign risk).
In addition, evidences of ownership of portfolio securities may be held outside
of the U.S. and the Funds may be subject to the risks associated with the
holding of such property overseas. Various provisions of federal law governing
the establishment and operation of domestic branches do not apply to foreign
branches of domestic banks. The Adviser, subject to the overall supervision of
the Board of Trustees, carefully considers these factors when making
investments. The Funds do not limit the amount of their assets which can be
invested in any one type of instrument or in any foreign country in which a
branch of a U.S. bank or the parent of a U.S. branch is located. Investments in
obligations of foreign banks are subject to the overall limit of 25% of total
assets which may be invested in a single industry.
COMMERCIAL PAPER. Commercial paper consists of short-term, (usually from
one to two hundred seventy days) unsecured promissory notes issued by U.S.
corporations in order to finance their current operations. Certain notes may
have floating or variable rates. Variable and floating rate notes with a demand
notice period exceeding seven days will be subject to a Fund's restrictions on
illiquid investments (see "Investment Limitations") unless, in the judgment of
the Adviser, subject to the direction of the Board of Trustees, such note is
liquid.
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VARIABLE RATE DEMAND INSTRUMENTS. The Funds may purchase variable rate
demand instruments. Variable rate demand instruments that the Funds will
purchase are variable amount master demand notes that provide for a periodic
adjustment in the interest rate paid on the instrument and permit the holder to
demand payment of the unpaid principal balance plus accrued interest at
specified intervals upon a specific number of days' notice either from the
issuer or by drawing on a bank letter of credit, a guarantee, insurance or other
credit facility issued with respect to such instrument.
The variable rate demand instruments in which the Funds may invest are
payable on not more than thirty calendar days' notice either on demand or at
specified intervals not exceeding thirteen months depending upon the terms of
the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to thirteen months and their
adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments. In
order to minimize credit risks, the Adviser will decide which variable rate
demand instruments it will purchase in accordance with procedures prescribed by
the Board of Trustees. Each Fund may only purchase variable rate demand
instruments which have received a short-term rating meeting that Fund's quality
standards from an NRSRO or unrated variable rate demand instruments determined
by the Adviser, under the direction of the Board of Trustees, to be of
comparable quality. If such an instrument does not have a demand feature
exercisable by a Fund in the event of default in the payment of principal or
interest on the underlying securities, then the Fund will also require that the
instrument have a rating as long-term debt in one of the top two categories by
any NRSRO. The Adviser may determine, under the direction of the Board of
Trustees, that an unrated variable rate demand instrument meets a Fund's quality
criteria if it is backed by a letter of credit or guarantee or insurance or
other credit facility that meets the quality criteria for the Fund or on the
basis of a credit evaluation of the underlying obligor. If an instrument is ever
deemed to not meet a Fund's quality standards, such Fund either will sell it in
the market or exercise the demand feature as soon as practicable.
Each Fund will not invest more than 10% of its net assets (or 15% of net
assets with respect to the Adjustable Rate U.S. Government Securities Fund and
the Intermediate Bond Fund) in variable rate demand instruments as to which it
cannot exercise the demand feature on not more than seven days' notice if the
Board of Trustees determines that there is no secondary market available for
these obligations and all other illiquid securities. The Funds intend to
exercise the demand repurchase feature only (1) upon a default under the terms
of the bond
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documents, (2) as needed to provide liquidity to a Fund in order to make
redemptions of its shares, or (3) to maintain the quality standards of a Fund's
investment portfolio.
While the value of the underlying variable rate demand instruments may
change with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital depreciation is less than would be the case with a
portfolio of fixed income securities. Each Fund may hold variable rate demand
instruments on which stated minimum or maximum rates, or maximum rates set by
state law, limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent it does, increases or decreases in
value may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable banks' "prime rate," or other
interest rate adjustment index, the variable rate demand instruments are not
comparable to long-term fixed rate securities. Accordingly, interest rates on
the variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations or obligations of comparable quality with
similar maturities.
RESTRICTED SECURITIES. The Money Market Fund and the Intermediate Bond Fund
may invest in restricted securities. Restricted securities cannot be sold to the
public without registration under the Securities Act of 1933. The absence of a
trading market can make it difficult to ascertain a market value of illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expenses. Restricted securities generally can be sold in a
privately negotiated transaction, pursuant to an exemption from registration
under the securities Act of 1933, or in a registered public offering. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the time it
decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed when it decided to seek registration of the shares.
However, in general, the Funds anticipate holding restricted securities to
maturity or selling them in an exempt transaction.
ASSET-BACKED SECURITIES. The Intermediate Term Government Income Fund and
the Adjustable Rate U.S. Government Securities Fund may each invest in various
types of adjustable rate securities in the form of asset-backed securities
issued or guaranteed by U.S. Government agencies or instrumentalities. The
securitization techniques used in the context of asset-backed securities are
similar to those used for mortgage-related
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securities. Thus, through the use of trusts and special purpose corporations,
various types of receivables are securitized in pass-through structures similar
to the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure. In general, collateral supporting
asset-backed securities has shorter maturities than mortgage loans and has been
less likely to experience substantial prepayment.
The Funds' investments in asset-backed securities may include pass-through
securities collateralized by Student Loan Marketing Association ("SLMA")
guaranteed loans whose interest rates adjust in much the same fashion as
described above with respect to ARMS. The underlying loans are originally made
by private lenders and are guaranteed by the SLMA. It is the guaranteed loans
that constitute the underlying financial assets in these asset-backed
securities. There may be other types of asset-backed securities that are
developed in the future in which the Funds may invest.
The Intermediate Bond Fund may invest in asset-backed securities such as
securities whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the contracts or
a pool of credit card loan receivables.
MUNICIPAL SECURITIES. The Money Market Fund and the Intermediate Bond Fund
may invest in taxable and tax-exempt municipal securities. Municipal securities
consist of (i) debt obligations issued by or on behalf of public authorities to
obtain funds to be used for various public facilities, for refunding outstanding
obligations, for general operating expenses, and for lending such funds to other
public institutions and facilities; and (ii) certain private activity and
industrial development bonds issued by or on behalf of public authorities to
obtain funds to provide for the construction, equipment, repair, or improvement
of privately operated facilities. Municipal notes include general obligation
notes, tax anticipation notes, revenue anticipation notes, bond anticipation
notes, certificates of indebtedness, demand notes and construction loan notes
and participation interests in municipal notes. Municipal bonds include general
obligation bonds, revenue or special obligation bonds, private activity and
industrial development bonds, and participation interests in municipal bonds.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility.
The payment of principal and interest on private activity and industrial
development bonds generally is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Fund may make investments
in obligations issued by highly rated U.S. insurance companies, such as
guaranteed investment contracts and
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similar funding agreements (collectively "GICs"). A GIC is a general obligation
of the issuing insurance company and not a separate account. Under these
contracts, the Fund makes cash contributions to a deposit fund of the insurance
company's general account. The insurance company then credits to the Fund on a
monthly basis guaranteed interest which is based on an index. The GICs provide
that this guaranteed interest will not be less than a certain minimum rate. GIC
investments that do not provide for payment within seven days after notice are
subject to the Fund's policy regarding investments in illiquid securities.
PRIVATE PLACEMENT INVESTMENTS. The Money Market Fund may invest in
commercial paper issued in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities laws and is generally sold
to institutional investors who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Adviser believes that Section 4(2)
commercial paper and possibly certain other restricted securities which meet the
criteria for liquidity established by the Trustees are quite liquid. The Fund
intends therefore, to treat the restricted securities which meet the criteria
for liquidity established by the Trustees, including Section 4(2) commercial
paper, as determined by the Adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because Section 4(2)
commercial paper is liquid, the Fund does not intend to subject such paper to
the limitation applicable to restricted securities.
The ability of the Board of Trustees to determine the liquidity of certain
restricted securities is permitted under a position of the staff of the
Securities and Exchange Commission set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a nonexclusive
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The staff of the Securities and Exchange Commission has left
the question of determining the liquidity of all restricted securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities (including Section 4(2) commercial
paper): the frequency of trades and quotes for the security; the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; dealer undertakings to make a market in the security; and the
nature of
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the security and the nature of the marketplace trades. The Trustees have
delegated to the Adviser the daily function of determining and monitoring the
liquidity of restricted securities pursuant to the above criteria and guidelines
adopted by the Board of Trustees. The Trustees will monitor and periodically
review the Adviser's selection of Rule 144A and Section 4(2) commercial paper as
well as any determinations as to its liquidity.
LOAN PARTICIPATIONS. The Intermediate Bond Fund may invest, subject to an
overall 10% limit on loans, in loan participations, typically made by a
syndicate of banks to U.S. and non-U.S. corporate or governmental borrowers for
a variety of purposes. The underlying loans may be secured or unsecured, and
will vary in term and legal structure. When purchasing such instruments the Fund
may assume the credit risks associated with the original bank lender as well as
the credit risks associated with the borrower. Investments in loan
participations present the possibility that the Fund could be held liable as a
co-lender under emerging legal theories of lender liability. In addition, if the
loan is foreclosed, the Fund could be part owner of any collateral, and could
bear the costs and liabilities of owning and disposing of the collateral. Loan
participations are generally not rated by major rating agencies and may not be
protected by securities laws. Also, loan participations are generally considered
to be illiquid and are therefore subject to the Fund's overall 15% limitation on
illiquid securities.
ZERO COUPON BONDS. The Intermediate Bond Fund is permitted to purchase zero
coupon securities ("zero coupon bonds"). Zero coupon bonds are purchased at a
discount from the face amount because the buyer receives only the right to
receive a fixed payment on a certain date in the future and does not receive any
periodic interest payments. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yields on the zero coupon bond, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this reason,
zero coupon bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities which
pay interest currently, which fluctuation increases the longer the period to
maturity. Although zero coupon bonds do not pay interest to holders prior to
maturity, federal income tax law requires the Fund to recognize as interest
income a portion of the bond's discount each year and this income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as
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proceeds of sales of Fund shares and/or sale of portfolio securities. In such
cases, the Fund will not be able to purchase additional income-producing
securities with cash used to make such distributions and its current income may
ultimately be reduced as a result.
LOWER-RATED SECURITIES. The Intermediate Bond Fund may invest up to 20% of
its assets in higher yielding (and, therefore, higher risk), lower rated
fixed-income securities, including debt securities, convertible securities and
preferred stocks and unrated fixed-income securities. Lower rated fixed-income
securities, commonly referred to as "junk bonds", are considered speculative and
involve greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated fixed-income securities.
Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by S&P. The Fund may invest in any security which is rated by Moody's or
by S&P, or in any unrated security which the Adviser determines is of suitable
quality. Securities in the rating categories below Baa as determined by Moody's
and BBB as determined by S&P are considered to be of poor standing and
predominantly speculative.
Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. Although the Adviser will consider
security ratings when making investment decisions in the high yield market, it
will perform its own investment analysis and will not rely principally on the
ratings assigned by the rating agencies. The Adviser's analysis generally may
include, among other things, consideration of the issuer's experience and
managerial strength, changing financial conditions, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest rates. It also considers relative values based on
anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects.
Lower quality fixed-income securities generally produce a higher current
yield than do fixed-income securities of higher ratings. However, these
fixed-income securities are considered speculative because they involve greater
price volatility and risk than do higher rated fixed-income securities and
yields on these fixed-income securities will tend to fluctuate over time.
Although the market value of all fixed-income securities varies
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as a result of changes in prevailing interest rates (e.g., when interest rates
rise, the market value of fixed-income securities can be expected to decline),
values of lower rated fixed-income securities tend to react differently than the
values of higher rated fixed-income securities. The prices of lower rated
fixed-income securities are less sensitive to changes in interest rates than
higher rated fixed-income securities. Conversely, lower rated fixed-income
securities also involve a greater risk of default by the issuer in the payment
of principal and income and are more sensitive to economic downturns and
recessions than higher rated fixed-income securities. The financial stress
resulting from an economic downturn could have a greater negative effect on the
ability of issuers of lower rated fixed-income securities to service their
principal and interest payments, to meet projected business goals and to obtain
additional financing than on more creditworthy issuers. In the event of an
issuer's default in payment of principal or interest on such securities, or any
other fixed-income securities in the Fund's portfolio, the net asset value of
the Fund will be negatively affected. Moreover, as the market for lower rated
fixed-income securities is a relatively new one, a severe economic downturn
might increase the number of defaults, thereby adversely affecting the value of
all outstanding lower rated fixed-income securities and disrupting the market
for such securities. Fixed-income securities purchased by the Fund as part of an
initial underwriting present an additional risk due to their lack of market
history. These risks are exacerbated with respect to fixed-income securities
rated Caa or lower by Moody's or CCC or lower by S&P. Unrated fixed-income
securities generally carry the same risks as do lower rated fixed-income
securities.
Lower rated fixed-income securities are typically traded among a smaller
number of broker-dealers rather than in a broad secondary market. Purchasers of
lower rated fixed-income securities tend to be institutions, rather than
individuals, a factor that further limits the secondary market. To the extent
that no established retail secondary market exists, many lower rated
fixed-income securities may not be as liquid as Treasury and investment grade
bonds. The ability of the Fund to sell lower rated fixed-income securities will
be adversely affected to the extent that such securities are thinly traded or
illiquid. Moreover, the ability of the Fund to value lower rated fixed-income
securities becomes more difficult, and judgment plays a greater role in
valuation, as there is less reliable, objective data available with respect to
such securities that are thinly traded or illiquid.
Because investors may perceive that there are greater risks associated with
the lower rated fixed-income securities of the type in which the Fund may
invest, the yields and prices of such securities may tend to fluctuate more than
those for fixed-income securities with a higher rating. Changes in perception of
issuer's creditworthiness tend to occur more frequently and in a
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more pronounced manner in the lower quality segments of the fixed-income
securities market than do changes in higher quality segments of the fixed-income
securities market, resulting in greater yield and price volatility.
The Adviser believes that the risks of investing in such high yielding,
fixed-income securities may be minimized through careful analysis of prospective
issuers. Although the opinion of ratings services such as Moody's and S&P is
considered in selecting portfolio securities, they evaluate the safety of the
principal and the interest payments of the security, not their market value
risk. Additionally, credit rating agencies may experience slight delays in
updating ratings to reflect current events. The Adviser relies, primarily, on
its own credit analysis. This may suggest, however, that the achievement of the
Fund's investment objective is more dependent on the Adviser's proprietary
credit analysis, than is otherwise the case for a fund that invests exclusively
in higher quality fixed-income securities.
Once the rating of a portfolio security or the quality determination
ascribed by the Adviser to an unrated, fixed-income security has been
downgraded, the Adviser will consider all circumstances deemed relevant in
determining whether to continue to hold the security, but in no event will the
Fund retain such security if it would cause the Fund to have 20% or more of the
value of its net assets invested in fixed-income securities rated lower than Baa
by Moody's or BBB by S&P, or if unrated, are judged by the Adviser to be of
comparable quality.
The Intermediate Bond Fund may also invest in unrated fixed-income
securities. Unrated fixed-income securities are not necessarily of lower quality
than rated fixed-income securities, but they may not be attractive to as many
buyers.
There is no minimum rating standard for the Fund's investments in the high
yield market; therefore, the Fund may at times invest in fixed-income securities
not currently paying interest or in default. The Fund will invest in such
fixed-income securities where the Adviser perceives a substantial opportunity to
realize the Fund's objective based on its analysis of the underlying financial
condition of the issuer. It is not, however, the current intention of the Fund
to make such investments.
MAJORITY. The term "majority" of the outstanding shares of the Trust (or of
any Fund) means the lesser of (1) 67% or more of the outstanding shares of the
Trust (or the applicable Fund) present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust (or the applicable Fund) are present
or represented at such meeting or (2) more than 50% of the outstanding shares of
the Trust (or the applicable Fund).
26
<PAGE>
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS
- -------------------------------------------
CORPORATE BONDS.
Moody's Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
Aaa - "Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues."
Aa - "Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities."
A - "Bonds which are rated A possess many favorable investment attributes
and are considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future."
Baa - "Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well."
Ba - "Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class."
B - "Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small."
27
<PAGE>
Caa - "Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest."
Ca - "Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings."
C - "Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing."
Standard & Poor's Ratings Group provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
AAA - "Debt rated AAA has the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong."
AA - "Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree."
A - "Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories."
BBB - "Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
BB - "Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating."
B - "Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating."
28
<PAGE>
CCC - "Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial or economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating."
CC - "The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating."
C - "The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy has been filed but debt service
payments are continued."
CI - "The rating CI is reserved for income bonds on which no interest is
being paid."
D - "Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition and debt service payments are jeopardized."
Duff and Phelps Inc. provides the following descriptions of its corporate bond
- --------------------------------------------------------------------------------
ratings:
- --------
AAA - "Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt."
AA - "High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions."
A - "Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress."
BBB - "Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles."
BB - "Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category."
29
<PAGE>
B - "Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade."
CCC - "Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments."
DD - "Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments."
Fitch Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
AAA - "AAA ratings denote the lowest expectation of credit risk. They are
assigned only in cases of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events."
AA - "AA ratings denote a very low expectation of credit risk. They
indicate strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events."
A - "A ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings."
BBB - "BBB ratings indicate that there is currently a low expectation of
credit risk. Capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity. This is the lowest investment grade
category."
BB - "BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change 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 - "B ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for
30
<PAGE>
continued payment is contingent upon a sustained, favorable business and
economic environment."
CCC, CC, C - "Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default."
DDD, DD and D - "Securities are not meeting current obligations and are
extremely speculative. 'DDD' designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstanding, and
'D' the lowest recovery potential, i.e. below 50%."
Thomson BankWatch provides the following descriptions of its corporate bond
- --------------------------------------------------------------------------------
ratings:
- --------
AAA - "Indicates that the ability to repay principal and interest on a
timely basis is extremely high."
AA - "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 - "Indicates 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 - "The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. BBB issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings."
BB - "While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations."
B - "Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis."
CCC - "Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances."
31
<PAGE>
CC - "CC is applied to issues that are subordinate to other obligations
rated CCC and are afforded less protection in the event of bankruptcy or
reorganization."
D - "Default."
CORPORATE NOTES.
Moody's Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate note ratings:
- -----------------------
MIG-1 "Notes which are rated MIG-1 are judged to be of the best quality.
There is present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing."
MIG-2 "Notes which are rated MIG-2 are judged to be of high quality. Margins
of protection are ample although not so large as in the preceding
group."
Standard & Poor's Ratings Group provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate note ratings:
- -----------------------
SP-1 "Debt rated SP-1 has very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation."
SP-2 "Debt rated SP-2 has satisfactory capacity to pay principal and
interest."
COMMERCIAL PAPER.
Description of Commercial Paper Ratings of Moody's Investors Service, Inc.:
- ---------------------------------------------------------------------------
Prime-1 "Superior capacity for repayment of short-term promissory
obligations."
Prime-2 "Strong capacity for repayment of short-term promissory obligations."
Prime-3 "Acceptable ability for repayment of short-term promissory
obligations."
Description of Commercial Paper Ratings of Standard & Poor's Ratings Group:
- ---------------------------------------------------------------------------
A-1 "This designation indicates that the degree of safety regarding timely
payment is very strong."
32
<PAGE>
A-2 "Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated A-1."
A-3 "Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations."
Description of Commercial Paper Ratings of Duff & Phelps, Inc.:
- ---------------------------------------------------------------
DUFF-1 - "Very high certainty of timely payment. Liquidity factors are excellent
and supported by strong fundamental protection factors. Risk factors are minor."
DUFF-2 - "Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small."
Description of Commercial Paper Ratings of Thomson BankWatch:
- -------------------------------------------------------------
TBW-1 - "The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis."
TBW-2 - "The second highest category; 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 - "The lowest investment-grade category; indicates that while the
obligation is more susceptible to 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 - "The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative."
INVESTMENT LIMITATIONS
- ----------------------
The Trust has adopted certain fundamental investment limitations designed
to reduce the risk of an investment in the Funds. These limitations may not be
changed with respect to any Fund without the affirmative vote of a majority of
the outstanding shares of that Fund.
THE LIMITATIONS APPLICABLE TO THE SHORT TERM GOVERNMENT INCOME FUND AND THE
INTERMEDIATE TERM GOVERNMENT INCOME FUND ARE:
1. BORROWING MONEY. Each Fund will not borrow money, except (a) as a
temporary measure for extraordinary or emergency purposes and then only in
amounts not in excess of 10% of the value of the Fund's total assets or (b)
pursuant to Paragraph
33
<PAGE>
(15) of this section. Each Fund may pledge its assets to the extent of up to 15%
of the value of its total assets to secure such borrowings.
2. UNDERWRITING. Each Fund will not act as underwriter of securities issued
by other persons, either directly or through a majority owned subsidiary. This
limitation is not applicable to the extent that, in connection with the
disposition of its portfolio securities (including restricted securities), a
Fund may be deemed an underwriter under certain federal securities laws.
3. ILLIQUID INVESTMENTS. Each Fund will not purchase securities for which
there are legal or contractual restrictions on resale or enter into a repurchase
agreement maturing in more than seven days if, as a result thereof, more than
10% of the value of the Fund's total assets would be invested in such
securities.
4. REAL ESTATE. Each Fund will not purchase, hold or deal in real estate,
including real estate limited partnership interests.
5. COMMODITIES. Each Fund will not purchase, hold or deal in commodities or
commodities futures contracts.
6. LOANS. Each Fund will not make loans to individuals, to any officer or
Trustee of the Trust or to its Adviser or to any officer or director of the
Adviser (each Fund, however, may purchase and simultaneously resell for later
delivery obligations issued or guaranteed as to principal and interest by the
United States Government or an agency or instrumentality thereof; provided that
each Fund will not enter into such repurchase agreements if, as a result
thereof, more than 10% of the value of the Fund's total assets at that time
would be subject to repurchase agreements maturing in more than seven days). The
making of a loan by either Fund does not include the purchase of a portion of an
issue of publicly distributed bonds, debentures or other debt securities,
whether or not the purchase was made upon the original issuance of the
securities.
7. SECURITIES OF ONE ISSUER. Each Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause more than 25% of the
value of the Fund's total assets to be invested in the securities of such issuer
(the foregoing limitation does not apply to investments in government securities
as defined in the Investment Company Act of 1940).
8. SECURITIES OF ONE CLASS. Each Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause 10% of any class of
securities of such issuer to be held by a Fund, or acquire more than 10% of the
outstanding voting securities of such issuer. (All outstanding bonds and
34
<PAGE>
other evidences of indebtedness shall be deemed to be a single class of
securities of the issuer, and all kinds of stock of an issuer preferred over the
common stock as to dividends or liquidation shall be deemed to constitute a
single class regardless of relative priorities, series designations, conversion
rights and other differences).
9. INVESTING FOR CONTROL. Each Fund will not invest in companies for the
purpose of exercising control or management.
10. OTHER INVESTMENT COMPANIES. Each Fund will not purchase securities
issued by any other investment company or investment trust except (a) by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than customary brokers' commission or (b) where
such purchase, not made in the open market, is part of a plan of merger or
consolidation or acquisition of assets; provided that each Fund shall not
purchase the securities of any investment companies or investment trusts if such
purchase at the time thereof would cause more than 10% of the value of the
Fund's total assets to be invested in the securities of such issuers, and
provided further, that each Fund shall not purchase securities issued by any
other open-end investment company.
11. MARGIN PURCHASES. Each Fund will not purchase securities or evidences
of interest thereon on "margin," except that the Funds may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
or redemption of securities.
12. COMMON STOCKS. Each Fund will not invest in common stocks.
13. OPTIONS. Each Fund will not engage in the purchase or sale of put or
call options.
14. SHORT SALES. Each Fund will not sell any securities short.
15. WHEN-ISSUED PURCHASES. The Funds will not make any commitment to
purchase securities on a when-issued basis except that the Intermediate Term
Government Income Fund may make such commitments if no more than 20% of the
Fund's net assets would be so committed.
16. CONCENTRATION. Each Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
17. MINERAL LEASES. The Funds will not purchase oil, gas or other mineral
leases or exploration or development programs.
35
<PAGE>
18. SENIOR SECURITIES. The Funds will not issue or sell any senior security
as defined by the Investment Company Act of 1940 except insofar as any borrowing
that a Fund may engage in may be deemed to be an issuance of a senior security.
THE LIMITATIONS APPLICABLE TO THE INSTITUTIONAL GOVERNMENT INCOME FUND ARE:
1. BORROWING MONEY. The Fund will not borrow money, except (a) from a bank,
provided that immediately after such borrowing there is asset coverage of 300%
for all borrowings of the Fund; or (b) from a bank for temporary purposes only,
provided that, when made, such temporary borrowings are in an amount not
exceeding 5% of the Fund's total assets. The Fund also will not make any
borrowing which would cause its outstanding borrowings to exceed one-third of
the value of its total assets.
2. PLEDGING. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above. The Fund will not mortgage, pledge or hypothecate more
than one-third of its assets in connection with borrowings.
3. UNDERWRITING. The Fund will not act as underwriter of securities issued
by other persons. This limitation is not applicable to the extent that, in
connection with the disposition of portfolio securities (including restricted
securities), the Fund may be deemed an underwriter under certain federal
securities laws.
4. ILLIQUID INVESTMENTS. The Fund will not invest more than 10% of its net
assets in securities for which there are legal or contractual restrictions on
resale and other illiquid securities.
5. REAL ESTATE. The Fund will not purchase, hold or deal in real estate.
6. COMMODITIES. The Fund will not purchase, hold or deal in commodities or
commodities futures contracts, or invest in oil, gas or other mineral
explorative or development programs. This limitation is not applicable to the
extent that the U.S. Government obligations in which the Fund may otherwise
invest would be considered to be such commodities, contracts or investments.
36
<PAGE>
7. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, or (b) by engaging in repurchase agreements. For
purposes of this limitation, the term "loans" shall not include the purchase of
a portion of an issue of U.S. Government obligations.
8. MARGIN PURCHASES. The Fund will not purchase securities or evidences of
interest thereon on "margin." This limitation is not applicable to short-term
credit obtained by the Fund for the clearance of purchases and sales or
redemption of securities.
9. SHORT SALES AND OPTIONS. The Fund will not sell any securities short or
sell put and call options. This limitation is not applicable to the extent that
sales by the Fund of securities in which the Fund may otherwise invest would be
considered to be sales of options.
10. OTHER INVESTMENT COMPANIES. The Fund will not invest more than 5% of
its total assets in the securities of any investment company and will not invest
more than 10% of its total assets in securities of other investment companies.
11. CONCENTRATION. The Fund will not invest more than 25% of its total
assets in a particular industry; this limitation is not applicable to
investments in obligations issued by the U.S. Government, its territories and
possessions, the District of Columbia and their respective agencies and
instrumentalities or repurchase agreements with respect thereto.
12. MINERAL LEASES. The Fund will not purchase oil, gas or other mineral
leases or exploration or development programs.
13. SENIOR SECURITIES. The Fund will not issue or sell any senior security
as defined by the Investment Company Act of 1940 except insofar as any borrowing
that the Fund may engage in may be deemed to be an issuance of a senior
security.
THE LIMITATIONS APPLICABLE TO THE ADJUSTABLE RATE U.S. GOVERNMENT
SECURITIES FUND ARE:
1. BORROWING MONEY. The Fund will not borrow money, except (a) as a
temporary measure for extraordinary or emergency purposes and then only in
amounts not in excess of 10% of the value of its total assets or (b) pursuant to
Paragraph (15) of this section. The Fund may pledge its assets to the extent of
up to 15% of the value of its total assets to secure such borrowings.
2. UNDERWRITING. The Fund will not act as underwriter of securities issued
by other persons, either directly or through a majority owned subsidiary. This
limitation is not applicable to the extent that, in connection with the
disposition of its portfolio securities (including restricted securities), the
Fund may be deemed an underwriter under certain federal securities laws.
37
<PAGE>
3. ILLIQUID INVESTMENTS. The Fund will not purchase securities for which
there are legal or contractual restrictions on resale or enter into a repurchase
agreement maturing in more than seven days if, as a result thereof, more than
15% of the value of the Fund's net assets would be invested in such securities.
4. REAL ESTATE. The Fund will not purchase, hold or deal in real estate,
including real estate limited partnerships.
5. COMMODITIES. The Fund will not purchase, hold or deal in commodities or
commodities futures contracts.
6. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities if the borrower agrees to maintain collateral
marked to market daily in an amount at least equal to the market value of the
loaned securities, or (b) by engaging in repurchase agreements. For purposes of
this limitation, the term "loans" shall not include the purchase of a portion of
an issue of U.S. Government obligations.
7. SECURITIES OF ONE ISSUER. The Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause more than 5% of the
value of its total assets to be invested in the securities of such issuer (the
foregoing limitation does not apply to investments in government securities as
defined in the Investment Company Act of 1940).
8. SECURITIES OF ONE CLASS. The Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause 10% of any class of
securities of such issuer to be held by the Fund, or acquire more than 10% of
the outstanding voting securities of such issuer. (All outstanding bonds and
other evidences of indebtedness shall be deemed to be a single class of
securities of the issuer).
9. INVESTING FOR CONTROL. The Fund will not invest in companies for the
purpose of exercising control or management.
10. OTHER INVESTMENT COMPANIES. The Fund will not invest more than 5% of
its total assets in the securities of any investment company and will not invest
more than 10% of its total assets in securities of other investment companies.
11. MARGIN PURCHASES. The Fund will not purchase securities or evidences of
interest thereon on "margin," except that it may obtain such short-term credit
as may be necessary for the clearance of purchases and sales or redemption of
securities.
12. COMMON STOCKS. The Fund will not invest in common stocks.
38
<PAGE>
13. OPTIONS. The Fund will not engage in the purchase or sale of put or
call options.
14. SHORT SALES. The Fund will not sell any securities short.
15. WHEN-ISSUED PURCHASES. The Fund will not make any commitment to
purchase securities on a when-issued or to-be-announced basis if more than 25%
of the Fund's net assets would be so committed.
16. CONCENTRATION. The Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
17. MINERAL LEASES. The Fund will not purchase oil, gas or other mineral
leases or exploration or development programs.
18. SENIOR SECURITIES. The Fund will not issue or sell any senior security
as defined by the Investment Company Act of 1940 except insofar as any borrowing
that the Fund may engage in may be deemed to be an issuance of a senior
security.
19. UNSEASONED ISSUERS. The Fund will not purchase securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years if more than 5% of the value of the Fund's total assets would
be so committed.
THE LIMITATIONS APPLICABLE TO THE MONEY MARKET FUND AND THE INTERMEDIATE
BOND FUND ARE:
1. BORROWING MONEY. Each Fund will not borrow money, except (a) from a
bank, provided that immediately after such borrowing there is asset coverage of
300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that, when made, such temporary borrowings are
in an amount not exceeding 5% of the Fund's total assets. Each Fund also will
not make any borrowing which would cause outstanding borrowings to exceed
one-third of the value of its total assets.
2. UNDERWRITING. Each Fund will not act as underwriter of securities issued
by other persons, either directly or through a majority owned subsidiary. This
limitation is not applicable to the extent that, in connection with the
disposition of its portfolio securities (including restricted securities), a
Fund may be deemed an underwriter under certain federal securities laws.
39
<PAGE>
3. REAL ESTATE. Each Fund will not purchase, hold or deal in real estate.
4. CONCENTRATION. Each Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
5. COMMODITIES. Each Fund will not purchase, hold or deal in commodities
and will not invest in oil, gas or other mineral explorative or development
programs.
6. LOANS. Each Fund will not make loans to other persons if, as a result,
more than one-third of the value of the Fund's total assets would be subject to
such loans. This limitation does not apply to (a) the purchase of a portion of
an issue of debt securities in accordance with a Fund's investment objective,
policies and limitations or (b) engaging in repurchase transactions.
7. OPTIONS. Each Fund will not engage in the purchase or sale of put or
call options.
8. SENIOR SECURITIES. Each Fund will not issue or sell any senior security
as defined by the Investment Company Act of 1940 except insofar as any borrowing
that the Funds may engage in may be deemed to be an issuance of a senior
security.
The Money Market Fund has adopted the following additional investment
limitation, which may not be changed without the affirmative vote of a majority
of the outstanding shares of the Fund. The Fund will not purchase the securities
of any issuer if such purchase at the time thereof would cause more than 5% of
the value of its total assets to be invested in the securities of such issuer
(the foregoing limitation does not apply to investments in government securities
as defined in the Investment Company Act of 1940).
In addition, the Money Market Fund may not invest more than 25% of its
total assets in a particular industry, except that the Fund may invest more than
25% of total assets in the securities of banks. Currently, the Securities and
Exchange Commission defines the term "bank" to include U.S. banks and their
foreign branches if, in the case of foreign branches, the parent U.S. bank is
unconditionally liable for such obligations. These limitations do not apply to
obligations of the U.S. Government or any of its agencies or instrumentalities.
The Fund does not consider utilities or companies engaged in finance generally
to be one industry. Finance companies will be considered a part of the industry
they finance (e.g., GMAC-auto; VISA-credit cards). Utilities will be divided
according to the types of services they
40
<PAGE>
provide; for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
THE FOLLOWING INVESTMENT LIMITATIONS OF THE MONEY MARKET FUND AND THE
INTERMEDIATE BOND FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER
APPROVAL.
1. ILLIQUID INVESTMENTS. Each Fund will not purchase securities for which
there are legal or contractual restrictions on resale or enter into a repurchase
agreement maturing in more than seven days if, as a result thereof, more than
15% of the value of the Intermediate Bond Fund's net assets or 10% of the value
of the Money Market Fund's net assets would be invested in such securities.
2. OTHER INVESTMENT COMPANIES. Each Fund will not invest more than 5% of
its total assets in the securities of any investment company and will not invest
more than 10% of the value of its total assets in securities of other investment
companies.
3. MARGIN PURCHASES. Each Fund will not purchase securities or evidences of
interest thereon on "margin." This limitation is not applicable to short-term
credit obtained by a Fund for the clearance of purchases and sales or redemption
of securities.
4. SHORT SALES. Each Fund will not make short sales of securities, unless
it owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short.
With respect to the percentages adopted by the Trust as maximum limitations
on a Fund's investment policies and restrictions, an excess above the fixed
percentage (except for the percentage limitations relative to the borrowing of
money or investing in illiquid securities) will not be a violation of the policy
or restriction unless the excess results immediately and directly from the
acquisition of any security or the action taken.
The Trust has never pledged, mortgaged or hypothecated the assets of any
Fund, and the Trust presently intends to continue this policy. The Trust has
never acquired, nor does it presently intend to acquire, securities issued by
any other investment company or investment trust. The Institutional Government
Income Fund does not intend to invest in obligations issued by territories and
possessions of the United States, the District of Columbia and their respective
agencies and instrumentalities or repurchase agreements with respect thereto.
The Short Term Government Income Fund and the Intermediate Term Government
Income Fund will not purchase securities for which there are legal or
contractual restrictions on resale or enter into a repurchase agreement maturing
in more than seven days if, as a result thereof, more than 10% of the value of a
Fund's net assets would be invested in such securities. The statements of
41
<PAGE>
intention in this paragraph reflect nonfundamental policies which may be changed
by the Board of Trustees without shareholder approval.
Although not a fundamental policy, portfolio investments and transactions
of the Short Term Government Income Fund, the Intermediate Term Government
Income Fund, the Institutional Government Income Fund and the Adjustable Rate
U.S. Government Securities Fund will be limited to those investments and
transactions permissible for Federal credit unions pursuant to 12 U.S.C. Section
1757(7) and (8) and 12 CFR Part 703. If this policy is changed as to allow the
Funds to make portfolio investments and engage in transactions not permissible
for Federal credit unions, the Trust will so notify all Federal credit union
shareholders.
TRUSTEES AND OFFICERS
- ---------------------
The following is a list of the Trustees and executive officers of the
Trust, their compensation from the Trust and their aggregate compensation from
the Western-Southern complex of mutual funds for the fiscal year ended September
30, 1999. Messrs. Coleman, Cox, Schwab and Stautberg did not receive any
compensation from the Trust during the fiscal year since they did not begin
serving as Trustees until October 29, 1999. Each Trustee who is an "interested
person" of the Trust, as defined by the Investment Company Act of 1940, is
indicated by an asterisk. Each of the Trustees is also a Trustee of Countrywide
Tax-Free Trust and Countrywide Strategic Trust.
AGGREGATE
COMPENSATION
COMPENSATION FROM
POSITION FROM WESTERN-SOUTHERN
NAME AGE HELD TRUST COMPLEX(1)
- --------------------- --- -------- ------------ -------------
William O. Coleman 70 Trustee $ 0 $ 2,192
Phillip R. Cox 52 Trustee 0 10,000
+H. Jerome Lerner 61 Trustee 5,000 15,000
*Robert H. Leshner 60 President/Trustee 0 0
*Jill T. McGruder 44 Trustee 0 0
+Oscar P. Robertson 60 Trustee 5,000 15,000
Nelson Schwab, Jr. 81 Trustee 0 2,192
+Robert E. Stautberg 65 Trustee 0 10,000
Joseph S. Stern, Jr. 81 Trustee 0 8,000
Maryellen Peretzky 47 Vice President 0 0
Tina D. Hosking 31 Secretary 0 0
Theresa M. Samocki 30 Treasurer 0 0
(1) The Western-Southern complex of mutual funds consists of six series of the
Trust, six series of Countrywide Tax-Free Trust, four series of Countrywide
Strategic Trust, eight series of Touchstone Series Trust and eight series
of Touchstone Variable Series Trust.
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* Mr. Leshner, as President and a director of Countrywide Investments, Inc.
and Ms. McGruder, as a director of Countrywide Investments, Inc., are each
an "interested person" of the Trust within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940.
+ Member of Audit Committee.
The principal occupations of the Trustees and executive officers of the
Trust during the past five years are set forth below:
WILLIAM O. COLEMAN, 2 Noel Lane, Cincinnati, Ohio is a retired General
Sales Manager and Vice President of The Procter & Gamble Company and a trustee
of The Procter & Gamble Profit Sharing Plan and The Procter & Gamble Employee
Stock Ownership Plan. He is a director of LCA Vision (a laser vision correction
institute) and a trustee of Touchstone Series Trust and Touchstone Variable
Series Trust (registered investment companies).
PHILLIP R. COX, 105 East Fourth Street, Cincinnati, Ohio is President and
Chief Executive Officer of Cox Financial Corp. (a financial services company).
He is a director of the Federal Reserve Bank of Cleveland, Cincinnati Bell Inc.,
PNC Bank N.A. and Cinergy Corporation. He is also a trustee of Touchstone Series
Trust and Touchstone Variable Series Trust.
H. JEROME LERNER, 7149 Knoll Road, Cincinnati, Ohio is a principal of HJL
Enterprises and is Chairman of Crane Electronics, Inc. (a manufacturer of
electronic connectors). He is also a director of Slush Puppy Inc. (a
manufacturer of frozen beverages) and Peerless Manufacturing (a manufacturer of
bakery equipment).
ROBERT H. LESHNER, 312 Walnut Street, Cincinnati, Ohio is President and a
Trustee of Countrywide Strategic Trust and Countrywide Tax-Free Trust,
registered investment companies. He is also President and a director of
Countrywide Investments, Inc. (the investment adviser and principal underwriter
of the Trust). Until 1999, he was President and a director of Countrywide
Financial Services, Inc. (a financial services company and parent of Countrywide
Investments, Inc., Countrywide Fund Services, Inc. and CW Fund Distributors,
Inc.), Countrywide Fund Services, Inc. (a registered transfer agent) and CW Fund
Distributors, Inc. (a registered broker-dealer).
JILL T. McGRUDER, 311 Pike Street, Cincinnati, Ohio is President, Chief
Executive Officer and a director of IFS Financial Services, Inc. (a holding
company), Touchstone Advisors, Inc. (a registered investment adviser) and
Touchstone Securities, Inc. (a registered broker-dealer). She is a Senior Vice
President of The Western-Southern Life Insurance Company and a director of
Capital Analysts Incorporated (a registered
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<PAGE>
investment adviser and broker-dealer), Countrywide Financial Services, Inc.,
Countrywide Investments, Inc., CW Fund Distributors, Inc. and Countrywide Fund
Services, Inc. She is also President and a director of IFS Agency Services, Inc.
and IFS Insurance Agency, Inc. (insurance agencies). Until December 1996, she
was National Marketing Director of Metropolitan Life Insurance Co. From 1991
until 1996, she was Vice President of Touchstone Advisors, Inc. and IFS
Financial Services, Inc.
OSCAR P. ROBERTSON, 4293 Muhlhauser Road, Fairfield, Ohio is President of
Orchem Corp., a chemical specialties distributor, and Orpack Stone Corporation,
a corrugated box manufacturer.
NELSON SCHWAB, JR., 511 Walnut Street, Cincinnati, Ohio is Senior Counsel
of Graydon, Head & Ritchey (a law firm). He is a director of Rotex, Inc. (a
machine manufacturer), The Ralph J. Stolle Company and Security Rug Cleaning
Company. He is also a trustee of Touchstone Series Trust and Touchstone Variable
Series Trust.
ROBERT E. STAUTBERG, 4815 Drake Road, Cincinnati, Ohio is a retired partner
and director of KPMG Peat Marwick LLP. He is a trustee of Good Samaritan
Hospital, Bethesda Hospital and Tri Health. He is also a trustee of Touchstone
Series Trust and Touchstone Variable Series Trust.
JOSEPH S. STERN, JR., 3 Grandin Place, Cincinnati, Ohio is a retired
Professor Emeritus of the University of Cincinnati College of Business. He is
also a Trustee of Touchstone Series Trust and Touchstone Variable Series Trust.
TINA D. HOSKING, 312 Walnut Street, Cincinnati, Ohio is Vice President and
Associate General Counsel of Countrywide Fund Services, Inc. and CW Fund
Distributors, Inc. She is also Secretary of Countrywide Tax-Free Trust and
Countrywide Strategic Trust.
THERESA M. SAMOCKI, 312 Walnut Street, Cincinnati, Ohio is Vice
President-Fund Accounting of Countrywide Fund Services, Inc. and CW Fund
Distributors, Inc. She is also Treasurer of Countrywide Tax-Free Trust and
Countrywide Strategic Trust.
Each Trustee, except for Mr. Leshner and Ms. McGruder, receives a quarterly
retainer of $1,500 and a fee of $1,500 for each Board meeting attended. Such
fees are split equally among the Trust, Countrywide Tax-Free Trust and
Countrywide Strategic Trust.
THE INVESTMENT ADVISER AND UNDERWRITER
- --------------------------------------
Countrywide Investments, Inc. (the "Adviser") is the Funds' investment
manager. The Adviser is a subsidiary of Countrywide Financial Services, Inc.,
which is a wholly-owned subsidiary of
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<PAGE>
Fort Washington Investment Advisors, Inc. (a registered investment adviser).
Fort Washington Investment Advisors, Inc. is a wholly-owned subsidiary of The
Western-Southern Life Insurance Company which provides life and health
insurance, annuities, mutual funds, asset management and related financial
services. Mr. Leshner is deemed to be an affiliate of the Adviser since he is
President and a director of the Adviser. Ms. McGruder is deemed to be an
affiliate of the Adviser since she is a Director of the Adviser. Mr. Leshner and
Ms. McGruder, by reason of such affiliation, may directly or indirectly receive
benefits from the advisory fees paid to the Adviser.
Under the terms of the investment advisory agreements between the Trust and
the Adviser, the Adviser is responsible for the management of the Funds'
investments. The Short Term Government Income Fund, the Intermediate Term
Government Income Fund, the Adjustable Rate U.S. Government Securities Fund, the
Money Market Fund and the Intermediate Bond Fund each pay the Adviser a fee
computed and accrued daily and paid monthly at an annual rate of .5% of its
average daily net assets up to $50,000,000, .45% of such assets from $50,000,000
to $150,000,000, .4% of such assets from $150,000,000 to $250,000,000 and .375%
of such assets in excess of $250,000,000. The Institutional Government Income
Fund pays the Adviser a fee computed and accrued daily and paid monthly at an
annual rate of .2% of its average daily net assets. The total fees paid by a
Fund during the first and second halves of each fiscal year of the Trust may not
exceed the semiannual total of the daily fee accruals requested by the Adviser
during the applicable six month period.
Set forth below are the advisory fees paid by the Funds during the fiscal
years ended September 30, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Short Term Government Income Fund 522,067 459,485 476,697
Intermediate Term Government Income Fund 231,334 251,601 274,084
Institutional Government Income Fund(1) 91,227 100,484 100,101
Adjustable Rate U.S. Govt. Securities Fund(2) 48,923 72,130 79,473
Money Market Fund(3) 137,483 312,309 --
Intermediate Bond(4) 77,965 112,811 --
(1) The Adviser voluntarily waived $33,050, $23,440 and $22,972 of its fees for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively, in
order to reduce the operating expenses of the Fund.
(2) The Adviser voluntarily waived all of its fees for the fiscal years ended
September 30, 1999, 1998 and 1997 and reimbursed the Fund for $53,400 and
$16,687 of expenses for the fiscal years ended September 30, 1999 and 1998,
respectively, in order to reduce the operating expenses of the Fund.
45
<PAGE>
(3) The Adviser voluntarily waived $127,666 of its fees for the fiscal year
ended September 30, 1999 in order to reduce the operating expenses of the
Fund.
(4) The Adviser voluntarily waived $49,390 and $7,205 of its fees for the
fiscal years ended September 30, 1999 and 1998, respectively, in order to
reduce the operating expenses of the Fund.
Prior to August 29, 1997, the investment adviser of the Predecessor Money
Market Fund and the Predecessor Intermediate Bond Fund was Trans Financial Bank,
N.A. (the "Predecessor Adviser"). For the fiscal period ended August 31, 1997,
the Predecessor Money Market Fund accrued advisory fees of $188,896; however,
the Predecessor Adviser voluntarily waived $130,362 of such fees during the
fiscal year ended August 31, 1997 in order to reduce the operating expenses of
the Fund. For the fiscal period ended August 31, 1997, the Predecessor
Intermediate Bond Fund accrued advisory fees of $60,906; however, the
Predecessor Adviser waived its entire advisory fee and reimbursed the
Predecessor Fund for $43,624 of expenses during the fiscal year ended August 31,
1997 in order to reduce the operating expenses of the Fund.
The Funds are responsible for the payment of all expenses incurred in
connection with the organization, registration of shares and operations of the
Funds, including such extraordinary or non-recurring expenses as may arise, such
as litigation to which the Trust may be a party. The Funds may have an
obligation to indemnify the Trust's officers and Trustees with respect to such
litigation, except in instances of willful misfeasance, bad faith, gross
negligence or reckless disregard by such officers and Trustees in the
performance of their duties. The Adviser bears promotional expenses in
connection with the distribution of the Funds' shares to the extent that such
expenses are not assumed by the Funds under their plan of distribution (see
below). The compensation and expenses of any officer, Trustee or employee of the
Trust who is an officer, director or employee of the Adviser are paid by the
Adviser.
By their terms, the Funds' investment advisory agreements remain in force
until October 28, 2001 and from year to year thereafter, subject to annual
approval by (a) the Board of Trustees or (b) a vote of the majority of a Fund's
outstanding voting securities; provided that in either event continuance is also
approved by a majority of the Trustees who are not interested persons of the
Trust, by a vote cast in person at a meeting called for the purpose of voting
such approval. The Funds' investment advisory agreements may be terminated at
any time, on sixty days' written notice, without the payment of any penalty, by
the Board of Trustees, by a vote of the majority of a Fund's outstanding voting
securities, or by the Adviser. The investment advisory agreements automatically
terminate in the event of their assignment, as defined by the Investment Company
Act of 1940 and the rules thereunder.
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<PAGE>
The Adviser is also the principal underwriter of the Funds and, as such,
the exclusive agent for distribution of shares of the Funds. The Adviser is
obligated to sell the shares on a best efforts basis only against purchase
orders for the shares. Shares of each Fund are offered to the public on a
continuous basis.
As principal underwriter of the Funds, the Adviser retains the entire sales
load on all direct initial investments and on all investments in accounts with
no designated dealer of record. The Adviser is the only affiliated dealer of the
Funds. The Adviser allows concessions to dealers who sell shares of the
Intermediate Term Government Income Fund and the Intermediate Bond Fund. For the
fiscal year ended September 30, 1999, the aggregate commissions on sales of the
Intermediate Term Government Income Fund's shares were $20,561, of which the
Adviser paid $13,878 to unaffiliated broker-dealers in the selling network,
earned $5,262 as a broker-dealer in the selling network and retained $1,421 in
underwriting commissions. For the fiscal year ended September 30, 1999, the
aggregate commissions on sales of the Intermediate Bond Fund's shares were
$6,920 of which the Adviser paid $4,058 to unaffiliated broker-dealers in the
selling network, earned $2,237 as a broker-dealer in the selling network and
retained $624 in underwriting commissions. For the fiscal year ended September
30, 1999, the aggregate commissions on sales of the Adjustable Rate U.S.
Government Securities Fund's shares were $14,323, of which the Adviser paid
$12,773 to unaffiliated broker-dealers in the selling network, earned $218 as a
broker-dealer in the selling network and retained $1,332 in underwriting
commissions. For the fiscal year ended September 30, 1998, the aggregate
commissions on sales of the Intermediate Term Government Income Fund's shares
were $22,767, of which the Adviser paid $17,566 to unaffiliated broker-dealers
in the selling network, earned $3,762 as a broker-dealer in the selling network
and retained $1,439 in underwriting commissions. For the fiscal year ended
September 30, 1998, the aggregate commissions on sales of the Intermediate Bond
Fund's shares were $3,059, of which the Adviser paid $1,630 to unaffiliated
broker-dealers in the selling network, earned $1,123 as a broker-dealer in the
selling network and retained $306 in underwriting commissions. For the fiscal
year ended September 30, 1998, the aggregate commissions on sales of the
Adjustable Rate U.S. Government Securities Fund's shares were $15,945, of which
the Adviser paid $14,237 to unaffiliated broker-dealers in the selling network,
earned $436 as a broker-dealer in the selling network and retained $1,272 in
underwriting commissions. For the fiscal year ended September 30, 1997, the
aggregate commissions on sales of the Intermediate Term Government Income Fund's
shares were $14,314, of which the Adviser paid $10,905 to unaffiliated
broker-dealers in the selling network, earned $2,847 as a broker-dealer in the
selling network and retained $562 in underwriting commissions. For the fiscal
year ended September 30, 1997, the aggregate commissions on sales of the
Intermediate Bond Fund's shares were $188 of which the Adviser earned $168 as
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<PAGE>
a broker-dealer in the selling network and retained $20 in underwriting
commissions. For the fiscal year ended September 30, 1997, the aggregate
commissions on sales of the Adjustable Rate U.S. Government Securities Fund's
shares were $16,854, of which the Adviser paid $14,595 to unaffiliated
broker-dealers in the selling network, earned $806 as a broker-dealer in the
selling network and retained $1,453 in underwriting commissions.
The Funds may compensate dealers, including the Adviser and its affiliates,
based on the average balance of all accounts in the Fund for which the dealer is
designated as the party responsible for the account. See "Distribution Plans"
below.
DISTRIBUTION PLANS
- ------------------
CLASS A SHARES As stated in the Prospectus, the Funds have adopted a plan
of distribution (the "Class A Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 which permits each Fund to pay for expenses incurred in the
distribution and promotion of the Funds' shares, including but not limited to,
the printing of prospectuses, statements of additional information and reports
used for sales purposes, advertisements, expenses of preparation and printing of
sales literature, promotion, marketing and sales expenses, and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Adviser. The Class A Plan expressly limits payment of the
distribution expenses listed above in any fiscal year to a maximum of .35% of
the average daily net assets of the Short Term Government Income Fund, the
Intermediate Term Government Income Fund, the Adjustable Rate U.S. Government
Securities Fund, the Money Market Fund and Class A shares of the Intermediate
Bond Fund and .10% of the average daily net assets of the Institutional
Government Income Fund. Unreimbursed expenses will not be carried over from year
to year.
For the fiscal year ended September 30, 1999, the aggregate
distribution-related expenditures of the Short Term Government Income Fund
("STF"), the Intermediate Term Government Income Fund ("ITF"), the Institutional
Government Income Fund ("IGF"), the Adjustable Rate U.S. Government Securities
Fund ("ARM"), the Money Market Fund ("MMF") and the Intermediate Bond Fund
("IBF") under the Class A Plan were $147,856, $61,623, $2,503, $4,048, $5,128
and $5,468, respectively. Amounts were spent as follows:
STF ITF IGF ARM MMF IBF
--- --- --- --- --- ---
Printing and mailing
of prospectuses and
reports to prospective
shareholders.......... $ 4,356 $ 4,123 $ 2,503 $ 4,048 $ 5,128 $ 5,468
Payments to broker-
dealers and others
for the sale or
retention of assets... 143,500 57,500 -- -- -- --
Advertising and
promotion............. -- -- -- -- -- --
-------- ------- ------ ------ ------ ------
$147,856 $61,623 $2,503 $4,048 $5,128 $5,468
======== ======= ====== ====== ====== ======
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<PAGE>
CLASS C SHARES (INTERMEDIATE BOND FUND ONLY) -- The Intermediate Bond Fund
has also adopted a plan of distribution (the "Class C Plan") with respect to the
Fund's Class C shares. The Class C Plan provides for two categories of payments.
First, the Class C Plan provides for the payment to the Adviser of an account
maintenance fee, in an amount equal to an annual rate of .25% of the average
daily net assets of the Class C shares, which may be paid to other dealers based
on the average value of Class C shares owned by clients of such dealers. In
addition, the Fund may pay up to an additional .75% per annum of the daily net
assets of its Class C shares for expenses incurred in the distribution and
promotion of the shares, including prospectus costs for prospective
shareholders, costs of responding to prospective shareholder inquiries, payments
to brokers and dealers for selling and assisting in the distribution of Class C
shares, costs of advertising and promotion and any other expenses related to the
distribution of the Class C shares. Unreimbursed expenditures will not be
carried over from year to year. The Fund may make payments to dealers and other
persons in an amount up to .75% per annum of the average value of Class C shares
owned by its clients, in addition to the .25% account maintenance fee described
above. Class C shares of the Intermediate Bond Fund did not incur any
distribution expenses during the fiscal year ended September 30, 1999.
GENERAL INFORMATION -- Agreements implementing the Plans (the
"Implementation Agreements"), including agreements with dealers wherein such
dealers agree for a fee to act as agents for the sale of the Funds' shares, are
in writing and have been approved by the Board of Trustees. All payments made
pursuant to the Plans are made in accordance with written agreements.
The continuance of the Plans and the Implementation Agreements must be
specifically approved at least annually by a vote of the Trust's Board of
Trustees and by a vote of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the Plans or any
Implementation Agreement (the "Independent Trustees") at a meeting called for
the purpose of voting on such continuance. A Plan may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of a Fund or the applicable class of a
Fund. In the event a Plan is terminated in accordance with its terms, the
affected Fund (or class) will not be required to make any payments for expenses
incurred by the Adviser after the termination date. Each Implementation
Agreement terminates automatically in the event of its assignment and may be
terminated at any time by a vote of a majority of the Independent Trustees or by
a vote of the holders of a majority of the outstanding shares of a Fund (or the
applicable class) on not more than 60 days' written notice to any other party to
the Implementation Agreement. The Plans may not be amended to
49
<PAGE>
increase materially the amount to be spent for distribution without shareholder
approval. All material amendments to the Plans must be approved by a vote of the
Trust's Board of Trustees and by a vote of the Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their
business judgment and in light of their fiduciary duties as Trustees, that there
is a reasonable likelihood that the Plans will benefit the Funds and their
shareholders. The Board of Trustees believes that expenditure of the Funds'
assets for distribution expenses under the Plans should assist in the growth of
the Funds which will benefit the Funds and their shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
diversification and less chance of disruption of planned investment strategies.
The Plans will be renewed only if the Trustees make a similar determination for
each subsequent year of the Plans. There can be no assurance that the benefits
anticipated from the expenditure of the Funds' assets for distribution will be
realized. While the Plans are in effect, all amounts spent by the Funds pursuant
to the Plans and the purposes for which such expenditures were made must be
reported quarterly to the Board of Trustees for its review. Distribution
expenses attributable to the sale of more than one class of shares of the
Intermediate Bond Fund will be allocated at least annually to each class of
shares based upon the ratio in which the sales of each class of shares bears to
the sales of all the shares of the Fund. In addition, the selection and
nomination of those Trustees who are not interested persons of the Trust are
committed to the discretion of the Independent Trustees during such period.
Robert H. Leshner and Jill T. McGruder, as interested persons of the Trust,
may be deemed to have a financial interest in the operation of the Plans and the
Implementation Agreements.
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Funds and the placing of the
Funds' securities transactions and negotiation of commission rates where
applicable are made by the Adviser and are subject to review by the Board of
Trustees of the Trust. In the purchase and sale of portfolio securities, the
Adviser seeks best execution for the Funds, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), the
execution capability, financial responsibility and responsiveness of the broker
or dealer and the brokerage and research services provided by the broker or
dealer. The Adviser generally seeks favorable prices and commission rates that
are reasonable in relation to the benefits received.
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<PAGE>
Generally, the Funds attempt to deal directly with the dealers who make a
market in the securities involved unless better prices and execution are
available elsewhere. Such dealers usually act as principals for their own
account. On occasion, portfolio securities for the Funds may be purchased
directly from the issuer. Because the portfolio securities of the Funds are
generally traded on a net basis and transactions in such securities do not
normally involve brokerage commissions, the cost of portfolio securities
transactions of the Funds will consist primarily of dealer or underwriter
spreads. No brokerage commissions were paid by the Funds during the last three
fiscal years.
The Adviser is specifically authorized to select brokers who also provide
brokerage and research services to the Funds and/or other accounts over which
the Adviser exercises investment discretion and to pay such brokers a commission
in excess of the commission another broker would charge if it is determined in
good faith that the commission is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
terms of a particular transaction or the Adviser's overall responsibilities with
respect to the Funds and to accounts over which it exercises investment
discretion.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment securities for the Funds and statistical services and
information with respect to the availability of securities or purchasers or
sellers of securities. Although this information is useful to the Funds or the
Adviser, it is not possible to place a dollar value on it. Research services
furnished by brokers through whom the Funds effect securities transactions may
be used by the Adviser in servicing all of its accounts and not all such
services may be used in connection with the Funds.
The Funds have no obligation to deal with any broker or dealer in the
execution of securities transactions. However, the Adviser and other affiliates
of the Trust or the Adviser may effect securities transactions which are
executed on a national securities exchange or transactions in the
over-the-counter market conducted on an agency basis. No Fund will effect any
brokerage transactions in its portfolio securities with the Adviser if such
transactions would be unfair or unreasonable to its shareholders.
Over-the-counter transactions will be placed either directly with principal
market makers or with broker-dealers. Although the Funds do not anticipate any
ongoing arrangements with other brokerage firms, brokerage business may be
transacted from time to time with other firms. Neither the Adviser nor
affiliates of the Trust or the Adviser will receive reciprocal brokerage
business as a result of the brokerage business transacted by the Funds with
other brokers.
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<PAGE>
During the fiscal year ended September 30, 1999, the Money Market Fund
acquired securities of the Trust's regular broker-dealers as follows: Morgan
Stanley, Dean Witter, Discover & Co. corporate notes $150,000 par value, the
market value of which was $150,136 as of September 30, 1999; Merrill Lynch &
Company corporate notes $420,000 par value, the market value of which was
$421,309 as of September 30, 1999; Bear Stearns & Co., Inc. corporate notes,
$250,000 par value, the market value of which was $251,008 as of September 30,
1999.
During the fiscal year ended September 30, 1999, the Funds entered into
repurchase transactions with the following entities who may be deemed to be
regular broker-dealers of the Trust as defined under the Investment Company Act
of 1940: Banc One Capital Markets, Deutsche Bank Securities Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley, Dean Witter & Co.,
Nesbitt-Burns Securities Inc. and Prudential-Bache Securities Inc.
CODE OF ETHICS. The Trust and the Adviser have each adopted a Code of Ethics
under Rule 17j-1 of the Investment Company Act of 1940. The Code significantly
restricts the personal investing activities of all employees of the Adviser and,
as described below, imposes additional, more onerous, restrictions on investment
personnel of the Adviser. The Code requires that all employees of the Adviser
preclear any personal securities investment (with limited exceptions, such as
U.S. Government obligations). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. In addition, no employee may purchase or
sell any security which at the time is being purchased or sold (as the case may
be), or to the knowledge of the employee is being considered for purchase or
sale, by any Fund. The substantive restrictions applicable to investment
personnel of the Adviser include a ban on acquiring any securities in an initial
public offering. Furthermore, the Code provides for trading "blackout periods"
which prohibit trading by investment personnel of the Adviser within periods of
trading by the Funds in the same (or equivalent) security. The Code of Ethics
adopted by the Trust and the Adviser are on public file with, and are available
from, the Securities and Exchange Commission.
PORTFOLIO TURNOVER
- ------------------
The Adviser intends to hold the portfolio securities of the Short Term
Government Income Fund, the Institutional Government Income Fund and the Money
Market Fund to maturity and to limit portfolio turnover to the extent possible.
Nevertheless, changes in a Fund's portfolio will be made promptly when
determined to be advisable by reason of developments not foreseen at the time of
the original investment decision, and usually without reference to the length of
time a security has been held.
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The Intermediate Term Government Income Fund, the Adjustable Rate U.S.
Government Securities Fund and the Intermediate Bond Fund do not intend to
purchase securities for short term trading; however, a security may be sold in
anticipation of a market decline, or purchased in anticipation of a market rise
and later sold. Securities will be purchased and sold in response to the
Adviser's evaluation of an issuer's ability to meet its debt obligations in the
future. A security may be sold and another purchased when, in the opinion of the
Adviser, a favorable yield spread exists between specific issues or different
market sectors.
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. High turnover may result in a Fund recognizing greater amounts of income
and capital gains, which would increase the amount of income and capital gains
which a Fund must distribute to its shareholders in order to maintain its status
as a regulated investment company and to avoid the imposition of federal income
or excise taxes. A 100% turnover rate would occur if all of a Fund's portfolio
securities were replaced once within a one year period.
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
The share price (net asset value) and the share price of the shares of the
Short Term Government Income Fund, the Institutional Government Income Fund and
the Money Market Fund is determined as of 12:30 p.m. and 4:00 p.m., Eastern
time, on each day the Trust is open for business. The share price (net asset
value) of the shares of the Adjustable Rate U.S. Government Securities Fund and
the share price and the public offering price (net asset value plus applicable
sales load) of the shares of the Intermediate Term Government Income Fund and
the Intermediate Bond Fund are determined as of the close of the regular session
of trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time),
on each day the Trust is open for business. The Trust is open for business on
every day except Saturdays, Sundays and the following holidays: New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. The Trust may also be
open for business on other days in which there is sufficient trading in any
Fund's portfolio securities that its net asset value might be materially
affected. For a description of the methods used to determine the share price and
the public offering price, see "Calculation of Share Price and Public Offering
Price" in the Prospectus.
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Pursuant to Rule 2a-7 promulgated under the Investment Company Act of 1940,
the Short Term Government Income Fund, the Institutional Government Income Fund
and the Money Market Fund each value their portfolio securities on an amortized
cost basis. The use of the amortized cost method of valuation involves valuing
an instrument at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
of the Short Term Government Income Fund, the Institutional Government Income
Fund or the Money Market Fund is affected by any unrealized appreciation or
depreciation of the portfolio. The Board of Trustees has determined in good
faith that utilization of amortized cost is appropriate and represents the fair
value of the portfolio securities of the Short Term Government Income Fund, the
Institutional Government Income Fund and the Money Market Fund.
Pursuant to Rule 2a-7, the Short Term Government Income Fund, the
Institutional Government Income Fund and the Money Market Fund each maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
securities having remaining maturities of thirteen months or less and invest
only in United States dollar-denominated securities determined by the Board of
Trustees to be of high quality and to present minimal credit risks. If a
security ceases to be an eligible security, or if the Board of Trustees believes
such security no longer presents minimal credit risks, the Trustees will cause
the Fund to dispose of the security as soon as possible. The maturity of U.S.
Government obligations which have a variable rate of interest readjusted no less
frequently than annually will be deemed to be the period of time remaining until
the next readjustment of the interest rate.
The Board of Trustees has established procedures designed to stabilize, to
the extent reasonably possible, the price per share of the Short Term Government
Income Fund, the Institutional Government Income Fund and the Money Market Fund
as computed for the purpose of sales and redemptions at $1 per share. The
procedures include review of each Fund's portfolio holdings by the Board of
Trustees to determine whether a Fund's net asset value calculated by using
available market quotations deviates more than one-half of one percent from $1
per share and, if so, whether such deviation may result in material dilution or
is otherwise unfair to existing shareholders. In the event the Board of Trustees
determines that such a deviation exists, it will take corrective action as it
regards necessary and appropriate, including the sale of portfolio securities
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturities; withholding dividends; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations.
The Board of Trustees has
54
<PAGE>
also established procedures designed to ensure that each Fund complies with the
quality requirements of Rule 2a-7.
While the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Short Term Government
Income Fund, the Institutional Government Income Fund or the Money Market Fund
would receive if it sold the instrument. During periods of declining interest
rates, the daily yield on shares of each Fund may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio securities. Thus, if the use of amortized cost by a Fund resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values and existing investors would
receive less investment income. The converse would apply in a period of rising
interest rates.
Portfolio securities held by the Intermediate Term Government Income Fund,
the Adjustable Rate U.S. Government Securities Fund or the Intermediate Bond
Fund for which market quotations are readily available are generally valued at
their most recent bid prices as obtained from one or more of the major market
makers for such securities. Securities (and other assets) for which market
quotations are not readily available are valued at their fair value as
determined in good faith in accordance with consistently applied procedures
established by and under the general supervision of the Board of Trustees.
OTHER PURCHASE INFORMATION
- --------------------------
The Prospectus describes generally how to purchase shares of the Funds.
Additional information with respect to certain types of purchases of shares of
the Intermediate Term Government Income Fund and Class A shares of the
Intermediate Bond Fund is set forth below.
RIGHT OF ACCUMULATION. A "purchaser" (as defined in the Prospectus) of
shares of the Intermediate Term Government Income Fund and Class A shares of the
Intermediate Bond Fund has the right to combine the cost or current net asset
value (whichever is higher) of his existing shares of the load funds distributed
by the Adviser with the amount of his current purchases in order to take
advantage of the reduced sales loads set forth in the tables in the Prospectus.
The purchaser or his dealer must notify the Transfer Agent that an investment
qualifies for a reduced sales load. The reduced load will be granted upon
confirmation of the purchaser's holdings by the Transfer Agent.
55
<PAGE>
LETTER OF INTENT. The reduced sales loads set forth in the tables in the
Prospectus may also be available to any "purchaser" (as defined in the
Prospectus) of shares of the Intermediate Term Government Income Fund and Class
A shares of the Intermediate Bond Fund who submits a Letter of Intent to the
Transfer Agent. The Letter must state an intention to invest within a thirteen
month period in any load fund distributed by the Adviser a specified amount
which, if made at one time, would qualify for a reduced sales load. A Letter of
Intent may be submitted with a purchase at the beginning of the thirteen month
period or within ninety days of the first purchase under the Letter of Intent.
Upon acceptance of this Letter, the purchaser becomes eligible for the reduced
sales load applicable to the level of investment covered by such Letter of
Intent as if the entire amount were invested in a single transaction.
The Letter of Intent is not a binding obligation on the purchaser to
purchase, or the Trust to sell, the full amount indicated. During the term of a
Letter of Intent, shares representing 5% of the intended purchase will be held
in escrow. These shares will be released upon the completion of the intended
investment. If the Letter of Intent is not completed during the thirteen month
period, the applicable sales load will be adjusted by the redemption of
sufficient shares held in escrow, depending upon the amount actually purchased
during the period. The minimum initial investment under a Letter of Intent is
$10,000.
A ninety-day backdating period can be used to include earlier purchases at
the purchaser's cost (without a retroactive downward adjustment of the sales
charge). The thirteen month period would then begin on the date of the first
purchase during the ninety-day period. No retroactive adjustment will be made if
purchases exceed the amount indicated in the Letter of Intent. The purchaser or
his dealer must notify the Transfer Agent that an investment is being made
pursuant to an executed Letter of Intent.
OTHER INFORMATION. The Trust does not impose a front-end sales load or
imposes a reduced sales load in connection with purchases of shares of the
Intermediate Term Government Income Fund and Class A shares of the Intermediate
Bond Fund made under the reinvestment privilege or the purchases described in
the "Reduced Sales Load," "Purchases at Net Asset Value" or "Exchange Privilege"
sections in the Prospectus because such purchases require minimal sales effort
by the Adviser. Purchases described in the "Purchases at Net Asset Value"
section may be made for investment only, and the shares may not be resold except
through redemption by or on behalf of the Trust.
56
<PAGE>
TAXES
- -----
The Prospectus describes generally the tax treatment of distributions by
the Funds. This section of the Statement of Additional Information includes
additional information concerning federal taxes.
Each Fund has qualified and intends to qualify annually for the special tax
treatment afforded a "regulated investment company" under Subchapter M of the
Internal Revenue Code so that it does not pay federal taxes on income and
capital gains distributed to shareholders. To so qualify a Fund must, among
other things, (i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currency, or
certain other income (including but not limited to gains from options, futures
and forward contracts) derived with respect to its business of investing in
stock, securities or currencies; and (ii) diversify its holdings so that at the
end of each quarter of its taxable year the following two conditions are met:
(a) at least 50% of the value of the Fund's total assets is represented by cash,
U.S. Government securities, securities of other regulated investment companies
and other securities (for this purpose such other securities will qualify only
if the Fund's investment is limited in respect to any issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer) and (b) not more than 25% of the value of the Fund's
assets is invested in securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies).
A Fund's net realized capital gains from securities transactions will be
distributed only after reducing such gains by the amount of any available
capital loss carryforwards. As of September 30, 1999, the Intermediate Term
Government Income Fund, the Institutional Government Income Fund, the Adjustable
Rate U.S. Government Securities Fund and the Money Market Fund had capital loss
carryforwards for federal income tax purposes of $2,354,472, $22,343, $1,309,556
and $6,403, respectively. In addition, the Intermediate Bond Fund, the
Adjustable Rate U.S. Government Securities Fund and the Money Market Fund
elected to defer until the September 30, 2000 tax year $429,852, $3,127 and
$4,941, respectively, of capital losses incurred after October 31, 1998. These
capital loss carryforwards and "post-October" losses may be carried forward to
offset any capital gains for eight years, after which any undeducted capital
loss remaining is lost as a deduction.
A federal excise tax at the rate of 4% will be imposed on the excess, if
any, of a Fund's "required distribution" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of a Fund's
ordinary income for
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<PAGE>
the calendar year plus 98% of its net capital gains recognized during the one
year period ending on October 31 of the calendar year plus undistributed amounts
from prior years. The Funds intend to make distributions sufficient to avoid
imposition of the excise tax.
The Trust is required to withhold and remit to the U.S. Treasury a portion
(31%) of dividend income on any account unless the shareholder provides a
taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding.
REDEMPTION IN KIND
- ------------------
Under unusual circumstances, when the Board of Trustees deems it in the
best interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. If any such redemption in kind is to be made, each Fund intends
to make an election pursuant to Rule 18f-1 under the Investment Company Act of
1940. This election will require the Funds to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of each Fund during any 90
day period for any one shareholder. Should payment be made in securities, the
redeeming shareholder will generally incur brokerage costs in converting such
securities to cash. Portfolio securities which are issued in an in-kind
redemption will be readily marketable.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
Yield quotations on investments in the Short Term Government Income Fund,
the Institutional Government Income Fund and the Money Market Fund are provided
on both a current and an effective (compounded) basis. Current yields are
calculated by determining the net change in the value of a hypothetical account
for a seven calendar day period (base period) with a beginning balance of one
share, dividing by the value of the account at the beginning of the base period
to obtain the base period return, multiplying the result by (365/7) and carrying
the resulting yield figure to the nearest hundredth of one percent. Effective
yields reflect daily compounding and are calculated as follows: Effective yield
= (base period return + 1)365/7 -1. For purposes of these calculations, no
effect is given to realized or unrealized gains or losses (the Short Term
Government Income Fund, the Institutional Government Income Fund and the Money
Market Fund do not normally recognize unrealized gains and losses under the
amortized cost valuation method). The Short Term Government Income Fund's
current and effective yields for the seven days ended September 30, 1999 were
4.23% and 4.32%, respectively. The Institutional Government Income Fund's
current and effective yields for the seven days ended September 30, 1999 were
4.93% and 5.05%, respectively. The Money Market Fund's current and effective
yields for the
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seven days ended September 30, 1999 were 4.84% and 4.96%, respectively.
From time to time, the Intermediate Term Government Income Fund, the
Adjustable Rate U.S. Government Securities Fund and the Intermediate Bond Fund
may advertise average annual total return. Average annual total return
quotations will be computed by finding the average annual compounded rates of
return over 1, 5 and 10 year periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P (1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all
dividends and distributions. The calculation also assumes the deduction of the
current maximum sales load from the initial $1,000 payment. If a Fund has been
in existence less than one, five or ten years, the time period since the date of
the initial public offering of shares will be substituted for the periods
stated. The average annual total returns of the Intermediate Term Government
Income Fund, the Adjustable Rate U.S. Government Securities Fund and the
Intermediate Bond Fund for the periods ended September 30, 1999 are as follows:
Intermediate Term Government Income Fund
- ----------------------------------------
1 Year -6.59%
5 Years 5.33%
10 Years 6.13%
Adjustable Rate U.S. Government Securities Fund
- -----------------------------------------------
1 Year 5.22%
5 Years 5.41%
Since Inception (February 10, 1993) 4.82%
Intermediate Bond Fund (Class A)
- --------------------------------
1 Year -8.28%
Since Inception (October 3, 1995) 3.83%
The Intermediate Term Government Income Fund, the Adjustable Rate U.S.
Government Securities Fund and the Intermediate Bond Fund may also advertise
total return (a "nonstandardized quotation") which is calculated differently
from average annual total return. A nonstandardized quotation of total return
may be a cumulative return which measures the percentage change in the
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value of an account between the beginning and end of a period, assuming no
activity in the account other than reinvestment of dividends and capital gains
distributions. This computation does not include the effect of the applicable
front-end sales load for the Intermediate Term Government Income Fund and the
Intermediate Bond Fund which, if included, would reduce total return. The total
returns of the Intermediate Term Government Income Fund ("ITF"), the Adjustable
Rate U.S. Government Securities Fund ("ARM") and the Intermediate Bond
Fund-Class A ("IBF") as calculated in this manner for each of the last ten
fiscal years (or since inception) are as follows:
ITF ARM IBF
Period Ended --- --- ---
- ------------------
September 30, 1990 5.31%
September 30, 1991 14.19%
September 30, 1992 13.27%
September 30, 1993 10.15% 2.90%(1)
September 30, 1994 -6.76% 2.09%
September 30, 1995 12.52% 5.33%
September 30, 1996 3.55% 6.32% 4.16%(2)
September 30, 1997 7.74% 6.34% 10.04%
September 30, 1998 10.54% 3.88% 10.54%
September 30, 1999 -1.93% 5.22% -3.71%
(1) From date of initial public offering on February 10, 1993
(2) From date of initial public offering on October 3, 1995
A nonstandardized quotation may also indicate average annual compounded rates of
return without including the effect of the applicable front-end sales load or
over periods other than those specified for average annual total return. The
average annual compounded rates of return for the Intermediate Term Government
Income Fund, the Adjustable Rate U.S. Government Securities Fund and the
Intermediate Bond Fund (excluding sales loads) for the periods ended September
30, 1999 are as follows:
Intermediate Term Government Income Fund
- ----------------------------------------
1 Year -1.93%
3 Years 5.32%
5 Years 6.36%
10 Years 6.65%
Since Inception (February 6, 1981) 8.24%
Adjustable Rate U.S. Government Securities Fund
- -----------------------------------------------
1 Year 5.22%
3 Years 5.14%
5 Years 5.41%
Since Inception (February 10, 1993) 4.82%
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Intermediate Bond Fund (Class A)
- --------------------------------
1 Year -3.71%
3 Years 5.41%
Since Inception (October 3, 1995) 5.10%
A nonstandardized quotation of total return will always be accompanied by the
Fund's average annual total return as described above.
From time to time, the Intermediate Term Government Income Fund, the
Adjustable Rate U.S. Government Securities Fund and the Intermediate Bond Fund
may advertise their yield. A yield quotation is based on a 30-day (or one month)
period and is computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
Yield = 2[a-b/cd + 1)6 - 1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Generally, interest earned (for the purpose of "a" above) on debt obligations is
computed by reference to the yield to maturity of each obligation held based on
the market value of the obligation (including actual accrued interest) at the
close of business on the last business day prior to the start of the 30-day (or
one month) period for which yield is being calculated, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest). With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
paydowns of principal and interest, gain or loss attributable to actual monthly
paydowns is accounted for as an increase or decrease to interest income during
the period and discount or premium on the remaining security is not amortized.
The yield of the Intermediate Term Government Income Fund for September 1998 was
4.40%. The yield of the Adjustable Rate U.S. Government Securities Fund for
September 1998 was 5.28%. The yield of the Intermediate Bond Fund for September
1998 was 5.28%.
The performance quotations described above are based on historical earnings
and are not intended to indicate future performance. Average annual total return
and yield are computed separately for Class A and Class C shares of the
Intermediate Bond Fund. The yield of Class A shares is expected to be higher
than the yield of Class C shares due to the higher distribution fees imposed on
Class C shares.
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To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding each Fund may discuss
various measures of Fund performance, including current performance ratings
and/or rankings appearing in financial magazines, newspapers and publications
which track mutual fund performance. Advertisements may also compare performance
(using the calculation methods set forth in the Prospectus) to performance as
reported by other investments, indices and averages. When advertising current
ratings or rankings, the Funds may use the following publications or indices to
discuss or compare Fund performance:
IBC Financial Data Inc.'s Money Fund Report provides a comparative analysis
of performance for various categories of money market funds. The Short Term
Government Income Fund may compare performance rankings with money market funds
appearing in the Taxable U.S. Treasury & Repo Funds category. The Institutional
Government Income Fund may compare performance rankings with money market funds
appearing in the Taxable Institutional Government Funds category. The Money
Market Fund may compare performance rankings with money market funds appearing
in the First Tier Taxable category.
Lipper Fixed Income Fund Performance Analysis measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads. The Short Term Government Income Fund
may provide comparative performance information appearing in the U.S. Government
Money Market Funds category, the Intermediate Term Government Income Fund may
provide comparative performance information appearing in the Intermediate U.S.
Government Funds category, the Institutional Government Income Fund may provide
comparative performance information appearing in the Institutional U.S.
Government Money Market Funds category, the Adjustable Rate U.S. Government
Securities Fund may provide comparative performance information appearing in the
Adjustable Rate Mortgage Funds category, the Money Market Fund may provide
comparative performance information appearing in the Money Market Funds category
and the Intermediate Bond Fund may provide comparative performance information
appearing in the Intermediate Investment Grade Debt Funds category.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their performance. In addition, there can be no assurance that the Funds will
continue this performance as compared to such other averages.
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PRINCIPAL SECURITY HOLDERS
- --------------------------
As of November 12, 1999, Amivest Corporation, P.O. Box 370 Cooper Station,
New York, New York owned of record 29.1% of the outstanding shares of the
Intermediate Bond Fund. Amivest Corporation may be deemed to control the
Intermediate Bond Fund by virtue of the fact that it owns of record more than
25% of the Fund's shares as of such date. For purposes of voting on matters
submitted to shareholders, any person who owns more than 50% of the outstanding
shares of a Fund generally would be able to cast the deciding vote.
As of November 12, 1999, Citizens Business Bank, Trustee FBO Countrywide
Credit Industries, Inc., P.O. Box 671, Pasadena, California owned of record
14.5% of the outstanding shares of the Intermediate Term Government Income Fund;
Scudder Trust Company FBO Countrywide Credit Industries Tax Deferred Savings &
Supplemental Investment Plan, 5375 Mira Sorrento, San Diego, California owned of
record 21.8% of the outstanding shares of the Institutional Government Income
Fund; Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio owned of record 6.7%
of the outstanding shares of the Institutional Government Income Fund; Bear
Stearns & Co. FBO a customer, One Metrotech Center North, Brooklyn, New York
owned of record 5.7% of the outstanding shares of the Institutional Government
Income Fund; Warren W. and Betty M. Rosenthal Trust, Betty M. Rosenthal Trustee,
P.O. Box 54826, Lexington, Kentucky owned of record 10.3% of the outstanding
shares of the Adjustable Rate U.S. Government Securities Fund; First Trust
Corporation, P.O. Box 173736, Denver, Colorado owned of record 13.0% of the
outstanding shares of the Adjustable Rate U.S. Government Securities Fund;
McCracken County Board of Education, 260 Bleich Road, Paducah, Kentucky owned of
record 10.3% of the outstanding shares of the Adjustable Rate U.S. Government
Securities Fund; Scudder Trust Company FBO Countrywide Credit Industries Tax
Deferred Savings & Supplemental Investment Plan, 5375 Mira Sorrento, San Diego,
California owned of record 6.6% of the outstanding shares of the Adjustable Rate
U.S. Government Securities Fund; James Money Market Account FBO its Customers,
312 Walnut Street, Cincinnati, Ohio owned of record 11.2% of the outstanding
shares of the Money Market Fund; National Investor Services Corp. FBO The
Exclusive Benefit of its Customers, 55 Water Street, New York, New York owned of
record 7.4% of the outstanding shares of the Money Market Fund and BAND & Co.
c/o Firstar East, P.O. Box 1787, Milwaukee, Wisconsin owned of record 22.9% of
the outstanding Class A shares of the Intermediate Bond Fund.
As of November 12, 1999, the Trustees and officers of the Trust as a group
owned of record and beneficially less than 1% of the outstanding shares of the
Trust and of each Fund.
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CUSTODIAN
- ---------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio, has been
retained to act as Custodian for each Fund's investments. The Fifth Third Bank
acts as each Fund's depository, safekeeps its portfolio securities, collects all
income and other payments with respect thereto, disburses funds as instructed
and maintains records in connection with its duties. As compensation, The Fifth
Third Bank receives from each Fund a base fee at the annual rate of .005% of
average net assets (subject to a minimum annual fee of $1,500 per Fund and a
maximum fee of $5,000 per Fund) plus transaction charges for each security
transaction of the Funds.
AUDITORS
- --------
The firm of Arthur Andersen LLP has been selected as independent auditors
for the Trust for the fiscal year ending September 30, 2000. Arthur Andersen
LLP, 425 Walnut Street, Cincinnati, Ohio, performs an annual audit of the
Trust's financial statements and advises the Funds as to certain accounting
matters.
TRANSFER AGENT
- --------------
The Trust's transfer agent, Countrywide Fund Services, Inc. ("CFS"),
maintains the records of each shareholder's account, answers shareholders'
inquiries concerning their accounts, processes purchases and redemptions of the
Funds' shares, acts as dividend and distribution disbursing agent and performs
other shareholder service functions. CFS is an affiliate of the Adviser by
reason of common ownership. CFS receives for its services as transfer agent a
fee payable monthly at an annual rate of $25 per account from each of the Short
Term Government Income Fund, the Institutional Government Income Fund and the
Money Market Fund and $21 per account from each of the Intermediate Term
Government Income Fund, the Adjustable Rate U.S. Government Securities Fund and
the Intermediate Bond Fund, provided, however, that the minimum fee is $1,000
per month for each Fund. In addition, the Funds pay out-of-pocket expenses,
including but not limited to, postage, envelopes, checks, drafts, forms,
reports, record storage and communication lines.
CFS also provides accounting and pricing services to the Trust. For
calculating daily net asset value per share and maintaining such books and
records as are necessary to enable CFS to perform its duties, the Short Term
Government Income Fund, the Institutional Government Income Fund, the
Intermediate Term Government Income Fund and the Money Market Fund each pay CFS
a fee in accordance with the following schedule:
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Asset Size of Fund Monthly Fee
--------------------------- -----------
$ 0 - $ 50,000,000 $2,000
$ 50,000,000 - $100,000,000 $2,500
$100,000,000 - $200,000,000 $3,000
$200,000,000 - $300,000,000 $3,500
Over $300,000,000 $4,500*
The Intermediate Bond Fund pays CFS a fee in accordance with the following
schedule:
Asset Size of Fund Monthly Fee
--------------------------- -----------
$ 0 - $ 50,000,000 $3,000
$ 50,000,000 - $100,000,000 $3,500
$100,000,000 - $200,000,000 $4,000
$200,000,000 - $300,000,000 $4,500
Over $300,000,000 $5,500*
The Adjustable Rate U.S. Government Securities Fund pays CFS a fee in accordance
with the following schedule:
Asset Size of Fund Monthly Fee
--------------------------- -----------
$ 0 - $ 50,000,000 $2,500
$ 50,000,000 - $100,000,000 $3,000
$100,000,000 - $200,000,000 $3,500
$200,000,000 - $300,000,000 $4,000
Over $300,000,000 $5,000*
* Subject to an additional fee of .001% of average daily net assets in excess
of $300 million.
In addition, each Fund pays all costs of external pricing services.
CFS is retained by the Adviser to assist the Adviser in providing
administrative services to the Funds. In this capacity, CFS supplies
non-investment related statistical and research data, internal regulatory
compliance services and executive and administrative services. CFS supervises
the preparation of tax returns, reports to shareholders of the Funds, reports to
and filings with the Securities and Exchange Commission and state securities
commissions, and materials for meetings of the Board of Trustees. For the
performance of these administrative services, CFS receives a fee from the
Adviser. The Adviser is solely responsible for the payment of these
administrative fees to CFS, and CFS has agreed to seek payment of such fees
solely from the Adviser.
65
<PAGE>
ANNUAL REPORT
- -------------
The Funds' financial statements as of September 30, 1999 appear in the
Trust's annual report which is attached to this Statement of Additional
Information.
SHORT TERM GOVERNMENT
INCOME FUND
o
INSTITUTIONAL GOVERNMENT
INCOME FUND
o
MONEY MARKET FUND
o
INTERMEDIATE BOND FUND
o
INTERMEDIATE TERM GOVERNMENT
INCOME FUND
o
ADJUSTABLE RATE
U.S. GOVERNMENT SECURITIES FUND
66
<PAGE>
INTERMEDIATE BOND FUND
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
During the fiscal year, the Intermediate Bond Fund continued to shift its focus
from an income orientation to a total return orientation. While we have worked
to change the profile of the Fund, it has been difficult to move out of certain
securities. As a result, the Fund at fiscal year-end maintained a substantial
position in high yielding, intermediate to longer-maturity premium corporate
bonds, a segment that has lagged the general improvement experienced by
investment grade corporate bonds. For the year ended September 30, 1999, the
Fund's total return (excluding the impact of applicable sales loads) was -3.71%,
as compared to 0.63% for the Lehman Brothers Intermediate Government/Corporate
Bond Index.
Since the beginning of the fiscal year, we have sold almost $8 million in
corporate securities, some of which fit the income-oriented profile. While we
have reduced our overall exposure to corporates by over 30%, many of the
remaining positions still have an income orientation. It is our intention to
continue to cycle out of most of these positions so that we may purchase
corporate securities with better total return profiles.
Interest rate spreads in the investment grade, fixed-income arena ended the
fiscal year mostly unchanged. Day-to-day volatility, however, was not for the
faint of heart. Spread performance in the corporate sector was similar to that
of the mortgage sector with spreads widening dramatically early in the fiscal
year, then narrowing through December and January as volatility declined and
interest rates settled into a range. In late June, a vigilant Federal Reserve,
concerned over tight labor markets and a robust economy, pushed interest rates
higher. This, combined with fresh memories of the 1998 liquidity crisis,
fostered uncertainty and resulted in much wider spreads. With such wide swings
in relative valuation, sector positioning was critical to performance during the
year.
Late in the fiscal year, we slightly reduced the Fund's duration, bringing it in
line with our peers. The Fund currently maintains a slight overweight in the
mortgage-backed sector, at approximately 33% versus a target weighting of 30%.
Going forward, we will look to reallocate our exposure to mortgage-backed
securities, selling 30-year collateral for a position in hybrid adjustable-rate
mortgages where there is compelling relative value. We also plan to continue to
work out of income-oriented corporate bonds in favor of high-quality, global
corporate deals where liquidity and performance appears greatest. We expect to
maintain a neutral to slightly short duration as the overall trend in interest
rates remains bearish.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE
BOND FUND AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX
Intermediate Bond Fund Average Annual Total Returns:
1 Year Since Inception*
(8.28)% 3.83%
Lehman Brothers Intermediate
Government/Corporate Bond Index Intermediate Bond Fund
- --------------------------------------------------------------------------------
10/95 10000 9525
10352 9756
10266 9730
10331 9816
9/96 10515 9921
10772 10212
10760 10161
11078 10564
9/97 11377 10917
11620 11194
11802 11351
12025 11593
9/98 12565 12068
12601 11962
12577 11782
12527 11603
9/99 12642 11621
Past performance is not predictive of future performance.
*Fund inception was October 3, 1995.
4 - Countrywide Investments
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND MANAGEMENT
DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Fiscal year 1999 was a difficult year in the fixed-income markets as
intermediate-term Treasury yields increased by approximately 1.5%. During this
period, however, there were many opportunities to capitalize on trades of
relative value, as sector volatility was extremely high. Generally,
short-duration funds fared well while the spike in interest rates pressured
intermediate and long-term funds. For the fiscal year ended September 30, 1999,
the Intermediate Term Government Income Fund's total return (excluding the
impact of applicable sales loads) was -1.93%, as compared to 0.78% for the
Lehman Brothers Intermediate Government Bond Index.
During the fiscal year, we witnessed dramatic changes in the basis, or spread,
of mortgage-backed securities (MBS), corporate securities and agency debentures.
Option-adjusted spreads on MBS widened from 80 basis points (bps) to 160 bps
early in the year, then recovered to 80 bps by May of 1999, one example of the
dramatic change in relative value in the non-Treasury sectors. With such wide
swings in relative valuation, sector positioning was critical to performance
during the fiscal year.
The Fund's prospectus was amended to provide for greater use of government MBS.
We began allocating assets to the mortgage sector early in 1999, but missed a
substantial portion of the rally experienced in this sector. This reallocation,
combined with the Fund's slightly longer duration relative to its peer group,
hindered performance in mid-1999 as interest rates continued to climb and
spreads on MBS temporarily widened. Since then, we have shortened the Fund's
duration and further bolstered our exposure to the mortgage sector. The Fund
currently maintains an exposure of approximately 26% to MBS, just shy of our
target exposure of 30%.
With inflation showing signs of life, consumption strong and the Federal Reserve
now maintaining a tightening bias, Treasuries are likely to remain under
pressure. Recent uncertainty regarding the Fed has fostered volatility in the
fixed-income markets. With the tremendous performance in the mortgage market, we
will now look to reduce our exposure, most likely investing the proceeds in
agency debentures, both callable and non-callable. We have our eye on the hybrid
adjustable rate mortgage (ARM) market and are looking to add exposure to this
sector with a modest widening of spreads.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE
TERM GOVERNMENT INCOME FUND AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND
INDEX
Intermediate Term Government Income Fund Average Annual Total Returns:
1 Year 5 Years 10 Years
(6.59)% 5.33% 6.13%
Lehman Brothers Intermediate Intermediate Term Government
Government Bond Index Income Fund
- --------------------------------------------------------------------------------
"9/89" 10000 9525
10341 9800
10327 9670
10651 9938
"9/90" 10857 10031
11329 10484
11578 10686
11774 10819
"9/91" 12333 11454
12927 12065
12791 11795
13288 12296
"9/92" 13870 12975
13823 12861
14340 13516
14621 13888
"9/93" 14929 14292
14952 14190
14675 13613
14593 13357
"9/94" 14705 13325
14690 13295
15302 13978
16016 14810
"9/95" 16264 14994
16808 15537
16693 15223
16805 15240
"9/96" 17094 15525
17489 15930
17486 15840
17973 16289
"9/97" 18434 16728
18841 17081
19125 17323
19479 17682
"9/98" 20389 18491
20440 18442
20385 18268
20344 18061
"9/99" 20549 18135
Past performance is not predictive of future performance.
Countrywide Investments - 5
<PAGE>
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES FUND
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest rates rose steadily during the Adjustable Rate U.S. Government
Securities Fund's fiscal year with short-term rates up roughly 0.50% and
intermediate to long-term rates up approximately 1.50%. The Federal Reserve, in
response to the international liquidity crisis, cut the fed funds rate twice
from 5.25% to 4.75%, then raised the fed funds rate twice, returning it to 5.25%
and effectively "taking back" the added liquidity. This change in policy was
prompted by the global economic recovery and, more specifically, by above-trend
economic growth domestically. The Fund performed well during this period of
uncertainty returning 5.22%, as compared to 4.30% for the Lehman Brothers
Adjustable Rate Mortgage (ARM) Index.
The Fund's performance was enhanced by its focus on the seasoned, one-year
constant maturity Treasury (CMT) sector, which performed well during the fiscal
year. The market for these securities firmed as the general increase in interest
rates and steepening of the yield curve worked to slow prepayments on ARMs. With
ARMs back in vogue at the origination level, the supply of ARM securities has
picked up and enhanced liquidity in the sector.
We continue to find relative value in low gross margin GNMA ARMs with October
reset dates. These securities generally have 6.75% coupons, prepay more slowly
than newer issuance and can be purchased at slight premiums. Another area that
is especially attractive from an income perspective is fixed-rate collateralized
mortgage obligations (CMOs) with short average lives where we can typically pick
up 0.50% in yield over one-year CMT ARMs. And, regarding our core holding of
one-year CMT ARMs, the additional supply, combined with a slower and more stable
prepayment outlook, should allow prices to continue firming.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ADJUSTABLE RATE
U.S. GOVERNMENT SECURITIES FUND AND THE LEHMAN BROTHERS ARM INDEX
Adjustable Rate U.S. Government Securities Fund Average Annual Total Returns:
1 Year 5 Years Since Inception*
5.22% 5.41% 4.82%
Adjustable Rate U.S. Government
Lehman Brothers ARM Index Securities Fund
- --------------------------------------------------------------------------------
"2/93" 10000 10000
10045 10048
10235 10168
"9/93" 10346 10274
10399 10371
10353 10435
10312 10469
"9/94" 10383 10489
10400 10423
10836 10682
11173 10897
"9/95" 11362 11048
11618 11240
11746 11428
11879 11569
"9/96" 12102 11746
12397 11945
12563 12092
12824 12327
"9/97" 13074 12490
13290 12636
13492 12761
13683 12853
"9/98" 13884 12975
13984 13067
14209 13348
14305 13533
"9/99" 14481 13653
Past performance is not predictive of future performance.
*Fund inception was February 10, 1993.
6 - Countrywide Investments
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
SHORT TERM INSTITUTIONAL MONEY
GOVERNMENT GOVERNMENT MARKET
(000's) INCOME FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities:
At acquisition cost...............$ 31,205 $ 37,415 $ 23,007
===================================================
At amortized cost.................$ 31,101 $ 37,379 $ 22,975
===================================================
At market value (Note 2)..........$ 31,101 $ 37,379 $ 22,975
Repurchase agreements (Note 2)......... 78,600 12,000 --
Cash................................... -- 77 1
Interest receivable.................... 449 429 231
Organization costs, net (Note 2)....... -- -- 6
Other assets........................... 15 5 11
---------------------------------------------------
TOTAL ASSETS........................... 110,165 49,890 23,224
---------------------------------------------------
LIABILITIES
Bank overdraft......................... 3 -- --
Dividends payable...................... 4 19 4
Payable to affiliates (Note 4)......... 68 7 4
Other accrued expenses and liabilities. 30 16 18
TOTAL LIABILITIES...................... 105 42 26
NET ASSETS.............................$ 110,060 $ 49,848 $ 23,198
Net Assets Consist of:
Paid-in capital........................$ 110,060 $ 49,870 $ 23,209
Accumulated net realized losses from
security transactions............. -- (22) (11)
----------------------------------------------------
Net Assets.............................$ 110,060 $ 49,848 $ 23,198
===================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5)............ 110,060 49,870 23,209
===================================================
Net asset value, offering price and redemption
price per share (Note 2)..........$ 1.00 $ 1.00 $ 1.00
===================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 7
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000'S) FUND INCOME FUND FUND
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities:
At acquisition cost $ 11,887 $ 45,330 $ 8,692
=======================================================================
At amortized cost $ 11,887 $ 45,289 $ 8,692
=======================================================================
At market value (Note 2) $ 11,527 $ 44,615 $ 8,705
Cash -- 1 1
Interest and principal paydowns receivable 168 649 68
Receivable for capital shares sold 2 11 5
Receivable from affiliates (Note 4) 1 -- 6
Organization costs, net (Note 2) 6 -- --
Other assets 10 12 10
-----------------------------------------------------------------------
TOTAL ASSETS 11,714 45,288 8,795
-----------------------------------------------------------------------
LIABILITIES
Dividends payable 9 22 4
Payable for capital shares redeemed 6 164 119
Payable to affiliates (Note 4) -- 23 --
Other accrued expenses and liabilities 12 19 12
-----------------------------------------------------------------------
TOTAL LIABILITIES 27 228 135
-----------------------------------------------------------------------
NET ASSETS $ 11,687 $ 45,060 $ 8,660
=======================================================================
Net Assets Consist of:
Paid-in capital $ 12,477 $ 48,088 $ 9,960
Accumulated net realized losses from
security transactions (430) (2,354) (1,313)
Net unrealized appreciation (depreciation)
on investments (360) (674) 13
-----------------------------------------------------------------------
NET ASSETS $ 11,687 $ 45,060 $ 8,660
=======================================================================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5) 1,236 4,357 895
=======================================================================
Net asset value and redemption price
per share (Note 2) $ 9.45 $ 10.34 $ 9.68
=======================================================================
Maximum offering price per share (Note 2) $ 9.92 $ 10.86 $ 9.68
=======================================================================
</TABLE>
See accompanying notes to financial statements.
8 - Countrywide Investments
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
SHORT TERM INSTITUTIONAL MONEY
GOVERNMENT GOVERNMENT MARKET
(000's) INCOME FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income $ 5,413 $ 2,316 $ 1,450
-------------------------------------------------------
EXPENSES
Investment advisory fees (Note 4) 522 91 137
Transfer agent fees (Note 4) 171 18 33
Distribution expenses (Note 4) 148 3 5
Postage and supplies 62 8 27
Accounting services fees (Note 4) 36 25 24
Custodian fees 25 18 15
Registration fees 22 7 21
Professional fees 19 14 13
Standard & Poor's rating expense 13 13 --
Trustees' fees and expenses 8 8 8
Reports to shareholders 10 1 6
Amortization of organization
costs (Note 2) -- -- 6
Other expenses 13 9 11
-------------------------------------------------------
TOTAL EXPENSES 1,049 215 306
Fees waived by the Adviser (Note 4) -- (33) (128)
NET EXPENSES 1,049 182 178
-------------------------------------------------------
NET INVESTMENT INCOME 4,364 2,134 1,272
-------------------------------------------------------
NET REALIZED LOSSES FROM SECURITY
TRANSACTIONS -- -- (5)
-------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 4,364 $ 2,134 $ 1,267
=======================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 9
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000'S) FUND INCOME FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income $ 1,076 $ 3,043 $ 584
----------------------------------------------------------------------
EXPENSES
Investment advisory fees (Note 4) 78 231 49
Accounting services fees (Note 4) 24 24 30
Distribution expenses (Note 4) 5 62 4
Transfer agent fees (Note 4) 12 39 12
Professional fees 19 24 18
Registration fees 19 17 17
Postage and supplies 7 26 11
Trustees' fees and expenses 8 8 8
Custodian fees 6 9 8
Reports to shareholders 5 8 5
Standard & Poor's rating expense -- -- 8
Amortization of organization costs (Note 2) 6 -- --
Other expenses 8 10 6
----------------------------------------------------------------------
TOTAL EXPENSES 197 458 176
Fees waived and/or expenses reimbursed
by the Adviser (Note 4) (49) -- (102)
----------------------------------------------------------------------
NET EXPENSES 148 458 74
----------------------------------------------------------------------
NET INVESTMENT INCOME 928 2,585 510
----------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) from
security transactions (223) 390 (3)
Net change in unrealized appreciation/
depreciation on investments (1,386) (3,884) (22)
----------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSSES
ON INVESTMENTS (1,609) (3,494) (25)
----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ (681) $ (909) $ 485
======================================================================
</TABLE>
See accompanying notes to financial statements.
10 - Countrywide Investments
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
SHORT TERM INSTITUTIONAL
GOVERNMENT GOVERNMENT
INCOME FUND INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 4,364 $ 4,475 $ 2,134 $ 2,598
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (4,364) (4,475) (2,134) (2,598)
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 354,333 301,198 83,427 179,615
Reinvested distributions 4,260 4,351 1,889 2,188
Payments for shares redeemed (351,014) (299,865) (80,265) (198,254)
----------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 7,579 5,684 5,051 (16,451)
----------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 7,579 5,684 5,051 (16,451)
NET ASSETS
Beginning of year 102,481 96,797 44,797 61,248
----------------------------------------------------------------------
End of year $ 110,060 $ 102,481 $ 49,848 $ 44,797
======================================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 11
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
MONEY INTERMEDIATE
MARKET BOND
FUND FUND
- ----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 1,272 $ 3,176 $ 928 $ 1,372
Net realized losses from
security transactions (5) (2) (223) (13)
Net change in unrealized
appreciation/depreciation
on investments -- -- (1,386) 809
-----------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS 1,267 3,174 (681) 2,168
-----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (1,272) (3,176) (932) (1,368)
From net realized gains -- -- (138) --
-----------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (1,272) (3,176) (1,070) (1,368)
-----------------------------------------------------------------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 68,597 317,726 7,494 19,933
Reinvested distributions 781 674 711 530
Payments for shares redeemed (64,667) (373,727) (18,485) (13,216)
-----------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 4,711 (55,327) (10,280) 7,247
-----------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 4,706 (55,329) (12,031) 8,047
NET ASSETS
Beginning of year 18,492 73,821 23,718 15,671
-----------------------------------------------------------------------
End of year $ 23,198 $ 18,492 $ 11,687 $ 23,718
=======================================================================
UNDISTRIBUTED NET INVESTMENT
INCOME $ -- $ -- $ -- $ 4
=======================================================================
</TABLE>
See accompanying notes to financial statements.
12 - Countrywide Investments
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
INTERMEDIATE TERM ADJUSTABLE RATE
GOVERNMENT U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
- ----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 2,585 $ 2,844 $ 510 $ 788
Net realized gains (losses) from
security transactions 390 157 (3) (59)
Net change in unrealized
appreciation/depreciation
on investments (3,884) 2,055 (22) (153)
----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS (909) 5,056 485 576
----------------------------------------------------------------------------------
Distributions to Shareholders
From net investment income (2,585) (2,844) (510) (788)
----------------------------------------------------------------------------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 12,477 14,138 4,152 8,357
Reinvested distributions 2,271 2,508 467 717
Payments for shares redeemed (17,362) (20,723) (6,550) (21,448)
----------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
FROM CAPITAL SHARE TRANSACTIONS (2,614) (4,077) (1,931) (12,374)
----------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (6,108) (1,865) (1,956) (12,586)
NET ASSETS
Beginning of year 51,168 53,033 10,616 23,202
----------------------------------------------------------------------------------
End of year $ 45,060 $ 51,168 $ 8,660 $ 10,616
==================================================================================
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 13
<PAGE>
SHORT TERM GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income 0.040 0.046 0.044 0.044 0.046
Dividends from net investment income (0.040) (0.046) (0.044) (0.044) (0.046)
=====================================================================================
Net asset value at end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return 4.02% 4.74% 4.53% 4.51% 4.69%
=====================================================================================
Net assets at end of year (000's) $ 110,060 $ 102,481 $ 96,797 $ 91,439 $ 87,141
=====================================================================================
Ratio of net expenses to
average net assets(A) 0.95% 0.91% 0.97% 0.99% 0.99%
Ratio of net investment income to
average net assets 3.95% 4.63% 4.43% 4.42% 4.59%
</TABLE>
(A) Absent fee waivers by the Adviser, the ratio of expenses to average net
assets would have been 0.94% for the year ended September 30, 1998.
See accompanying notes to financial statements.
14 - Countrywide Investments
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income 0.047 0.052 0.051 0.051 0.053
-------------------------------------------------------------------------------------
Dividends from net investment income (0.047) (0.052) (0.051) (0.051) (0.053)
-------------------------------------------------------------------------------------
Net asset value at end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================================================
Total return 4.78% 5.30% 5.17% 5.18% 5.42%
=====================================================================================
Net assets at end of year (000's) $ 49,848 $ 44,797 $ 61,248 $ 39,382 $ 36,009
=====================================================================================
Ratio of net expenses to
average net assets(A) 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to
average net assets 4.68% 5.17% 5.07% 5.06% 5.30%
(A) Absent fee waivers by the Adviser, the ratios of expenses to average net
assets would have been 0.47%, 0.45%, 0.45%, 0.49%, and 0.42% for the years ended
September 30, 1999, 1998, 1997, 1996 and 1995, respectively (Note 4).
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 15
<PAGE>
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30 AUGUST 31, AUGUST 31,
1999 1998 1997(A) 1997 1996(B)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------------
Net investment income 0.046 0.050 0.004 0.050 0.046(C)
------------------------------------------------------------------------------
Dividends from net investment income (0.046) (0.050) (0.004) (0.050) (0.046)
------------------------------------------------------------------------------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================
Total return 4.74% 5.07% 4.99%(E) 5.14% 4.70%
==============================================================================
Net assets at end of period (000's) $ 23,198 $ 18,492 $ 73,821 $ 94,569 $ 76,363
==============================================================================
Ratio of net expenses to
average net assets(D) 0.65% 0.79% 0.80%(E) 0.65% 0.65%(E)
Ratio of net investment income to
average net assets 4.63% 4.95% 4.99%(E) 5.03% 4.94%(E)
(A) Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997, was changed
to September 30.
(B) Represents the period from the commencement of operations
(September 29, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 1.11%, 0.79% and 0.99%(E) for the periods
ended September 30, 1999, and August 31, 1997 and 1996, respectively (Note 4).
(E) Annualized.
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 16
<PAGE>
INTERMEDIATE BOND FUND -- CLASS A
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30 AUGUST 31, AUGUST 31,
1999 1998 1997(A) 1997 1996(B)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.50 $ 10.09 $ 10.00 $ 9.75 $ 10.00
--------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.59 0.62 0.05 0.62 0.57(C)
Net realized and unrealized gains
(losses) on investments (0.97) 0.41 0.09 0.28 (0.25)(C)
--------------------------------------------------------------------------
Total from investment operations (0.38) 1.03 0.14 0.90 0.32
--------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (0.59) (0.62) (0.05) (0.62) (0.57)
Distributions from net realized
gains (0.08) -- -- (0.03) --
--------------------------------------------------------------------------
Total distributions (0.67) (0.62) (0.05) (0.65) (0.57)
--------------------------------------------------------------------------
Net asset value at end of period $ 9.45 $ 10.50 $ 10.09 $ 10.00 $ 9.75
==========================================================================
Total return(D) (3.71)% 10.54% 1.41% 9.48% 3.23%
==========================================================================
Net assets at end of period (000's) $ 11,687 $ 23,718 $ 15,671 $ 15,114 $ 13,357
==========================================================================
Ratio of net expenses to
average net assets(E) 0.95% 0.95% 0.95%(F) 0.85% 0.68%(F)
Ratio of net investment income to
average net assets 5.96% 6.08% 6.18%(F) 6.26% 6.31%(F)
Portfolio turnover rate 92% 63% 0% 41% 12%
(A) Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997, was
changed to September 30.
(B) Represents the period from the commencement of
operations (October 3, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 1.27%, 0.98%, 1.38%(F), 1.53% and 2.04%(F)
for the periods ended September 30, 1999, 1998 and 1997, and August 31, 1997 and
1996, respectively (Note 4).
(F) Annualized.
</TABLE>
See accompanying notes to financial statements.
Countrywide Investments - 17
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 11.15 $ 10.67 $ 10.49 $ 10.73 $ 10.14
---------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.60 0.61 0.61 0.61 0.64
Net realized and unrealized gains
(losses) on investments (0.81) 0.48 0.18 (0.24) 0.59
---------------------------------------------------------------------------------------
Total from investment operations (0.21) 1.09 0.79 0.37 1.23
---------------------------------------------------------------------------------------
Dividends from net investment income (0.60) (0.61) (0.61) (0.61) (0.64)
---------------------------------------------------------------------------------------
Net asset value at end of year $ 10.34 $ 11.15 $ 10.67 $ 10.49 $ 10.73
=======================================================================================
Total return(A) (1.93)% 10.54% 7.74% 3.55% 12.52%
=======================================================================================
Net assets at end of year (000's) $ 45,060 $ 51,168 $ 53,033 $ 56,095 $ 56,969
=======================================================================================
Ratio of net expenses to
average net assets 0.99% 0.99% 0.99% 0.99% 0.99%
Ratio of net investment income to
average net assets 5.59% 5.64% 5.78% 5.75% 6.17%
Portfolio turnover rate 58% 29% 49% 70% 58%
</TABLE>
(A) Total returns shown exclude the effect of applicable sales loads.
See accompanying notes to financial statements.
18 - Countrywide Investments
<PAGE>
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 9.69 $ 9.85 $ 9.81 $ 9.78 $ 9.82
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.50 0.53 0.57 0.57 0.55
Net realized and unrealized gains
(losses) on investments (0.01) (0.16) 0.04 0.03 (0.04)
-----------------------------------------------------------------------------------------
Total from investment operations 0.49 0.37 0.61 0.60 0.51
-----------------------------------------------------------------------------------------
Dividends from net investment income (0.50) (0.53) (0.57) (0.57) (0.55)
-----------------------------------------------------------------------------------------
Net asset value at end of year $ 9.68 $ 9.69 $ 9.85 $ 9.81 $ 9.78
=========================================================================================
Total return(A) 5.22% 3.88% 6.34% 6.32% 5.33%
=========================================================================================
Net assets at end of year (000's) $ 8,660 $ 10,616 $ 23,202 $ 11,732 $ 20,752
=========================================================================================
Ratio of net expenses to
average net assets(B) 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of net investment income to
average net assets 5.22% 5.47% 5.73% 5.91% 5.57%
Portfolio turnover rate 42% 45% 58% 44% 115%
</TABLE>
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios
of expenses to average net assets would have been 1.80%, 1.37%, 1.47%, 1.46%
and 1.21% for the years ended September 30, 1999, 1998, 1997, 1996 and 1995,
respectively (Note 4).
See accompanying notes to financial statements.
Countrywide Investments - 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Short Term Government Income Fund, Institutional Government Income Fund,
Money Market Fund, Intermediate Bond Fund, Intermediate Term Government Income
Fund and Adjustable Rate U.S. Government Securities Fund (individually, a Fund
and, collectively, the Funds) are each a series of Countrywide Investment Trust
(the Trust). The Trust is registered under the Investment Company Act of 1940 as
an open-end management investment company. The Trust was organized as a
Massachusetts business trust under a Declaration of Trust dated December 7,
1980. The Declaration of Trust, as amended, permits the Trustees to issue an
unlimited number of shares of each Fund.
The Short Term Government Income Fund seeks high current income, consistent with
protection of capital, by investing primarily in short-term obligations issued
or guaranteed as to principal and interest by the U.S. Government, its agencies
or instrumentalities and backed by the "full faith and credit" of the United
States.
The Institutional Government Income Fund seeks high current income, consistent
with protection of capital, by investing primarily in short-term obligations
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities. The Fund is designed primarily for institutions
as an economical and convenient means for the investment of short-term funds.
The Money Market Fund seeks high current income, consistent with liquidity and
stability of principal. The Fund invests primarily in high-quality U.S.
dollar-denominated money market instruments.
The Intermediate Bond Fund seeks to provide as high a level of current income as
is consistent with the preservation of capital. The Fund invests in marketable
corporate debt securities, U.S. Government securities, mortgage-related
securities, other asset-backed securities and cash or money market instruments.
The maturity composition of the Fund's portfolio of fixed-income securities is
adjusted in response to market conditions and expectations.
The Intermediate Term Government Income Fund seeks high current income,
consistent with protection of capital, by investing primarily in U.S. Government
obligations having an effective maturity of twenty years or less with a
dollar-weighted effective average portfolio maturity under normal market
conditions of between three and ten years. To the extent consistent with the
Fund's primary objective, capital appreciation is a secondary objective.
The Adjustable Rate U.S. Government Securities Fund seeks high current income,
consistent with lower volatility of principal, by investing primarily in
adjustable rate mortgage securities or other securities collateralized by or
representing an interest in mortgages which have interest rates that reset at
periodic intervals. The Fund invests in mortgage-related securities only if they
are issued or guaranteed by the United States Government, its agencies or
instrumentalities.
Effective August 1, 1999, the Intermediate Bond Fund is authorized to offer two
classes of shares: Class A shares (sold subject to a maximum 4.75% front-end
sales load and a distribution fee of up to 0.35% of average daily net assets)
and Class C shares (sold subject to a 1.25% front-end sales load, a 1%
contingent deferred sales load for a one-year period and a distribution fee of
up to 1% of average daily net assets). Each Class A and Class C share of the
Fund represents identical interests in the Fund's investment portfolio and has
the same rights, except that (i) Class C shares bear the expenses of higher
distribution fees, which will cause Class C shares to have a higher expense
ratio and to pay lower dividends than those related to Class A shares; (ii)
certain other class specific expenses will be borne solely by the class to which
such expenses are attributable; and (iii) each class has exclusive voting rights
with respect to matters relating to its own distribution arrangements. As of
September 30, 1999, the public offering of Class C shares of the Fund had not
commenced.
20 - Countrywide Investments
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Funds' significant accounting policies:
Securities valuation -- Investment securities in the Short Term Government
Income Fund, Institutional Government Income Fund and Money Market Fund are
valued on the amortized cost basis, which approximates market value. This
involves initially valuing a security at its original cost and thereafter
assuming a constant amortization to maturity of any discount or premium. This
method of valuation is expected to enable these Funds to maintain a constant net
asset value per share. Investment securities in the Intermediate Bond Fund,
Intermediate Term Government Income Fund and Adjustable Rate U.S. Government
Securities Fund for which market quotations are readily available are valued at
their most recent bid prices as obtained from one or more of the major market
makers for such securities by an independent pricing service. Securities for
which market quotations are not readily available are valued at their fair
values as determined in good faith in accordance with consistently applied
procedures approved by and under the general supervision of the Board of
Trustees.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' custodian, at the Federal
Reserve Bank of Cleveland. At the time each Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying securities,
including accrued interest, will at all times be equal to or exceed the face
amount of the repurchase agreement.
Share valuation -- The net asset value per share of each Fund is calculated
daily by dividing the total value of a Fund's assets, less liabilities, by the
number of shares outstanding.
The offering price per share of the Short Term Government Income Fund,
Institutional Government Income Fund, Money Market Fund and, effective August 1,
1999, the Adjustable Rate U.S. Government Securities Fund is equal to the net
asset value per share. Also effective August 1, 1999, the maximum offering price
per share of Class A shares of the Intermediate Bond Fund and shares of the
Intermediate Term Government Income Fund is equal to the net asset value per
share plus a sales load equal to 4.99% of the net asset value (or 4.75% of the
offering price). Prior to August 1, 1999, the maximum offering price per share
of the Intermediate Bond Fund, Intermediate Term Government Income Fund and
Adjustable Rate U.S. Government Securities Fund was equal to the net asset value
per share plus a sales load equal to 2.04% of the net asset value (or 2% of the
offering price). The redemption price per share of each Fund is equal to the net
asset value per share. Investment income -- Interest income is accrued as
earned. Discounts and premiums on securities purchased are amortized in
accordance with income tax regulations which approximate generally accepted
accounting principles.
Distributions to shareholders -- Dividends arising from net investment income
are declared daily and paid on the last business day of each month to
shareholders of each Fund. With respect to each Fund, net realized short-term
capital gains, if any, may be distributed throughout the year and net realized
long-term capital gains, if any, are distributed at least once each year. Income
dividends and capital gain distributions are determined in accordance with
income tax regulations.
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are determined on a specific identification basis.
Organization costs -- Costs incurred by the Money Market Fund and Intermediate
Bond Fund in connection with their organization and registration of shares, net
of certain expenses, have been capitalized and are being amortized on a
straight-line basis over a five year period beginning with each Fund's
commencement of operations.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Countrywide Investments - 21
<PAGE>
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
As of September 30, 1999, the Institutional Government Income Fund, Money Market
Fund, Intermediate Term Government Income Fund and Adjustable Rate U.S.
Government Securities Fund had capital loss carryforwards for federal income tax
purposes of $22,343, $6,403, $2,354,472 and $1,309,556, respectively. In
addition, the Money Market Fund, Intermediate Bond Fund and Adjustable Rate U.S.
Government Securities Fund elected to defer until its subsequent tax year
$4,941, $429,852 and $3,127, respectively, of capital losses incurred after
October 31, 1998. These capital loss carryforwards and "post-October" losses may
be utilized in future years to offset net realized capital gains, if any, prior
to distributing such gains to shareholders.
The following information is based upon the federal income tax
cost of portfolio investments as of September 30, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000's) FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation $ 8 $ 271 $ 38
Gross unrealized depreciation (368) (945) (25)
----------------------------------------------------
Net unrealized appreciation (depreciation) $ (360) $ (674) $ 13
====================================================
Federal income tax cost $ 11,887 $ 45,289 $ 8,692
====================================================
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) were as follows for
the year ended September 30, 1999:
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE
INTERMEDIATE RATE U.S.
INTERMEDIATE TERM GOVERNMENT
BOND GOVERNMENT SECURITIES
(000's) FUND INCOME FUND FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of investment securities $ 13,539 $ 25,963 $ 3,775
====================================================
Proceeds from sales and maturities of
investment securities $ 24,045 $ 27,717 $ 5,767
====================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
4. TRANSACTIONS WITH AFFILIATES
The President and certain other officers of the Trust are also officers of
Countrywide Financial Services, Inc., or its subsidiaries which include
Countrywide Investments, Inc. (the Adviser), the Trust's investment adviser and
principal underwriter, and Countrywide Fund Services, Inc. (CFS), the Trust's
administrator, transfer agent and accounting services agent. Countrywide
Financial Services, Inc. is a wholly-owned subsidiary of Fort Washington
Investment Advisors, Inc., which is a wholly-owned subsidiary of The Western and
Southern Life Insurance Company.
22 - Countrywide Investments
<PAGE>
MANAGEMENT AGREEMENT
Each Fund's investments are managed by the Adviser under the terms of a
Management Agreement. Under the Management Agreement, the Short Term Government
Income Fund, Money Market Fund, Intermediate Bond Fund, Intermediate Term
Government Income Fund and Adjustable Rate U.S. Government Securities Fund each
pay the Adviser a fee, which is computed and accrued daily and paid monthly, at
an annual rate of 0.50% of its respective average daily net assets up to $50
million; 0.45% of such net assets from $50 million to $150 million; 0.40% of
such net assets from $150 million to $250 million; and 0.375% of such net assets
in excess of $250 million. The Institutional Government Income Fund pays the
Adviser a fee, which is computed and accrued daily and paid monthly, at an
annual rate of 0.20% of its average daily net assets.
In order to voluntarily reduce operating expenses during the year ended
September 30, 1999, the Adviser waived $33,050 of its advisory fees for the
Institutional Government Income Fund; waived $127,666 of its advisory fees for
the Money Market Fund; waived $49,390 of its advisory fees for the Intermediate
Bond Fund; and waived its advisory fees of $48,923 and reimbursed other
operating expenses of $53,400 for the Adjustable Rate U.S. Government Securities
Fund.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement between the Trust and CFS, CFS maintains the records of
each shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $25 per shareholder account from each of the Short Term Government
Income Fund, Institutional Government Income Fund and Money Market Fund and $21
per shareholder account from each of the Intermediate Bond Fund, Intermediate
Term Government Income Fund and Adjustable Rate U.S. Government Securities Fund,
subject to a $1,000 minimum monthly fee for each Fund. In addition, each Fund
pays CFS out-of-pocket expenses including, but not limited to, postage and
supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement between the Trust and CFS,
CFS calculates the daily net asset value per share and maintains the financial
books and records of each Fund. For these services, CFS receives a monthly fee,
based on current net asset levels, of $3,000 from the Short Term Government
Income Fund, $2,000 from each of the Institutional Government Income Fund, Money
Market Fund, Intermediate Bond Fund and Intermediate Term Government Income Fund
and $2,500 from the Adjustable Rate U.S. Government Securities Fund. In
addition, each Fund pays CFS certain out-of-pocket expenses incurred by CFS in
obtaining valuations of such Fund's portfolio securities.
UNDERWRITING AGREEMENT
The Adviser is the Funds' principal underwriter and, as such, acts as exclusive
agent for distribution of the Funds' shares. Under the terms of the Underwriting
Agreement between the Trust and the Adviser, the Adviser earned $2,862, $6,683
and $1,550 from underwriting and broker commissions on the sale of shares of the
Intermediate Bond Fund, Intermediate Term Government Income Fund and Adjustable
Rate U.S. Government Securities Fund, respectively, for the year ended September
30, 1999.
PLANS OF DISTRIBUTION
The Trust has a Plan of Distribution under which shares of each Fund may
directly incur or reimburse the Adviser for expenses related to the distribution
and promotion of shares. The annual limitation for payment of such expenses
under the Plan is 0.35% of average daily net assets attributable to such shares,
except for the Institutional Government Income Fund and Class C shares of the
Intermediate Bond Fund for which the annual limitation is 0.10% and 1.00% of
average daily net assets, respectively.
Countrywide Investments -23
<PAGE>
5. CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold and payments for shares redeemed as shown in the
Statements of Changes in Net Assets are the result of the following capital
share transactions for the years shown:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
INTERMEDIATE TERM ADJUSTABLE RATE
INTERMEDIATE BOND GOVERNMENT U.S. GOVERNMENT
FUND - CLASS A INCOME FUND SECURITIES FUND
- -----------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(000's) 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 750 1,948 1,170 1,313 429 852
Shares reinvested 72 51 213 232 48 73
Shares redeemed (1,844) (1,295) (1,614) (1,927) (677) (2,186)
-----------------------------------------------------------------------
Net increase (decrease) in
shares outstanding (1,022) 704 (231) (382) (200) (1,261)
-----------------------------------------------------------------------
Shares outstanding,
beginning of year 2,258 1,554 4,588 4,970 1,095 2,356
-----------------------------------------------------------------------
Shares outstanding,
end of year 1,236 2,258 4,357 4,588 895 1,095
- -----------------------------------------------------------------------------------------------
</TABLE>
Share transactions for the Short Term Government Income Fund, Institutional
Government Income Fund and Money Market Fund are identical to the dollar value
of those transactions as shown in the Statements of Changes in Net Assets.
6. FEDERAL TAX INFORMATION FOR SHAREHOLDERS (UNAUDITED)
On October 31, 1998, the Intermediate Bond Fund declared and paid a short-term
capital gain distribution of $0.007 per share and a long-term capital gain
distribution of $0.074 per share. In January of 1999, shareholders were provided
with Form 1099-DIV which reported the amounts and tax status of such capital
gain distributions paid during calendar year 1998.
24 - Countrywide Investments
<PAGE>
SHORT TERM GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) U.S. TREASURY OBLIGATIONS -- 28.3% (000's)
- --------------------------------------------------------------------------------
$ 5,000 U.S. Treasury Notes, 5.875%, 11/15/99 $ 5,007
5,000 U.S. Treasury Notes, 5.625%, 11/30/99 5,007
3,000 U.S. Treasury Notes, 5.625%, 12/31/99 3,005
2,000 U.S. Treasury Notes, 5.375%, 1/31/00 2,005
4,000 U.S. Treasury Notes, 5.50%, 2/29/00 4,010
3,000 U.S. Treasury Notes, 6.875%, 3/31/00 3,023
3,000 U.S. Treasury Notes, 6.375%, 5/15/00 3,018
4,000 U.S. Treasury Notes, 5.875%, 6/30/00 4,015
2,000 U.S. Treasury Notes, 6.125%, 7/31/00 2,011
- ------------ -------------------
$ 31,000 TOTAL U.S. TREASURY OBLIGATIONS
============ (Amortized Cost $31,101) $ 31,101
--------------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000's) REPURCHASE AGREEMENTS (NOTE A) -- 71.4% (000's)
- --------------------------------------------------------------------------------
$ 27,000 Morgan Stanley Dean Witter, Inc., 5.37%,
dated 9/30/99, due 10/01/99,
repurchase proceeds $27,004 $ 27,000
27,000 Prudential Securities, Inc.,
5.33%, dated 9/30/99, due 10/01/99,
repurchase proceeds $27,004 27,000
20,000 Nesbitt Burns Securities, Inc.,
5.30%, dated 9/30/99, due 10/01/99,
repurchase proceeds $20,003 20,000
4,600 Nesbitt Burns Securities, Inc., 4.75%,
- ------------- dated 9/30/99, due 10/01/99,
repurchase proceeds $4,601 4,600
---------------
$ 78,600 Total Repurchase Agreements
============= (Cost $78,600) $ 78,600
---------------
TOTAL INVESTMENT SECURITIES AND
REPURCHASE AGREEMENTS -- 99.7% $ 109,701
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.3% 359
===============
NET ASSETS -- 100.0% $ 110,060
===============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 25
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) Investment Securities -- 75.0% (000's)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES -- 70.2%
$ 2,815 FHLB Discount Notes, 10/01/99 $ 2,815
450 FNMA Medium Term Notes, 5.81%, 10/01/99 450
750 FRMC Discount Notes, 10/05/99 750
2,000 FHLB Discount Notes, 10/06/99 1,999
250 FHLMC Discount Notes, 10/06/99 250
600 FNMA Discount Notes, 10/07/99 599
500 FFCB Discount Notes, 10/08/99 500
2,558 FHLB Discount Notes, 10/12/99 2,554
615 FFCB Discount Notes, 10/13/99 614
1,000 FNMA Medium Term Notes, 4.63%, 10/14/99 1,000
315 FNMA Medium Term Notes, 5.73%, 10/14/99 315
1,525 FHLB, 5.87%, 10/22/99 1,525
500 FHLB, 8.375%, 10/25/99 501
250 FHLB, 4.92%, 10/27/99 250
500 FHLB, 5.00%, 10/28/99 500
500 FHLB, 5.03%, 10/29/99 500
650 FFCB Discount Notes, 11/04/99 647
475 FNMA Discount Notes, 11/04/99 473
345 FNMA Medium Term Notes, 5.95%, 11/05/99 345
500 FNMA Discount Notes, 11/09/99 497
1,863 FNMA, 8.35%, 11/10/99 1,869
540 FHLMC, 6.60%, 11/12/99 541
140 FNMA Medium Term Notes, 5.83%, 11/12/99 140
235 FHLB, 5.825%, 11/19/99 235
500 FNMA, 7.68%, 11/22/99 501
200 FHLB, 5.825%, 11/26/99 200
195 FFCB, 4.85%, 12/01/99 195
250 FNMA Discount Notes, 12/01/99 248
500 FFCB Medium Term Notes, 5.63%, 12/09/99 501
100 FNMA Medium Term Notes, 5.74%, 12/09/99 100
100 FHLB, 5.00%, 12/29/99 100
400 FFCB, 4.76%, 1/18/00 399
1,000 SLMA Floating Rate Notes, 5.286%, 1/20/00 (Note B) 999
500 FHLMC, 7.90%, 1/27/00 503
1,000 FHLB Floating Rate Notes, 5.406%, 1/28/00 (Note B) 1,000
485 FHLB, 6.173%, 1/28/00 485
320 FNMA, 6.10%, 2/10/00 321
1,000 FHLB Floating Rate Notes, 5.556%, 2/25/00 (Note B) 1,000
500 FHLB, 5.04%, 3/03/00 499
125 FHLB, 5.645%, 3/06/00 125
165 FHLB, 5.16%, 3/08/00 165
550 FNMA Medium Term Notes, 5.57%, 3/17/00 550
500 FHLMC, 5.875%, 3/22/00 501
500 FNMA Medium Term Notes, 5.53%, 3/23/00 500
250 FHLB, 5.655%, 3/30/00 250
165 FHLB, 5.00%, 4/05/00 164
1,000 FHLB Floating Rate Notes,
5.346%, 4/14/00 (Note B) 1,000
26 - Countrywide Investments
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME FUND (CONTINUED)
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000'S) INVESTMENT SECURITIES -- 75.0% (CONTINUED) (000'S)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES -- 70.2% (CONTINUED)
$ 480 FHLB, 4.97%, 4/20/00 $ 478
200 FHLB, 6.84%, 4/25/00 201
265 FHLMC, 6.395%, 5/16/00 266
200 FHLB, 5.125%, 5/19/00 199
500 FNMA Medium Term Notes, 6.41%, 5/22/00 501
400 FNMA Medium Term Notes, 5.72%, 5/22/00 400
390 FHLB, 5.625%, 6/02/00 390
494 FNMA Medium Term Notes, 6.20%, 6/06/00 495
215 FHLB, 5.415%, 6/14/00 215
1,000 SLMA Floating Rate Notes, 5.394%, 6/30/00 (Note B) 1,000
500 FHLB, 5.89%, 7/24/00 500
160 FNMA Medium Term Notes, 5.50%, 7/26/00 160
- ------------ --------------
$ 34,985 TOTAL U.S. GOVERNMENT AGENCY ISSUES
- ------------ (Amortized Cost $34,980) $ 34,980
--------------
COMMERCIAL PAPER -- 3.0%
$ 1,500 Nebraska Higher Education Loan Program,
- ------------ 10/04/99, Guarantor SLMA
(Amortized Cost $1,499) $ 1,499
--------------
VARIABLE RATE DEMAND NOTES (NOTE C) -- 1.8%
$ 900 Illinois Student Loan Assistance Commission,
- ------------ Student Loan Rev., Ser. C, 5.33%, 12/01/22,
Guarantor SLMA
(Amortized Cost $900) $ 900
--------------
$ 37,385 TOTAL INVESTMENT SECURITIES
============ (Amortized Cost $37,379) $ 37,379
--------------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000's) REPURCHASE AGREEMENTS (NOTE A) -- 24.1% (000's)
- --------------------------------------------------------------------------------
$ 12,000 Morgan Stanley Dean Witter, Inc., 5.37%,
============ dated 9/30/99, due 10/01/99,
repurchase proceeds $12,002
(Cost $12,000) $ 12,000
--------------
TOTAL INVESTMENT SECURITIES AND
REPURCHASE AGREEMENTS -- 99.1% $ 49,379
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.9% 469
--------------
NET ASSETS -- 100.0% $ 49,848
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 27
<PAGE>
MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 99.0% (000's)
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (NOTE C) -- 59.1%
$ 240 Monroe Co., NY, IDA Rev.,
Ser. B, 5.50%, 10/01/00 $ 240
500 Brownsburg, IN, EDR (Zanetis Ent.),
5.70%, 6/01/03 500
855 HDR Power Systems, Inc., 5.59%, 6/01/03 855
1,380 Nassau Co., NY, IDA Rev., 5.50%, 5/17/05 1,380
601 Illinois Development Finance Auth. IDR
(Landcomp Corp.), 5.55%, 7/01/05 601
215 Schenectady, NY, IDR (JMR Development Co.),
5.55%, 12/01/07 215
765 Diamond Development Group, Inc.,
Ser. 1996, 5.62%, 9/01/08 765
1,250 North Greenbush, NY, IDA Rev., 5.70%, 11/01/08 1,250
805 Vista Funding Corp., 5.54%, 9/01/11 805
1,600 Westwood Baptist Church, OH, 5.49%, 5/01/24 1,600
1,200 Waukesha, WI, Health Systems Rev.,
5.45%, 8/15/26 1,200
500 Ontario, CA, Rev. (Mission Oaks), 5.60%, 10/01/26 500
1,500 ABAG Fin. Auth. for Nonprofit Corp., CA,
COP, Ser. D, 5.55%, 10/01/27 1,500
1,300 Illinois HFA Rev., Ser. 1998B
(Elmhurst Memorial), 5.60%, 1/01/28 1,300
550 American Healthcare Funding, 5.45%, 3/01/29 550
455 California Statewide Cmntys.
Dev. Auth. Rev., 5.50%, 5/01/29 455
- ------------ --------------
$ 13,716 TOTAL VARIABLE RATE DEMAND NOTES
- ------------ (Amortized Cost $13,716) $ 13,716
--------------
FIXED RATE REVENUE BONDS -- 7.2%
$ 400 Chicago Tax Increment Allocation
(Near South Proj.), 5.20%, 11/15/99 $ 400
250 Lehigh Co., PA, General Purpose Rev.
(St. Francis College), 5.50%,12/15/99 250
200 Umatilla Indian Reservation, OR,
Ser. 1999B, 5.60%, 2/01/00 200
500 Hamilton, OH, Parking Garage Rev., 5.66%, 3/22/00 501
315 New Britain, CT, GO, 5.32%, 5/01/00 315
- ------------ --------------
$ 1,665 TOTAL FIXED RATE REVENUE BONDS
- ------------ (Amortized Cost $1,666) $ 1,666
--------------
CORPORATE NOTES -- 27.8%
$ 130 Transamerica Financial Corp.,
8.75%, 10/01/99 $ 130
100 Wal-Mart Stores, 6.125%, 10/01/99 100
130 American General Corp., 7.70%, 10/15/99 130
100 Associates Corp., NA, 6.75%, 10/15/99 100
227 Ford Motor Co., 7.50%, 11/15/99 228
420 Merrill Lynch & Co., 8.25%, 11/15/99 421
400 Huntington Bancshares, 6.10%, 11/29/99 400
375 Associates Corp., NA, 8.25%, 12/01/99 377
250 BP America, Inc., 6.50%, 12/15/99 251
300 American General Finance, 7.00%, 12/30/99 301
250 GMAC, 5.70%, 1/10/00 250
200 AIG, 6.375%, 1/18/00 200
200 Ford Motor Credit Co., 5.83%, 2/28/00 200
100 Associates Corp., NA, 7.78%, 3/01/00 101
181 GMAC, 7.00%, 3/01/00 182
499 Associates Corp., NA, 6.00%, 3/15/00 500
150 Morgan Stanley, Dean Witter,
Discover & Co., 6.25%, 3/15/00 150
250 KeyCorp., 7.43%, 3/28/00 253
28 - Countrywide Investments
<PAGE>
MONEY MARKET FUND (CONTINUED)
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 99.0% (CONTINUED) (000's)
- --------------------------------------------------------------------------------
CORPORATE NOTES -- 27.8% (CONTINUED)
$ 245 GMAC, 6.625%, 4/24/00 $ 246
165 Gannett Co., 5.85%, 5/01/00 165
330 American General Finance, 6.78%, 5/15/00 332
150 Duke Energy Corp., 7.00%, 6/01/00 151
315 Mellon Financial Co., 6.30%, 6/01/00 315
100 GMAC, 7.50%, 6/09/00 101
262 Citigroup, Inc., 6.125%, 6/15/00 262
350 Beneficial Corp., 6.45%, 6/19/00 351
250 Bear Stearns & Co., Inc., 6.75%, 8/15/00 251
- ------------ --------------
$ 6,429 TOTAL CORPORATE NOTES
- ------------ (Amortized Cost $6,448) $ 6,448
--------------
COMMERCIAL PAPER -- 4.9%
$ 880 GTE, 10/01/99 $ 880
265 Gannett Co., 10/05/99 265
- ------------ --------------
$ 1,145 TOTAL COMMERCIAL PAPER
- ------------ (Amortized Cost $1,145) $ 1,145
--------------
$ 22,955 TOTAL INVESTMENT SECURITIES -- 99.0%
============ (Amortized Cost $22,975) $ 22,975
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.0% 223
--------------
NET ASSETS -- 100.0% $ 23,198
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 29
<PAGE>
INTERMEDIATE BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 98.6% (000's)
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 10.4%
$ 1,200 U.S. Treasury Notes, 6.00%, 8/15/09
- ------------ (Amortized Cost $1,221) $ 1,209
--------------
U.S. GOVERNMENT AGENCY ISSUES -- 13.0%
$ 1,600 FHLMC, 6.45%, 4/29/09
- ------------ (Amortized Cost $1,599) $ 1,524
--------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 32.7%
$ 52 SBA #1987-20A, 8.45%, 1/01/07 $ 52
985 FNMA #313386, 7.00%, 3/01/12 985
948 GNMA #780777, 7.00%, 4/15/28 934
977 FHLMC #C21763, 6.00%, 2/01/29 912
981 GNMA #482725, 6.50%, 3/15/29 939
- ------------ --------------
$ 3,943 TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
- ------------ (Amortized Cost $3,924) $ 3,822
--------------
CORPORATE BONDS -- 37.2%
$ 175 Pacific Gas & Electric Co.,
6.625%, 6/01/00 $ 175
350 Florida Residential Property & Casualty Co.,
7.25%, 7/01/02 350
259 May Department Stores Co., 9.875%, 12/01/02 283
380 Bankers Trust Corp., 7.25%, 1/15/03 383
68 U.S. Leasing International, Inc., 6.625%, 5/15/03 67
500 AT&T Corp., 5.625%, 3/15/04 479
66 Kaiser Permanente, 9.55%, 7/15/05 73
510 Honeywell, Inc., 8.625%, 4/15/06 549
500 Union Oil of California Corp.
Medium Term Notes, 6.70%, 10/15/07 479
50 Berkley (W.R.) Corp., 9.875%, 5/15/08 57
575 General Electric Capital Corp.
Medium Term Notes, 7.50%, 6/15/09 593
10 Union Camp Corp., 8.625%, 4/15/16 10
35 Kraft, Inc., 8.50%, 2/15/17 36
150 Deere & Co., 8.95%, 6/15/19 167
115 Rohm & Haas Co., 9.80%, 4/15/20 134
165 Questar Pipeline Co., 9.375%, 6/01/21 178
120 Jersey Central Power & Light Co., 9.20%, 7/01/21 125
85 Southwestern Public Service Co., 8.20%, 12/01/22 85
130 Union Electric Co., 8.00%, 12/15/22 129
- ------------ --------------
$ 4,243 TOTAL CORPORATE BONDS
- ------------ (Amortized Cost $4,523) $ 4,352
--------------
30 - Countrywide Investments
<PAGE>
INTERMEDIATE BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 98.6% (CONTINUED) (000's)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 5.3%
$ 620 GTE, 10/01/99
- ------------ (Amortized Cost $620) $ 620
--------------
$ 11,606 TOTAL INVESTMENT SECURITIES -- 98.6%
============ (Amortized Cost $11,887) $ 11,527
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.4% 160
--------------
Net Assets -- 100.0% $
11,687
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 31
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 99.0% (000's)
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 9.3%
$ 1,000 U.S. Treasury Notes, 7.75%, 2/15/01 $ 1,028
2,000 U.S. Treasury Notes, 7.50%, 11/15/01 2,071
1,000 U.S. Treasury Bonds, 7.50%, 11/15/16 1,108
- ------------ --------------
$ 4,000 TOTAL U.S. TREASURY OBLIGATIONS
- ------------ (Amortized Cost $4,151) $ 4,207
--------------
U.S. GOVERNMENT AGENCY ISSUES -- 63.5%
$ 230 FNMA Discount Notes, 10/01/99 $ 230
1,000 SLMA Medium Term Notes, 7.50%, 7/02/01 1,023
2,000 FHLB Notes, 7.31%, 7/06/01 2,042
2,000 FHLB Medium Term Notes, 8.43%, 8/01/01 2,081
2,000 FNMA Notes, 7.55%, 4/22/02 2,062
1,000 FNMA Notes, 5.125%, 2/13/04 952
2,000 FHLMC Notes, 6.80%, 7/09/04 1,990
2,000 FHLMC Notes, 8.53%, 11/18/04 2,007
2,000 FHLMC Notes, 7.65%, 5/10/05 2,011
1,400 FNMA Notes, 6.26%, 1/24/06 1,350
2,500 FNMA Notes, 6.21%, 1/26/06 2,405
2,000 FNMA Notes, 6.06%, 2/03/06 1,914
1,000 FHLMC Notes, 6.345%, 2/15/06 967
2,203 RFCO STRIPS, 10/15/08 1,241
1,000 FNMA Notes, 6.50%, 4/29/09 957
3,500 FNMA Notes, 6.375%, 6/15/09 3,423
2,000 FNMA Notes, 6.96%, 9/05/12 1,942
- ------------ --------------
$ 29,833 TOTAL U.S. GOVERNMENT AGENCY ISSUES
- ------------ (Amortized Cost $28,866) $ 28,597
--------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 26.2%
$ 1,657 FNMA #380592, 6.17%, 8/01/08 $ 1,592
2,688 FNMA #381464, 6.11%, 4/01/09
2,565
1,213 FNMA #1997-25E, 7.00%, 12/18/22 1,218
1,856 GNMA #455136, 7.00%, 6/15/28 1,823
1,925 FHLMC #C19286, 6.00%, 12/01/28 1,797
2,943 GNMA #482725, 6.50%, 3/15/29 2,816
- ------------ --------------
$ 12,282 TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
- ------------ (Amortized Cost $12,272) $ 11,811
--------------
$ 46,115 TOTAL INVESTMENT SECURITIES -- 99.0%
============ (Amortized Cost $45,289) $ 44,615
Other assets in excess of liabilities -- 1.0% 445
--------------
NET ASSETS -- 100.0% $ 45,060
==============
See accompanying notes to portfolios of investments and notes to financial
statements.
32 - Countrywide Investments
<PAGE>
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
(000's) INVESTMENT SECURITIES -- 100.5% (000's)
- --------------------------------------------------------------------------------
ADJUSTABLE RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (NOTE D) -- 76.1%
$ 736 FNMA #70907, 6.687%, 3/01/18 $ 750
855 FHLMC #605793, 6.489%, 5/01/18 873
744 FNMA #70614, 6.377%, 10/01/18 758
212 FNMA #70635, 6.515%, 6/01/20 215
946 FHLMC #846013, 7.067%, 6/01/22 974
1,005 GNMA #8217, 6.375%, 6/20/23 1,015
863 FNMA #70176, 6.497%, 8/01/27 884
1,103 FNMA #70243, 6.504%, 3/01/28 1,125
- ------------ --------------
$ 6,464 TOTAL ADJUSTABLE RATE U.S. GOVERNMENT AGENCY
- ------------ MORTGAGE-BACKED SECURITIES
(Amortized Cost $6,572) $ 6,594
FIXED RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES -- 13.1%
$ 1,121 FNMA #1997-42H, 7.00%, 12/17/19
- ------------ (Amortized Cost $1,141) $ 1,132
--------------
U.S. GOVERNMENT AGENCY ISSUES -- 11.3%
$ 979 FNMA Discount Notes, 10/01/99
- ------------ (Amortized Cost $979) $ 979
--------------
$ 8,564 TOTAL INVESTMENT SECURITIES -- 100.5%
============ (Amortized Cost $8,692) $ 8,705
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.5%) (45)
--------------
NET ASSETS -- 100.0% $ 8,660
--------------
See accompanying notes to portfolios of investments and notes to financial
statements.
Countrywide Investments - 33
<PAGE>
NOTES TO PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
A. REPURCHASE AGREEMENTS
Repurchase agreements are fully collateralized by U.S. Government obligations.
B. FLOATING RATE NOTES
A floating rate note is a security whose terms provide for the periodic
readjustment of its interest rate whenever a specified interest rate index
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. The interest rates shown represent the
effective rates as of the report date. The dates shown represent the scheduled
maturity dates.
C. VARIABLE RATE DEMAND NOTES
A variable rate demand note is a security payable on demand at par whose terms
provide for the periodic readjustment of its interest rate on set dates and
which, at any time, can reasonably be expected to have a market value that
approximates its par value. The interest rates shown represent the effective
rates as of the report date. The dates shown represent the scheduled maturity
dates.
D. ADJUSTABLE RATE U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
Adjustable rate U.S. Government agency mortgage-backed securities are
mortgage-related securities created from pools of adjustable rate mortgages
which are issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities. Such adjustable rate mortgage
securities have interest rates that reset at periodic intervals based on a
specified interest rate index. The interest rates shown represent the effective
rates as of the report date. The dates shown represent the scheduled maturity
date.
PORTFOLIO ABBREVIATIONS:
COP - Certificate of Participation
EDR - Economic Development Revenue
FFCB - Federal Farm Credit Bank
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
FRMC - Federal Agricultural Mortgage Corporation
GNMA - Government National Mortgage Association
HFA - Housing Finance Authority
IDA - Industrial Development Authority
IDR - Industrial Development Revenue
RFCO - Resolution Funding Corporation
SBA - Small Business Administration
SLMA - Student Loan Marketing Association
STRIPS - Separate Trading of Registered Interest and Principal of Securities
34 - Countrywide Investments
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP
To the Shareholders and Board of Trustees of Countrywide Investment Trust:
We have audited the statements of assets and liabilities, including the
portfolios of investments, of Countrywide Investment Trust (a Massachusetts
business trust) (comprising, respectively, the Short Term Government Income
Fund, the Institutional Government Income Fund, the Intermediate Term Government
Income Fund, the Adjustable Rate U.S. Government Securities Fund, the
Intermediate Bond Fund, and the Money Market Fund) as of September 30, 1999, and
(i) for the Short Term Government Income Fund, the Institutional Government
Income Fund, the Intermediate Term Government Income Fund, and the Adjustable
Rate U.S. Government Securities Fund, the related statements of operations, the
statements of changes in net assets, and the financial highlights for the
periods indicated thereon and (ii) for the Intermediate Bond Fund and the Money
Market Fund the related statements of operations for the year ended September
30, 1999, the statements of changes in net assets for the year ended September
30, 1999 and 1998, and the financial highlights for the year ended September 30,
1999, September 30, 1998, the one-month period ended September 30, 1997 and the
year ended August 31, 1997. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights of the Intermediate Bond Fund and the
Money Market Fund for the period ended August 31, 1996 were audited by other
auditors whose report dated October 18, 1996, expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights audited by us
and referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting the Countrywide
Investment Trust as of September 30, 1999, the results of their operations, the
changes in their net assets, and their financial highlights for the periods
referred to above, in conformity with generally accepted accounting principles.
/S/ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
October 27, 1999
Countrywide Investments - 35
<PAGE>
The Touchstone Funds
Touchstone Series Trust
(formerly Select Advisors Trust A)
Class A, Class C and Class Y shares
Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Income Opportunity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Touchstone Balanced Fund
Touchstone Bond Fund
Touchstone Standby Income Fund
Statement of Additional Information
May 1, 1999
This Statement of Additional Information is not a Prospectus, but it relates to
the Prospectuses of Touchstone Series Trust dated May 1, 1999.
Financial statements are incorporated by reference into this Statement of
Additional Information from the Funds' most recent annual and semi-annual
reports.
You can get a free copy of the Prospectuses of Touchstone Series Trust or the
Funds' most recent annual and semi-annual reports, request other information and
discuss your questions about the Funds by contacting your financial advisor or
Touchstone at: Touchstone Family of Funds 311 Pike Street Cincinnati, Ohio 45202
(800) 669-2796 http://www.touchstonefunds.com
You can view the Funds' Prospectuses as well as other reports at the Public
Reference Room of the Securities and Exchange Commission.
You can get text-only copies:
For a fee by writing to or calling the Public Reference Room of the Commission,
Washington, D.C. 20549-6009. Telephone: 1-800-SEC-0330.
Free from the Commission's Internet website at http://www.sec.gov.
<PAGE>
Table of Contents
PAGE
The Trust and the
Funds........................................................... 3
Description of the Funds and Their Investments and Risks........ 4
Fund
Policies........................................................ 23
Management of the
Trust........................................................... 26
Investment Advisory and Other Services.......................... 29
Brokerage Allocation and Other Practices........................ 34
Capital Stock and Other Securities.............................. 36
Purchase, Redemption and Pricing of Shares...................... 38
Taxation of the
Funds........................................................... 42
Performance
Information..................................................... 44
Financial
Statements...................................................... 47
Appendix
................................................................ A-1
<PAGE>
The Trust and the Funds
Touchstone Series Trust (the "Trust") is composed of eight funds:
Touchstone Emerging Growth Fund, Touchstone International Equity Fund,
Touchstone Income Opportunity Fund, Touchstone Value Plus Fund, Touchstone
Growth & Income Fund, Touchstone Balanced Fund, Touchstone Bond Fund and
Touchstone Standby Income Fund (the "Standby Income Fund") (each, a "Fund" and
collectively, the "Funds").
Each Fund, other than the Standby Income Fund, is divided into three
classes of shares: class A shares ("Class A Shares"), class C shares ("Class C
Shares"), and class Y shares ("Class Y Shares"). Throughout this Statement of
Additional Information (the "SAI"), unless otherwise specified, the term Fund or
Funds refers to all applicable classes of such Fund or Funds.
Each Fund is an open-end management investment company. The Trust was
formed as a Massachusetts business trust on November 9, 1994.
Shares of the Funds are sold by Touchstone Securities, Inc.
("Touchstone Securities" or the "Distributor"), the Trust's distributor.
Touchstone Advisors, Inc. ("Touchstone" or the "Advisor") is the investment
advisor of each Fund and the Standby Income Fund. The specific investments of
each Fund are managed on a day-to-day basis by their respective sub-advisors
(collectively, the "Fund Sub-Advisors"). Investors Bank & Trust Company
("Investors Bank" or the "Administrator") serves as administrator, custodian and
fund accounting agent to each Fund.
The Prospectuses, dated May 1, 1999, provide the basic information
investors should know before investing, and may be obtained without charge by
calling the Trust at the telephone number listed on the cover. This Statement of
Additional Information, which is not a prospectus, is intended to provide
additional information regarding the activities and operations of the Trust and
should be read in conjunction with the Prospectuses. This Statement of
Additional Information is not an offer of any Fund for which an investor has not
received a Prospectus.
3
<PAGE>
Description of the Funds and Their Investments and Risks
Investment Goals
The investment goal(s) of each Fund is described in the Prospectuses.
There can be no assurance that any Fund will achieve its investment goal(s).
Investment Strategies and Risks
The following provides additional information about the investment
policies and types of securities which may be invested in by one or more Funds.
Fixed-Income and Other Debt Instrument Securities
Fixed-income and other debt instrument securities include all bonds,
high yield or "junk" bonds, municipal bonds, debentures, U.S. Government
securities, mortgage-related securities including government stripped
mortgage-related securities, zero coupon securities and custodial receipts. The
market value of fixed-income obligations of the Funds will be affected by
general changes in interest rates which will result in increases or decreases in
the value of the obligations held by the Funds. The market value of the
obligations held by a Fund can be expected to vary inversely to changes in
prevailing interest rates. As a result, shareholders should anticipate that the
market value of the obligations held by the Fund generally will increase when
prevailing interest rates are declining and generally will decrease when
prevailing interest rates are rising. Shareholders also should recognize that,
in periods of declining interest rates, a Fund's yield will tend to be somewhat
higher than prevailing market rates and, in periods of rising interest rates, a
Fund's yield will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to a Fund from the continuous sale of its
shares will tend to be invested in instruments producing lower yields than the
balance of its portfolio, thereby reducing the Fund's current yield. In periods
of rising interest rates, the opposite can be expected to occur. In addition,
securities in which a Fund may invest may not yield as high a level of current
income as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by Standard & Poor's Rating Service ("S&P") and
Moody's Investor Service, Inc. ("Moody's") are relative and subjective and are
not absolute standards of quality. Although these ratings are initial criteria
for selection of portfolio investments, a Fund Sub-Advisor also will make its
own evaluation of these securities. Among the factors that will be considered
are the long term ability of the issuers to pay principal and interest and
general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "Additional Risks and Investment Techniques --
When-Issued and Delayed-Delivery Securities" below.
Commercial Paper
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
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Medium and Lower Rated and Unrated Securities
Securities rated in the fourth highest category by S&P or Moody's, BBB
and Baa, respectively, although considered investment grade, may possess
speculative characteristics, and changes in economic or other conditions are
more likely to impair the ability of issuers of these securities to make
interest and principal payments than is the case with respect to issuers of
higher grade bonds.
Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds," offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower-rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower rated debt securities, the Fund Sub-Advisor's
research and credit analysis are an especially important part of managing
securities of this type held by a Fund. In light of these risks, the Board of
Trustees of the Trust has instructed the Fund Sub-Advisor, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower-rated categories
is more volatile than that of higher quality securities, and the markets in
which medium and lower-rated or unrated securities are traded are more limited
than those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Funds to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading market
may restrict the availability of securities for the Funds to purchase and may
also have the effect of limiting the ability of a Fund to sell securities at
their fair value either to meet redemption requests or to respond to changes in
the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower yielding security, resulting in a decreased
return for shareholders. Also, as the principal value of bonds moves inversely
with movements in interest rates, in the event of rising interest rates the
value of the securities held by a Fund may decline relatively proportionately
more than a portfolio consisting of higher rated securities. If a Fund
experiences unexpected net redemptions, it may be forced to sell its higher
rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Fund and increasing the exposure of the Fund to the risks
of lower rated securities. Investments in zero coupon bonds may be more
speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. Neither event will require sale of these securities by the Fund,
but the Fund Sub-Advisor will consider this event in its determination of
whether the Fund should continue to hold the securities.
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Lower-Rated Debt Securities
While the market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980's brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
The market for lower-rated debt securities may be thinner and less
active than that for higher rated debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the ability of outside pricing services
to value lower-rated debt securities and the ability to dispose of these
securities.
In considering investments for the Fund, the Fund Sub-Advisor will
attempt to identify those issuers of high yielding debt securities whose
financial condition is adequate to meet future obligations, has improved or is
expected to improve in the future. The Fund Sub-Advisor's analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects and the experience and managerial strength of the
issuer.
A Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
best interest of the Fund.
Illiquid Securities
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as "private placements" or
"restricted securities" and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted securities or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and an investment company might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. An investment
company might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
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The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act on resales of certain securities to qualified institutional buyers. The
Advisor anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
Each Fund Sub-Advisor will monitor the liquidity of Rule 144A
securities in each Fund's portfolio under the supervision of the Board of
Trustees. In reaching liquidity decisions, the Fund Sub-Advisor will consider,
among other things, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers and other potential
purchasers wishing to purchase or sell the security; (3) dealer undertakings to
make a market in the security and (4) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Related Investment Policies
No Fund may invest more than 15% of its net assets in securities which
are illiquid or otherwise not readily marketable. The Trustees of the Trust have
adopted a policy that the International Equity Fund may not invest in illiquid
securities other than Rule 144A securities. If a security becomes illiquid after
purchase by the Fund, the Fund will normally sell the security unless to do so
would not be in the best interests of shareholders.
Each Fund may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A or under an exemption from such laws. Provided
that a dealer or institutional trading market in such securities exists, these
restricted securities or Rule 144A securities are treated as exempt from the
Fund's 15% limit on illiquid securities. The Board of Trustees of the Trust,
with advice and information from the respective Fund Sub-Advisor, will determine
the liquidity of restricted securities or Rule 144A securities by looking at
factors such as trading activity and the availability of reliable price
information and, through reports from such Fund Sub-Advisor, the Board of
Trustees of the Trust will monitor trading activity in restricted securities. If
institutional trading in restricted securities or Rule 144A securities were to
decline, a Fund's illiquidity could be increased and the Fund could be adversely
affected.
No Fund will invest more than 10% of its total assets in restricted
securities (excluding Rule 144A securities).
Foreign Securities
Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
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foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
Emerging Market Securities
Emerging Market Securities are securities that are issued by a company
that (i) is organized under the laws of an emerging market country (any country
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Holland, Italy, Japan, Luxembourg, New Zealand, Norway, Spain, Sweden,
Switzerland, the United Kingdom and the United States), (ii) has its principal
trading market for its stock in an emerging market country, or (iii) derives at
least 50% of its revenues or profits from corporations within emerging market
countries or has at least 50% of its assets located in emerging market
countries.
The following Funds may invest in Emerging Market Securities:
Emerging Growth Fund - up to 10% of total assets,
International Equity Fund - up to 40% of total assets,
Income Opportunity Fund - up to 65% of total assets,
Growth & Income Fund - up to 5% of total assets, and Balanced
Fund - up to 15% of total assets.
Investments in securities of issuers based in underdeveloped countries
entail all of the risks of investing in foreign issuers outlined in this section
to a heightened degree. These heightened risks include: (i) expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the smaller size of the market for such securities and a low or
nonexistent volume of trading, resulting in a lack of liquidity and in price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities including restrictions on investing in issuers in
industries deemed sensitive to relevant national interests; and (iv) in the case
of Eastern Europe, the absence of developed capital markets and legal structures
governing private or foreign investment and private property and the possibility
that recent favorable economic and political developments could be slowed or
reversed by unanticipated events.
Special Considerations Concerning Eastern Europe
Investments in companies domiciled in Eastern European countries may be
subject to potentially greater risks than those of other foreign issuers. These
risks include: (i) potentially less social, political and economic stability;
(ii) the small current size of the markets for such securities and the low
volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Funds'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the Commonwealth of Independent States (formerly the Union of Soviet Socialist
Republics).
So long as the Communist Party continues to exercise a significant or,
in some cases, dominant role in Eastern European countries, investments in such
countries will involve risks of nationalization, expropriation and confiscatory
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taxation. The Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in many cases
without adequate compensation, and there may be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
a Fund could lose a substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in Eastern European
countries. Finally, even though certain Eastern European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial in
relation to the actual market values and may be adverse to the interests of a
Fund's shareholders.
Currency Exchange Rates
A Fund's share value may change significantly when the currencies,
other than the U.S. dollar, in which the Fund's investments are denominated
strengthen or weaken against the U.S. dollar. Currency exchange rates generally
are determined by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different countries as seen
from an international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
Options
Options on Securities
The respective Funds may write (sell), to a limited extent, only
covered call and put options ("covered options") in an attempt to increase
income. However, the Fund may forgo the benefits of appreciation on securities
sold or may pay more than the market price on securities acquired pursuant to
call and put options written by the Fund.
When a Fund writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Fund will realize income
in an amount equal to the premium received for writing the option. If the option
is exercised, a decision over which the Fund has no control, the Fund must sell
the underlying security to the option holder at the exercise price. By writing a
covered call option, the Fund forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option period
from an increase in the market value of the underlying security above the
exercise price.
When a Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Fund will realize income in the amount of the premium received
for writing the option. If the put option is exercised, a decision over which
the Fund has no control, the Fund must purchase the underlying security from the
option holder at the exercise price. By writing a covered put option, the Fund,
in exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price.
A Fund may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." Where the Fund cannot effect a closing purchase transaction, it
may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
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When a Fund writes an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction, the Fund will
realize a gain (or loss if the cost of a closing purchase transaction exceeds
the premium received when the option was sold), and the deferred credit related
to such option will be eliminated. If a call option is exercised, the Fund will
realize a gain or loss from the sale of the underlying security and the proceeds
of the sale will be increased by the premium originally received. The writing of
covered call options may be deemed to involve the pledge of the securities
against which the option is being written.
When a Fund writes a call option, it will "cover" its obligation by
segregating the underlying security on the books of the Fund's custodian or by
placing liquid securities in a segregated account at the Fund's custodian. When
a Fund writes a put option, it will "cover" its obligation by placing liquid
securities in a segregated account at the Fund's custodian.
A Fund may purchase call and put options on any securities in which it
may invest. The Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. The Fund would ordinarily have a
gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund's portfolio, at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
portfolio securities. Put options also may be purchased by the Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. The Fund would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
Each Fund has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Fund's activities in options
may also be restricted by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
A Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
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over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Fund will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Fund Sub-Advisor will
monitor the creditworthiness of dealers with whom a Fund enters into such
options transactions under the general supervision of the Board of Trustees.
Related Investment Policies
Each Fund which invests in equity securities may write or purchase
options on stocks. A call option gives the purchaser of the option the right to
buy, and obligates the writer to sell, the underlying stock at the exercise
price at any time during the option period. Similarly, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy the
underlying stock at the exercise price at any time during the option period. A
covered call option with respect to which a Fund owns the underlying stock sold
by the Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying stock
or to possible continued holding of a stock which might otherwise have been sold
to protect against depreciation in the market price of the stock. A covered put
option sold by a Fund exposes the Fund during the term of the option to a
decline in price of the underlying stock.
To close out a position when writing covered options, a Fund may make a
"closing purchase transaction" which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Fund will realize a profit or loss for
a closing purchase transaction if the amount paid to purchase an option is less
or more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund may make a "closing
sale transaction" which involves liquidating the Fund's position by selling the
option previously purchased.
Options on Securities Indexes
Such options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between the exercise
price and the value of the index. Such options will be used for the purposes
described above under "Options on Securities" or, to the extent allowed by law,
as a substitute for investment in individual securities.
Options on securities indexes entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indexes is more likely to occur, although the
Fund generally will only purchase or write such an option if the Fund
Sub-Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase such options unless the
Advisor and the respective Fund Sub-Advisor each believes the market is
sufficiently developed such that the risk of trading in such options is no
greater than the risk of trading in options on securities.
Price movements in a Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indexes
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cannot serve as a complete hedge. Because options on securities indexes require
settlement in cash, the Fund Sub-Advisor may be forced to liquidate portfolio
securities to meet settlement obligations.
When a Fund writes a put or call option on a securities index it will
cover the position by placing liquid securities in a segregated asset account
with the Fund's custodian.
Options on securities indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular security, whether the
Fund will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of securities prices in the market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in price of a particular security. Accordingly, successful
use by a Fund of options on security indexes will be subject to the Fund
Sub-Advisor's ability to predict correctly movement in the direction of that
securities market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities.
Related Investment Policies
Each Fund may purchase and write put and call options on securities
indexes listed on domestic and, in the case of those Funds which may invest in
foreign securities, on foreign exchanges. A securities index fluctuates with
changes in the market values of the securities included in the index.
To the extent permitted by U.S. federal or state securities laws, the
International Equity Fund may invest in options on foreign stock indexes in lieu
of direct investment in foreign securities. The Fund may also use foreign stock
index options for hedging purposes.
Options on Foreign Currencies
Options on foreign currencies are used for hedging purposes in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, are utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, a Fund will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
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however, the benefit to the Fund derived from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of
hedging purposes. For example, where a Fund anticipates a decline in the dollar
value of foreign currency denominated securities due to adverse fluctuations in
exchange rates, it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the options
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Certain Funds intend to write covered call options on foreign
currencies. A call option written on a foreign currency by a Fund is "covered"
if the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Fund has a call on
the same foreign currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash and liquid
securities in a segregated account with its custodian.
Certain Funds also intend to write call options on foreign currencies
that are not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in the U.S. dollar value of a security which
the Fund owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Fund collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
Related Investment Policies
Each Fund that may invest in foreign securities may write covered put
and call options and purchase put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. The Fund may use options on currency to cross-hedge, which involves
writing or purchasing options on one currency to hedge against changes in
exchange rates for a different, but related currency. As with other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
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currency may be used to hedge against fluctuations in exchange rates although,
in the event of exchange rate movements adverse to the Fund's position, it may
not forfeit the entire amount of the premium plus related transaction costs. In
addition, the Fund may purchase call options on currency when the Fund
Sub-Advisor anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time. If the
Fund is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
currency or dispose of assets held in a segregated account until the options
expire. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying currency. The Fund pays brokerage commissions or
spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. The
Fund's ability to terminate over-the-counter options ("OTC Options") will be
more limited than the exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Fund will treat purchased OTC Options and assets used to cover written OTC
Options as illiquid securities. With respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase formula.
Forward Currency Contracts
Because, when investing in foreign securities, a Fund buys and sells
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
such Funds from time to time may enter into forward currency transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. A Fund either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward currency contracts to purchase
or sell foreign currencies.
A forward currency contract is an obligation by a Fund to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract. Forward currency contracts establish an exchange
rate at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward currency contract generally has no deposit
requirement and is traded at a net price without commission. Each Fund maintains
with its custodian a segregated account of liquid securities in an amount at
least equal to its obligations under each forward currency contract. Neither
spot transactions nor forward currency contracts eliminate fluctuations in the
prices of the Fund's securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.
A Fund may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into a Fund Sub-Advisor's long-term
investment decisions, a Fund will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the Fund
Sub-Advisors believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when it determines that the transactions
would be in a Fund's best interest. Although these transactions tend to minimize
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the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
currency contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of such
securities between the date the forward currency contract is entered into and
the date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward currency contracts. In
such event the Fund's ability to utilize forward currency contracts in the
manner set forth in the Prospectuses may be restricted. Forward currency
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not entered into such contracts. The use of forward currency
contracts may not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices of or rates of return on a Fund's foreign
currency denominated portfolio securities and the use of such techniques will
subject a Fund to certain risks.
The matching of the increase in value of a forward currency contract
and the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Fund may not always be able to enter into forward
currency contracts at attractive prices and this will limit the Fund's ability
to use such contract to hedge or cross-hedge its assets. Also, with regard to a
Fund's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a Fund's
cross-hedges and the movements in the exchange rates of the foreign currencies
in which the Fund's assets that are the subject of such cross-hedges are
denominated.
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Futures Contracts and Options on Futures Contracts
The successful use of such instruments draws upon the Fund
Sub-Advisor's skill and experience with respect to such instruments and usually
depends on the Fund Sub-Advisor's ability to forecast interest rate and currency
exchange rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and thus will be
in a worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
Futures Contracts
A Fund may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies, or contracts based on
financial indexes including any index of U.S. Government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange. A
Fund may enter into futures contracts which are based on debt securities that
are backed by the full faith and credit of the U.S. Government, such as
long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association ("GNMA") modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. A Fund may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Fund which holds or intends to acquire fixed-income securities, is to
attempt to protect the Fund from fluctuations in interest or foreign exchange
rates without actually buying or selling fixed-income securities or foreign
currencies. For example, if interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the debt
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securities owned by the Fund. If interest rates did increase, the value of the
debt security in the Fund would decline, but the value of the futures contracts
to the Fund would increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling debt securities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is more liquid than the cash market,
the use of futures contracts as an investment technique allows the Fund to
maintain a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Fund could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on the
cash market.
When a Fund enters into a futures contract for any purpose, the Fund
will establish a segregated account with the Fund's custodian to collateralize
or "cover" the Fund's obligation consisting of cash or liquid securities from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Fund Sub-Advisor may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although each applicable
Fund Sub-Advisor believes that use of such contracts will benefit the respective
Fund, if the Fund Sub-Advisor's investment judgment about the general direction
of interest rates is incorrect, a Fund's overall performance would be poorer
than if it had not entered into any such contract. For example, if a Fund has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a Fund has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of bonds may
be, but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Options on Futures Contracts
Each Fund may purchase and write options on futures contracts for
hedging purposes. The purchase of a call option on a futures contract is similar
in some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
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contract or underlying debt securities. As with the purchase of futures
contracts, when a Fund is not fully invested it may purchase a call option on a
futures contract to hedge against a market advance due to declining interest
rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing of
a put option on a futures contract constitutes a partial hedge against
increasing prices of the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Fund's losses from existing options
on futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Fund will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin deposits on all
the futures contracts of the Fund and premiums paid on outstanding options on
futures contracts owned by the Fund would exceed 5% of the market value of the
total assets of the Fund.
Additional Risks of Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies
Unlike transactions entered into by a Fund in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
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all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Fund's ability to terminate over-the-counter options will be more limited than
with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Fund will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
Futures Contracts and Related Options
Each Fund may enter into futures contracts and purchase and write
(sell) options on these contracts, including but not limited to interest rate,
securities index and foreign currency futures contracts and put and call options
on these futures contracts. These contracts will be entered into only upon the
agreement of the Fund Sub-Advisor that such contracts are necessary or
appropriate in the management of the Fund's assets. These contracts will be
entered into on exchanges designated by the Commodity Futures Trading Commission
("CFTC") or, consistent with CFTC regulations, on foreign exchanges. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes including protecting against anticipated changes in the
value of securities a Fund intends to purchase.
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No Fund will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Fund will buy futures or write puts whose underlying value exceeds 25% of its
total assets, and no Fund will buy calls with a value exceeding 5% of its total
assets.
A Fund will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Fund's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Fund may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the Fund's
futures and options positions may not prove to be perfectly or even highly
correlated with changes in the value of its portfolio securities. Successful use
of futures and related options is subject to a Fund Sub-Advisor's ability to
predict correctly movements in the direction of the securities markets
generally, which ability may require different skills and techniques than
predicting changes in the prices of individual securities. Moreover, futures and
options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Fund may realize a
loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are being hedged or a Fund may not be
able to close a futures or options position without incurring a loss in the
event of adverse price movements.
Certificates of Deposit and Bankers' Acceptances
Certificates of deposit are receipts issued by a depository institution
in exchange for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date specified on
the certificate. The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Lending of Fund Securities
By lending its securities, a Fund can increase its income by continuing
to receive interest on the loaned securities as well as by either investing the
cash collateral in short-term securities or obtaining yield in the form of
interest paid by the borrower when U.S. Government obligations are used as
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. Each Fund
will adhere to the following conditions whenever its securities are loaned: (i)
the Fund must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (ii) the borrower must increase this collateral
whenever the market value of the securities including accrued interest rises
above the level of the collateral; (iii) the Fund must be able to terminate the
loan at any time; (iv) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned securities,
and any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material event
adversely affecting the investment occurs, the Board of Trustees must terminate
the loan and regain the right to vote the securities.
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Derivatives
The Funds may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement, the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. Some "derivatives" such as certain mortgage-related and other
asset-backed securities are in many respects like any other investment, although
they may be more volatile or less liquid than more traditional debt securities.
There are, in fact, many different types of derivatives and many different ways
to use them. There is a range of risks associated with those uses. Futures and
options are commonly used for traditional hedging purposes to attempt to protect
a fund from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. A Fund Sub-Advisor
will use derivatives only in circumstances where the Fund Sub-Advisor believes
they offer the most economic means of improving the risk/reward profile of the
Fund. Derivatives will not be used to increase portfolio risk above the level
that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Fund. The use of derivatives for non-hedging
purposes may be considered speculative. A description of the derivatives that
the Funds may use and some of their associated risks is found below.
ADRs, EDRs and CDRs
ADRs are U.S. dollar-denominated receipts typically issued by domestic
banks or trust companies that represent the deposit with those entities of
securities of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States. European Depositary Receipts ("EDRs"),
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), may
also be purchased by the Funds. EDRs and CDRs are generally issued by foreign
banks and evidence ownership of either foreign or domestic securities. Certain
institutions issuing ADRs or EDRs may not be sponsored by the issuer of the
underlying foreign securities. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer of the underlying foreign
securities.
U.S. Government Securities
Each Fund may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Some U.S. Government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. Government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities include: (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any of its
agencies, authorities or instrumentalities; and (ii) participation interests in
loans made to foreign governments or other entities that are so guaranteed. The
secondary market for certain of these participation interests is limited and,
therefore, may be regarded as illiquid.
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Mortgage-Related Securities
Each Fund may invest in mortgage-related securities. There are several
risks associated with mortgage-related securities generally. One is that the
monthly cash inflow from the underlying loans may not be sufficient to meet the
monthly payment requirements of the mortgage-related security.
Prepayment of principal by mortgagors or mortgage foreclosures will
shorten the term of the underlying mortgage pool for a mortgage-related
security. Early returns of principal will affect the average life of the
mortgage-related securities remaining in a Fund. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions. In periods of rising interest rates, the rate
of prepayment tends to decrease, thereby lengthening the average life of a pool
of mortgage-related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Fund. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Fund will have to reinvest the proceeds of prepayments at lower
interest rates than those at which the assets were previously invested. If this
occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Fund
purchases mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule as
they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Fund invests, the investment may be
subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities.
Mortgage-related securities may not be readily marketable. To the
extent any of these securities are not readily marketable in the judgment of the
Fund Sub-Advisor, the investment restriction limiting a Fund's investment in
illiquid instruments to not more than 15% of the value of its net assets will
apply.
Stripped Mortgage-Related Securities
These securities are either issued and guaranteed, or privately-issued
but collateralized by securities issued, by GNMA, FNMA or FHLMC. These
securities represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage-related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage-related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Fund will
invest in stripped mortgage-related securities in order to enhance yield or to
benefit from anticipated appreciation in value of the securities at times when
its Fund Sub-Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of stripped mortgage-related securities may offset all or a portion of any
decline in value of the securities held by the Fund.
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Investing in stripped mortgage-related securities involves the risks
normally associated with investing in mortgage-related securities. See
"Mortgage-Related Securities" above. In addition, the yields on stripped
mortgage- related securities are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on
interest-only stripped mortgage-related securities and increasing the yield to
maturity on principal-only stripped mortgage-related securities. Sufficiently
high prepayment rates could result in a Fund not fully recovering its initial
investment in an interest-only stripped mortgage-related security. Under current
market conditions, the Fund expects that investments in stripped
mortgage-related securities will consist primarily of interest-only securities.
Stripped mortgage-related securities are currently traded in an over-the-counter
market maintained by several large investment banking firms. There can be no
assurance that the Fund will be able to effect a trade of a stripped
mortgage-related security at a time when it wishes to do so. The Fund will
acquire stripped mortgage-related securities only if a secondary market for the
securities exists at the time of acquisition. Except for stripped mortgage-
related securities based on fixed rate FNMA and FHLMC mortgage certificates that
meet certain liquidity criteria established by the Board of Trustees, the Funds
will treat government stripped mortgage-related securities and privately-issued
mortgage-related securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, to not more than 15% of
net assets.
Zero Coupon Securities
Zero coupon U.S. Government securities are debt obligations that are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity or the particular interest payment date at a rate
of interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of cash. These investments may experience greater
volatility in market value than U.S. Government securities that make regular
payments of interest. A Fund accrues income on these investments for tax and
accounting purposes, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations, in which
case the Fund will forego the purchase of additional income producing assets
with these funds. Zero coupon securities include STRIPS, that is, securities
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain notes or bonds issued
by the U.S. government, its agencies, authorities or instrumentalities. They
also include Coupons Under Book Entry System ("CUBES"), which are component
parts of U.S. Treasury bonds and represent scheduled interest and principal
payments on the bonds.
Loans and Other Direct Debt Instruments
These are instruments in amounts owed by a corporate, governmental or
other borrower to another party. They may represent amounts owed to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables) or to other parties. Direct debt
instruments purchased by a Fund may have a maturity of any number of days or
years, may be secured or unsecured, and may be of any credit quality. Direct
debt instruments involve the risk of loss in the case of default or insolvency
of the borrower. Direct debt instruments may offer less legal protection to a
Fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lending bank or other
financial intermediary. Direct debt instruments also may include standby
financing commitments that obligate a Fund to supply additional cash to the
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borrower on demand at the time when a Fund would not have otherwise done so,
even if the borrower's condition makes it unlikely that the amount will ever be
repaid.
These instruments will be considered illiquid securities and so will be
limited, along with a Fund's other illiquid securities, to not more than 15% of
the Fund's net assets.
Swap Agreements
To help enhance the value of its portfolio or manage its exposure to
different types of investments, the Funds may enter into interest rate, currency
and mortgage swap agreements and may purchase and sell interest rate "caps,"
"floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make
regular payments equal to a floating interest rate on a specified amount (the
"notional principal amount") in return for payments equal to a fixed interest
rate on the same amount for a specified period. If a swap agreement provides for
payment in different currencies, the parties may also agree to exchange the
notional principal amount. Mortgage swap agreements are similar to interest rate
swap agreements, except that notional principal amount is tied to a reference
pool of mortgages.
In a cap or floor, one party agrees, usually in return for a fee, to
make payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed level; the purchaser of an interest rate floor
has the right to receive payments to the extent a specified interest rate falls
below an agreed level. A collar entitles the purchaser to receive payments to
the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile;
depending on how they are used, they may have a considerable impact on a Fund's
performance. Swap agreements involve risks depending upon the other party's
creditworthiness and ability to perform, as judged by the Fund Sub-Advisor, as
well as the Fund's ability to terminate its swap agreements or reduce its
exposure through offsetting transactions.
All swap agreements are considered as illiquid securities and,
therefore, will be limited, along with all of a Fund's other illiquid
securities, to 15% of that Fund's net assets.
Custodial Receipts
Custodial receipts or certificates, such as Certificates of Accrual on
Treasury Securities ("CATS"), Treasury Investors Growth Receipts ("TIGRs") and
Financial Corporation certificates ("FICO Strips"), are securities underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, authorities or instrumentalities. The
underwriters of these certificates or receipts purchase a U.S. Government
security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government securities, described above. Although typically under the terms
of a custodial receipt a Fund is authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund may be required to
assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, if the underlying issuer fails to pay principal and/or
interest when due, a Fund may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, if the trust or custodial account
in which the underlying security has been deposited is determined to be an
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association taxable as a corporation, instead of a non-taxable entity, the yield
on the underlying security would be reduced in respect of any taxes paid.
When-Issued and Delayed-Delivery Securities
To secure prices deemed advantageous at a particular time, each Fund
may purchase securities on a when-issued or delayed-delivery basis, in which
case delivery of the securities occurs beyond the normal settlement period;
payment for or delivery of the securities would be made prior to the reciprocal
delivery or payment by the other party to the transaction. A Fund will enter
into when-issued or delayed-delivery transactions for the purpose of acquiring
securities and not for the purpose of leverage. When-issued securities purchased
by the Fund may include securities purchased on a "when, as and if issued" basis
under which the issuance of the securities depends on the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring.
Securities purchased on a when-issued or delayed-delivery basis may
expose a Fund to risk because the securities may experience fluctuations in
value prior to their actual delivery. The Fund does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
Repurchase Agreements
Each of the Funds may engage in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, a Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. A Fund may enter into repurchase agreements with respect to U.S.
Government securities with member banks of the Federal Reserve System and
certain non-bank dealers approved by the Board of Trustees. Under each
repurchase agreement, the selling institution is required to maintain the value
of the securities subject to the repurchase agreement at not less than their
repurchase price. The Fund Sub-Advisor, acting under the supervision of the
Advisor and the Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those non-bank dealers with whom the Fund
enters into repurchase agreements. In entering into a repurchase agreement, a
Fund bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement. Repurchase agreements are considered to
be collateralized loans under the Investment Company Act of 1940, as amended
(the "1940 Act").
Reverse Repurchase Agreements and Forward Roll Transactions
The Funds may enter into reverse repurchase agreements and forward roll
transactions. In a reverse repurchase agreement the Fund agrees to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price. Forward roll
transactions are equivalent to reverse repurchase agreements but involve
mortgage-backed securities and involve a repurchase of a substantially similar
security. At the time the Fund enters into a reverse repurchase agreement or
forward roll transaction it will place in a segregated custodial account cash or
liquid securities having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements and forward roll transactions
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involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. Reverse repurchase
agreements and forward roll transactions are considered to be borrowings by a
Fund for purposes of the limitations described in "Fund Policies" below.
Temporary Investments
For temporary defensive purposes during periods when the Fund
Sub-Advisor of a Fund believes, in consultation with the Advisor, that pursuing
the Fund's basic investment strategy may be inconsistent with the best interests
of its shareholders, the Fund may invest its assets without limit in the
following money market instruments: securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities (including those purchased in
the form of custodial receipts), repurchase agreements, certificates of deposit,
master notes, time deposits and bankers' acceptances issued by banks or savings
and loan associations having assets of at least $500 million as of the end of
their most recent fiscal year and high quality commercial paper.
In addition, for the same purposes the Fund Sub-Advisor of the
International Equity Fund may invest without limit in obligations issued or
guaranteed by foreign governments or by any of their political subdivisions,
authorities, agencies or instrumentalities that are rated at least AA by S&P or
Aa by Moody's or, if unrated, are determined by the Fund Sub-Advisor to be of
equivalent quality. Each Fund also may hold a portion of its assets in money
market instruments or cash in amounts designed to pay expenses, to meet
anticipated redemptions or pending investments in accordance with its objectives
and policies. Any temporary investments may be purchased on a when-issued basis.
Convertible Securities
Convertible securities may offer higher income than the common stocks
into which they are convertible and include fixed-income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to both
non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
Real Estate Investment Trusts
The Growth & Income Fund may invest in REITs, which can generally be
classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which
invest the majority of their assets directly in real property, derive their
income primarily from rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs, which invest
the majority of their assets in real estate mortgages, derive their income
primarily from interest payments on real estate mortgages in which they are
invested. Hybrid REITs combine the characteristics of both equity REITs and
mortgage REITs.
Investment in REITs is subject to risks similar to those associated
with the direct ownership of real estate (in addition to securities markets
risks). REITs are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
REITs may also be affected by tax and regulatory requirements.
Standard & Poor's Depositary Receipts ("SPDRs")
The Growth & Income Fund may invest up to 5% of its total assets in
SPDRs. SPDRs typically trade like a share of common stock and provide investment
results that generally correspond to the price and yield performance of the
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component common stocks of the S&P 500 Index. There can be no assurance that
this can be accomplished as it may not be possible for the portfolio to
replicate and maintain exactly the composition and relative weightings of the
S&P 500 Index securities. SPDRs are subject to the risks of an investment in a
broadly based portfolio of common stocks, including the risk that the general
level of stock prices may decline, thereby adversely affecting the value of such
investment.
Asset Coverage
To assure that a Fund's use of futures and related options, as well as
when-issued and delayed-delivery transactions, forward currency contracts and
swap transactions, are not used to achieve investment leverage, the Fund will
cover such transactions, as required under applicable SEC interpretations,
either by owning the underlying securities or by establishing a segregated
account with the Trust's custodian containing liquid securities in an amount at
all times equal to or exceeding the Fund's commitment with respect to these
instruments or contracts.
Rating Services
The ratings of nationally recognized statistical rating organizations
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings are
an initial criterion for selection of portfolio investments, each Fund
Sub-Advisor also makes its own evaluation of these securities, subject to review
by the Board of Trustees of the Trust. After purchase by a Fund, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event would require a Fund to eliminate the
obligation from its portfolio, but a Fund Sub-Advisor will consider such an
event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in the Funds'
Prospectuses is set forth in the Appendix to the Prospectuses.
Fund Policies
The following investment restrictions are "fundamental policies" of
each Fund and may not be changed with respect to a Fund without the approval of
a "majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this Statement of Additional
Information and the Prospectuses, means, the lesser of (i) 67% or more of the
outstanding voting securities of the Fund present at a meeting if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding voting securities
of the Fund.
As a matter of fundamental policy, no Fund may (except that no
investment restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same investment
objectives):
(1) borrow money or mortgage or hypothecate assets of the Fund ,
except that in an amount not to exceed 1/3 of the current value
of the Fund's net assets, it may borrow money (including through
reverse repurchase agreements, forward roll transactions
involving mortgage-backed securities or other investment
techniques entered into for the purpose of leverage), and except
that it may pledge, mortgage or hypothecate not more than 1/3 of
such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this restriction
and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for
additional related restrictions, see clause (i) under the caption
"Additional Restrictions" below;
(2) underwrite securities issued by other persons except insofar as
the Funds may technically be deemed an underwriter under the 1933
Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of
the Fund's portfolio securities and provided that any such loans
not exceed 30% of the Fund's total assets (taken at market
value); (b) through the use of repurchase agreements or the
purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed
publicly or privately;
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(4)(a)(all Funds except the Growth & Income Fund) purchase or sell
real estate (including limited partnership interests but
excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Fund may hold and
sell, for the Fund's portfolio, real estate acquired as a result
of the Fund's ownership of securities);
(4)(b)(Growth & Income Fund only)
(i) purchase or sell real estate (except that (a) the Fund may
invest in (i) securities of entities that invest or deal in
real estate, mortgages, or interests therein and (ii)
securities secured by real estate or interests therein and
(b) the Fund may hold and sell real estate acquired as a
result of the Fund's ownership of securities;
(ii) purchase or sell interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and
options contracts) in the ordinary course or business.
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for
the achievement of a Fund's investment objective(s), up to 25% of
its total assets may be invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are
not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) with respect to 75% of its total assets taken at market value,
invest in assets other than cash and cash items (including
receivables), U.S. Government securities, securities of other
investment companies and other securities for purposes of this
calculation limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the total assets of the
Fund and to not more than 10% of the outstanding voting
securities of such issuer.
Additional Restrictions
Each Fund (or the Trust, on behalf of each Fund) will not, as a matter
of "operating policy" (changeable by the Board of Trustees without a shareholder
vote) (except that no operating policy shall prevent a Fund from investing all
of its Assets in an open-end investment company with substantially the same
investment objectives):
(i) borrow money (including through reverse repurchase
agreements or forward roll transactions involving
mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Fund
may borrow for temporary or emergency purposes up to 10% of
its total assets; provided, however, that no Fund may
purchase any security while outstanding borrowings exceed
5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Fund's total assets (taken at market value),
provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit
and variation margin, and reverse repurchase agreements are
not considered a pledge of assets for purposes of this
restriction;
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be
necessary for the clearance of purchases and sales of
securities may be obtained and except that deposits of
initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of
futures;
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(iv) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale
a right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the
securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except
by purchase in the open market where no commission or profit
to a sponsor or dealer results from such purchase other than
the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that
securities of any investment company will not be purchased
for the Fund if such purchase at the time thereof would
cause: (a) more than 10% of the Fund's total assets (taken
at the greater of cost or market value) to be invested in
the securities of such issuers; (b) more than 5% of the
Fund's total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any
such issuer to be held for the Fund; provided further that,
except in the case of a merger or consolidation, the Fund
shall not purchase any securities of any open-end investment
company unless the Fund (1) waives the investment advisory
fee, with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in
connection with the investment;
(vii) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are
illiquid or not readily marketable (defined as a security
that cannot be sold in the ordinary course of business
within seven days at approximately the value at which the
Fund has valued the security) not including (a) Rule 144A
securities that have been determined to be liquid by the
Board of Trustees; and (b) commercial paper that is sold
under section 4(2) of the 1933 Act which is not traded flat
or in default as to interest or principal and either (i) is
rated in one of the two highest categories by at least two
nationally recognized statistical rating organizations and
the Fund's Board of Trustees have determined the commercial
paper to be liquid; or (ii) is rated in one of the two
highest categories by one nationally recognized statistical
rating agency and the Fund's Board of Trustees have
determined that the commercial paper is equivalent quality
and is liquid;
(viii) invest more than 10% of the Fund's total assets in
securities that are restricted from being sold to the public
without registration under the 1933 Act (other than Rule
144A Securities deemed liquid by the Fund's Board of
Trustees);
(ix) purchase securities of any issuer if such purchase at the
time thereof would cause the Fund to hold more than 10% of
any class of securities of such issuer, for which purposes
all indebtedness of an issuer shall be deemed a single class
and all preferred stock of an issuer shall be deemed a
single class, except that futures or option contracts shall
not be subject to this restriction;
(x) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible
into or exchangeable, without payment of any further
consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more
than 10% of the Fund's net assets (taken at market value) is
represented by such securities, or securities convertible
into or exchangeable for such securities, at any one time
(the Funds have no current intention to engage in short
selling);
(xi) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of the Fund's
aggregate investment in such classes of securities will
exceed 5% of its total assets;
(xii) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying
the put or call is within the investment policies of the
Fund and the option is issued by the OCC, except for put and
call options issued by non-U.S. entities or listed on
non-U.S. securities or commodities exchanges; (b) the
aggregate value of the obligations underlying the puts
determined as of the date the options are sold shall not
exceed 50% of the Fund's net assets; (c) the securities
subject to the exercise of the call written by the Fund must
be owned by the Fund at the time the call is sold and must
continue to be owned by the Fund until the call has been
exercised, has lapsed, or the Fund has purchased a closing
call, and such purchase has been confirmed, thereby
extinguishing the Fund's obligation to deliver securities
pursuant to the call it has sold; and (d) at the time a put
is written, the Fund establishes a segregated account with
its custodian consisting of cash or liquid securities equal
in value to the amount the Fund will be obligated to pay
upon exercise of the put (this account must be maintained
until the put is exercised, has expired, or the Fund has
purchased a closing put, which is a put of the same series
as the one previously written); and
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(xiii) buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or financial
futures or options on financial futures unless such options
are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities
association or are listed on a national securities or
commodities exchange, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on
all such options which are held at any time do not exceed
20% of the Fund's total net assets; and (c) the aggregate
margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's
total assets.
Management of the Trust
Board of Trustees
Overall responsibility for management and supervision of the Trust
rests with the Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons and companies that furnish services
to the Trust.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is 311 Pike Street, Cincinnati, Ohio
45202. The Trustees and officers of the Trust also serve in the same positions
with the Touchstone Variable Series Trust (formerly named the Select Advisors
Variable Insurance Trust).
Trustees of the Trust
*JILL T. MCGRUDER (Born: 7/9/55) - Chairman of the Board of Trustees,
President and chief Executive Officer; Director, President and Chief Executive
Officer, Touchstone Advisors, Inc. and Touchstone Securities, Inc. (since
February, 1999); Senior Vice President, Western-Southern Life Insurance Company
(since December, 1996); National Marketing Director, Metropolitan Life Insurance
Co. (February, 1996 - December, 1996); Executive Vice President, Touchstone
Advisors, Inc. and Touchstone Securities, Inc. (1991 - 1996).
*WILLIAM J. WILLIAMS (Born: 12/19/15) - Trustee; Chairman of the Board
of Directors, The Western and Southern Life Insurance Company (since March,
1984); Chief Executive Officer, The Western and Southern Life Insurance Company
(from March, 1984 to March, 1994). His address is 400 Broadway, Cincinnati, OH
45202.
JOSEPH S. STERN, JR. (Born: 3/31/18) - Trustee; Retired Professor
Emeritus, College of Business, University of Cincinnati. His address is 3
Grandin Place, Cincinnati, OH 45208.
PHILLIP R. COX (Born: 11/24/47) - Trustee; President and Chief
Executive Officer, Cox Financial Corp. (since 1972); Director, Federal Reserve
Bank of Cleveland; Director, Cincinnati Bell, Inc.; Director, PNC Bank;
Director, Cinergy Corporation. His address is 105 East Fourth Street,
Cincinnati, OH 45202.
ROBERT E. STAUTBERG (Born: 9/6/34) - Trustee; Retired Partner and
Director, KPMG Peat Marwick; Chairman of the Board of Trustees, Good Samaritan
Hospital. His address is 4815 Drake Road, Cincinnati, OH 45243.
Officers of the Trust
Unless otherwise specified, each officer listed below holds the same
position with the Trust and each Fund.
JAMES J. VANCE (Born: 7/12/61) - Treasurer; Treasurer Western-Southern
Life Insurance Company (since January, 1994). His address is 400 Broadway,
Cincinnati, OH 45202.
30
<PAGE>
EDWARD S. HEENAN (Born: 12/18/43) - Controller; Vice President and
Controller, Touchstone Advisors, Inc. (since December, 1993); Director,
Controller, Touchstone Securities, Inc. (since October, 1991); Vice President
and Comptroller, The Western and Southern Life Insurance Company (since 1987).
His address is 400 Broadway, Cincinnati, OH 45202.
DAVID DENNISON (Born: 2/20/62) - Assistant Treasurer; Vice President of
Administration, IFS Financial Services and Touchstone Securities, Inc. (since
August, 1994); Director of Strategic Marketing, Providian Capital Management
(January, 1993 to July, 1994)
ANDREW S. JOSEF (Born: 2/25/64) - Secretary; Director, Legal
Administration, Investors Bank & Trust Company ("Investors Bank") (since May,
1997); Senior Associate, Sullivan & Worcester LLP (November, 1995 to May, 1997);
Associate, Goodwin, Proctor & Hoar (January, 1993 to November, 1995); Associate,
Simpson Thacher & Bartlett (prior to 1993). His address is 200 Clarendon Street,
Boston, Massachusetts 02116.
SUSAN C. MOSHER (Born: 1/29/55) - Assistant Secretary; Director, Legal
Administration, Investors Bank (since August, 1995); Associate Counsel, 440
Financial Group of Worcester, Inc. (January, 1993 to August, 1995). Her address
is 200 Clarendon Street, Boston, Massachusetts 02116.
TIMOTHY F. OSBORNE (Born: 12/3/66) - Assistant Treasurer; Director,
Mutual Fund Administration, Investors Bank (since May, 1995); Account
Supervisor, Mutual Fund Administration, Chase Global Funds Services Company
(prior to May, 1995).
Ms. Mosher and Messrs. Josef and Osborne also hold similar positions
for Touchstone Variable Series Trust and certain unaffiliated investment
companies for which Investors Bank serves as administrator.
No director, officer or employee of the Advisor, the Fund Sub-Advisors,
the Distributor, the Administrator or any of their affiliates will receive any
compensation from the Trust for serving as an officer or Trustee of the Trust.
The Trust and Touchstone Variable Series Trust (together, the "Fund Complex")
pay in the aggregate, to each Trustee who is not a director, officer or employee
of the Advisor, the Fund Sub-Advisors, the Distributor, the Administrator or any
of their affiliates, an annual fee of $5,000, respectively, plus $1,000,
respectively, per meeting attended and reimburses them for travel and
out-of-pocket expenses. The following table reflects Trustee fees paid for the
year ended December 31, 1998.
31
<PAGE>
<TABLE>
<CAPTION>
Trustee Compensation Table
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Name of Person and Position Aggregate Compensation from Aggregate Compensation from Total Compensation from
the Trust with respect to the Trust with respect to Trust and Fund Complex Paid
Class A Shares of the Funds Class C Shares of the Funds to Trustees
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
<S> <C> <C> <C>
Joseph S. Stern, Jr. $ 1,166.43 $ 365.49 $ 8,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Phillip R. Cox $ 1,451.17 $ 459.27 $10,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Robert E. Stautberg $ 1,451.17 $ 459.27 $10,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
David Pollak $ 1,451.17 $ 459.27 $10,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
</TABLE>
Control Persons and Principal Holders of Securities: Class A Shares of the Funds
As of April 2, 1999, Trustees and officers of the Trust owned in the
aggregate less than 1% of the Class A Shares of any Fund or the Trust (all
series taken together).
As of April 2, 1999,
(i) Western-Southern Life Assurance Company ("Western-
Southern"), 400 Broadway, Cincinnati, Ohio 45202, which was
organized under the laws of the State of Ohio and which is a
wholly owned subsidiary of The Western and Southern Life
Insurance Company ("Western and Southern"), 400 Broadway,
Cincinnati, Ohio 45202, which was organized under the laws
of the State of Ohio, was the record owner of 54.47% and
22.29% of the outstanding shares of the International Equity
Fund - Class A and Income Opportunity Fund Class A,
respectively;
(ii) Western-Southern, Highlands Company of Delaware, c/o Karen
Clark, Smith Fought Bunker & Hume PC, 2301 Mitchell Park
Drive, Petoskey, MI 49770-9600, and Western Southern
Deferred Compensation, FBO 1, 85B&86-89 Attn: M Scott, 400
Broadway, Cincinnati, OH 45202-3341 ("FBO 1"), were the
record owners of 23.26%, 8.37% and 7.56%, respectively, of
the Emerging Growth Fund - Class A;
(iii) FBO 1, Western Southern Deferred Compensation, FBO 6,
82-88, Attn: M Scott, 400 Broadway, Cincinnati, OH 45202,
Western and Southern were the record owners of 12.88%,
11.22% and 11.20%, respectively, of the outstanding shares
of the Growth & Income Fund - Class A;
(iv) Western and Southern; Western Southern Deferred
Compensation, FBO 2, Lump Sum, Attn: M Scott, 400 Broadway,
Cincinnati, OH 45202; Western Southern Deferred
Compensation, FBO 2, 94, Attn: M Scott, 400 Broadway,
Cincinnati, OH 45202; and Richard J. Mullenax, Mildred
Mullenax JT WROS, Rt 3 Box 225, Bridgeport, WV 26330-9430
were the record owners of 9.78%, 6.54%, 6.26% and 5.75%,
respectively, of the outstanding shares of the Bond Fund -
Class A;
(v) Western-Southern, and NFSC FEBO #EBN-543152, Charles R.
Hosche TTEE, The Hosch Grit II Tr, FBO Charles R. Hosche,
P.O. Box 7569, Marietta, GA 30065-1569, were the record
owners of 39.19%, and 8.03%, respectively, of the
outstanding shares of the Balanced Fund Class A; and
(vi) Western and Southern was the record owner of 95.77% of the
outstanding shares of the Value Plus Fund - Class A.
Each of the above-named entities owning over 50% of the outstanding
shares of any of the above-named Funds may take actions requiring a majority
vote without the approval of any other investor in such Fund.
32
<PAGE>
Control Persons and Principal Holders of Securities: Class C Shares of
the Funds
As of April 2, 1999, the Trustees and officers of the Trust owned in
the aggregate less than 1% of the Class C shares of any Fund or the Trust (all
series taken together).
As of April 2, 1999,
(i) Western-Southern was the record owner of 56.19%, 69.58%,
56.57%, 37.80%, 7.87% and 13.06% of the outstanding shares
of the Emerging Growth Fund - Class C, International Equity
Fund - Class C, Balanced Fund - Class C, Income Opportunity
Fund - Class C, Growth & Income Fund - Class C and Bond Fund
- Class C, respectively; and
(ii) Western and Southern and NFSC FZEBO # TRG-011630, NFSC/FMTC
IRA Rollover, FBO Richard Gum, 210 Gull Road, Ocean City, NJ
08226-4529 were the record owners of 59.69% and 23.35%, of
the outstanding shares of the Value Plus Fund - Class C,
respectively.
Because Western-Southern owns more than 50% of the outstanding shares
of certain of the above-named Funds, it may take actions requiring a majority
vote without the approval of any other investor in such Fund.
Control Persons and Principal Holders of Securities: Class Y Shares of
the Funds
As of April 2, 1999, Trustees and officers of the Trust owned in the
aggregate less than 1% of the Class Y Shares of the Growth & Inocme Fund or the
Bond Fund or the Trust (all series taken together).
As of April 2, 1999, The Western and Southern Life Insurance Company
("Western and Southern"), was the record owner of 100% of the outstanding shares
of each of the Growth & Inocme Fund and the Bond Fund.
Control Persons and Principal Holders of Securities: Standby Income Fund
As of April 2, 1999, Western-Southern; Western and Southern; and Leslie
V. Craig, 9904 Misty Morn Lane, Cincinnati, Ohio 45242 were the record owners of
28.64%, 28.64% and 5.09%, respectively, of the outstanding shares of the Standby
Income Fund.
Investment Advisory and Other Services
Advisor
Touchstone Advisors provides service to each Fund pursuant to
Investment Advisory Agreements with the Trust (the "Advisory Agreements"). The
services provided by the Advisor consist of directing and supervising each Fund
Sub-Advisor, reviewing and evaluating the performance of each Fund Sub-Advisor
and determining whether or not any Fund Sub-Advisor should be replaced. The
Advisor furnishes at its own expense all facilities and personnel necessary in
connection with providing these services. Each respective Advisory Agreement
will continue in effect if such continuance is specifically approved at least
annually by the respective Board of Trustees and by a majority of the respective
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Advisory
Agreement.
Each Advisory Agreement is terminable, with respect to a Fund or
Standby Income Fund, without penalty on not more than 60 days' nor less than 30
days' written notice by (1) the Trust, when authorized either by (a) in the case
of a Fund or the Standby Income Fund, a majority vote of the shareholders of the
Fund (with the vote of each shareholder being in proportion to the amount of
their investment), or (b) a vote of a majority of the respective Board of
Trustees or (2) the Advisor. Each Advisory Agreement will automatically
terminate in the event of its assignment. Each Advisory Agreement provides that
neither the Advisor nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in its services to the Funds, except for willful misfeasance, bad
faith or gross negligence or reckless disregard of its or their obligations and
duties under the Advisory Agreement.
33
<PAGE>
The Trust's Prospectuses contain a description of fees payable to the
Advisor for services under the Advisory Agreements.
For the periods indicated, the Portfolio of Select Advisors Portfolios
in which each Fund (other than the Standby Income Fund) invested all of its
assets and the Standby Income Fund incurred the following investment advisory
fees equal on an annual basis to the following percentages of the average daily
net assets of the Portfolio and the Standby Income Fund, respectively.
<TABLE>
<CAPTION>
Emerging International Income Value Plus Growth & Balanced Bond Standby
Growth Fund Equity Fund Opportunity Fund Income Fund Fund Fund Income Fund
Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate 0.80% 0.95% 0.65% 0.75% 0.80%+ 0.80%* 0.55% 0.25%
5/1/98** to
12/31/98 N/A N/A N/A $123,531 N/A N/A N/A N/A
For the Year
Ended 12/31/98
$76,428 $100,226 $71,387 N/A $278,037 $56,349 $100,011 $25,969
For the Year
Ended 12/31/97
For the Year $48,463 $73,217 $66,313 N/A $181,803 $38,823 $82,976 $18,755
Ended 12/31/96
$35,755 $55,448 $28,495 N/A $138,167 $24,065 $70,808 $15,675
</TABLE>
+ Prior to September, 1997 the rate was 0.75%.
* Prior to May, 1997, the rate was 0.70%.
** Commencement of operations.
The Advisor has contractually agreed to reimburse each Fund for certain
of its fees and expenses as described in the Prospectuses. For the periods
indicated, the Advisor reimbursed the Portfolios and the Standby Income Fund the
following amounts:
<TABLE>
<CAPTION>
Emerging International Income Value Plus Growth & Balanced Bond Standby
Growth Fund Equity Fund Opportunity Fund Income Fund Fund Fund Income Fund
Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5/1/98** to
12/31/98 N/A N/A N/A $48,591 N/A N/A N/A N/A
For the Year
Ended 12/31/98
$43,744 $126,131 $57,832 N/A $5,311 $68,910 $50,678 $147,725
For the Year
Ended 12/31/97
For the Year $84,098 $200,506 $62,571 N/A $39,190 $82,721 $96,974 $192,319
Ended 12/31/96
$59,720 $84,640 $62,865 N/A $62,911 $64,645 $60,817 $114,416
** Commencement of operations.
</TABLE>
34
<PAGE>
Fund Sub-Advisors
The Advisor has, in turn, entered into a portfolio advisory agreement
(each a "Fund Agreement") with each Fund Sub-Advisor selected by the Advisor for
a Fund or Standby Income Fund. Under the direction of the Advisor and,
ultimately, of the Board of Trustees of the Trust, each Fund Sub-Advisor is
responsible for making all of the day-to-day investment decisions for the
respective Fund (or portion of a Fund).
Each Fund Sub-Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Fund
Agreement contains provisions similar to those described above with respect to
the Advisory Agreements.
The Advisor pays each Fund Sub-Advisor a fee for its services provided
to the Fund that is computed daily and paid monthly at an annual rate equal to
the percentage specified below of the value of the average daily net assets of
the Fund:
<TABLE>
<CAPTION>
- -------------------------------------------------------- -----------------------------------
Emerging Growth Fund
- -------------------------------------------------------- -----------------------------------
<S> <C>
David L. Babson & Company, Inc. 0.50%
- -------------------------------------------------------- -----------------------------------
Westfield Capital Management 0.45% on the first $10 million
Company, Inc. 0.40% on the next $40 million
0.35% thereafter
- -------------------------------------------------------- -----------------------------------
International Equity Fund
- -------------------------------------------------------- -----------------------------------
BEA Associates 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
- -------------------------------------------------------- -----------------------------------
Income Opportunity Fund
- -------------------------------------------------------- -----------------------------------
Alliance Capital Management, L.P. 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
- -------------------------------------------------------- -----------------------------------
Value Plus Fund
- -------------------------------------------------------- -----------------------------------
Fort Washington Investment Advisors, Inc. 0.45%
- -------------------------------------------------------- -----------------------------------
Growth & Income Fund
- -------------------------------------------------------- -----------------------------------
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
- -------------------------------------------------------- -----------------------------------
Balanced Fund
- -------------------------------------------------------- -----------------------------------
OpCap Advisors 0.60% on the first $20 million
0.50% on the next $30 million
0.40% thereafter
- -------------------------------------------------------- -----------------------------------
Bond Fund
- -------------------------------------------------------- -----------------------------------
Fort Washington Investment Advisors, Inc. 0.30%
- -------------------------------------------------------- -----------------------------------
Standby Income Fund
- -------------------------------------------------------- -----------------------------------
Fort Washington Investment Advisors, Inc. 0.15%
- -------------------------------------------------------- -----------------------------------
35
</TABLE>
Administrator, Custodian and Transfer Agent
Pursuant to Administration and Fund Accounting Agreements, Investors
Bank supervises the overall administration of the Trust, including but not
limited to, accounting, clerical and bookkeeping services; daily calculation of
net asset values; preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations. Investors Bank
also provides persons to serve as officers of the Trust. As custodian, Investors
Bank holds cash, securities and other assets of the Trust.
The Trust's Prospectuses contain a description of fees payable to
Investors Bank for its services as administrator, fund accounting agent and
custodian.
Prior to December 1, 1996, Signature Financial Services, Inc.
("Signature") served as administrator and fund accounting agent to the Trust.
The Class A Shares of the Funds and the Standby Income Fund incurred
the following administration and fund accounting fees for the periods indicated:
<TABLE>
<CAPTION>
Emerging International Income Value Plus Growth & Balanced Fund Bond Fund Standby
Growth Equity Fund Opportunity Fund - Income Fund - Class A - Class A Income Fund
Fund - - Class A Fund - Class A Class A - Class A
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5/1/98* to
12/31/99 N/A N/A N/A $16,667 N/A N/A N/A N/A
For the Year
Ended 12/31/98
$24,725 $30,559 $26,001 N/A $30,475 $20,146 $30,475 $82,695
For the Year
Ended 12/31/97
For the Year $15,324 $16,990 $15,399 N/A $16,552 $15,324 $16,836 $68,412
Ended
12/31/96**
$61,789 $64,008 $61,674 N/A $61,966 $64,985 $61,716 $24,289
- -----------
</TABLE>
* Commencement of operations.
** Amounts represent fees paid by the master portfolio in which all of the
Class A assets were invested at the time. Includes administrative and fund
accounting fees paid to Signature Financial Services, Inc. and Investors Bank
& Trust Company.
Each of the Administration, Fund Accounting and Custodian Agreements
(collectively, the "Agreements") provide that neither Investors Bank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission, except for willful misfeasance, bad faith or negligence (gross
negligence in respect of the Custodian Agreement) in the performance of its or
their duties or by reason of disregard (reckless disregard in respect of the
Custodian Agreement) of its or their obligations and duties under the
Agreements.
Each Agreement may not be assigned without the consent of the
non-assigning party, and may be terminated after its Initial Term, with respect
to a Fund, without penalty by majority vote of the shareholders of the Fund or
by either party on not more than 60 days' written notice.
State Street Bank and Trust Company ("State Street") serves as transfer
agent of the Trust pursuant to a transfer agency agreement. Under its transfer
agency agreement with the Trust, State Street maintains the shareholder account
records for each Fund, handles certain communications between shareholders and
the Trust and causes to be distributed any dividends and distributions payable
by the Trust. State Street may be reimbursed by the Trust for its out-of-pocket
expenses.
36
<PAGE>
Distributor
The Trustees of the Trust have adopted a Distribution and Services Plan
(the "Distribution Plan") with respect to Class A and Class C shares of each
Fund (except the Standby Income Fund) after having concluded that there was a
reasonable likelihood that the Distribution Plan would benefit each Class of
each such Fund and its shareholders. The Distribution Plan is designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. In addition, an increase in net assets may lessen
the adverse effects that could result were the Fund required to liquidate
portfolio securities to meet redemptions. Of course, there is no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Class A Distribution Plan provides that the Trust may pay the
Distributor a fee not to exceed 0.25% per annum of each Fund's average daily net
assets attributable to its class A shares in anticipation of, or as
reimbursement for, expenses incurred in connection with the sale of shares of
the Trust, such as payments to broker-dealers who advise shareholders regarding
the purchase, sale or retention of shares of the Trust, payments to employees of
the Distributor, advertising expenses and the expenses of printing and
distributing prospectuses and reports used for sales purposes, expenses of
preparing and printing sales literature and other distribution-related expenses.
The Class C Distribution Plan provides that the Trust may pay the
Distributor a fee not to exceed 0.75% per annum of each Fund's average daily net
assets attributable to its class C shares in anticipation of, or as
reimbursement for, expenses incurred in connection with the sale of shares of
the Trust, such as payments to broker-dealers who advise shareholders regarding
the purchase, sale or retention of shares of the Trust, payments to employees of
the Distributor, advertising expenses and the expenses of printing and
distributing prospectuses and reports used for sales purposes, expenses of
preparing and printing sales literature and other distribution-related expenses.
No Fund is obligated under a Distribution Plan to pay any distribution
or shareholder service expense in excess of the fees described above. Expenses
incurred by the Distributor in one fiscal year in excess of the fees received
from a Fund in that fiscal year do not give rise to any obligation on the part
of a Fund to the Distributor with respect to any future fiscal year. Thus, if a
Distribution Plan were terminated or not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed by a Fund to the
Distributor. Under arrangements with Dealers and others, the Distributor may pay
compensation upon the sale of Fund shares. To finance such payments, the
Distributor may utilize funds obtained from the Advisor which, in turn, may
borrow funds from affiliated or unaffiliated parties. Such borrowings may be
repaid or secured by an assignment of fees payable pursuant to the Distribution
Plan.
Each Distribution Plan will continue in effect indefinitely if such
continuance is specifically approved at least annually by a vote of both a
majority of the Trust's Trustees and a majority of the Trust's Trustees who are
not "interested persons of the Trust" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any agreement
related to such Plan ("Qualified Trustees"). The Distributor will provide to the
Trustees of the Trust a quarterly written report of amounts expended by it under
each Distribution Plan and the purposes for which such expenditures were made.
The Distribution Plans further provide that the selection and nomination of the
Trust's disinterested Trustees shall be committed to the discretion of the
disinterested Trustees of the Trust. A Distribution Plan may be terminated at
any time by a vote of a majority of the Trust's Qualified Trustees or by a vote
of the shareholders of the Class. The Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without a
vote of the majority of both the Trust's Trustees and the Trust's Qualified
Trustees. No disinterested Trustee has any financial interest in the
Distribution Plan or in any related agreement. The Distributor will preserve
copies of any plan, agreement or report made pursuant to the Distribution Plans
for a period of not less than six years from the date of the Distribution Plan,
and for the first two years the Distributor will preserve such copies in an
easily accessible place.
The Trust paid the following fees pursuant to the Class A Distribution
Plan for the periods indicated with respect to Class A Shares of each Fund:
37
<TABLE>
<CAPTION>
Distribution Emerging International Income Value Plus Growth & Balanced Bond Fund
Fee Growth Equity Fund Opportunity Fund - Income Fund Fund - - Class A
Fund - - Fund - Class A Class A - Class A Class A
Class A Class A
<S> <C> <C> <C> <C> <C> <C> <C>
5/1/98**
to 12/31/99 N/A N/A N/A $40,779 N/A N/A N/A
For the Year Ended
12/31/98 $17,105 $15,073 $17,824 N/A $30,065 $10,468 $9,589
For the Year Ended
12/31/97 $9,801 $10,363 $17,453 N/A $11,516 $6,637 $4,764
For the Year Ended
12/31/96 $7,651 $7,551 $5,849 N/A $6,288 $4,477 $3,038
** Commencement of operations.
</TABLE>
The Trust has entered into a Distribution Agreement with the
Distributor. Under the Distribution Agreement, the Distributor acts as the agent
of the Trust in connection with the offering of shares of the Trust.
The following table shows commissions and other compensation received
by the Distributor, which is an affiliated person of the Funds, for the fiscal
year ended December 31, 1998:
<TABLE>
<CAPTION>
Net Underwriting Compensation on
---------------- ---------------
Touchstone Discounts and Redemptions and Brokerage Other Compensation
---------- ------------- --------------- --------- ------------------
Fund Commissions* Repurchases** Commissions
---- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Bond $ 8,272.99 $1,106.41 $0 $0
Balanced $ 5,088.21 $ 159.46 $0 $0
Growth & Income $ 8,915.69 $ 545.14 $0 $0
Income Opportunity $13,304.06 $4,436.96 $0 $0
Emerging Growth $ 5,770.41 $ 479.65 $0 $0
International Equity $ 5,165.31 $ 474.10 $0 $0
Value Plus $ 57.36 $ 156.74 $0 $0
* Amounts retained by the distributor upon sale of shares currently
designated Class A shares.
** Amounts retained by the distributor upon redemption (within one year of
purchase) of shares currently designated Class C shares.
</TABLE>
In addition, the Distributor, as a dealer, received $17,885.01 for the sale of
shares of the Funds for the fiscal year ended December 31, 1998.
The Distributor may pay additional cash amounts to dealers in
connection with the sale of shares of the Funds.
Counsel and Independent Accountants
Frost & Jacobs LLP, 2500 PNC Center, 201 East 5th Street, Cincinnati,
Ohio 45201-5715, serves as counsel to the Trust and each Fund.
PricewaterhouseCoopers LLP, One Post Office Square, Boston, Massachusetts 02109,
acts as independent accountants of the Funds, providing audit services, tax
return review and assistance and consultation in connection with the review of
filings with the SEC.
Brokerage Allocation and Other Practices
Brokerage Transactions
The Fund Sub-Advisors are responsible for decisions to buy and sell
securities, futures contracts and options on such securities and futures for
each Fund, the selection of brokers, dealers and futures commission merchants to
effect transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, the Advisor, the Fund
Sub-Advisors or their subsidiaries or affiliates. Purchases and sales of certain
portfolio securities on behalf of a Fund are frequently placed by the Fund
Sub-Advisor with the issuer or a primary or secondary market-maker for these
securities on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as market-makers reflect the spread between the bid and asked
prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The Fund Sub-Advisors seek to evaluate the overall reasonableness of
the brokerage commissions paid through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. In placing orders for the purchase and sale
of securities for a Fund, the Fund Sub-Advisors take into account such factors
as price, commission (if any, negotiable in the case of national securities
exchange transactions), size of order, difficulty of execution and skill
required of the executing broker-dealer. The Fund Sub-Advisors review on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Fund Sub-Advisors are authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for a Fund with a broker to pay a brokerage commission (to the
extent applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. A Fund Sub-Advisor may use this research
information in managing a Fund's assets, as well as the assets of other clients.
38
<PAGE>
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Board of Trustees may determine, the Fund Sub-Advisors may consider sales of
shares of the Trust as a factor in the selection of broker-dealers to execute
portfolio transactions. The Fund Sub-Advisor will make such allocations if
commissions are comparable to those charged by nonaffiliated, qualified
broker-dealers for similar services.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Fund and to the corresponding Fund
Sub-Advisor, it is the opinion of the management of the Funds that such
information is only supplementary to the Fund Sub-Advisor's own research effort,
since the information must still be analyzed, weighed and reviewed by the Fund
Sub-Advisor's staff. Such information may be useful to the Fund Sub-Advisor in
providing services to clients other than the Funds, and not all such information
is used by the Fund Sub-Advisor in connection with the Funds. Conversely, such
information provided to the Fund Sub-Advisor by brokers and dealers through whom
other clients of the Fund Sub-Advisor effect securities transactions may be
useful to the Fund Sub-Advisor in providing services to the Funds.
In certain instances there may be securities which are suitable for a
Fund as well as for one or more of the respective Fund Sub-Advisor's other
clients. Investment decisions for a Fund and for the Fund Sub-Advisor's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment advisor, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Fund is concerned.
However, it is believed that the ability of a Fund to participate in volume
transactions will produce better executions for the Fund.
39
<PAGE>
Commissions
The Portfolios of Select Advisors Portfolios in which each Fund (other
than Standby Income Fund) invested and Standby Income Fund paid the following
brokerage commissions for the periods indicated:
<TABLE>
<CAPTION>
Emerging International Income Value Growth & Balanced Bond Fund Standby
Aggregate Growth Equity Fund Opportunity Plus Income Fund Fund - - Class A Income
Commission Fund - - Fund - Class A Fund - Class A Class A Fund
Class A Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5/1/98*
to 12/31/99 N/A N/A N/A $44,920 N/A N/A N/A
For the Year
Ended 12/31/98 $21,590 $64,980 $0 N/A $45,667 $9,730 $60 $0
For the Year
Ended 12/31/97 $13,110 $57,618 $0 N/A $94,360 $12,476 $0 $0
For the Year
Ended 12/31/96 $11,550 $27,326 $0 N/A $45,100 $4,379 $0 $0
* Commencement of operations.
</TABLE>
Capital Stock and Other Securities
Capital Stock
The Trust's Amended Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest (par
value $0.00001 per share). The Trust currently consists of eight series (each a
"Fund" and collectively, the "Funds") of shares. The shares of each series
participate equally in the earnings, dividends and assets of the particular
series. The Trust may create and issue additional series of shares. The Trust's
Declaration of Trust permits the Trustees to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in a series. Each share represents an equal proportionate
interest in a series with each other share. Shares have no pre-emptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth below. Shareholders are entitled to one vote for each share held.
Each Fund, other than the Standby Income Fund, is divided into three
classes of shares: Class A Shares, Class C Shares and Class Y Shares. The
following discussion applies to all classes of shares.
The Trust is not required to hold annual meetings of shareholders but
the Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have, under certain circumstances, the right to communicate with
other shareholders for the purpose of removing one or more Trustees. Upon
liquidation of a Fund, shareholders of that Fund would be entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
The Trust was organized on February 7, 1994 as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations. However, the Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of this
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or a Trustee. The Declaration of Trust provides for
indemnification from the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations, a possibility that the Trust believes is remote. Upon
payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Trustees intend to conduct the operations of the Trust in a manner so
as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
40
<PAGE>
Each investor in a Fund may add to or reduce its investment in the Fund
on each day the Fund determines its net asset value. At the close of each such
business day, the value of each investor's beneficial interest in the Fund will
be determined by multiplying the net asset value of the Fund by the percentage,
effective for that day, which represents that investor's share of the aggregate
beneficial interests in the Fund. Any additions or withdrawals which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Fund will
then be re-computed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Fund as of the close of
business on such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor's investment in the Fund effected
as of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Fund as of the close of business on such
day plus or minus, as the case may be, the amount of the net additions to or
withdrawals from the aggregate investments in the Fund by all investors in the
Fund. The percentage so determined will then be applied to determine the value
of the investor's interest in the Fund as of the close of business on the
following business day.
When matters are submitted for shareholder vote or when shareholders
are asked to provide voting instructions, shareholders of each Fund will have
one vote for each full share held and a proportionate, fractional vote for
fractional shares held. The separate vote of a Fund is required on any matter
affecting the Fund unless the interests of each Fund in the matter are identical
or the matter does not affect any interest of the Fund. Shareholders of a Fund
are not entitled to vote or to provide voting instructions on matters that do
not affect the Fund and do not require a separate vote of the Fund. Shareholders
of all Funds will vote together to elect trustees and for certain other matters.
Under certain circumstances the shareholders of one or more Funds could control
the outcome of these votes.
There normally will be no meeting of shareholders for the purpose of
electing Trustees of the Trust unless and until such time as less than a
majority of the Trust's Trustees holding office have been elected by
shareholders, at which time the Trust's Trustees then in office will call a
shareholders meeting for the election of Trustees. Any Trustee of the Trust may
be removed from office upon the vote of shareholders holding at least two-thirds
of the Trust's outstanding shares at a meeting called for that purpose. The
Trustees are required to call such a meeting upon the written request of
shareholders holding at least 10% of the Trust's outstanding shares. The Trust
will also assist shareholders in communicating with one another as provided for
in the 1940 Act.
The Trust sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Funds.
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
41
<PAGE>
Purchase, Redemption and Pricing of Shares
Offering Price
Shares of the Funds are offered at NAV (as defined in the
Prospectuses), plus any applicable sales charges.
Valuation of Securities
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in accordance with procedures
established by the Trust. Such procedures include the use of independent pricing
services, which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. All portfolio securities with a
remaining maturity of less than 60 days are valued at amortized cost, which
approximates market.
The accounting records of the Funds are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and forward
contracts denominated in foreign currencies are translated into U.S. dollars at
the prevailing exchange rates at the end of the period. Purchases and sales of
securities, income receipts, and expense payments are translated at the exchange
rate prevailing on the respective dates of such transactions. Reported net
realized gains and losses on foreign currency transactions represent net gains
and losses from sales and maturities of forward currency contracts, disposition
of foreign currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received.
The problems inherent in making a good faith determination of the value
of restricted securities are recognized in the codification effected by SEC
Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting Series Release
No. 113)) which concludes that there is "no automatic formula" for calculating
the value of restricted securities. It recommends that the best method simply is
to consider all relevant factors before making any calculation. According to FRR
1 such factors would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the Fund
Sub-Advisor will value such securities based upon all relevant factors as
outlined in FRR 1.
Redemption in Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Trust, or the Fund, as the case may be, and valued as they are for purposes
of computing the Fund's net asset value, as the case may be (a redemption in
kind). If payment is made in securities, an investor, including the Fund, may
incur transaction expenses in converting these securities into cash. The Trust,
on behalf of each Fund, has elected, however, to be governed by Rule 18f-1 under
the 1940 Act as a result of which each Fund is obligated to redeem shares or
beneficial interests, as the case may be, with respect to any one investor
during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund at the beginning of the period.
42
<PAGE>
Class A Sales Charges
Shares are sold at the public offering price next determined after a
purchase order is received as discussed above. Each Fund, except the Standby
Income Fund, imposes a sales charge in accordance with the following schedules:
Value Plus Fund, Emerging Growth Fund, International Equity Fund,
Growth & Income Fund and Balanced Fund
<TABLE>
<CAPTION>
Amount of Investment Sales Charge as % Sales Charge as Dealer Distributor
of Offering Price % of Net Asset Concession Retention
Value
<S> <C> <C> <C> <C> <C>
Under $50,000........................................ 5.75% 6.10% 5.00% 0.75%
$50,000 but less than $100,000....................... 4.50% 4.71% 3.75% 0.75%
$100,000 but less than $250,000...................... 3.50% 3.63% 2.75% 0.75%
$250,000 but less than $500,000...................... 2.50% 2.56% 2.00% 0.50%
$500,000 but less than $1 million.................... 2.00% 2.04% 1.60% 0.40%
$1 million or more*.................................. 0.00% 0.00% 0.00% 0.00%
Income Opportunity Fund and Bond Fund
Amount of Investment Sales Charge as % Sales Charge as Dealer Distributor
of Offering Price % of Net Asset Concession Retention
Value
Under $25,000........................................ 4.75% 4.99% 4.00% 0.75%
$25,000 but less than $50,000........................ 4.50% 4.71% 3.75% 0.75%
$50,000 but less than $100,000....................... 4.00% 4.17% 3.25% 0.75%
$100,000 but less than $250,000...................... 3.50% 3.63% 2.75% 0.75%
$250,000 but less than $500,000...................... 2.50% 2.56% 2.00% 0.50%
$500,000 but less than $1 million.................... 2.00% 2.04% 1.60% 0.40%
$1 million or more*.................................. 0.00% 0.00% 0.00 % 0.00%
----------
</TABLE>
* There is no initial sales charge on purchases of $1 million or more,
including purchases involving a Letter of Intent, Right of
Accumulation, Aggregation or Concurrent Purchases (as described below).
However, a contingent deferred sales charge ("CDSC") of 1% is imposed
on such purchases if liquidated within the first year after purchase,
except for exchanges or certain qualified retirement plans. See
"Reduced Sales Charges" for information as to ways in which initial
sales charges may be reduced.
On sales at net asset value, Dealers may be paid referral fees by the
Distributor directly; such fees will not be borne by the investor.
From time to time, the Distributor may reallow to Dealers the full
amount of the sales charge.
Class C Contingent Deferred Sales Charge ("CDSC")
Class C Shares of any Fund may be purchased without an initial sales
charge. However, (with the exception of Standby Income Fund) you will bear your
proportionate share of payments made pursuant to the Trust's distribution and
service plan described hereunder under the caption "Distribution and Service
Plan." Such payments will affect the net asset value of shares in each Fund. In
addition, with the exception of Standby Income Fund, a CDSC of 1.0% applies to
redemptions of shares made within one year after the date of their purchase. No
such charge is imposed if the shares redeemed have been acquired through the
reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of the purchase payments. In determining whether a CDSC is payable, it is
assumed that the redemption is made from the earliest purchase payments(s) that
remain invested in the Funds. To determine if amounts are available for
redemption free of any CDSC, all of your purchase payments (reduced by any
amounts previously withdrawn) are aggregated, and the current value of all
shares to be redeemed is aggregated. All CDSC's are paid to the Distributor.
43
<PAGE>
The CDSC is waived for redemptions of shares by: (1) current or retired
directors, trustees, partners, officers and employees of a Trust, the Portfolio
Trust, the Distributor, the Advisor or any Portfolio Advisor, certain family
members of the above persons, and trusts or plans primarily for such persons;
(2) trustees or other fiduciaries purchasing shares for certain retirement plans
and (3) participants in certain pension, profit-sharing or employee benefit
plans that are sponsored by the Distributor and its affiliates.
The CDSC is also waived for exchanges of shares (except if shares
acquired by exchange are then redeemed within 12 months of the initial
purchase); for redemptions in connection with mergers, acquisitions and exchange
offers; for distributions from qualified retirement plans and other employee
benefit plans; for distributions from custodial accounts under Section 403(b)(7)
of the Internal Revenue Code of 1986, as amended (the "Code"), or IRAs due to
death, disability or attainment of age 591/2; for tax-free returns of excess
contributions to IRAs; and for any partial or complete redemptions following the
death or disability of a shareholder, provided the redemption is made within one
year of death or initial determination of disability.
Reduced Initial Sales Charges For Class A Shares
Aggregation
Sales charge discounts are available for certain aggregated
investments. Investments which may be aggregated include those made by you, your
spouse and your children under the age of 21, if all parties are purchasing
shares for their own accounts, which may include purchases through employee
benefit plans such as an IRA, individual-type 403(b) plan or single-participant
Keogh-type plan or by a business solely controlled by these individuals (for
example, the individuals own the entire business) or by a trust (or other
fiduciary arrangement) solely for the benefit of these individuals. Individual
purchases by trustees or other fiduciaries may also be aggregated if the
investments are: (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above; (2) made for two or
more employee benefit plans of a single employer or of affiliated employers as
defined in the 1940 Act, other than employee benefit plans described above; or
(3) for a common trust fund or other pooled account not specifically formed for
the purpose of accumulating Fund shares. Purchases made for nominee or street
name accounts (securities held in the name of a Dealer or another nominee such
as a bank trust department instead of the customer) may not be aggregated with
those made for other accounts and may not be aggregated with other nominee or
street name accounts unless otherwise qualified as described above.
Concurrent Purchases
To qualify for a reduced sales charge, you may combine concurrent
purchases of shares of two or more Funds (other than the Standby Income Fund).
For example, if you concurrently invest $25,000 in one Fund and $25,000 in
another Fund, the sales charge would be reduced to reflect a $50,000 purchase.
Right of Accumulation
Reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase shares of a Fund at the
offering price applicable to the total of (a) the dollar amount then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's combined holdings. For any such right of accumulation to be made
available, the Transfer Agent must be provided at the time of purchase, by the
purchaser or the purchaser's securities dealer, with sufficient information to
permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
44
<PAGE>
Letter of Intent
Reduced sales charges are applicable to purchases aggregating a minimum
of $25,000 for the Income Opportunity Fund, the Bond Fund, and the Standby
Income Fund and $50,000 for each other Touchstone Fund, of the shares of the
Fund made within a 24 month period starting with the first purchase pursuant to
a Letter of Intent. The Letter of Intent is not a binding obligation to purchase
any amount of shares; however, its execution will result in the purchaser paying
a lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of shares of the Fund presently held on the date of the first purchase
under the Letter of Intent, may be included as a credit toward the completion of
such Letter, but the reduced sales charge applicable to the amount covered by
such Letter will be applied only to new purchases. If the total amount of shares
does not equal the amount stated in the Letter of Intent, the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Shares equal to 5% of the intended amount will be held in escrow during
the 24 month period (while remaining registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intent must be 5% of
the dollar amount of such Letter. If, during the term of such Letter, a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the shares
then being purchased under such Letter, but there will not be a retroactive
reduction of the sales charges on any previous purchase. The value of any shares
redeemed or otherwise disposed of by the purchaser prior to termination or
completion of the Letter of Intent will be deducted from the total purchases
made under such Letter.
You must advise your financial advisor if you qualify for a reduction
in sales charge using one or any combination of the methods described above.
Waiver of Sales Charge
Sales charges do not apply to shares of the Funds purchased: (1) by
registered representatives or other employees (and their immediate family
members) of broker/dealers, banks or other financial institutions having
agreements with the Distributor; (2) by any director, officer or other employee
(and their immediate family members) of (A) The Western and Southern Life
Insurance Company or any of its affiliates, (B) any Portfolio Advisor; (C)
RogersCasey; (D) Investors Bank & Trust Company; (E) the Transfer Agent; and (F)
those firms that provide legal, accounting, public relations or other services
to the Distributor or Advisor; (3) by clients of any Portfolio Advisor or of
RogersCasey who are referred to the Distributor by a Portfolio Advisor or
RogersCasey; (4) in accounts as to which a broker-dealer charges an asset
management fee, provided the broker-dealer has an agreement with the
Distributor; (5) as part of an employee benefit plan having more than 25
eligible employees or a minimum of $250,000 invested in the Fund; (6) as part of
certain promotional programs established by the Fund and/or Distributor; (7) by
one or more members of a group of persons engaged in a common business,
profession, civic or charitable endeavor or other activity and retirees and
immediate family members of such persons pursuant to a marketing program between
the Distributor and such group; (8) by bank trust departments; and (9) through
Processing Organizations described in the Prospectuses.
There is no initial sales charge on your purchase of shares in a Roth
IRA or Roth Conversion IRA if (1) you purchase the shares with the proceeds of a
redemption made within the previous 180 days from another mutual fund complex
and (2) you paid an initial sales charge or a contingent deferred sales charge
on your investment in the other mutual fund complex.
Immediate family members are defined as the spouse, parents, siblings,
natural or adopted children, mother-in-law, father-in-law, brother-in-law and
sister-in-law of a director, officer or employee. The term "employee" is deemed
to include current and retired employees.
Exemptions must be qualified in advance by the Distributor. Your
financial advisor should call the Distributor for more information.
45
<PAGE>
Taxation of the Funds
The Trust intends to qualify annually and to elect each Fund to be
treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among
other things: (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of: (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year; (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year; and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared by
the Fund in October, November or December with a record date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
Each Fund shareholder will receive, if appropriate, various written
notices after the close of the Fund's prior taxable year as to the federal
income status of his dividends and distributions which were received from the
Fund during the Fund's prior taxable year. Shareholders should consult their tax
advisors as to any state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded from federal income
taxation and the dollar amount subject to such income taxation, if any, will
vary for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. To the extent that the Fund earns taxable
net investment income, the Fund intends to designate as taxable dividends the
same percentage of each dividend as its taxable net investment income bears to
its total net investment income earned. Therefore, the percentage of each
dividend designated as taxable, if any, may vary.
Foreign Taxes
Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective rate
of foreign tax in advance since the amount of each applicable Fund's assets to
be invested in various countries will vary.
If the Fund is liable for foreign taxes, and if more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
stocks or securities of foreign corporations, it may make an election pursuant
to which certain foreign taxes paid by it would be treated as having been paid
directly by shareholders of the entities, such as the corresponding Fund, which
have invested in the Fund. Pursuant to such election, the amount of foreign
taxes paid will be included in the income of the corresponding Fund's
46
<PAGE>
shareholders, and such Fund shareholders (except tax-exempt shareholders) may,
subject to certain limitations, claim either a credit or deduction for the
taxes. Each such Fund shareholder will be notified after the close of the Fund's
taxable year whether the foreign taxes paid will "pass through" for that year
and, if so, such notification will designate (a) the shareholder's portion of
the foreign taxes paid to each such country and (b) the portion which represents
income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit
in any year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest and
certain foreign currency gains. Because capital gains realized by the Fund on
the sale of foreign securities will be treated as U.S.-source income, the
available credit of foreign taxes paid with respect to such gains may be
restricted by this limitation.
Distributions
Dividends paid out of the Fund's investment company taxable income will
be taxable to a U.S. shareholder as ordinary income. Distributions of net
capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long the shareholder has held the
Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares, rather
than cash, generally will have a cost basis in each such share equal to the net
asset value of a share of the Fund on the reinvestment date. Shareholders will
be notified annually as to the U.S. federal tax status of distributions.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other
disposition of any Class of shares of a Fund, or upon receipt of a distribution
in complete liquidation of a Fund, generally will be a capital gain or loss
which will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment plan) within a
period of 61 days beginning 30 days before and ending 30 days after disposition
of the shares. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
Foreign Withholding Taxes
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
Backup Withholding
A Fund may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
Foreign Shareholders
The tax consequences to a foreign shareholder of an investment in a
Fund may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisors with respect to the particular tax
consequences to them of an investment in a Fund.
47
<PAGE>
Other Taxation
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
Fund shareholders may be subject to state and local taxes on their Fund
distributions. Shareholders are advised to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a Fund.
Performance Information
From time to time, quotations of a Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
Yield:
Yields for a Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month period, net
of expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
at the end of the period, and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. Income is calculated
for purposes of yield quotations in accordance with standardized methods
applicable to all stock and bond mutual funds. Dividends from equity investments
are treated as if they were accrued on a daily basis, solely for the purpose of
yield calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distributions of the Fund paid over the same period or the rate of income
reported in the Fund's financial statements. For the 30-day period ended
December 31, 1998, the Funds' yields were as follows:
<TABLE>
<CAPTION>
Balanced Bond
Fund - Class A Balanced Income Opportunity Income Fund - Class A Bond Fund - Standby
Fund - Fund - Class A Opportunity Class C Income
Class C Fund - Class C Fund
<S> <C> <C> <C> <C> <C> <C>
2.31% 1.66% 17.45% 17.21% 5.41% 4.30% 5.04%
For the 7-day period ended December 31, 1998, the Standby Income Fund's
yield was 5.07%.
</TABLE>
Total return - Class A Shares
A Fund's standardized average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the end of
the periods. A Fund may also calculate non-standardized total return figures
which represent aggregate (not annualized) performance over any period or
year-by-year performance, such as the following.
48
<PAGE>
<TABLE>
<CAPTION>
Average Annual Emerging International Income Value Plus Growth & Balanced Bond Standby
Total Return Growth Equity Fund Opportunity Fund - Income Fund - Fund - Fund - Income
(Including Sales Fund - Fund - Class A Class A Class A Class A Fund**
Charge) - Class Class A Class A
A
For the Period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5/1/98* to 12/31/98 N/A N/A N/A -1.71% N/A N/A N/A N/A
For the Year Ended
12/31/98 -3.29% 13.01% -17.84% N/A .71% -2.02 3.40% 5.49%
For the Period
10/3/94* to 12/31/98
14.53% 8.25% 6.41% N/A 16.68% 13.13% 7.11% 5.28%
Average Annual
Total Return
(Without Sales
Charge)
For the Period
5/1/98* to 12/31/98 N/A N/A N/A 4.29% N/A N/A N/A N/A
For the Year Ended
12/31/98 2.57% 19.94% -13.77% N/A 6.87% 3.98% 8.56% 5.49
For the Period
10/3/94 * to 16.14% 9.77% 7.64% N/A 18.32% 14.72% 8.34% 5.28%
12/31/98
Aggregate
Total Return
(Including Sales
Charge)
For the Period
5/1/98* to 12/31/98 N/A N/A N/A -1.71% N/A N/A N/A N/A
For the Year Ended -3.29% 13.01% -17.84% N/A .71% -2.02% 3.40% 5.49%
12/31/98
For the Period
10/3/94 * to 77.90% 40.02% 30.21% N/A 92.53% 68.85% 33.84% 24.40%
12/31/98
Aggregate
Total Return
(Without Sales
Charge)
For the Period
5/1/98* to 12/31/98 N/A N/A N/A 4.29% N/A N/A N/A N/A
For the Year Ended 2.57% 19.94% -13.77% N/A 6.87% 3.98% 8.56% 5.49%
12/31/98
For the Period
10/3/94 * to 88.89% 48.56% 36.72% N/A 104.28% 79.15% 40.54% 24.40%
12/31/98
- ------------
* Commencement of operations
**Standby Income Fund may be purchased and redeemed at net asset value.
</TABLE>
49
<PAGE>
Total return - Class C Shares
A Fund's standardized average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the end of
the periods. A Fund may also calculate non-standardized total return figures
which represent aggregate (not annualized) performance over any period or
year-by-year performance, such as the following
<TABLE>
<CAPTION>
Average Emerging International Income Value Plus Growth & Balanced Bond
Annual Total Return Growth Equity Fund - Opportunity Fund - Income Fund - Fund - Fund -
Fund - Class C Fund - Class C Class C Class C Class C Class C
Class C
For Period 5/1/98*
<S> <C> <C> <C> <C> <C> <C> <C>
to 12/31/98 N/A N/A N/A 2.60% N/A N/A N/A
For the Year Ended
12/31/98 1.95% 18.99% -14.52% N/A 5.97% 3.31% 6.90%
For the Period
10/3/94* to
12/31/98 15.07% 8.95% 6.80% N/A 17.50% 13.88% 7.34%
Aggregate
Total Return
For Period 5/1/98*
to 12/31/98 N/A N/A N/A 2.60% N/A N/A N/A
For the Year Ended
12/31/98 1.95% 18.99% -14.52% N/A 5.97% 3.31% 6.90%
For the Period
10/3/94* to
12/31/98 81.48% 43.89% 32.21% N/A 98.33% 73.67% 35.10%
- ------------------------
* Commencement of operations
</TABLE>
Any total return quotation provided for a Fund should not be considered
as representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary based not
only on the type, quality and maturities of the securities held in the
corresponding Fund, but also on changes in the current value of such securities
and on changes in the expenses of the Fund and the corresponding Fund. These
factors and possible differences in the methods used to calculate total return
should be considered when comparing the total return of a Fund to total returns
published for other investment companies or other investment vehicles. Total
return reflects the performance of both principal and income.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services, to the
performance of various indices and investments for which reliable performance
data is available. The performance figures of unmanaged indices may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. The performance of the Funds may also be
compared to averages, performance ratings, or other information prepared by
recognized mutual fund statistical services. Evaluations of a Fund's performance
made by independent sources may also be used in advertisements concerning the
Fund. Sources for a Fund's performance information could include Asian Wall
Street Journal, Barron's, Business Week, Changing Times, The Kiplinger Magazine,
Consumer Digest, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund
Performance Analysis, Money, The New York Times, Personal Investing News,
Personal Investor, Success, U.S. News and World Report, The Wall Street Journal
and CDA/Weisenberger Investment Companies Services.
50
<PAGE>
Financial Statements
The following financial statements for the Trust and the Standby Income
Fund at and for the fiscal periods indicated are incorporated herein by
reference from their current reports to shareholders filed with the SEC pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy of each such
report will be provided, without charge, to each person receiving this Statement
of Additional Information.
TOUCHSTONE SERIES TRUST - Class A* (other than the Standby Income Fund)
Schedule of Investments, December 31, 1998 Statement of Assets and
Liabilities, December 31, 1998 Statement of Operations, for the year
ended December 31, 1998
Statement of Changes in Net Assets for the years ended December 31,
1998 and December 31, 1997
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
STANDBY INCOME FUND
Schedule of Investments, December 31, 1998 Statement of Assets and
Liabilities, December 31, 1998 Statement of Operations, for the year
ended December 31, 1998
Statement of Changes in Net Assets for the years ended December 31,
1998 and December 31, 1997
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
* The outstanding shares of each series of Touchstone Series Trust (formerly
Select Advisors Trust A), other than the Standby Income Fund, were redesignated
as Class A shares, effective after the close of business on December 31, 1998.
51
<PAGE>
A-1
Appendix
Bond and Commercial Paper Ratings
Set forth below are descriptions of the ratings of Moody's and S&P,
which represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality.
Moody's Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Unrated. Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
A-1
<PAGE>
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effect of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
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 Aa-1, A-1, Baa-1, Ba-1 and B-1.
S&P's Bond Ratings
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from higher rated issues only in a small degree.
A. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in the highest rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB, B, CCC, CC and C. Bonds rated BB, B, CCC, CC, and C are regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of this obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
NR. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does
not rate a particular type of obligation as a matter of policy.
S&P's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by S&P,
which uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
A-2
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
A-3
<PAGE>
Distributor
Touchstone Securities, Inc. Touchstone Series Trust
311 Pike Street
Cincinnati, Ohio 45202 Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Income Opportunity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Investment Advisor of each Fund Touchstone Balanced Fund
Touchstone Bond Fund A
Touchstone Advisors, Inc. Touchstone Bond Fund
311 Pike Street Touchstone Standby Income Fund
Cincinnati, Ohio 45202
Class A, Class C and Class Y Shares
Transfer Agent
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
Administrator, Custodian and
Fund Accounting Agent
Investors Bank & Trust Company Statement of Additional Information
200 Clarendon Street May 1, 1999
Boston, Massachusetts 02116
Independent Accountants
PricewaterhouseCoopers LLP
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
<PAGE>
Pro Forma Unaudited Financial Statements
INTRODUCTORY PARAGRAPH
The proposed reorganization of the Touchstone Funds includes the merger of
Touchstone Bond Fund into Intermediate Bond Fund. Touchstone Bond Fund is a
series of Touchstone Series Trust. Touchstone Series Trust is a registered
open-end investment company. It is organized as a Massachusetts business trust.
The Intermediate Bond Fund is a series of Countrywide Investment Trust.
Countrywide Investment Trust is a registered open-end investment company. It is
organized as a Massachusetts business trust.
In the reorganization, Touchstone Series Trust will transfer all of the assets
of Touchstone Bond Fund, subject to its liabilities, to Intermediate Bond Fund.
Class A shares of Intermediate Bond Fund that Touchstone Series Trust receives
in the exchange will be distributed pro rata to Class A shareholders of
Touchstone Bond Fund. Class C shares of Intermediate Bond Fund that Touchstone
Series Trust receives in the exchange will be distributed pro rata to Class C
shareholders of Touchstone Bond Fund. After the exchange, Touchstone Bond Fund
will be dissolved. As a result of the reorganization, each shareholder of Class
A or Class C shares of Touchstone Bond Fund will own shares of the corresponding
class of Intermediate Bond Fund equal in value to the shares of Touchstone Bond
Fund that he owns immediately before the reorganization.
The Western and Southern Life Insurance Company Separate Account A is the only
shareholder of Class Y shares of Touchstone Bond Fund. This shareholder has
informed Touchstone Advisors that it intends to redeem its shares of the
Touchstone Bond Fund before the completion of the reorganization. Therefore, no
Class Y shares of the Intermediate Bond Fund will be issued in the
reorganization.
The accounting survivor for the purposes of the merger will be Touchstone Bond
Fund. The pro forma unaudited combining statements of assets and liabilities
reflect the financial position of the merged funds as though the reorganization
occurred on September 30, 1999. The pro forma unaudited statement of operations
reflects the results of operations of the merged funds as though the
reorganization occurred at the beginning of the period presented. The pro forma
unaudited Schedule of Investments is presented as though the reorganization
occurred on September 30, 1999.
<PAGE>
Touchstone Combined Bond Fund
Combined Schedule of Investments
Touchstone Bond Fund
Combined Schedule of Investments (unaudited)
September 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE SECURITY DESCRIPTION RATE MATURITY MARKET VALUE
AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS - 2.17%
CENTRAL AMERICA
<S> <C> <C> <C> <C>
125,000 Central America International Development, Series F (restricted) 10.00% 12/01/11 141,671
125,000 Central America International Development, Series G (restricted) 10.00% 12/01/11 141,671
125,000 Central America International Development, Series H (restricted) 10.00% 12/01/11 141,671
HONDURAS
100,000 Republic of Honduras Interntional Development, Series C (restricted) 13.00% 06/01/06 121,774
100,000 Republic of Honduras Interntional Development, Series D (restricted) 13.00% 06/01/11 138,377
------------
TOTAL AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS
(Amortized Cost $575,000) 685,164
ASSET-BACKED SECURITES - 4.30%
40,081 Chase Manhattan Grantor Trust, Series 1996-A, Class A 5.20% 02/15/02 39,970
93,432 Navistar Financial Corp. Owner Trust, Series 1996-A, Class A2 6.35% 11/15/02 93,544
496,451 World Omni Auto Lease, Series 1997-B, Class A3 6.18% 11/25/03 496,753
750,000 Chemical Credit Card Master Trust, Series 1996-2, Class A 5.98% 09/15/08 725,423
------------
TOTAL ASSET-BACKED SECURITES
(Amortized Cost $1,334,420) 1,355,690
SOVEREIGN GOVERNMENT OBLIGATIONS - 3.25%
1,000,000 Province of Ontario 7.38% 01/27/03 1,025,300
------------
TOTAL SOVEREIGN GOVERNMENT OBLIGATIONS
(Amortized Cost $1,077,440) 1,025,300
U.S. TREASURY OBLIGATIONS - 6.93%
900,000 U.S. Treasury Bond 7.25% 05/15/16 972,844
1,200,000 U.S. Tresury Notes 6.00% 08/15/09 1,209,372
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Amortized Cost $2,255,016) 2,182,216
U.S. GOVERNMENT AGENCY ISSUES - 4.84%
1,600,000 Federal Home Loan Mortgage Association 6.45% 04/29/09 1,523,856
------------
TOTAL U.S. GOVERNMENT AGENCY ISSUES
(Amortized Cost $1,599,072) 1,523,856
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 34.18%
1,250,000 Federal Home Loan Bank 5.63% 03/19/01 1,243,239
1,000,000 Federal National Mortgage Association 5.75% 04/15/03 982,658
51,384 SBA #1987-20A 8.45% 01/01/07 52,158
121,671 Federal Home Loan Mortgage Corporation 6.00% 05/01/09 118,300
349,741 Government National Mortgage Association 7.00% 06/15/09 350,248
436,331 Federal Home Loan Mortgage Corporation 6.00% 08/01/10 423,333
37,144 Federal Home Loan Mortgage Corporation 6.00% 10/01/10 36,038
984,876 Federal National Mortgage Association 7.00% 03/01/12 985,152
228,081 Government National Mortgage Association 9.00% 08/15/19 240,165
295,936 Government National Mortgage Association 6.50% 01/15/24 285,617
<PAGE>
Touchstone Combined Bond Fund
Combined Schedule of Investments
74,440 Government National Mortgage Association 7.50% 12/15/27 74,707
947,974 Government National Mortgage Association 7.00% 04/15/28 933,906
823,877 Government National Mortgage Association 7.00% 05/15/28 808,962
1,228,239 Federal National Mortgage Association 6.50% 07/01/28 1,178,020
247,626 Government National Mortgage Association 6.50% 09/15/28 236,766
977,354 Federal Home Loan Mortgage Corporation 6.00% 02/01/29 912,115
981,006 Government National Mortgage Association 6.50% 03/15/29 938,636
986,906 Federal National Mortgage Association 7.00% 08/01/29 970,274
------------
TOTAL U.S. GOVERNMENT AGENCY & MORTGAGE BACKED SECURITIES
(Amortized Cost $10,995,416) 10,770,294
CORPORATE BONDS - 36.69%
175,000 Pacific Gas & Electric Co. 6.63% 06/01/00 175,369
49,276 Mercantile Safe Deposit (restricted) 12.13% 01/02/01 49,399
350,000 Florida Residential Property & Casualty Co. 7.25% 07/01/02 350,102
259,000 May Department Stores Co. 9.88% 12/01/02 282,533
380,000 Bankers Trust Corp. 7.25% 01/15/03 382,816
68,000 U.S. Leasing International, Inc. 6.63% 05/15/03 67,471
1,000,000 Raytheon 5.70% 11/01/03 955,439
500,000 AT&T Corp. 5.63% 03/15/04 479,185
500,000 Bank of New York 8.50% 12/15/04 529,719
66,000 Kaiser Permanente 9.55% 07/15/05 72,457
400,000 MCI WorldCom 8.88% 01/15/06 423,239
510,000 Honeywell, Inc. 8.63% 04/15/06 549,148
500,000 Harris Corporation 6.65% 08/01/06 501,574
225,000 Credit Suisse First Boston - London 7.90% 05/01/07 214,991
750,000 Norfolk Southern 7.35% 05/15/07 751,295
500,000 Union Oil of California Corp. Medium Term Notes 6.70% 10/15/07 478,580
50,000 Berkley (W.R.) Corp. 9.88% 05/15/08 56,600
500,000 International Business Machines 5.38% 02/01/09 449,705
500,000 Pepsi Bottling, 144A 5.63% 02/17/09 448,946
575,000 General Electric Capital Corp. Medium Term Notes 7.50% 06/15/09 593,130
250,000 News America Holdings 10.13% 10/15/12 275,331
10,000 Union Camp Corp. 8.63% 04/15/16 10,320
35,000 Kraft, Inc. 8.50% 02/15/17 36,111
500,000 Consumers Energy, Series B 6.50% 06/15/18 475,022
150,000 Deere & Co. 8.95% 06/15/19 167,361
115,000 Rohm & Haas Co. 9.80% 04/15/20 134,386
165,000 Questar Pipeline Co. 9.38% 06/01/21 177,692
120,000 Jersey Central Power & Light Co. 9.20% 07/01/21 125,168
250,000 Georgia-Pacific 9.50% 05/15/22 268,858
85,000 Southwestern Public Service Co. 8.20% 12/01/22 84,703
130,000 Union Electric Co. 8.00% 12/15/22 128,862
250,000 Husky Oil 8.90% 08/15/28 242,112
350,000 First Union 6.55% 10/15/35 339,468
750,000 Safeco Capital 8.07% 07/15/37 662,219
650,000 Columbia/HCA Health 6.73% 07/15/45 623,182
------------
TOTAL CORPORATE BONDS
(Amortized Cost $12,034,017) 11,562,493
PREFERRED STOCKS - 2.98%
8,700 Ohio Power, Series A 211,519
9,600 Appalachian Power 235,800
20,000 Transcanada Pipelines 491,250
------------
TOTAL PREFERRED STOCKS
(Amortized Cost $ 984,461) 938,569
<PAGE>
Touchstone Combined Bond Fund
Combined Schedule of Investments
COMMERCIAL PAPER - 1.97%
620,000 GTE 10/01/99 620,000
------------
TOTAL COMMERCIAL PAPER
(Amortized Cost $619,904) 620,000
TOTAL INVESTMENTS AT VALUE - 97.31% 30,663,582
------------
(COST $ 31,474,372)
CASH AND OTHER ASSETS - 2.69% 848,332
- ----------------------------------------------------------------------- ------------
NET ASSETS - 100.0% 31,511,914
- ----------------------------------------------------------------------- ------------
</TABLE>
<PAGE>
COUNTRYWIDE FUNDING
INTERMEDIATE TERM BOND FUND
PORTFOLIO OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
PAR MARKET
VALUE VALUE
(000'S) INVESTMENT SECURITIES - 98.6%
U.S. TREASURY OBLIGATIONS - 10.4%
1,200 U.S. Tresury Notes, 6.00%, 8/15/09
(Amortized Cost $1,221) $ 1,209,372
U.S. GOVERNMENT AGENCY ISSUES - 13.0%
1,600 FHLMC, 6.45%, 4/29/09
(Amortized Cost $1,599) $ 1,523,856
U.S. GOVERNMENT AGENCY AND MORTGAGE-BACKED SECURITIES
- 32.7%
52 SBA #1987-20A, 8.45%, 1/01/07 $ 52,158
985 FNMA #313386, 7.00%, 3/01/12 985,152
948 GNMA #780777, 7.00%, 4/15/28 933,906
977 FHLMC #C21763, 6.00%, 2/01/29 912,115
981 GNMA #482725, 6.50%, 3/15/29 938,636
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Amortized Cost $1,599) $ 3,821,967
CORPORATE BONDS - 37.2%
175 Pacific Gas & Electric Co., 6.625%, 6/01/00 175,369
350 Florida Residential Property & Casualty Co., 7.25%, 7/01/02 350,102
259 May Department Stores Co., 9.875%, 12/01/02 282,533
380 Bankers Trust Corp., 7.25%, 1/15/03 382,816
68 U.S. Leasing International, Inc., 6.625%, 5/15/03 67,471
500 AT&T Corp., 5.625%, 3/15/04 479,185
66 Kaiser Permanente, 9.55%, 7/15/05 72,457
510 Honeywell, Inc., 8.625%, 4/15/06 549,148
500 Union Oil of California Corp. Medium Term Notes,
6.70%, 10/15/07 478,580
50 Berkley (W.R.) Corp., 9.875%, 5/15/08 56,601
575 General Electric Capital Corp. Medium Term Notes,
7.50%, 6/15/09 593,130
10 Union Camp Corp., 8.625%, 4/15/16 10,320
35 Kraft, Inc., 8.50%, 2/15/17 36,111
150 Deere & Co., 8.95%, 6/15/19 167,361
115 Rohm & Haas Co., 9.80%, 4/15/20 134,386
165 Questar Pipeline Co., 9.375%, 6/01/21 177,692
120 Jersey Central Power & Light Co., 9.20%, 7/01/21 125,168
85 Southwestern Public Service Co., 8.20%, 12/01/22 84,703
130 Union Electric Co., 8.00%, 12/15/22 128,863
4,243 TOTAL CORPORATE BONDS
(Amortized Cost $4,523) $ 4,351,994
COMMERCIAL PAPER
620 GTE, 10/01/99
(Amortized Cost $620) $ 620,000
11,606 TOTAL INVESTMENT SECURITIES - 98.6%
(Amortized Cost $11,887) $ 11,527,189
------------
OTHER ASSETS IN EXCESS OF LIABILITIES - 1.4% 159,811
<PAGE>
COUNTRYWIDE FUNDING
NET ASSETS - 100% $ 11,687,000
------------
<PAGE>
TOUCHSTONE BOND FUND
SCHEDULE OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Par
Value Security Description Rate Maturity Market Value
<S> <C> <C> <C> <C>
AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS - 3.46%
CENTRAL AMERICA
125,000 Central America International Development, Series F (restricted) 10.00% 12/01/11 141,671
125,000 Central America International Development, Series G (restricted) 10.00% 12/01/11 141,671
125,000 Central America International Development, Series H (restricted) 10.00% 12/01/11 141,671
HONDURAS
100,000 Republic of Honduras Interntional Development, Series C (restricted) 13.00% 06/01/06 121,774
100,000 Republic of Honduras Interntional Development, Series D (restricted) 13.00% 06/01/11 138,377
575,000 TOTAL AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS
(Amortized Cost $ 575,000) 685,164
ASSET-BACKED SECURITES - 6.84%
40,081 Chase Manhattan Grantor Trust, Series 1996-A, Class A 5.20% 02/15/02 39,970
1,000,000 Navistar Financial Corp. Owner Trust, Series 1996-A, Class A2 6.35% 11/15/02 93,544
496,451 World Omni Auto Lease, Series 1997-B, Class A3 6.18% 11/25/03 496,753
750,000 Chemical Credit Card Master Trust, Series 1996-2, Class A 5.98% 09/15/08 725,423
2,286,532 TOTAL ASSET-BACKED SECURITIES
(Amortized Cost $ 1,334,420) 1,355,690
CORPORATE BONDS - 36.37%
49,276 Mercantile Safe Deposit (restricted) 12.13% 01/02/01 49,399
1,000,000 Raytheon 5.70% 11/01/03 955,439
500,000 Bank of New York 8.50% 12/15/04 529,719
400,000 MCI WorldCom 8.88% 01/15/06 423,239
500,000 Harris Corporation 6.65% 08/01/06 501,574
225,000 Credit Suisse First Boston - London, 144A, FLIRB 7.90% 05/01/06 214,991
750,000 Norfolk Southern 7.35% 05/15/07 751,295
500,000 International Business Machines 5.38% 02/01/09 449,705
500,000 Pepsi Bottling, 144A 5.63% 02/17/09 448,946
250,000 News America Holdings 10.13% 10/15/12 275,331
500,000 Consumers Energy, Series B 6.50% 06/15/18 475,022
250,000 Georgia-Pacific 9.50% 05/15/22 268,858
250,000 Husky Oil 8.90% 08/15/28 242,112
350,000 First Union 6.55% 10/15/35 339,469
750,000 Safeco Capital 8.07% 07/15/37 662,218
650,000 Columbia/HCA Health 6.73% 07/15/45 623,182
7,424,276 TOTAL CORPORATE BONDS
(Amortized Cost $7,511,127) 7,210,499
MORTGAGE-BACKED SECURITIES - 35.05%
1,250,000 Federal Home Loan Bank 5.63% 03/19/01 1,243,239
1,000,000 Federal National Mortgage Association 5.75% 04/15/03 982,658
121,671 Federal Home Loan Mortgage Corporation 6.00% 05/01/09 118,300
349,741 Government National Mortgage Association 7.00% 06/15/09 350,248
436,331 Federal Home Loan Mortgage Corporation 6.00% 08/01/10 423,333
37,144 Federal Home Loan Mortgage Corporation 6.00% 10/01/10 36,038
228,081 Government National Mortgage Association 9.00% 08/15/19 240,165
295,936 Government National Mortgage Association 6.50% 01/15/24 285,617
<PAGE>
74,440 Government National Mortgage Association 7.50% 12/15/27 74,707
823,877 Government National Mortgage Association 7.00% 05/15/28 808,962
1,228,239 Federal National Mortgage Association 6.50% 07/01/28 1,178,209
247,626 Government National Mortgage Association 6.50% 09/15/28 236,766
986,906 Federal National Mortgage Association 7.00% 08/01/29 970,274
7,079,992 TOTAL MORTGAGE-BACKED SECURITIES
(Amortized Cost $7,071,659) 6,948,516
SOVEREIGN GOVERNMENT OBLIGATIONS - 5.17%
1,000,000 Province of Ontario 7.38% 01/27/03 1,025,300
(Amortized Cost $1,077,440) 1,025,300
900,000 U.S. TREASURY OBLIGATIONS - 4.91%
U.S. Treasury Bond 7.25% 05/15/06 972,844
(Amortized Cost $1,033,453) 972,844
PREFERRED STOCKS - 4.73
8,700 Ohio Power, Series A 0.00% NA 211,519
9,600 Appalachian Power 0.00% NA 235,800
20,000 Transcanada Pipelines 0.00% NA 491,250
38,300 TOTAL PREFERRED STOCKS
(Amortized Cost $984,273) 938,569
TOTAL INVESTMENTS AT VALUE - 96.53% $19,136,582
-----------
COST $19,587,372
CASH AND OTHER ASSETS - 3.47% 688,332
-------------------------------------------------------------------- -----------
NET ASSETS - 100.0% $19,824,914
-------------------------------------------------------------------- -----------
</TABLE>
<PAGE>
TOUCHSTONE BOND FUND AND COUNTRYWIDE INTERMEDATE BOND FUND
COMBINED PRO FORMA FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
TOUCHSTONE INTERMEDIATE (REFERENCES ARE
BOND BOND TO PRO FORMA
FUND FUND FOOTNOTES) PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (a) $ 19,136,582 $ 11,527,000 $ 30,663,582
Cash 512,877 -- 512,877
Receivables for:
Fund shares sold -- 2,000 2,000
Interest & Dividends 293,250 168,000 461,250
Deferred Organization expense 1,993 6,000 $ (6,000)A 1,993
Other assets -- 10,000 10,000
Receivable from Investment Advisor/Affiliate 93,519 1,000 6,000 A 100,519
- --------------------------------------------------------------------------------------- ------------
Total assets 20,038,221 11,714,000 31,752,221
- --------------------------------------------------------------------------------------- ------------
LIABILITIES:
Dividends Payable 98,122 9,000 107,122
Fund shares redeemed -- 6,000 6,000
Other accrued expenses 115,185 12,000 127,185
- --------------------------------------------------------------------------------------- ------------
Total liabilities 213,307 27,000 240,307
- --------------------------------------------------------------------------------------- ------------
NET ASSETS (B) $ 19,824,914 $ 11,687,000 $ 31,511,914
======================================================================================= ============
NET ASSETS CONSIST OF:
Paid-in capital $ 16,665,718 $ 12,477,000 $ 29,142,718
Undistributed (distributions in excess of) net
investment income 3,197,933 -- 3,197,933
Accumulated net realized gain (loss) 412,053 (430,000) (17,947)
Net unrealized appreciation (depreciation) (450,790) (360,000) (810,790)
---------------------------- ------------
Net assets applicable to shares outstanding $ 19,824,914 $ 11,687,000 $ 31,511,914
---------------------------- ------------
COMPUTATION OF NET ASSET VALUE, REDEMPTION VALUE AND
OFFERING PRICE PER SHARE:
Net assets - Class A $ 4,970,963 $ 11,687,000 13,926,351 B $ 30,584,314
Shares outstanding - Class A 507,702 1,236,000 1,492,014 B 3,235,716
Net asset value and redemption price per share - Class A $ 9.79 $ 9.45 $ 9.45
Offering price per share - Class A (b) $ 10.28 $ 9.92 $ 9.92
Net assets - Class C $ 927,600 -- $ 927,600
Shares outstanding - Class C 97,907 -- 97,907
Net asset value, offering price and redemption price
per share - Class C $ 9.47 -- $ 9.47
Net assets - Class Y $ 13,926,351 -- (13,926,351)B --
Shares outstanding - Class Y 1,039,192 -- (1,039,192)B --
Net asset value, offering price and redemption price
per share - Class Y $ 13.40 -- --
(a) Cost of investments of: $ 19,587,372 $ 11,887,000 $ 31,474,372
(b) The offering price per share is calculated as follows: Net Asset Value Per Share/(1-maximum sales load).
</TABLE>
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Adjustments
(References are
Touchstone Intermediate to Pro Forma
Bond Bond Footnotes) Pro Forma
Fund Fund Fund
------------- ------------- ---------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income $1,259,324 $1,076,000 $2,335,324
Dividend income 91,966 - 91,966
- --------------------------------------------------------------------------------------------------- ---------------
Total investment income 1,351,290 1,076,000 2,427,290
- --------------------------------------------------------------------------------------------------- ---------------
EXPENSES:
Investment advisory fees 109,210 78,000 $ (9,648) C 177,562
Sponsor fees 32,765 - (32,765) D -
Custody, administration and fund accounting fees 99,963 30,000 (25,320) E 104,643
Transfer agent fees 78,184 12,000 (2,017) F 88,167
Registration fees 22,970 19,000 (22,970) G 19,000
Professional fees 37,565 19,000 (10,000) H 46,565
Printing fees 3,396 12,000 15,396
Trustee fees 1,673 8,000 9,673
Distribution fees - Class A 12,113 5,000 69,018 I 86,131
Distribution fees - Class C 10,578 - 10,578
Amortization of organization costs 24,595 6,000 (6,000) A 24,595
Miscellaneous (2,761) 8,000 5,239
- --------------------------------------------------------------------------------------------------- ---------------
Total expenses 430,251 197,000 587,549
Waiver of Sponsor fee (32,765) - 32,765 D -
Reimbursement or waiver from Investment Advisor (245,347) (49,000) 34,358 K (259,989)
- --------------------------------------------------------------------------------------------------- ---------------
Net expenses 152,139 148,000 327,560
- --------------------------------------------------------------------------------------------------- ---------------
Net investment income (loss) 1,199,151 928,000 2,099,730
- --------------------------------------------------------------------------------------------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (29,338) (223,000) (252,338)
- --------------------------------------------------------------------------------------------------- ---------------
(29,338) (223,000) (252,338)
- --------------------------------------------------------------------------------------------------- ---------------
Net change in unrealized appreciation (depreciation) on:
Investments (1,086,352) (1,386,000) (2,472,352)
- --------------------------------------------------------------------------------------------------- ---------------
(1,086,352) (1,386,000) (2,472,352)
- --------------------------------------------------------------------------------------------------- ---------------
NET REALIZED AND UNREALIZED GAIN (LOSS): (1,115,690) (1,609,000) (2,724,690)
- --------------------------------------------------------------------------------------------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $83,461 ($681,000) ($624,960)
- --------------------------------------------------------------------------------------------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Notes to the Pro Forma Combining Financial Statements (unaudited)
The reorganization, if approved, results in the transfer of substantially all of
the assets and liabilities of Touchstone Bond Fund to Intermediate Bond Fund, a
series of Countrywide Investment Trust, in exchange for shares of Intermediate
Bond Fund and distribution of these shares to the shareholders of Touchstone
Bond Fund.
Touchstone Series Trust will transfer all of the assets of Touchstone Bond Fund,
subject to its liabilities, to Intermediate Bond Fund, a series of Countrywide
Investment Trust, in exchange for shares of Intermediate Bond Fund. Class A
shares of Intermediate Bond Fund that Touchstone Series Trust receives in the
exchange will be distributed pro rata to Class A shareholders of Touchstone Bond
Fund. Class C shares of Intermediate Bond Fund that Touchstone Series Trust
receives in the exchange will be distributed pro rata to Class C shareholders of
Touchstone Bond Fund. As of September 30, 1999, Intermediate Bond Fund Class C
shares had not commenced operations. After the exchange, Touchstone Bond Fund
will be dissolved but will be the accounting survivor. As a result of the
reorganization, each shareholder of Class A or Class C shares of Touchstone Bond
Fund will own shares of the corresponding class of Intermediate Bond Fund equal
in value to the shares of Touchstone Bond Fund that he owns immediately before
the reorganization.
After the merger, Intermediate Bond Fund intends to adopt the investment
strategies and policies of Touchstone Bond Fund. The funds have similar
investment goals, strategies and policies. For more information, you should
refer to the section in this Proxy Statement/Prospectus entitled Comparison of
Touchstone Bond Fund to Intermediate Bond Fund as well as the prospectus for
Touchstone Series Trust and the prospectus for Intermediate Bond Fund.
Touchstone Advisors, the advisor for Touchstone Bond Fund, and Fort Washington
Investment Advisors, the sub-advisor for Touchstone Bond Fund, will serve as the
advisor and sub-advisor of Intermediate Bond Fund.
All expenses associated with the reorganization (which are estimated at
$375,000) will be paid by Touchstone Advisors, Inc. or one of its affiliates.
Note A
The organization costs of the Intermediate Bond Fund will be fully expensed as a
part of the reorganization. Touchstone Advisors has agreed to reimburse all
costs associated with the reorganization.
Note B
Reflects the redemption of Touchstone Bond Fund Class Y shares by The Western
and Southern Life Insurance Company Separate Account A, the anticipated purchase
of Touchstone Bond Fund Class A shares by Western and Southern or one of its
affiliates and the conversion of Touchstone Bond Fund Class A shares into
Intermediate Bond Fund Class A shares. The redemption and purchase price and the
conversion ratio have been estimated based on the September 30, 1999 net asset
value per share of the Touchstone Bond Fund Class A and Class Y shares and the
net asset value per share of the Intermediate Bond Fund Class A shares.
Note C
Estimated reduction in advisory fees due to the Intermediate Bond Fund's lower
advisory fee rate of 0.50% being applied to the Touchstone Bond Fund's assets.
Note D
Sponsor fees are not applicable to the Intermediate Bond Fund and will not be
applicable to the Intermediate Bond Fund after the merger.
Note E
<PAGE>
Estimated reduction in custody fees due to the elimination of fixed costs
currently being charged to the Intermediate Bond Fund.
Note F
Estimated reduction in transfer agent fees related to the elimination of
duplicate fixed fund minimum charges.
Note G
Estimated reduction in registration fees due to the elimination of duplicate
Blue Sky filing fees.
Note H
Estimated reduction in professional fees due to the elimination of duplicate
audit fees.
Note I
Estimated increase in Rule 12b-1 fees due to the redemption of the existing
Touchstone Bond Fund Class Y shares, which do not pay a Rule 12b-1 fee, and the
purchase of Touchstone Bond Fund Class A shares. This estimate assumes that the
Intermediate Bond Fund will pay a Rule 12b-1 fee of 0.25% of its average net
assets. The current maximum Rule 12b-1 fee for Touchstone Bond Fund Class A
shares is 0.25% of average net assets. The current maximum Rule 12b-1 fee for
Intermediate Bond Fund Class A shares is 0.35% of average net assets. After the
merger, the maximum Rule 12b-1 fee for Intermediate Bond Fund Class A shares
will be 0.35% of average net assets; however, for the 2-year period ending
October 31, 2001, Touchstone Advisors has agreed to waive a portion of the
maximum Rule 12b-1 fee assessed on Intermediate Bond Fund Class A shares so that
the annual fee during that time period is 0.25% or less.
Note K
Estimated reduction in reimbursement due from Touchstone Advisors resulting from
the expected reductions in capped expenses identified above.
<PAGE>
PART C--OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The information required by this Item 15 is hereby incorporated by
reference from Item 25 in Post-Effective Amendment No. 70 to
Registrant's Registration Statement filed with the Commission on
December 3, 1999 (File Nos. 002-52242 and 811-02538).
ITEM 16. EXHIBITS
(1) CHARTER
(a) Registrant's Restated Agreement and Declaration of Trust,
which was filed as an Exhibit to Registrant's Post-Effective
Amendment No. 68, is hereby incorporated by reference.
(b) Amendment No. 1, dated December 8, 1994, to Registrant's
Restated Agreement and Declaration of Trust, which was filed
as an Exhibit to Registrant's Post-Effective Amendment No.
68, is hereby incorporated by reference.
(c) Amendment No. 2, dated January 31, 1995, to Registrant's
Restated Agreement and Declaration of Trust, which was filed
as an Exhibit to Registrant's Post-Effective Amendment No.
68, is hereby incorporated by reference.
(d) Amendment No. 3, dated February 28, 1997, to Registrant's
Restated Agreement and Declaration of Trust, which was filed
as an Exhibit to Registrant's Post-Effective Amendment No.
66, is hereby incorporated by reference.
(2) BYLAWS
(a) Registrant's Bylaws, as amended, which were filed as an
Exhibit to Registrant's Post-Effective Amendment No. 66, are
hereby incorporated by reference.
(b) Amendment to Bylaws adopted on January 10, 1984, which were
filed as an Exhibit to Registrant's Post-Effective Amendment
No. 68, are hereby incorporated by reference.
(3) VOTING TRUST AGREEMENTS
Not Applicable.
1
<PAGE>
(4) Agreement of Reorganization
Agreement and Plan of Reorganization between Registrant and
Touchstone Series Trust is filed herewith in Part A of this
Registration Statement on Form N-14.
(5) INSTRUMENTS DEFINING SHAREHOLDER RIGHTS
The information required by this Item 16(5) is hereby
incorporated by reference from Item 23(c) in Post-Effective
Amendment No. 70 to Registrant's Registration Statement filed
with the Commission on December 3, 1999 (File Nos. 002-52242 and
811-02538).
(6) INVESTMENT ADVISORY CONTRACTS
(a) Form of Registrant's Investment Advisory Agreement with
Touchstone Advisors, Inc., which was filed as an exhibit to
Registrant's Proxy Statement filed March 15, 2000, is hereby
incorporated by reference.
(b) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc. and Fort Washington Investment Advisors, Inc. for
Intermediate Bond Fund, which was filed as an exhibit to
Registrant's Proxy Statement filed March 15, 2000, is hereby
incorporated by reference.
(7) UNDERWRITING CONTRACTS
(a) Form of Registrant's Underwriting Agreement with Touchstone
Securities, Inc., which was filed as an exhibit to
Registrant's Post-Effective Amendment No. 71, is hereby
incorporated by reference.
(b) Form of Underwriter's Dealer Agreement to be filed by
Amendment.
(8) BONUS OR PROFIT SHARING CONTRACTS
None.
(9) CUSTODIAN AGREEMENTS
Custody Agreement with The Fifth Third Bank, the Custodian for
Intermediate Bond Fund, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 68, is hereby
incorporated by reference.
2
<PAGE>
(10) RULE 12b-1 PLANS AND RULE 18f-3 PLANS
(a) Registrant's Plans of Distribution Pursuant to Rule 12b-1,
which were filed as an Exhibit to Registrant's
Post-Effective Amendment No. 70, are hereby incorporated by
reference.
(b) Form of Administration Agreement for the administration of
shareholder accounts, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 67, is hereby
incorporated by reference.
(c) Amended Rule 18f-3 Plan Adopted with Respect to the Multiple
Class Distribution System, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 65, is hereby
incorporated by reference.
(11) LEGAL OPINION
Opinion and consent of counsel as to the legality of the
securities being registered is filed herewith.
(12) TAX OPINION
Opinion and consent of counsel supporting the tax matters and
consequences to shareholders is filed herewith.
(13) OTHER MATERIAL CONTRACTS
None.
(14) OTHER OPINIONS
(a) Consent of Ernst & Young LLP is filed herewith.
(b) Consent of Arthur Andersen LLP is filed herewith.
(15) OMITTED FINANCIAL STATEMENTS
None.
(16) POWERS OF ATTORNEY
Powers of Attorney are incorporated by reference from
Registrant's Registration Statement on Form N-14.
(17) ADDITIONAL EXHIBITS
None.
3
<PAGE>
ITEM 17. UNDERTAKINGS
(1) Not Applicable.
(2) Not Applicable.
4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement on Form
N-14 has been signed on behalf of the registrant, in the City of Cincinnati and
State of Ohio, on the 15th day of March, 2000.
COUNTRYWIDE INVESTMENT TRUST
By: /s/ Robert H. Leshner
Robert H. Leshner, President
As required by the Securities Act of 1933, this registration statement on Form
N-14 has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE
/s/ Robert H. Leshner March 15, 2000
Robert H. Leshner President and Trustee
/s/ Theresa M. Samocki March 15, 2000
Theresa M. Samocki Treasurer
William O. Coleman* Trustee
Phillip R. Cox* Trustee
H. Jerome Lerner* Trustee
/s/ Jill T. McGruder March 15, 2000
Jill T. McGruder Trustee
Oscar P. Robertson* Trustee
Nelson Schwab, Jr.* Trustee
Robert E. Stautberg* Trustee
Joseph S. Stern, Jr.* Trustee
*By: /s/ Jill T. McGruder March 15, 2000
Jill T. McGruder
As attorney in fact for each Trustee
<PAGE>
EXHIBIT INDEX
PAGE
Legal Opinion
Tax Opinion
Consent of Ernst & Young LLP
Consent of Arthur Andersen LLP
March 29, 2000
Countrywide Investment Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
Re: Form N-14
---------
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Countrywide Investment
Trust, a Massachusetts business trust (the "Trust"), in connection with
Pre-Effective Amendment No. 1 to the Trust's Registration Statement on Form N-14
to be filed with the Securities and Exchange Commission on or about March 29,
2000 (as amended by such Pre-Effective Amendment No. 1, the "Registration
Statement"), with respect to the shares (the "Shares") of beneficial interest,
without par value, of its series Intermediate Bond Fund (the "Fund") to be
issued in exchange for all of the assets of Touchstone Bond Fund (the "Acquired
Fund"), a series of Touchstone Series Trust, as described in the Registration
Statement. You have requested that we deliver this opinion to you to be used as
an exhibit to the Registration Statement.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth of
Massachusetts as to the existence of the Trust;
(b) a copy, certified by the Office of the Secretary of the
Commonwealth of Massachusetts on March 20, 2000, of the Trust's Restated
Agreement and Declaration of Trust dated as of August 26, 1993 and all
amendments thereto on file as of that date with the Office of the Secretary
(collectively, the "Declaration");
(c) a copy of the Trust's Establishment and Designation of Classes, as
executed on March 16, 2000 by a majority of the Trust's Trustees and as
filed with the Office of the Secretary of the Commonwealth of Massachusetts
on March 21, 2000 (the "Designation of Classes");
(d) a copy of the Certificate of Amendment to the Declaration, as
executed on March 16, 2000 by a majority of the Trust's Trustees and as
filed with the Office of the Secretary of the Commonwealth of Massachusetts
on March 21, 2000 (the "Amendment");
<PAGE>
Countrywide Investment Trust
March 29, 2000
Page 2
(e) a copy of the Trust's Establishment and Designation of Series, as
executed on March 16, 2000 by a majority of the Trust's Trustees and as
filed with the Office of the Secretary of the Commonwealth of Massachusetts
on March 21, 2000 (the "Designation of Series");
(f) a certificate executed by the Secretary of the Trust certifying as
to, and attaching copies of, the Trust's Declaration, the Amendment,
Designation of Series, Designation of Classes, By-Laws, and certain
resolutions adopted by the Trustees of the Trust at meetings held on
February 15, 2000 and March 16, 2000;
(g) a copy of the Trust's initial filing on Form N-14 dated January
31, 2000 as available on Edgar (the "Initial Filing"); and
(h) a copy of the Agreement and Plan of Reorganization entered into by
the Trust as of February 15, 2000, on behalf of the Fund, providing for,
(a) the acquisition by the Fund of all of the assets of the Acquired Fund
in exchange for the Shares and the Fund's assumption of all of the
liabilities of the Acquired Fund and (b) the pro rata distribution of the
Shares to the holders of the shares of the Acquired Fund in liquidation of
the Acquired Fund (the "Reorganization"), in the form included in the
Initial Filing referred to in paragraph (g) above (the "Agreement and Plan
of Reorganization").
In such examination, we have assumed the genuineness of all signatures, the
conformity to the originals of all of the documents reviewed by us as copies,
including conformed copies, the authenticity and completeness of all original
documents reviewed by us in original or copy form and the legal competence of
each individual executing any document. We have assumed that the Registration
Statement as filed with the Securities and Exchange Commission will be in
substantially the form of the Initial Filing referred to in paragraph (g) above
and that the Agreement and Plan of Reorganization has been duly completed,
executed and delivered by the parties thereto in substantially the form of the
copy referred to in paragraph (h) above.
This opinion is based entirely on our review of the documents listed above
and such investigation of law as we have deemed necessary or appropriate. We
have made no other review or investigation of any kind whatsoever, and we have
assumed, without independent inquiry, the accuracy of the information set forth
in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such Commonwealth,
to the extent the same may apply to or govern the transactions covered by this
opinion, except that we express no opinion as to any Massachusetts securities
law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
<PAGE>
Countrywide Investment Trust
March 29, 2000
Page 3
Based upon and subject to the foregoing, please be advised that it is our
opinion that:
1. The Trust is duly organized and existing under the Trust's Declaration
of Trust and the laws of the Commonwealth of Massachusetts as a voluntary
association with transferable shares of beneficial interest commonly referred to
as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Agreement and
Plan of Reorganization, will be legally issued, fully paid and non-assessable,
except that, as set forth in the Registration Statement, shareholders of the
Fund may under certain circumstances be held personally liable for its
obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
The opinions expressed herein concern only the effect of the law as
currently in effect and the facts and assumptions described herein. The
undersigned undertakes no obligation to supplement or update this opinion after
the date hereof.
Very truly yours,
BINGHAM DANA LLP
March 29, 2000
Touchstone Series Trust
311 Pike Street
Cincinnati OH 45202
Countrywide Investment Trust
312 Walnut Street
Cincinnati OH 45202
Ladies and Gentlemen:
This opinion is intended to set forth our conclusions on the federal income
tax consequences of the transactions described below.
Facts and Representations
-------------------------
The proposed transaction is part of a series of transactions designed to
consolidate the Touchstone and Countrywide mutual fund complexes. Currently, the
Touchstone mutual fund complex includes 8 funds, each a series of one investment
company, Touchstone Series Trust, a Massachusetts business trust. The
Countrywide mutual fund complex includes 18 funds in three investment companies,
Countrywide Strategic Trust, Countrywide Investment Trust and Countrywide
Tax-Free Trust. These three investment companies are also Massachusetts business
trusts.
Touchstone Advisors, Inc. serves as the investment advisor to each fund in
Touchstone Series Trust. Touchstone Advisors is a wholly-owned subsidiary of
Western-Southern Life Assurance Company, which is a wholly-owned subsidiary of
The Western and Southern Life Insurance Company (the "Company"). The Company is
a life insurance company subject to taxation under Subchapter L of the Internal
Revenue Code of 1986, as amended (the "Code").
Touchstone Bond Fund (the "Touchstone Fund") will be merged with
Intermediate Bond Fund (the "Countrywide Fund") in the Countrywide Investment
Trust.
On or before the transaction's closing date (the "Closing Date") the
Touchstone Fund may declare additional dividends or other distributions in order
to distribute substantially all of its investment company taxable income and net
realized capital gain. On the Closing Date, the Touchstone Fund will transfer
all of its assets to the Countrywide Fund in exchange for newly created shares
of beneficial interest in the Countrywide Fund. The Touchstone Fund will then
distribute the shares of the Countrywide Fund to its shareholders.
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Touchstone Series Trust
Countrywide Investment Trust
March 29, 2000
Page 2
In arriving at our opinions we have relied on the following
representations:
1. The property that the Countrywide Fund receives in the reorganization
from the Touchstone Fund will not include any shares of beneficial
interest in a Fund in Countrywide Investment Trust or Touchstone
Series Trust ("a party to the reorganization" within the meaning of
Section 368(b)).
2. The Countrywide Fund will continue the historic business of the
Touchstone Fund or will use a significant portion of the Touchstone
Fund's historic business assets in a business.
3. The plan of reorganization which is adopted by Countrywide Investment
Trust and Touchstone Series Trust will be based upon business reasons
germane to the conduct of each company's business activities.
4. In the reorganization conducted by the Touchstone Fund and the
Countrywide Fund, the fair market value of the voting shares of
beneficial interest received by the Touchstone Fund and thereafter
distributed to the owners of Touchstone Series Trust will be
approximately equal to the fair market value of the assets transferred
to the Countrywide Fund. Similarly, the fair market value of the
voting shares of beneficial interest received by the owners of the
Touchstone Fund will be approximately equal to the fair market value
of the shares of beneficial interest in Touchstone Series Trust which
each owner surrenders.
5. The liabilities of the Touchstone Fund to be assumed by the
Countrywide Fund were incurred in the ordinary course of business and
are associated with the assets to be transferred.
6. There is no intercorporate indebtedness between the Touchstone Fund
and the Countrywide Fund.
7. The Countrywide Fund will continue to conduct the business formerly
conducted by the Touchstone Fund and, although the Countrywide Fund
may dispose of some of the assets acquired by the Touchstone Fund if
they are deemed to be held in uneconomically small quantities, not
more than 20% of the assets acquired from the Touchstone Fund will be
disposed of immediately for this reason. Further, the Countrywide Fund
has no plan or intention to sell or otherwise dispose of the remaining
assets of the Touchstone Fund acquired in the reorganization except
for dispositions made in the ordinary course of business.
8. The Countrywide Fund will acquire at least 90% of the fair market
value of the net assets and at least 70% of the fair market value of
the gross assets held by the Touchstone Fund. All redemptions and
distributions (except for regular, normal
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Touchstone Series Trust
Countrywide Investment Trust
March 29, 2000
Page 3
dividends) made by the Touchstone Fund immediately preceding the
transfer will be included as assets of the Touchstone Fund immediately
prior to the transaction.
9. After the reorganization, the Countrywide Fund has no plan or
intention to reacquire any of the shares of beneficial interest issued
in the transaction other than in the ordinary course of its business.
10. Prior to the reorganization, the Countrywide Fund did not own,
directly or indirectly, nor has it owned during the past five years,
directly or indirectly, any shares of beneficial interest in the
Touchstone Fund.
11. The fair market value of the assets in the Touchstone Fund transferred
to the Countrywide Fund will equal or exceed the sum of the
liabilities assumed by the Countrywide Fund, plus the amount of
liabilities, if any, to which the transferred assets are subject.
12. The Touchstone Fund is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of
the Code.
13. Each of the Countrywide Fund and the Touchstone Fund has qualified as
a regulated investment company since its formation, and will continue
to be subject to those provisions (Sections 851-855 of the Code) until
the consummation of the proposed transaction.
Based upon the foregoing factual background and representations, we opine
that:
1. The transfer by the Touchstone Fund of all of its assets to the
Countrywide Fund in exchange for voting shares of beneficial interest
in the Countrywide Fund followed by a distribution of such voting
shares to the owners of the Touchstone Fund will be treated as a
"reorganization" under Section 368(a)(1)(C), and the Countrywide Fund
and Touchstone Fund are each a "party to a reorganization" within the
meaning of Section 368(b) of the Code.
2. Neither the Countrywide Fund nor the Touchstone Fund will recognize
gain or loss in the reorganization described in item 1, above. The
basis of the assets contributed to the Countrywide Fund by the
Touchstone Fund will be the same in the hands of the Countrywide Fund
they were in the hands of the Touchstone Fund. Section 362(b). The
holding period of the assets in the hands of the Countrywide Fund will
include the period the assets were held by the Touchstone Fund.
Section 1223(2).
3. The owners of Touchstone Series Trust who receive shares of beneficial
interest of the Countrywide Fund in exchange for their shares of
beneficial interest in Touchstone Series Trust will not recognize gain
or loss. The basis of the shares of
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Touchstone Series Trust
Countrywide Investment Trust
March 29, 2000
Page 4
beneficial interest received will be the same as the basis of the
shares exchanged therefor. Section 358. The holding period of the
shares received will include the holding period of the shares
exchanged therefor, provided that such shares were held as capital
assets on the date of the transaction. Section 1223(1).
We express no opinion on the tax ramifications of any transaction which is
not undertaken in accordance with the facts as set forth in our opinion letter.
The opinion set forth above is based upon applicable statutes, regulations,
judicial and administrative decisions and interpretations in effect on the date
hereof. Any change in any of those authorities could result in a change in our
opinion.
Very truly yours,
/s/ FROST & JACOBS LLP
FROST & JACOBS LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report on the Touchstone Series Trust dated
February 16, 2000 incorporated in Pre-Effective Amendment No. 1 to the
Registration Statement (1933 Act File No. 333-30452 and 1940 Act File No.
811-02538) of Countrywide Investment Trust.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
March 27, 2000
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------
As independent public accountants, we hereby consent to the use in this Form
N-14 filing of our auditors reports on the financial statements of the Short
Term Government Income Fund, the Institutional Government Income Fund, the
Intermediate Term Government Income Fund, the Adjustable Rate U.S. Government
Securities Fund, the Intermediate Bond Fund, and the Money Market Fund of
Countrywide Investment Trust dated October 27, 1999 and to all references to our
Firm included in or made a part of this Pre-Effective Amendment No. 1 Form N-14
filing.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
March 28, 2000
