TOUCHSTONE INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 3, 2000
Amended August 4, 2000
High Yield Fund
Bond Fund
Intermediate Term Government Income Fund
Money Market Fund
Short Term Government Income Fund
Institutional Government Income Fund
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus of Touchstone Investment Trust dated
May 3, 2000, revised May 19, 2000. A copy of the Funds' 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
Touchstone Investment Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
PAGE
THE TRUST............................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS........................5
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS.........................22
INVESTMENT LIMITATIONS..............................................28
TRUSTEES AND OFFICERS...............................................37
THE INVESTMENT ADVISOR AND SUB-ADVISOR..............................40
THE DISTRIBUTOR.....................................................42
DISTRIBUTION PLANS..................................................43
SECURITIES TRANSACTIONS.............................................46
PORTFOLIO TURNOVER..................................................48
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE................48
CHOOSING A SHARE CLASS..............................................50
OTHER PURCHASE INFORMATION..........................................54
TAXES .......................................................... 56
REDEMPTION IN KIND..................................................57
HISTORICAL PERFORMANCE INFORMATION..................................58
PRINCIPAL SECURITY HOLDERS..........................................61
CUSTODIAN...........................................................62
INDEPENDENT AUDITORS................................................63
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENTS......................63
ANNUAL REPORT.......................................................64
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THE TRUST
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Touchstone Investment Trust (the "Trust"), formerly Countrywide
Investment Trust, was organized as a Massachusetts business trust on December 7,
1980. The Trust currently offers six series of shares to investors: the High
Yield Fund, the Bond Fund, the Intermediate Term Government Income Fund, the
Money Market Fund, the Short Term Government Income Fund, and the Institutional
Government Income 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 (now known as the 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 Advisor 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 relate to the
Predecessor Funds.
Pursuant to an Agreement and Plan of Reorganization dated February 15,
2000, the Intermediate Bond Fund (now known as the Bond Fund), on May 1, 2000,
succeeded to the assets and liabilities of the Touchstone Bond Fund, a series of
the Touchstone Series Trust. The Intermediate Bond Fund maintained its
investment objective but adopted the investment policies and restrictions of the
Touchstone Bond Fund, which were similar to those of the Intermediate Bond Fund.
The financial data and information for periods ended prior to May 1, 2000
relates to the Touchstone Bond Fund.
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
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.
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Both Class A shares and Class C shares of the Bond Fund, the
Intermediate Term Government Income Fund and the High Yield 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, 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.
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DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
---------------------------------------------
A more detailed discussion of some of the terms used and investment
policies described in the Prospectus 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 TBA 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 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).
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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 TBA basis. The Money Market 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 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, the Intermediate Term Government Income Fund will not purchase STRIPS
with a maturity date that is more than 10 years from the settlement of the
purchase.
CUBES. In addition to STRIPS, the 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.
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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 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.
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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.
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.
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COLLATERALIZED MORTGAGE OBLIGATIONS. The Intermediate Term Government
Income Fund, the Bond Fund and the High Yield 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 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 Advisor will consider such features, together with the
character of the underlying mortgage pool and the liquidity and credit rating of
the issue. The Advisor 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
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(or B bond). This process continues until all of the classes have been 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.
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 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.
Mortgage-related securities such as CMOs may not be readily marketable.
To the extent any of these securities are not readily marketable in the judgment
of the Sub-Advisor, the Bond Fund and the High Yield Fund may not invest more
than 15% of total assets in such securities.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). 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.
The underlying mortgages which collateralize the ARMS 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 a 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 a Fund invests to be shorter than
the maturities stated in the underlying mortgages.
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INFLATION-INDEXED BONDS. The Intermediate Term Government Income Fund
and the 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 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.
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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.
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 Bond
Fund and the High Yield 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.
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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 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
Sub-Advisor 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 Money Market Fund, the Institutional
Government Income Fund, the High Yield Fund and the Bond Fund may each lend its
portfolio securities. The Institutional Government Income 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, the High Yield Fund and the 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.
<PAGE>
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 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 Advisor, the
Sub-Advisor or any affiliated person of the Trust or an affiliated person of the
Advisor, the Sub-Advisor 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 and the Intermediate
Term Government Income 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 High Yield Fund and the Bond 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 10% 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 Fund 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 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.
<PAGE>
The Money Market Fund may 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 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 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
<PAGE>
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 Sub-Advisor, 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 Sub-Advisor, subject to the direction of the Board of Trustees, such note is
liquid.
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. 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 Sub-Advisor 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 Sub-Advisor may determine that an unrated variable rate demand
instrument meets a Fund's quality criteria if it is backed by a
<PAGE>
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 Bond Fund and the High Yield Fund) in variable
rate demand instruments as to which it cannot exercise the demand feature on not
more than seven days' notice if it is determined 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 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, the High Yield Fund and
the Bond Fund (up to 10%) 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.
<PAGE>
ASSET-BACKED SECURITIES. The Intermediate Term Government Income Fund
may 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
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 Fund's 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 Bond Fund may invest in certain 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 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 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
<PAGE>
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 Sub-Advisor 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 Advisor, 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 the security and the nature of the marketplace trades. The Trustees
have delegated to the Sub-Advisor 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 Sub-Advisor's selection of Rule 144A and Section 4(2)
commercial paper as well as any determinations as to its liquidity.
LOAN PARTICIPATIONS. The Bond Fund may invest, subject to an overall
30% 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.
<PAGE>
ZERO COUPON BONDS. The 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 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 AND UNRATED SECURITIES. The High Yield Fund and the Bond
Fund may invest in higher yielding (and, therefore, higher risk), lower rated
fixed-income securities, including investment-grade securities, junk bonds 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.
<PAGE>
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 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 Sub-Advisor, in
evaluating the creditworthiness of an issue, whether rated or unrated, will 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 Sub-Advisor will consider this event in its determination of whether the
Fund should continue to hold the 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
<PAGE>
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 a Fund, the 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 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.
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).
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."
<PAGE>
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."
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."
<PAGE>
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."
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."
<PAGE>
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."
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."
<PAGE>
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 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."
<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."
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."
<PAGE>
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 HIGH YIELD FUND AND THE BOND FUND
ARE:
As a matter of fundamental policy, neither Fund may:
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;
<PAGE>
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;
4. 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);
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.
THE FOLLOWING INVESTMENT LIMITATIONS OF THE HIGH YIELD FUND AND THE
BOND FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
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):
1. 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%;
<PAGE>
2. 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;
3. 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;
4. 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;
5. invest for the purpose of exercising control or management;
6. 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;
7. 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;
<PAGE>
8. 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);
9. 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;
10. 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);
11. 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;
12. 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
13. 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.
<PAGE>
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 (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 Advisor, or to any officer or director of the
Advisor (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
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).
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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 of1940 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 MONEY MARKET 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 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. The 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. 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.
3. Real Estate. The Fund will not purchase, hold or deal in real
estate.
4. 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.
5. Commodities. The 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. The 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 the Fund's investment
objective, policies and limitations or (b) engaging in repurchase transactions.
<PAGE>
7. Options. The Fund will not engage in the purchase or sale of put
or call options.
8. 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 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 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 are
non-fundamental and may be changed without shareholder approval.
1. 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 10% of the value of its net assets would be invested in such
securities.
2. 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 the value of its total assets in securities of other
investment companies.
3. 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.
4. Short Sales. The 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.
<PAGE>
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
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 Institutional
Government Fund and the Intermediate Term Government Income 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 Touchstone Family 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.
<PAGE>
AGGREGATE COMPENSATION
FROM THE
COMPENSATION TOUCHSTONE COMPLEX(1)
POSITION FROM TRUST
NAME HELD
William O. Coleman Trustee $ 0 $ 2,192
Phillip R. Cox Trustee 0 10,000
+ H. Jerome Lerner Trustee 4,000 15,000
* Jill T. McGruder President/Trustee 0 0
* Robert H. Leshner Trustee 0 0
+ Oscar P. Robertson Trustee 4,000 15,000
Nelson Schwab, Jr. Trustee 0 2,192
+ Robert E. Stautberg Trustee 0 10,000
Joseph S. Stern, Jr. Trustee 0 8,000
Maryellen Peretzky Vice President 0 0
Tina D. Hosking Secretary 0 0
David E. Dennison Treasurer 0 0
Terrie A. Wiedenheft Controller 0 0
(1) The Touchstone complex of mutual funds consists of six series of the
Trust, six series of Touchstone Tax-Free Trust, eight series of Touchstone
Strategic Trust and ten variable annuity series of Touchstone Variable Series
Trust. Each Trustee is also a Trustee of Touchstone Tax-Free Trust and
Touchstone Strategic Trust. Messrs. Coleman, Cox, Schwab, Stautberg and Stern
are also Trustees of Touchstone Variable Series Trust.
* Ms. McGruder, as President and Director of Touchstone Advisors, Inc., the
Trust's investment advisor, Touchstone Securities, Inc., the Trust's distributor
and Integrated Fund Services, Inc., the Trust's transfer agent and Mr. Leshner,
as Managing Director of Fort Washington Investment Advisors, Inc., the Trust's
Sub-Advisor, 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, Age 71, 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).
PHILLIP R. COX, Age 52, 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. and Cinergy Corporation.
H. JEROME LERNER, Age 61, 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).
<PAGE>
ROBERT H. LESHNER, Age 60, 312 Walnut Street, Cincinnati, Ohio is
Managing Director of Fort Washington Investment Advisors, Inc. Until 1999, he
was President and a director of Fort Washington Brokerage Services, Inc.
(a registered broker-dealer), Integrated Fund Services, Inc. (a registered
transfer agent) and IFS Fund Distributors, Inc. (a registered broker-dealer).
JILL T. McGRUDER, Age 45, 311 Pike Street, Cincinnati, Ohio is
President, Chief Executive Officer and a director of IFS Financial Services,
Inc. (a holding company), Touchstone Advisors, Inc. (the investment advisor for
the Trust) and Touchstone Securities, Inc. (the principal underwriter for the
Trust). She is a Senior Vice President of The Western-Southern Life Insurance
Company and a director of Capital Analysts Incorporated (a registered investment
advisor and broker-dealer). She is also President and a director of Fort
Washington Brokerage Services, Inc., IFS Fund Distributors, Inc., Integrated
Fund Services, Inc., IFS Agency Services, Inc. (insurance agency ) and IFS
Insurance Agency, Inc. 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, Age 61, 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., Age 82, 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.
ROBERT E. STAUTBERG, Age 65, 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.
JOSEPH S. STERN, JR., Age 82, 3 Grandin Place, Cincinnati, Ohio is a
retired Professor Emeritus of the University of Cincinnati College of Business.
MARYELLEN PERETZKY, Age 47, 312 Walnut Street, Cincinnati, Ohio is
Senior Vice President and Secretary of Fort Washington Brokerage Services, Inc.,
Integrated Fund Services, Inc. and IFS Fund Distributors, Inc. She is Assistant
Secretary of Fort Washington Investment Advisors, Inc. and is also Vice
President of Touchstone Tax-Free Trust and Touchstone Strategic Trust.
TINA D. HOSKING, Age 31, 312 Walnut Street, Cincinnati, Ohio is Vice
President and Associate General Counsel of Integrated Fund Services, Inc. and
IFS Fund Distributors, Inc. She is also Secretary of Touchstone Tax-Free Trust
and Touchstone Strategic Trust.
<PAGE>
DAVID E. DENNISON, Age 38, 312 Walnut Street, Cincinnati, Ohio is
Senior Vice President and Chief Operating Officer of Integrated Fund Services,
Inc. and IFS Fund Distributors, Inc. He is also Treasurer of Touchstone
Tax-Free Trust and Touchstone Strategic Trust.
TERRIE A. WIEDENHEFT, Age 38, 312 Walnut Street, Cincinnati, Ohio is
Senior Vice President, Chief Financial Officer and Treasurer of Integrated Fund
Services, Inc., IFS Fund Distributors, Inc., and Fort Washington Brokerage
Services, Inc. She is Chief Financial Officer of IFS Financial Services, Inc.,
Touchstone Advisors, Inc. and Touchstone Securities, Inc. and Assistant
Treasurer of Fort Washington Investment Advisors, Inc. She is also Controller
of Touchstone Tax-Free Trust and Touchstone 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, Touchstone Tax-Free
Trust and Touchstone Strategic Trust.
THE INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------
THE INVESTMENT ADVISOR. Touchstone Advisors, Inc. (the "Advisor") is the Funds'
investment manager. The Advisor is a wholly-owned subsidiary of IFS Financial
Services, Inc., which is a wholly-owned subsidiary of Western-Southern Life
Assurance Company. Western-Southern Life Assurance Company is a wholly-owned
subsidiary of The Western and Southern Life Insurance Company. Ms.McGruder may
be deemed to be an affiliate of the Advisor because of her position as
President and Director of the Advisor. Mr. Leshner may be deemed to be an
affiliate of the Advisor because of his position as Managing Director of Fort
Washington Investment Advisors, Inc., the Sub-Advisor for the Funds.
Ms. McGruder and Mr. Leshner, by reason of such affiliation, may directly or
indirectly receive benefits from the advisory fees paid to the Advisor.
Under the terms of the investment advisory agreement between the Trust
and the Advisor, the Advisor appoints and supervises each Fund's Sub-Advisor,
reviews and evaluates the performance of the Sub-Advisor and determines whether
or not the Sub-Advisor should be replaced. The Advisor furnishes at its own
expense all facilities and personnel necessary in connection with providing
these services. Each Fund pays the Advisor a fee computed and accrued daily and
paid monthly at an annual rate as shown below.
Short Term Government Income Fund 0.50% of assets up to $50 million;
Intermediate Term Government Income Fund 0.45% of assets from $50 million to
Money Market Fund $150 million; 0.40% of assets from
$150 million to $250 million; 0.375%
of assets over $250 million
Bond Fund 0.50% of average daily net assets
Institutional Government Income Fund 0.20% of average daily net assets
High Yield Fund 0.60% of average daily net assets
<PAGE>
The advisory fees paid by the Bond Fund during the fiscal years ended
December 31, 1999, 1998, and 1997 are $108,553, $100,011 and $82,976,
respectively. The Advisor voluntarily reimbursed $268,587, $50,678 and $96, 974
for the fiscal years ended December 31, 1999, 1998 and 1997.
Prior to May 1, 2000, Countrywide Investments, Inc. ("Countrywide") was
the investment adviser for the Short Term Government Income Fund, the
Intermediate Term Government Income Fund, the Institutional Government Income
Fund and the Money Market Fund. Prior to August 29, 1997, the investment adviser
for the Money Market Fund was Trans Financial Bank, N.A. and the Fund's fiscal
year end was August 31. Set forth below are the advisory fees paid by the Short
Term Government Income Fund, the Intermediate Term Government Income Fund and
the Institutional Government Income Fund during the fiscal years ended September
30, 1999, 1998 and 1997 and the advisory fees paid by the Money Market Fund
during the fiscal periods ended September 30, 1999 and 1998 and August 31, 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
Money Market Fund(1) 137,483 312,309 188,896
Institutional Government Income Fund(2) 91,227 100,484 100,100
(1) Countrywide 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.
Trans Financial Bank voluntarily waived $130,362 of its fees for the fiscal
period ended August 31, 1997 in order to reduce the operating expenses of the
Fund.
(2) Countrywide 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.
The Funds shall pay the expenses of their operation, including but not limited
to (i) charges and expenses for accounting, pricing and appraisal services and
related overhead, (ii) the charges and expenses of auditors; (iii) the charges
and expenses of any custodian, transfer agent, plan agent, dividend disbursing
agent and registrar appointed by the Trust with respect to the Funds; (iv)
brokers' commissions, and issue and transfer taxes chargeable to the Funds in
connection with securities transactions to which a Fund is a party; (v)
insurance premiums, interest charges, dues and fees for membership in trade
associations and all taxes and fees payable to federal, state or other
governmental agencies; (vi) fees and expenses involved in registering and
maintaining registrations of the Funds with the SEC, state or blue sky
securities agencies and foreign countries, including the preparation of
Prospectuses and Statements of Additional Information for filing with the SEC;
(vii) all expenses of meetings of Trustees and of shareholders of the Trust and
of preparing, printing and distributing prospectuses, notices, proxy statements
and all reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; and (x) interest on borrowed money, if any. The compensation and expenses
of any officer, Trustee or employee of the Trust who are affiliated persons of
the Advisor are paid by the Advisor.
<PAGE>
By its terms, the Funds' investment advisory agreement will remain in force
until May 1, 2002 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 agreement 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 Advisor. The investment advisory agreement automatically
terminates in the event of its assignment, as defined by the Investment Company
Act of 1940 and the rules thereunder.
THE SUB-ADVISOR. The Advisor has retained Fort Washington Investment Advisors,
Inc. ("the Sub-Advisor") to serve as the discretionary portfolio manager of each
Fund. The Sub-Advisor selects the portfolio securities for investment by a Fund,
purchases and sells securities of a Fund and places orders for the execution of
such portfolio transactions, subject to the general supervision of the Board of
Trustees and the Advisor. The Sub-Advisor receives a fee from the Advisor which
is paid monthly at an annual rate as follows:
Fund Fee to Sub-Advisor
(as % of daily net assets)
High Yield Fund 0.40%
Bond Fund 0.30%
Intermediate Term Government Income Fund 0.20%
Money Market Fund 0.15%
Short Term Government Income Fund 0.15%
Institutional Government Income Fund 0.05%
The services provided by the Sub-Advisor are paid for wholly by the Advisor. The
compensation of any officer, director or employee of the Sub-Advisor who is
rendering services to a Fund is paid by the Sub-Advisor.
The employment of the Sub-Advisor will remain in force until May 1, 2002 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
employment of the Sub-Advisor 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 a majority of a Fund's outstanding voting securities, by the Advisor,
or by the Sub-Advisor. Each Sub-Advisory Agreement will automatically terminate
in the event of its assignment, as defined by the 1940 Act and the rules
thereunder.
<PAGE>
THE DISTRIBUTOR
---------------
Touchstone Securities, Inc. ("Touchstone") is the principal underwriter of the
Funds and, as such, the exclusive agent for distribution of shares of the Funds.
Touchstone is an affiliate of the Advisor by reason of common ownership.
Touchstone 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.
Touchstone currently allows concessions to dealers who sell shares of the Funds.
Touchstone receives that portion of the sales load which is not reallowed to
dealers who sell shares of a Fund. Touchstone retains the entire sales load on
all direct initial investments in a Fund and on all investments in accounts with
no designated dealer of record.
Prior to May 1, 2000, Countrywide served as the distributor for the Intermediate
Term Government Income 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 Countrywide 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 December 31, 1999 the aggregate commissions on sales of the Bond
Fund's shares were $13,523.52, of which Touchstone paid $12,619.97 to
unaffiliated broker-dealers in the selling network, earned $903.55 as a
broker-dealer in the selling network and retained $5,338.50 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 Countrywide 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 December
31, 1998, the aggregate commissions paid to Touchstone on sales of the Bond
Fund's shares were $60. 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 Countrywide 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.
The Funds may compensate dealers, including Touchstone 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. 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 Touchstone. 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 Money
Market Fund and Class A shares of the Intermediate Term Government Income Fund,
the Bond Fund and the High Yield Fund and .10% of the average daily net assets
of the Institutional Government Income Fund. A waiver will limit the expenses
for the Bond Fund under the Class A Plan to 0.25% of average daily net assets
until October 29, 2001. Unreimbursed expenses will not be carried over from year
to year.
<PAGE>
For the 1999 fiscal year the aggregate distribution-related expenditures of the
Short Term Government Income Fund ("STF"), the Intermediate Term Government
Income Fund ("ITF"), the Money Market Fund ("MMF"), the Bond Fund ("BF") and the
Institutional Government Income Fund ("IGF") under the Class A Plan were
$147,856, $61,623, $5,128, $11,783 and $2,503, respectively. Amounts were spent
as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
STF ITF MMF BF IGF
--- --- --- -- ---
Printing and mailing of $ 4,356 $ 4,123 $ 5,128 $11,783 $2,503
prospectuses and reports
to prospective
shareholders.
Payments to broker-dealers 143,500 57,500 -- -- --
and others for the sale or
retention of assets.
-------- -------- -------- -------- --------
$147,856 $ 61,623 $ 5,128 $11,783 $2,503
======== ======== ======= ======= ======
</TABLE>
CLASS C SHARES. (Bond Fund, Intermediate Term Government Income Fund and High
Yield Fund Only) - The Bond Fund, the Intermediate Term Government Income Fund
and the High Yield Fund have also adopted a plan of distribution (the "Class C
Plan") with respect to each 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
Touchstone 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, a 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 Funds 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 Bond Fund incurred distribution expenses during the fiscal
year ended December 31, 1999 of $10,142.
<PAGE>
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 Touchstone 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 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 a 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.
<PAGE>
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 Sub-Advisor and are subject to review by the Advisor and the Board
of Trustees of the Trust. In the purchase and sale of portfolio securities, the
Sub-Advisor's primary objective will be to obtain the most favorable price and
execution for a Fund, taking into account such factors as the overall direct net
economic result to the Fund (including commissions, which may not be the lowest
available but ordinarily should not be higher than the generally prevailing
competitive range), the financial strength and stability of the broker, the
efficiency with which the transaction will be effected, the ability to effect
the transaction at all where a large block is involved and the availability of
the broker or dealer to stand ready to execute possibly difficult transactions
in the future.
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 Sub-Advisor is specifically authorized to pay a broker who provides research
services to the Sub-Advisor an amount of commission for effecting a portfolio
transaction in excess of the amount of commission another broker would have
charged for effecting such transaction, in recognition of such additional
research services rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer viewed in terms of the particular transaction or the Sub-Advisor's
overall responsibilities with respect to discretionary accounts that it manages,
and that the Fund derives or will derive a reasonably significant benefit from
such research services.
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 Sub-Advisor,
it is not possible to place a dollar value on it. Research services furnished by
brokers through whom a Fund effects securities transactions may be used by the
Sub-Advisor in servicing all of its accounts and not all such services may be
used in connection with a Fund.
The Funds have no obligation to deal with any broker or dealer in the execution
of securities transactions. However, the Funds 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 an
affiliated broker 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. Affiliated
broker-dealers of the Trust will not receive reciprocal brokerage business as a
result of the brokerage business transacted by the Funds with other brokers.
Consistent with the Rules of Conduct of the National Association of Securities
Dealers, Inc., and such other policies as the Board of Trustees may determine,
the Sub-Advisor may consider sales of shares of the Trust as a factor in the
selection of broker-dealers to execute portfolio transactions. The Sub-Advisor
will make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.
In certain instances, there may be securities which are suitable for a Fund as
well as for the Sub-Advisor's other clients. Investment decisions for a Fund and
for the 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 dome 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.
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, the Advisor, the Sub-Advisor and Touchstone 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
access, advisory and investment personnel of the Advisor, the Sub-Advisor and
Touchstone, and, as described below, imposes additional, more onerous,
restrictions on investment personnel of the Advisor and the Sub-Advisor. The
Code requires that all investment personnel of the Advisor and Sub-Advisor
preclear any personal securities investments in initial public offerings and
limited offerings. In addition, no access or advisory person may purchase or
sell any security (or equivalent) security if the employee has knowledge that it
is being purchased or sold at that time, or is being considered for purchase or
sale, by a Fund except under certain conditions. Furthermore, the Code provides
for trading "blackout periods" which prohibit trading by investment personnel of
the Advisor and Sub-Advisor within periods of trading by a Fund in the same (or
equivalent) security except under certain conditions. The Code of Ethics adopted
by the Trust, the Advisor, the Sub-Advisor and Touchstone are on public file
with, and are available from, the Securities and Exchange Commission.
<PAGE>
PORTFOLIO TURNOVER
------------------
The Sub-Advisor 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.
The Intermediate Term Government Income Fund does 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
Sub-Advisor'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 Sub-Advisor, 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) 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 and the public offering price (net
asset value plus applicable sales load) of the shares of the Intermediate Term
Government Income Fund, the High Yield Fund and the 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 "Pricing of Fund
Shares" in the Prospectus.
<PAGE>
Pursuant to Rule 2a-7 of 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 has 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.
<PAGE>
Portfolio securities held by the Intermediate Term Government Income Fund, the
Bond Fund or the High Yield 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.
CHOOSING A SHARE CLASS
----------------------
The Bond Fund, the Intermediate Term Government Income Fund and the High Yield
Fund each offer 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. Before choosing a class, you
should consider the following factors, as well as any other relevant facts and
circumstances:
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 advisors 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 a Fund. If you do not plan to hold your shares in a Fund
for a long time (less than 4 1/4 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 a Fund
for more than 4 1/4 years, it may be better to purchase Class A shares, since
after 4 1/4 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 advisor and the compensation provided to
these financial advisors under each share class. Touchstone works with many
experienced and very qualified financial advisors 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. Touchstone believes that these value-added
services can greatly benefit you through market cycles and will work diligently
with your chosen financial advisor.
<PAGE>
Set forth below is a chart comparing the sales loads and maximum 12b-1 fees
applicable to each class of shares of the Intermediate Term Government Income
Fund, the Bond Fund and the High Yield Fund:
MAXIMUM
CLASS SALES LOAD 12b-1 FEE
-----------------------------------------------------------------------------
A Maximum of 4.75% initial sales load 0.35%
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% contingent 1.00%
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
(INTERMEDIATE TERM GOVERNMENT INCOME FUND, BOND FUND AND HIGH YIELD FUND)
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 Touchstone to a participating unaffiliated
dealer. Class A shares are also subject to an annual 12b-1 distribution fee of
up to .35% of a Fund's average daily net assets allocable to Class A shares.
The following table illustrates the current initial sales load breakpoints for
the purchase of Class A shares:
Percentage Which Dealer
of Offering Equals this Reallowance
Price 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 None
<PAGE>
The following table illustrates the initial sales load breakpoints for
the purchase of shares of the Intermediate Term Government Income Fund for
accounts opened between February 1, 1995 and July 31, 1999:
Percentage Which Dealer
of Offering Equals this Reallowance
Price 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% 0.90%
$500,000 but less than $1,000,000 0.75% 0.76% 0.65%
$1,000,000 or more None None None
The following table shows the initial sales load breakpoints for the purchase of
shares of the Intermediate Term Government Income Fund for accounts opened
before February 1, 1995:
Percentage Which Dealer
of Offering Equals this Reallowance
Price Deducted Percentage as Percentage
for Sales of Your Net of Offering
Amount of Investment Load Investment Price
-------------------- -------------- ---------- ----------
Less than $500,000 1.00% 1.01% 1.00%
5000,000 but less than $1,000,000 0.75% 0.76% 0.75%
$1,000,000 or more None None None
Under certain circumstances, Touchstone may increase or decrease the reallowance
to selected dealers. In addition to the compensation otherwise paid to
securities dealers, Touchstone 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 Funds. On some occasions, such bonuses or
incentives may be conditioned upon the sale of a specified minimum dollar amount
of the shares of a Fund and/or other funds in the Touchstone 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 Touchstone. In determining a dealer's eligibility for such commission,
purchases of Class A shares of the Funds may be aggregated with concurrent
purchases of Class A shares of other funds in the Touchstone Family of Funds.
Dealers should contact Touchstone for more information on the calculation of the
dealer's commission in the case of combined purchases.
<PAGE>
An exchange from other Touchstone funds will not qualify for payment of the
dealer's commission unless the exchange is from a Touchstone 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
Touchstone Fund sold with a sales load with the amount of any current purchases
in order to take advantage of the reduced sales loads set forth in the table
above. Purchases made in any Touchstone 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. See "Other Purchase Information" below or
contact the Transfer Agent for information about the Right of Accumulation and
Letter of Intent.
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 Funds (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 Touchstone and the shares are redeemed
within one year from the date of purchase. The contingent deferred sales load
will be paid to Touchstone 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 such 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 such Class A shares of the Funds held
for at least one year will not be subject to the contingent deferred sales load.
CLASS C SHARES
(INTERMEDIATE TERM GOVERNMENT INCOME FUND, BOND FUND AND HIGH YIELD FUND)
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 such 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 a Fund's average daily net assets allocable to Class C
shares. Touchstone intends to pay a commission of 2.00% of the purchase amount
to your broker at the time you purchase Class C shares.
<PAGE>
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. Touchstone may require documentation prior to
waiver of the load, including death certificates, physicians' certificates, etc.
All sales loads imposed on redemptions are paid to Touchstone. 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
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.
OTHER PURCHASE INFORMATION
Additional information with respect to certain types of purchases of Class A
shares of the Intermediate Term Government Income Fund, the High Yield Fund and
the Bond Fund is set forth below.
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. Individual purchases by trustees or
other fiduciaries may also be aggregated if the investments are: (1) for a
single trust estate or fiduciary account; or (2) 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.
<PAGE>
CONCURRENT PURCHASES. To qualify for a reduced sales charge, you may
combine concurrent purchases of shares of two or more Funds (other than a money
market 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. A "purchaser" of Class A shares of the
Intermediate Term Government Income Fund, the High Yield Fund and the 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 Touchstone 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. A purchaser includes an individual
and his immediate family members, purchasing shares for his or their own
account; or a trustee or other fiduciary purchasing shares for a single
fiduciary account although more than one beneficiary is involved; or employees
of a common employer, provided that economies of scale are realized through
remittances from a single source and quarterly confirmation of such purchases;
or an organized group, provided that the purchases are made through a central
administration, or a single dealer, or by other means which result in economy of
sales effort or expense (the "Purchaser").
LETTER OF INTENT. The reduced sales loads set forth in the tables in
the Prospectus may also be available to any Purchaser of Class A shares of the
Intermediate Term Government Income Fund, the High Yield Fund and the 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 Touchstone 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.
<PAGE>
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 Touchstone.
2. By any director, officer or other employee (and their immediate family
members) of The Western and Southern Life Insurance Company or any of
its affiliates or any portfolio advisor or service provider to the
Trust.
3. By clients of any portfolio advisor who are referred to Touchstone by
a portfolio advisor.
4. In accounts as to which a broker-dealer charges an asset management
fee, provided the broker-dealer has an agreement with Touchstone.
5. As part of certain promotional programs established by the Fund and/or
Touchstone.
6. 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 Touchstone and such group.
7. By banks, bank trust departments, savings and loan associations and
federal and state credit unions.
8. Through Processing Organizations described in the Prospectus.
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 Touchstone. Your financial
advisor should call Touchstone for more information.
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 a Fund
made under the reinvestment privilege, purchases through exchanges and other
purchases which qualify for a reduced sales load as described herein because
such purchases require minimal sales effort by Touchstone. Purchases made at net
asset value may be made for investment only, and the shares may not be resold
except through redemption by or on behalf of the Trust.
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.
<PAGE>
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 December 31, 1999, the Bond Fund had a capital
loss carryforward for federal income tax purposes of $286,914. As of September
30, 1999, the Intermediate Term Government Income Fund, the Institutional
Government Income Fund and the Money Market Fund had capital loss carryforwards
for federal income tax purposes of $2,354,472, $22,343 and $6,403, respectively.
In addition, the Money Market Fund elected to defer until the September 30, 2000
tax year $4,941 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
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.
<PAGE>
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 seven days ended September 30, 1999 were 4.84% and 4.96%,
respectively.
From time to time, the Intermediate Term Government Income Fund, the Bond Fund
and the High Yield 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 for the periods ended September 30, 1999 and the Intermediate Bond
Fund for the period ended December 31, 1999 are as follows:
<PAGE>
Intermediate Term Government Income Fund (Class A)
1 Year -6.59%
5 Years 5.33%
10 Years 6.13%
Bond Fund (Class A)
1 Year -6.37%
5 Years 5.59%
Since Inception (October 3, 1994) 5.37%
The Intermediate Term Government Income Fund, the Bond Fund and the High Yield
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 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 which, if included, would reduce total
return. The total returns of the Intermediate Term Government Income Fund -
Class A ("ITF") and the Bond Fund-Class A ("BF") as calculated in this manner
for each of the last ten fiscal years (or since inception) are as follows:
Period Ended ITF Period Ended BF
------------ --- ------------ --
September 30, 1990 5.31% December 31, 1995 16.95%
September 30, 1991 14.19% December 31, 1996 2.85%
September 30, 1992 13.27% December 31, 1997 7.30%
September 30, 1993 10.15% December 31, 1998 8.56%
September 30, 1994 -6.76% December 31, 1999 -1.67%
September 30, 1995 12.52%
September 30, 1996 3.55%
September 30, 1997 7.74%
September 30, 1998 10.54%
September 30, 1999 -1.93%
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 for the periods ended September 30, 1999 are as follows:
Intermediate Term Government Income Fund Class A
1 Year -1.93%
3 Years 5.32%
5 Years 6.36%
10 Years 6.65%
Since Inception (February 6, 1981) 8.24%
<PAGE>
A non-standardized 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 Bond Fund
and the High Yield 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).
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 each 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.
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.
<PAGE>
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 Money Market Fund may provide
comparative performance information appearing in the Money Market Funds
category. The Bond Fund may provide comparative performance information
appearing in the Intermediate Investment Grade Debt Funds category. The High
Yield Fund may provide comparative performance information appearing in the
High Current Yield 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.
PRINCIPAL SECURITY HOLDERS
---------------------------
As of July 7, 2000, the principal owners of the Funds are listed in the
following table:
<TABLE>
<S> <C> <C> <C>
-------------------------------------- --------------------------------------------- -------------
Fund Shareholder % of Class
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Intermediate Term Government Income Citizens Business Bank, Trustee 15.81%
Fund - Class A FBO Countrywide Credit Industries, Inc.
P.O. Box 671
Pasadena, California 91102-0671
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Institutional Government Income Fund Scudder Trust Company 16.48%
Attn: Asset
Reconciliation
P.O. Box 957
Salem, New Hampshire 03079
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Institutional Government Income Fund Urban Data Solutions LLC 9.49%
c/o Andrew Lerner
589 Eighth Avenue
New York, New York 10018
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Institutional Government Income Fund Bear, Stearns & Co. 6.83%
FBO An Account
1 Metrotech Center North
Brooklyn, New York 11202
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Money Market Fund James Money Market Account 6.08%
FBO its Customers
312 Walnut Street
Cincinnati, Ohio 45202
-------------------------------------- --------------------------------------------- -------------
<PAGE>
-------------------------------------- --------------------------------------------- -------------
Money Market Fund Purisima Money Market Account 5.28%
FBO Customers
312 Walnut St. - 21st Floor
Cincinnati, Ohio 45202
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Money Market Fund Fort Washington Private Equity Investors II 9.75%
420 East Fourth Street
Cincinnati, Ohio 45202
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
High Yield Fund Class A The Western-Southern Life Assurance Company 99.18%
400 Broadway
Cincinnati, Ohio 45202
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
High Yield Fund Class C Custodial Account FBO Eleanor Petrosk 61.63%
Rollover IRA
290 Brickleberry Drive
Roswell, Georgia 30075
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
High Yield Fund Class C Dr. Dane R. Foust 13.26%
Roth Contribution IRA
Road 3 Box 5604 A
Hollidaysburg, Pennsylvania 16648
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
High Yield Fund Class C Douglas J. LaPlante 10.15%
Mary Katherine LaPlante, Joint Tenants
566 Lanceshire Lane
State College, Pennslyvania 16803
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
High Yield Fund Class C Custodial Account 9.32%
FBO Mike P. Vibbert
Sep IRA
45863 Governors Court
Great Mills, Maryland 20634
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Bond Fund Class A The Western-Southern Life Assurance Company 67.28%
400 Broadway
Cincinnati, Ohio 45202
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Bond Fund Class C The Western-Southern Life Assurance Company 14.88%
400 Broadway
Cincinnati, Ohio 45202
-------------------------------------- --------------------------------------------- -------------
-------------------------------------- --------------------------------------------- -------------
Bond Fund Class C Custodial Account FBO Frederic R. Duggan 6.89%
Rollover IRA
545 Spring Ridge Drive
Mabelvale Arkansas 72103
-------------------------------------- --------------------------------------------- -------------
</TABLE>
The Western-Southern Life Assurance Company may be deemed to control the Bond
Fund and the High Yield Fund by virtue of the fact that it owned of record more
than 25% of the outstanding shares of each Fund as of July 7, 2000.
As of July 7, 2000, 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.
CUSTODIANS
----------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio, has been
retained to act as Custodian for the Short Term Government Income Fund, the
Intermediate Term Government Income Fund, the Institutional Government Income
Fund, the Money Market Fund and the High Yield Fund. 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.
<PAGE>
Investors Bank & Trust Company ("Investors Bank"), 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the custodian for the Bond Fund. Investors Bank
holds cash, securities and other assets as required by the Investment Company
Act of 1940. As compensation for its services as custodian, Investors Bank
receives fees, computed and paid monthly, in the aggregate, of 0.03% on an
annual basis of the average daily net assets of all the Funds for which
Investors Bank acts as custodian up to $500 million and 0.02% on an annual basis
of average daily net assets for the next $500 million and 0.01% on an annual
basis of average daily net assets which exceed $1 billion.
INDEPENDENT AUDITORS
---------------------
The firm of Ernst & Young LLP, 250 East Fifth Street, Cincinnati, Ohio has been
selected as independent auditors for the Trust for its 2000 fiscal year. Ernst &
Young LLP will perform an annual audit of the Trust's financial statements and
advise the Trust as to certain accounting matters.
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENTS
----------------------------------------------
TRANSFER AGENT. The Trust's transfer agent, Integrated Fund Services, Inc.
("Integrated"), 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. Integrated is an
affiliate of the Advisor by reason of common ownership. Integrated 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. Integrated
receives $21 per account from each of the Intermediate Term Government Income
Fund, the High Yield Fund and the Bond Fund. However, 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.
ACCOUNTING AND PRICING AGENT. Integrated also provides accounting and pricing
services to each Fund, except the Bond Fund. Investors Bank & Trust Company
provides accounting and pricing services to the Bond Fund. These services
include calculating daily net asset value per share and maintaining all
necessary books and records for the Funds.
For calculating daily net asset value per share and maintaining such books and
records as are necessary to enable Integrated to perform its duties, the Short
Term Government Income Fund, the Institutional Government Income Fund and the
Money Market Fund each pay Integrated a fee in accordance with the following
schedule:
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 *
<PAGE>
The Intermediate Term Government Income Fund and the High Yield Fund each pay
Integrated 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 *
* 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.
During the fiscal year ended December 31, 1999, the Bond Fund paid $104,707 in
custody, administrative and accounting fees to Investors Bank & Trust Company.
ADMINISTRATIVE AGENT. Integrated is retained by the Advisor to assist the
Advisor in providing administrative services to the Funds (except the Bond
Fund). In this capacity, Integrated supplies non-investment related statistical
and research data, internal regulatory compliance services and executive and
administrative services. Integrated 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, Integrated receives a fee from the Advisor. The Advisor is solely
responsible for the payment of these administrative fees to Integrated, and
Integrated has agreed to seek payment of such fees solely from the Advisor.
ANNUAL REPORT
-------------
The financial statements of the Short Term Government Income Fund, the
Intermediate Term Government Income Fund, the Institutional Government Income
Fund and the Money Market Fund as of September 30, 1999 appear in the Trust's
annual report which is attached to this Statement of Additional Information. The
Trust's annual report was audited by Arthur Andersen LLP.
The financial statements of the Bond Fund as of December 31, 1999 appear in the
annual report of Touchstone Series Trust, which is attached to this Statement of
Additional Information. The financial statements were audited by Ernst & Young
LLP. The annual report also contains information about other funds which are not
series of the Trust.
<PAGE>
ANNUAL
REPORT
September 30, 1999
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
<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 -
<PAGE>
o Income Opportunity December 31, 1999
o Value Plus
o Growth & Income
o Balanced
o Bond
o Standby Income
TOUCHSTONE
FAMILY
OF
FUNDS
<PAGE>
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.
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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.
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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
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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.
71
