As filed with the Securities and Exchange Commission on January 27, 1997
Registration Nos. 33-8214
811-4813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 79 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 82 |X|
(Check appropriate box or boxes.)
------------------
Standish, Ayer & Wood Investment Trust
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 375-1760
ERNEST V. KLEIN, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
|X| Immediately upon filing pursuant to Rule 485(b)
|_| On [Date] pursuant to Rule 485(b)
|_| 60 days after filing pursuant to Rule 485(a)(1)
|_| 0n [Date] pursuant to Rule 485(a)(1)
|_| 75 days after filing pursuant to Rule 485(a)(2)
|_| 0n [Date] pursuant to Rule 485(a)(2)
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. The Rule 24f-2 Notice for series of the
Registrant with fiscal years ended September 30, 1996 was filed on November 29,
1996.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Cross-Reference Sheet Pursuant to Rule 495(a)
Part A Prospectus
Form Item Cross-Reference
- - - - --------- ---------------
Item 1. Cover Page Cover Page
Item 2. Synopsis "Expense Information"
Item 3. Condensed Financial "Financial Highlights"
Information
Item 4. General Description Cover Page, "The Fund
of Registrant and Its Shares" and "Investment
Objective and Policies"
Item 5. Management of the Fund "Management" and "Custodian,
Transfer Agent and Dividend
Disbursing Agent"
Item 6. Capital Stock and "The Fund and Its Shares",
Other Securities "Purchase of Shares",
"Redemption of Shares", "Dividends
and Distributions" and "Federal
Income Taxes"
Item 7. Purchase of Securities Cover Page and "Purchase of
Being Offered Shares"
Item 8. Redemption or Repurchase "Redemption of Shares"
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Statement of Additional
Part B Information Cross-
Form Item Reference
- - - - --------- ---------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents "Contents"
Item 12. General Information Not Applicable
and History
Item 13. Investment Objectives "Investment Objective and
and Policies and Policies" and "Investment
Restrictions"
Item 14. Management of the Fund "Management"
Item 15. Control Persons and "Management"
Principal Holders
of Securities
Item 16. Investment Advisory and "Management"
Other Services
Item 17. Brokerage Allocation "Portfolio Transactions"
Item 18. Capital Stock and "The Fund and Its Shares"
Other Securities
Item 19. Purchase, Redemption "Redemption of Shares" and
and Pricing of "Determination of Net Asset
Securities Being Offered Value"
Item 20. Tax Status "Taxation"
Item 21. Underwriters Not Applicable
Item 22. Calculation of "Calculation of Performance
Performance Data Data"
Item 23. Financial Statements "Experts and Financial Statements"
and "Financial Statements"
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Cross-Reference Sheet Pursuant to Rule 495(a)
Part A Prospectus
Form Item Cross-Reference
- - - - --------- ---------------
Item 1. Cover Page Cover Page
Item 2. Synopsis "Expense Information"
Item 3. Condensed Financial "Financial Highlights"
Information
Item 4. General Description Cover Page, "The Fund
of Registrant and Its Shares" and "Investment
Objective and Policies"
Item 5. Management of the Fund "Management" and "Custodian,
Transfer Agent and Dividend
Disbursing Agent"
Item 6. Capital Stock and "The Fund and Its Shares",
Other Securities "Purchase of Shares",
"Redemption of Shares", "Dividends
and Distributions" and "Federal
Income Taxes"
Item 7. Purchase of Securities Cover Page and "Purchase of
Being Offered Shares"
Item 8. Redemption or Repurchase "Redemption of Shares"
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Statement of Additional
Part B Information Cross-
Form Item Reference
- - - - --------- ---------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents "Contents"
Item 12. General Information
and History Not Applicable
Item 13. Investment Objectives "Investment Objective and
and Policies and Policies" and "Investment
Restrictions"
Item 14. Management of the Fund "Management"
Item 15. Control Persons and "Management"
Principal Holders
of Securities
Item 16. Investment Advisory and "Management"
Other Services
Item 17. Brokerage Allocation "Portfolio Transactions"
Item 18. Capital Stock and "The Fund and Its Shares"
Other Securities
Item 19. Purchase, Redemption "Redemption of Shares" and
and Pricing of Securities "Determination of Net Asset
Being Offered Value"
Item 20. Tax Status "Taxation"
Item 21. Underwriters Not Applicable
Item 22. Calculation of "Calculation of Performance
Performance Data Data"
Item 23. Financial Statements "Experts and Financial Statements"
<PAGE>
Prospectus dated January 27, 1997
PROSPECTUS
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Massachusetts Intermediate Tax Exempt Bond Fund (the "Fund") is
one fund in the Standish, Ayer & Wood family of funds. The Fund is organized as
a separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company.
The Fund is designed for Massachusetts investors in the upper income tax
brackets who are seeking a higher level of Massachusetts and federally tax-free
income than is normally provided by short-term investments, and more price
stability than investments in long-term municipal bonds. The Fund's investment
objective is to provide a high level of interest income exempt from
Massachusetts and federal income taxes, while seeking preservation of
shareholders' capital, through investing the Fund's assets in investment grade
intermediate-term municipal securities. Municipal bonds in which the Fund
invests will be rated, at the time of investment, within the four highest
ratings by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") or, if unrated,
determined by Standish, Ayer & Wood, Inc. (the "Adviser"), the Fund's investment
adviser, to be of comparable credit quality to the securities so rated. See
"Investment Objective and Policies."
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing to the Principal Underwriter at the telephone number or address
listed above. The Statement of Additional Information bears the same date as
this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information........................................2
Financial Highlights.......................................3
Investment Objectives and Policies.........................4
Risk Factors and Suitability ..............................7
Calculation of Performance Data............................8
Dividends and Distributions................................8
Purchase of Shares.........................................8
Exchange of Shares.........................................9
Redemption of Shares.......................................9
Management................................................10
Federal Income Taxes......................................11
Massachusetts Income Taxes................................12
The Fund and Its Shares...................................12
Custodian, Transfer Agent and Dividend Disbursing Agent...13
Independent Accountants...................................13
Legal Counsel.............................................13
Appendix..................................................14
Tax Certification Instructions............................15
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation) 0.32%
12b-1 Fees None
Other Expenses 0.33%
Total Fund Operating Expenses (after expense limitation) 0.65%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 yr. 3 yrs. 5 yrs. 10 yrs.
- - - - ------- ----- ------ ------ -------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $7 $21 $36 $81
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund that an investor in the Fund will
bear directly or indirectly. See "Management -- Investment Adviser" and
"Management -- Expenses." The figure shown in the caption "Other Expenses,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based upon expenses for the fiscal year ended September 30, 1996, during which
time the Adviser did not impose a portion of its fee. On February 9, 1996, the
Fund changed its fiscal year end from December 31 to September 30.
*The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding brokerage commissions, taxes, litigation,
indemnification, and other extraordinary expenses) to 0.65% of the Fund's
average daily net assets. This agreement is voluntary and temporary and may be
discontinued or revised by the Adviser at any time. In the absence of such
agreement, the Management Fees and the Total Fund Operating Expenses would have
been 0.40% and 0.73%, respectively, for the fiscal year ended September 30,
1996.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN OF GREATER OR LESS THAN 5%.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 and September 30, 1996 have been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report, together with the financial statements of
the Fund, is incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Nine Months Ended November 2, 1992
September 30, 1996 Year Ended December 31, (start of business) to
-------------------------------------
1995 1994 1993 December 31, 1992*
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.02 $19.55 $21.31 $20.32 $20.00
Income from investment operations
Net investment income ** 0.74 0.94 0.94 0.92 0.13
Net realized and unrealized gain (loss) (0.39) 1.47 (1.75) 1.13 0.32
-------- ----------- ----------- ----------- -----------
Total from investment operations 0.35 2.41 (0.81) 2.05 0.45
-------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income (0.74) (0.94) (0.94) (0.92) (0.13)
From realized capital gains - - (0.01) (0.14) -
-------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders (0.74) (0.94) (0.95) (1.06) (0.13)
-------- ----------- ----------- ----------- -----------
Net asset value - end of period $20.63 $21.02 $19.55 $21.31 $20.32
======== =========== =========== =========== ===========
Total return 1.70% 12.64% (3.84%) 10.24% 13.85t
Net assets at end of period (000 omitted) $32,136 $32,565 $27,776 $29,627 $6,537
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65%t 0.65% 0.65% 0.65% 0.65t
Net investment income ** 4.78%t 4.71% 4.67% 4.35% 4.05t
Portfolio turnover 35%x 77% 84% 94% 31%
** The investment adviser voluntarily did not impose a portion of its
investment advisory fee. If this reduction had not been undertaken, the net
investment income per share and the ratios would have been:
Net investment income per share $0.72 $0.95 $0.91 $0.86 $0.11
Ratios (to average net assets):
Expenses 0.73%t 0.72% 0.78% 0.95% 1.37t
Net investment income 4.70%t 4.64% 4.54% 4.05% 3.33t
* Audited by other auditors
t Computed on an annualized basis
x Commencing in fiscal 1996, securities which are puttable on demand have
been excluded from the portfolio turnover calculation
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide a high level of interest
income exempt from Massachusetts and federal income taxes, while seeking
preservation of shareholders' capital, through investing the Fund's assets in
investment grade intermediate-term municipal securities. The Fund seeks to
achieve its objective by investing in a non-diversified portfolio of municipal
securities of issuers located in Massachusetts and other qualifying issuers
(including Puerto Rico, the U.S. Virgin Islands and Guam), the interest on which
is, in the opinion of bond counsel to the issuer, excluded from gross income for
federal income tax purposes and is exempt from Massachusetts personal income tax
("Massachusetts Municipal Securities"). Because of the uncertainty inherent in
all investments, no assurance can be given that the Fund will achieve its
investment objective. The investment objective of the Fund is a fundamental
policy which may not be changed without shareholder approval.
Although the Fund may invest in investment grade Massachusetts Municipal
Securities, it intends to emphasize high quality intermediate-term Massachusetts
Municipal Securities. The dollar-weighted average effective maturity of the
Fund's portfolio will be in a range of three to ten years. However, the Fund may
purchase individual securities with effective maturities which are outside of
this range. Generally, a mutual fund with an average maturity longer than the
Fund will tend to have a higher yield, but will exhibit greater share price
volatility; a fund with a shorter maturity will have a lower yield but will
offer more price stability. The Fund's emphasis on high quality
intermediate-term securities is expected to limit its share price volatility.
Because the Fund holds investment grade municipal securities, the income earned
on shares of the Fund will tend to be less than it might be on a portfolio
emphasizing lower quality securities.
The Fund may invest, without percentage limitations, in municipal bonds
rated at the time of purchase within one of the four highest municipal ratings
by Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch (AAA, AA, A, BBB)
or, if not rated, determined by the Adviser to be of comparable credit quality
to the securities so rated. The Fund may invest in municipal notes rated MIG-1
or MIG-2 by Moody's or at least SP-1 or SP-2 by S&P or in municipal notes that
are not rated, provided that, in the opinion of the Adviser, such notes are of
comparable credit quality. In the case of a security that is rated differently
by two or more rating services, the higher rating is used; provided, however,
all securities purchased must also meet the credit standards of the Adviser.
Securities rated Baa by Moody's or BBB by S&P or Fitch may have some speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make interest payments and repay
principal than is the case with higher grade securities. Prior to acquiring
unrated securities, the Adviser considers the terms of the offering and various
other factors in order to initially determine whether the securities are
consistent with the Fund's investment objective and policies and thereafter to
determine the issuer's comparative credit rating. In the event the rating on a
security held in the Fund's portfolio is downgraded by a rating service, such
action will be considered by the Adviser in its evaluation of the overall
investment merits of that security, but will not necessarily result in a sale of
the security. A description of the ratings is contained in the Appendix to this
Prospectus.
<PAGE>
The Fund is a non-diversified investment company so that, as a fundamental
investment policy, with respect to 50% of the Fund's total assets, the Fund may
not invest more than 5% of the value of its total assets in securities of any
one issuer or acquire more than 10% of the voting securities of an issuer. This
limitation does not apply to investments issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and does not apply to the other
50% of the Fund's total assets. In order to qualify as a "Regulated Investment
Company" under the Internal Revenue Code of 1986, as amended (the "Code"), the
Fund must, among other requirements, not invest more than 25% of its total
assets in the securities of a single issuer as of the close of each quarter of
its taxable year. See "Federal and Massachusetts Income Taxes."
Although it is authorized to do so, the Fund does not expect to invest more
than 25% of its total assets in any one of the following sectors of the
municipal securities market: hospitals, ports, airports, colleges and
universities, turnpikes and toll roads, housing bonds, lease rental bonds,
industrial revenue bonds or pollution control bonds. For the purposes of this
limitation, securities whose credit is enhanced by bond insurance, letters of
credit or other means are not considered to belong to a particular sector.
As a fundamental policy, at least 80% of the Fund's net assets will
normally be invested in Massachusetts Municipal Securities and, during normal
market conditions, at least 65% of the Fund's net assets will be invested in
municipal bonds. There may be certain occasions, however, during which more than
20% of the Fund's net assets may be invested in other instruments. In unusual
circumstances, as a temporary defensive measure, the Fund may invest in taxable,
fixed income obligations and/or municipal securities other than Massachusetts
Municipal Securities, when the Adviser believes that market conditions, such as
rising interest rates or other adverse factors, would cause serious erosion of
portfolio value. In addition, the Fund may also invest up to 20% of its net
assets in taxable, fixed income obligations and/or municipal securities other
than Massachusetts Municipal Securities when there is a yield disparity between
these other instruments and Massachusetts Municipal Securities on an after tax
basis. These other investments will generally be of comparable credit quality
and maturity to the Massachusetts Municipal Securities in which the Fund invests
and will be limited primarily to obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; investment grade
corporate debt securities; municipal securities other than Massachusetts
Municipal Securities; prime commercial paper; certain certificates of deposit of
domestic banks; and repurchase agreements, secured by U.S. Government
securities, with maturities not in excess of seven days. To the extent that
income dividends include income from taxable sources, a portion of a
shareholder's dividend income will be subject to federal and/or Massachusetts
tax. See "Federal and Massachusetts Income Taxes."
Municipal securities include debt obligations issued to obtain funds for
various public purposes, including the construction of a variety of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities or bonds may be issued include the refunding of outstanding
obligations, obtaining funds for general operating expenses and the obtaining of
funds to loan to other public institutions and facilities. In addition, certain
types of industrial revenue bonds are, or have been under prior law, issued by
<PAGE>
or on behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage and solid waste disposal. Some of these bonds may be
"private activity bonds," the interest on which is treated as a tax preference
item for purposes of the federal alternative minimum tax. Such bonds are
sometimes referred to as "AMT Bonds" and are treated as taxable obligations for
the purposes of the Fund's policies. See "Federal and Massachusetts Income
Taxes."
Municipal bonds are issued in order to meet long-term capital needs and
generally have maturities of more than one year when issued. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the pledge of the municipality's faith,
credit and taxing power for the payment of principal and interest, and are
considered the safest type of municipal bond. Revenue bonds are payable only
from the revenues derived from a particular project or facility and are
generally dependent solely on a specific revenue source. Industrial revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user. Assessment bonds, which are issued by a specially created district
or project area which levies a tax (generally on its taxable property) to pay
for an improvement or project, may be considered to belong to either category.
There are, of course, other variations in the safety of municipal bonds, both
within a particular classification and between classifications, depending on
numerous factors. The Fund is not limited with respect to the categories of
municipal securities it may acquire.
Municipal securities also include municipal notes, which are generally
issued to satisfy short-term capital needs and have maturities of one year or
less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. The Fund may also
invest in variable rate demand instruments, which are securities with long
stated maturities, but demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
<PAGE>
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used in an attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although the Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 3% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating the Fund's
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that short-term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Code for qualification as a regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
<PAGE>
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the Fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Distributions by the Fund of any net income
or gains from its Strategic Transactions will be taxable to investors. Further
information concerning the Fund's Strategic Transactions is set forth in the
Statement of Additional Information.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 40% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, but will only do so with the
intention of actually acquiring the securities. The payment obligation and the
interest rate on these securities will be fixed at the time the Fund enters into
the commitment, but no income will accrue to the Fund until they are delivered
and paid for. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid securities assets equal to the amount of the
Fund's commitment will be segregated with the custodian for the Fund to secure
the Fund's obligation and to ensure that it is not leveraged. The market value
of the securities when they are delivered may be less than the amount paid by
the Fund. The Fund may sell portfolio securities on a delayed delivery basis.
The market value of the securities when they are delivered may be more than the
amount to be received by the Fund.
Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
<PAGE>
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, the
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement. Distributions by the Fund of any income from repurchase agreements
will be taxable to investors.
Stand-By Commitments and Other Puts
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no additional cost to
the Fund, but may, however, reduce the yields available on securities subject to
stand-by commitments.
Third Party Puts
The Fund may also purchase long-term fixed rate bonds which have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender or put its bonds to the institution
and receive the face value thereof. These third party puts are available in
several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features. The financial institution
granting the put option does not provide credit enhancement, and typically, if
there is a default on or significant downgrading of the bond, or a loss of its
tax-exempt status, the put option will terminate automatically and the risk to
the Fund will be that of holding a long-term bond. These third party puts will
not be considered to shorten the Fund's maturity.
Investment Restrictions
The Fund has adopted certain fundamental policies which may not be changed
without the approval of the Fund's shareholders. These policies provide, among
other things, that the Fund may not: (i) invest, with respect to at least 50% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer (in determining the issuer of
a tax-exempt security, identification of the issuer will be based upon a
determination of the source of assets and revenues committed to meeting interest
and principal payments of each security); (ii) issue senior securities, borrow
money or pledge or mortgage its assets, except that the Fund may borrow from
banks as a temporary measure for extraordinary or emergency purposes (but not
investment purposes) in an amount up to 15% of the current value of its total
assets, and pledge its assets to an extent not greater than 15% of the current
value of its total assets to secure such borrowings; however, the Fund may not
make any additional investments while its outstanding borrowings exceed 5% of
the current value of its total assets; (iii) lend portfolio securities, except
that the Fund may enter into repurchase agreements which are terminable within
seven days; or (iv) invest more than an aggregate of 15% of the net assets of
the Fund in securities subject to legal or contractual restrictions on resale or
for which there are no readily available market quotations or in other illiquid
securities.
<PAGE>
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
RISK FACTORS AND SUITABILITY
The Fund is designed for investors in the upper income tax brackets who are
seeking a higher level of Massachusetts and federal tax-free income than is
normally provided by tax-free money market or other short-term investments and
more price stability than investments in long-term municipal bonds. The Fund may
also be suitable for other investors, depending upon their investment goals and
financial and tax positions. Generally, a mutual fund with an average maturity
longer than the Fund will tend to have a higher yield, but will exhibit greater
share price volatility; a fund with a shorter maturity will have a lower yield
but will offer more price stability. The Fund's emphasis on high quality
securities is expected to limit its share price volatility.
The classification of the Fund under the Investment Company Act of 1940 as
a "non-diversified" investment company allows it to invest more than 5% of its
assets in the securities of any issuer, subject to certain limitations under the
Code. Because of the relatively small number of issues of Massachusetts
obligations, the Fund is likely to invest a greater percentage of its assets in
the securities of a single issuer than is an investment company which invests in
a broad range of municipal obligations. Therefore, the Fund would be more
susceptible than a diversified fund to any single adverse economic or political
occurrence or development affecting Massachusetts issuers. The Fund will also be
subject to an increased risk of loss if the issuer is unable to make interest or
principal payments or if the market value of such securities declines. It is
also possible that there will not be sufficient availability of suitable
Massachusetts Municipal Securities for the Fund to achieve its objective of
providing income exempt from Massachusetts taxes.
The market value of the Fund's investments will change in response to
changes in interest rates and other factors. During periods of falling interest
rates, the values of long-term fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating services in their
ratings of tax-exempt securities and in the ability of an issuer to make
payments of interest and repayments of principal will also affect the value of
these investments. Changes in the value of portfolio securities will not affect
cash income derived from those securities but will affect the Fund's net asset
value.
Certain Risk Considerations Relating to Massachusetts
The Fund is non-diversified and invests primarily in securities issued by
The Commonwealth of Massachusetts, its political subdivisions, including cities
and towns, and its public authorities. Therefore, the economic and financial
condition of the Commonwealth and its authorities and municipalities will have a
significant impact on the Fund's net asset value, yield and investment
performance. The availability of federal funds may affect the economic and
financial condition of the Commonwealth.
<PAGE>
In the late 1980s, The Commonwealth of Massachusetts began to suffer a
period of economic decline. Key sections of the economy, such as real estate,
construction, banking and financial services, high technology and defense
related industries either contracted or grew at very slow rates. Consequently,
personal income growth slowed and employment declined. By 1990, the
Commonwealth's unemployment rate significantly exceeded the national average. In
turn, these economic factors contributed to considerable financial problems for
the Commonwealth. Over the period 1987-1990, tax revenues failed to meet
budgeted forecasts and spending in several major expenditure categories grew at
relatively high rates. Sizeable operating deficits occurred in each of these
years, and the Commonwealth at times covered the deficits by borrowing funds in
the capital markets. During 1989-1990, Moody's and S&P downgraded their credit
ratings on Massachusetts' bonds from Aa and AA+ to Baa and BBB, respectively.
In fiscal year 1991, a combination of tax rate increases and tightened
expenditure controls helped to stabilize the Commonwealth's financial condition.
State government closed the year with a modest operating loss. Fiscal year 1992
financial reports showed a small surplus. In response to the improvement in
financial operations, Moody's and S&P upgraded the Commonwealth's general
obligation bonds to A. During the two most recent fiscal years, 1994 and 1995,
economic conditions have generally stabilized, although some sectors remain
weak. Financial operations also appear to have stabilized. Currently, the rating
assigned to the Commonwealth's general obligation bonds by Moody's is A1 and the
comparable rating assigned by S&P is A+. Fitch's current rating for the
Commonwealth's general obligation bonds is A+. However, the Commonwealth's debt
ratios are high relative to other states, and state government has amassed a
large unfunded pension liability. Over the course of time, downturns in economic
and financial conditions are likely to recur.
The financial position of the Commonwealth may have an impact on other
issuers of tax-exempt obligations who receive support from the Commonwealth
including municipalities and various public agencies. The Commonwealth may also
choose to implement regulations which could affect the financial condition of
issuers of tax-exempt securities. For example, changes to laws which regulate
rate setting procedures for health care providers in Massachusetts which were
enacted in 1992 may prove detrimental to some hospitals.
Proposition 2 1/2 is a property tax limitation initiative passed by
Massachusetts voters in 1980. In general, Proposition 2 1/2 constrains the
ability of cities and town to raise property tax revenues, virtually the only
local-source revenue available, and this may lead to adverse consequences on the
financial condition of some municipalities. Under Proposition 2 1/2, many cities
and towns were required to reduce their property tax levies to a stated
percentage of the full and fair cash value of their taxable real estate and
personal property. It limited the amount by which the total property taxes
assessed by all cities and towns may increase from year to year.
<PAGE>
Limitations on Commonwealth tax revenues have been established both by
legislation enacted in 1986 and by public approval of an initiative petition in
1986. The two measures are inconsistent in several respects, including the
methods of calculating the limits and the exclusions from the limits. The
initiative petition, which took effect on December 4, 1986, contains no
exclusion for debt service on municipal obligations of the Commonwealth.
Commonwealth tax revenues in fiscal years subsequent to passage of the
initiative were lower than the limit set by either the initiative petition or
the legislative enactment. The Executive Office for Administration and Finance
of the Commonwealth has estimated that Commonwealth tax revenues will not reach
the limit imposed by either the initiative petition or the legislative enactment
in fiscal year 1995.
Massachusetts Municipal Securities also include obligations of the
governments of Puerto Rico, the Virgin Islands and Guam to the extent that
interest on these obligations is exempt from Massachusetts state personal income
tax. The Fund will not invest more than 10% of its net assets in the obligations
of each of the Virgin Islands and Guam, but may invest without limitation in the
obligations of Puerto Rico. Accordingly, the Fund may be adversely affected by
local political and economic conditions and developments within Puerto Rico
affecting the issuers of such obligations. The economy of Puerto Rico is
dominated by the manufacturing and service sectors. Although the economy of
Puerto Rico expanded significantly from 1984 thorough 1989, the rate of this
expansion slowed in 1990 and remains weak. Although the Puerto Rico unemployment
rate has declined substantially since 1985, the seasonally adjusted rate of
unemployment for February 1995 was approximately 12.3%.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield, tax equivalent yield
and total return, all of which are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10-year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income, the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund which
invests primarily in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of the Fund's yield (calculated as indicated below) by one,
minus a stated income tax rate that reflects combined federal and Massachusetts
income tax rates (assuming full deductibility of Massachusetts income taxes on
the investor's federal income tax return and adding the product to the taxable
portion (if any) of the Fund's yield.
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE
Combined
Federal
and MA Taxable Equivalent Rates Based on
Marginal Tax-Exempt Yield of:
Tax Rate* 4% 5% 6% 7% 8% 9% 10%
- - - - --------------------------------------------------------------------------------
39.28% 6.59% 8.23% 9.88% 11.53% 13.18% 14.82% 16.47%
43.68% 7.10% 8.88% 10.65% 12.43% 14.20% 15.98% 17.76%
46.85% 7.53% 9.41% 11.29% 13.17% 15.05% 16.93% 18.81%
*Assuming a Massachusetts tax rate of 12% and federal tax rates of 31%, 36% and
39.6%, respectively.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
daily and distributed monthly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order is received in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter before the close of
its business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
<PAGE>
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (normally 4:00
p.m., New York City time). The net asset value per share is calculated by
determining the value of all the Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Municipal
securities are valued by the Adviser or by an independent pricing service
approved by the Trustees, which uses information with respect to transactions in
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining value.
The Fund believes that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations made by the
Adviser or provided by such pricing service will be based upon fair value
determined on the basis of the factors listed above (which also include the use
of yield equivalents or matrix pricing). Taxable securities are valued at the
last sale prices, on the valuation day, on the exchange or national securities
market on which they are primarily traded; taxable securities not listed on an
exchange or national securities market, or securities for which there were no
reported transactions, are valued at the last quoted bid prices. Securities for
which quotations are not readily available and all other assets are valued at
fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Trustees. Money market instruments with less than 60
days remaining to maturity when acquired by the Fund are valued on an amortized
cost basis unless the Trustees determine that amortized cost does not represent
fair value. If the Fund acquires a money market instrument with more than 60
days remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon its value on such date unless the Trustees determine during such 60-day
period that amortized cost does not represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
a taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
<PAGE>
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be available for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
<PAGE>
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
<PAGE>
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $10,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $10,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act
of 1940.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. The Adviser or its affiliate, Standish International Management
Company, L.P. ("SIMCO"), serves as the investment adviser to each of the funds
in the Standish, Ayer & Wood family of funds.
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of December
31, 1996, Standish managed approximately $30.6 billion in assets.
The Fund's portfolio managers are Maria D. Furman and Raymond J. Kubiak,
who have been primarily responsible for the day-to-day management of the Fund's
portfolio since its inception in November, 1992. During the past five years, Ms.
Furman has served as a Director and Vice President of the Adviser and Mr.
Kubiak has been a Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, the Adviser
manages the Fund's portfolio in accordance with its stated investment objective
and policies, recommends investment decisions for the Fund, places orders to
purchase and sell securities on behalf of the Fund, administers the affairs of
the Fund and permits the Fund to use the name "Standish." For these services,
the Fund pays a fee monthly at the annual rate of 0.40% of average daily net
assets. The Adviser has voluntarily agreed to limit the Fund's aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) to 0.65% of the Fund's average daily net assets. The Adviser may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. If the expense limit is exceeded, the
compensation due the Adviser for such fiscal year shall be proportionately
reduced by the amount of such excess by a reduction or refund thereof at the
time such compensation is payable after the end of each calendar month, subject
to readjustment during the fiscal year. For the fiscal period ended September
30, 1996, the advisory fees paid to the Adviser totalled $98,478. During this
period the Adviser voluntarily agreed not to impose $20,375 of its fee.
Expenses
The Fund bears all expenses of its operations other than those incurred by
the Adviser under the investment advisory agreement. Among other expenses, the
Fund will pay investment advisory fees; bookkeeping, share pricing and
<PAGE>
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of prospectuses, statements of additional information
and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Principal
Underwriter bears without subsequent reimbursement the distribution expenses
attributable to the offering and sale of Fund shares. Expenses of the Trust
which relate to more than one series are allocated among such series by the
Adviser and SIMCO in an equitable manner, primarily on the basis of relative net
asset values. For the fiscal period ended September 30, 1996, expenses borne by
the Fund amounted to $159,139 which represented 0.65% of the Fund's average
daily net assets after an expense reduction of $20,375.
Portfolio Transactions
It is not anticipated that the Fund will incur a significant amount of
brokerage expenses because municipal securities are generally traded on a "net"
basis in principal transactions without the addition or deduction of brokerage
commissions or transfer taxes. Subject to the supervision of the Trustees of the
Trust, the Adviser selects the brokers and dealers that execute orders to
purchase and sell portfolio securities for the Fund. The Adviser will generally
seek to obtain the best available price and most favorable execution with
respect to all transactions for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be treated by taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
The Fund intends to satisfy applicable requirements of the Code so that its
distributions to shareholders of the tax-exempt interest it earns will qualify
as "exempt-interest dividends," which shareholders are entitled to treat as
tax-exempt interest. Any portion of an exempt-interest dividend that is
attributable to the interest the Fund receives on certain tax-exempt obligations
that are "private activity bonds" and, for corporate shareholders, the entire
exempt-interest dividend, may increase a shareholder's liability, if any, for
alternative minimum tax.
<PAGE>
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
adviser if you think this may apply to you.
Shareholders which are taxable entities or persons will be subject to
federal income tax on capital gain distributions from the Fund and on any other
dividends they receive from the Fund that are not exempt-interest dividends.
Dividends paid by the Fund from any taxable net investment income, such as
interest income from taxable debt obligations, accrued market discount
recognized by the Fund, or repurchase agreements, and any excess of net
short-term capital gain over net long-term capital loss will be taxable to
shareholders as ordinary income, whether received in cash or Fund shares.
Dividends paid by the Fund from net capital gain (the excess of net long-term
capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. None of the Fund's exempt-interest
dividends, taxable income dividends or capital gain distributions will qualify
for the corporate dividends received deduction. Except as described below under
"Massachusetts Income Taxes," dividends and capital gain distributions may also
be subject to state and local or foreign taxes.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules disallow any losses on
the sale or exchange of Fund shares with a tax holding period of six months or
less, to the extent the shareholder received exempt-interest dividends with
respect to such shares, and recharacterize as long-term any such losses that are
not disallowed to the extent of any capital gain distributions received with
respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on taxable dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary taxable dividends from the Fund and,
unless a current IRS Form W-8 or an acceptable substitute is furnished to the
Fund, to backup withholding on certain payments from the Fund.
MASSACHUSETTS INCOME TAXES
To the extent that the Fund's exempt-interest dividends are derived from
interest on tax-exempt obligations of the Commonwealth of Massachusetts and its
political subdivisions or Puerto Rico, the U.S. Virgin Islands or Guam and are
<PAGE>
properly designated as such, these distributions will also be exempt from
Massachusetts personal income tax. For Massachusetts personal income tax
purposes, dividends from the Fund's taxable net investment income (if any),
federally tax-exempt income from obligations not described in the preceding
sentence, and net short-term capital gains, if any, will generally be taxable as
ordinary income, whether received in cash or additional shares. However, any
dividends that are properly designated as attributable to interest the Fund
receives on direct U.S. Government obligations will not be subject to
Massachusetts personal income tax. It is presently uncertain what Massachusetts
tax rate will apply to the Fund's capital gain distributions, but it is
anticipated that the Massachusetts Department of Revenue will address this issue
in the near future. A portion of such a capital gain distribution will be exempt
from Massachusetts personal income tax if it is properly designated as
attributable to gains realized on the sale of certain tax-exempt bonds issued
pursuant to Massachusetts statutes that specifically exempt such gains from
Massachusetts taxation. These bonds are relatively few in number. Dividends from
net investment income (including exempt-interest dividends) and from net
long-term and short-term capital gains will be subject to, and shares of the
Fund will be included in the net worth of intangible property corporations for
purposes of, the Massachusetts corporation excise tax if received by a
corporation subject to such tax.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal and Massachusetts tax
status of distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable by
the Trust. Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
At December 31, 1996, approximately 34% of the then outstanding shares of
the Fund were held by BDG & Co., c/o Bingham, Dana & Gould Trust Department, 150
Federal Street, Boston, MA, which was deemed to control the Fund.
The Trust has established series of its shares of beneficial interest,
including the Fund, and may establish additional series at any time. Each series
is a separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
<PAGE>
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
Inquiries concerning the Fund should be made by contacting at the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend-disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust and to the Adviser.
- - - - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
<PAGE>
APPENDIX
MOODY'S MUNICIPAL BOND RATINGS
Aaa -Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa -Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
MOODY'S MUNICIPAL NOTE RATINGS
MIG-1 -Notes which are rated MIG-1 are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or by
established and broad based access to the market for refinancing, or
both.
MIG-2 -Bonds which are rated MIG-2 are of high quality, with margins of
protection ample, although not as large as in the MIG-1 group.
S & P'S MUNICIPAL BOND RATINGS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
<PAGE>
AA -Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -Debt rated BBB is regarded as having an 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.
S & P'S MUNICIPAL NOTE RATINGS
SP-1 -Notes rated SP-1 indicate a very strong capacity to pay principal and
interest. A "plus" is added for those issues determined to possess
overwhelming safety characteristics.
SP-2 -Notes rated SP-2 indicate a satisfactory capacity to pay principal
and interest.
FITCH'S MUNICIPAL BOND RATINGS
AAA -Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
A -Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -Bonds rated BBB are considered to be investment grade and satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse effects on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. Amounts withheld and forwarded to the IRS can be credited as
a payment of tax when completing your federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
<PAGE>
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
<PAGE>
January 27, 1997
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated January
27, 1997, as amended and/or supplemented from time to time (the "Prospectus"),
of Standish Massachusetts Intermediate Tax Exempt Bond Fund (the "Fund"), a
separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"). This Statement of Additional Information should be read in conjunction
with the Fund's Prospectus a copy of which may be obtained without charge by
writing or calling Standish Fund Distributors, L.P., the Trust's principal
underwriter (the "Principal Underwriter") at the address and phone number set
forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Contents
Investment Objective and Policies..........................2
Investment Restrictions...................................12
Calculation of Performance Data...........................13
Management................................................15
Redemption of Shares......................................20
Portfolio Transactions....................................20
Determination of Net Asset Value..........................21
Federal and Massachusetts Income Taxes....................21
The Fund and Its Shares...................................23
Additional Information....................................24
Experts and Financial Statements..........................24
Financial Statements......................................25
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
The Fund will maintain an effective portfolio maturity of between three and
ten years. This means that the dollar weighted average duration of the Fund's
portfolio investments will be less than the duration of a U.S. Treasury
obligation with a remaining stated maturity of three to ten years. Duration
represents the weighted average maturity of expected cash flows (i.e., interest
and principal payments) on one or more debt obligations, discounted to their
present values. The duration of an obligation is always less than or equal to
its stated maturity and is related to the degree of the volatility in the market
value of the obligation. In computing the duration of its portfolio, the Fund
will have to estimate the duration of debt obligations that are subject to
prepayment or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that the effective portfolio maturity
will not exceed ten years, the Fund may invest in individual debt obligations of
any maturity, including obligations with a remaining stated maturity of less
than three or more than ten years. For purposes of the Fund's investment policy,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features (such as puts or demand
features) or a variable rate of interest which, in the judgment of Standish,
Ayer & Wood, Inc. (the "Adviser"), the Fund's investment adviser, will result in
the instrument being valued in the market as though it has the earlier maturity.
Because the Fund holds investment grade municipal securities, the income
earned on shares of the Fund will tend to be less than it might be on a
portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions the
power or ability of any one or more issuers to pay when due principal of and
interest on its or their municipal obligations may be materially affected.
Although the Fund's quality standards are designed to minimize the credit risk
of investing in the Fund, that risk cannot be entirely eliminated.
Municipal Notes
Municipal notes are generally issued to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include: tax anticipation notes; revenue anticipation notes; bond anticipation
notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
<PAGE>
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes in which
the Fund may invest which are issued for different purposes and secured
differently from those described above.
Municipal Bonds
Municipal bonds are issued to meet longer term capital needs and generally
have maturities of more than one year when issued. The two principal
classifications of municipal bonds are: "General Obligation" Bonds and "Revenue"
Bonds.
Issuers of General Obligation Bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
<PAGE>
Other Municipal Securities
There is a variety of hybrid and special types of municipal securities as
well as numerous differences in the security of municipal securities both within
and between the two principal classifications above.
Variable Rate Demand Instruments
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit the Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent. The demand feature may be backed by a bank letter of credit
or guarantee issued with respect to such instrument. A bank that issues a
repurchase commitment may receive a fee from the Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that the Fund may purchase are payable
on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Adviser will
select the variable rate demand instruments that the Fund will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
the Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria of the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. Because the adjustment of interest rates on the variable rate
demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
<PAGE>
The maturity of the variable rate demand instruments held by the Fund will
ordinarily be deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
* * * *
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the Securities Act of 1933 prior to offer and sale unless an exemption from such
registration is available, municipal securities which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for many
municipal securities which were not publicly offered initially.
Securities purchased for the Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in the Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to the Fund's investments enhance
marketability. In addition, stand-by commitments and demand obligations also
enhance marketability.
Money Market Instruments and Repurchase Agreements
The money market instruments in which the Fund may invest include
short-term U.S. Government securities, commercial paper (promissory notes issued
by corporations to finance their short-term credit needs), negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances and repurchase agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or
Duff 1+ by Duff & Phelps, Inc. ("Duff & Phelps"), which are the highest ratings
assigned by these rating services (even if rated lower by one or more of the
other agencies), or which, if not rated or rated lower by one or more of the
agencies and not rated by the other agency or agencies, are judged by the
Adviser to be of equivalent quality to the securities so rated. In determining
whether securities are of equivalent quality, the Adviser may take into account,
but will not rely entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
<PAGE>
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. The Trustees will
monitor the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used in an attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although the Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 3% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating the Fund's
<PAGE>
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that short term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
<PAGE>
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised) the underlying security, commodity, index, or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is "in-the-money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
<PAGE>
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. OTC options purchased by the Fund,
and portfolio securities "covering" the amount of the Fund's obligation pursuant
to an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are subject to the Fund's restriction on illiquid securities,
unless determined to be liquid in accordance with procedures adopted by the
Board of Trustees. For OTC options written with "primary dealers" in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price. The Fund expects generally to
enter into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser.
<PAGE>
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, municipal notes and bonds and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices and futures contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help offset any loss, the Fund may incur
a loss if the exercise price is below the market price for the security subject
to the call at the time of exercise. A call sold by the Fund exposes the Fund
also during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, municipal notes and bonds and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities indices and futures contracts. The Fund will not sell put options
if, as a result, more than 50% of the Fund's total assets would be required to
be segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
<PAGE>
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser to purchase a financial
instrument at a specific time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CFTC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount that the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options and
<PAGE>
interest rate transactions ("component transactions"), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund's net loss exposure resulting from swaps,
caps, floors and collars and other Strategic Transactions entered into for such
purposes will not exceed 3% of the Fund's net assets at any one time. The Fund
will not sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or the Counterparty issues debt that is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
<PAGE>
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations.
The Staff of the SEC currently takes the position that swaps, caps, floors
and collars are illiquid, and are subject to the Fund's limitation on investing
in illiquid securities.
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will not use leverage in Strategic Transactions. The Fund will
hold securities or other instruments whose values are expected to offset its
obligations under the Strategic Transactions. The Fund will not enter into
Strategic Transactions that expose the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or other options,
futures contracts or other instruments or (ii) cash, receivables or liquid
securities with a value sufficient to cover its potential obligations. The Fund
may have to comply with any applicable regulatory requirements designed to make
sure that mutual funds do not use leverage in Strategic Transactions, and if
required, will set aside cash and other assets in a segregated account with its
custodian bank in the amount prescribed. In that case, the Fund's custodian
would maintain the value of such segregated account equal to the prescribed
amount by adding or removing additional cash or other assets to account for
fluctuations in the value of the account and the Fund's obligations on the
underlying Strategic Transactions. Assets held in a segregated account would not
be sold while the Strategic Transaction is outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that segregation of a
large percentage of the Fund's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 40% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 days after the date
<PAGE>
of the transaction. The payment obligation and interest rate on the securities
are fixed at the time the Fund enters into the commitment, but interest will not
accrue to the Fund until delivery of and payment for the securities. Although
the Fund will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
the Fund may sell the securities before the settlement date if deemed advisable
by the Adviser.
Unless the Fund has entered into an offsetting agreement to sell the
securities purchased on a "when-issued" or "delayed delivery basis", cash or
liquid obligations with a market value at least equal to the amount of the
Fund's commitment will be segregated with the custodian bank for the Fund. If
the market value of these securities declines, additional cash or securities
will be segregated daily so that the aggregate market value of the segregated
securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Fund.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise.
The Fund may sell portfolio securities on a delayed delivery basis. The
market value of the securities when they are delivered may be more than the
amount to be received by the Fund.
Special Considerations Relating to Massachusetts Municipal Securities
The financial condition of the Commonwealth of Massachusetts (the
"Commonwealth"), its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of, the Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. The following
section provides only a brief summary of the complex factors affecting the
financial condition of Massachusetts, and is based on information obtained from
the Commonwealth, as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
creditworthiness of the Commonwealth, and that there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by the
Commonwealth.
Economic Factors Summary
Annual budgeted revenues increased by approximately 7.1% in fiscal 1993.
Annual budgeted revenues increased from fiscal 1993 to fiscal 1994 by
approximately 5.7%, by approximately 5.4% in fiscal 1995, and by approximately
5.7% in fiscal 1996. Annual budgeted revenues are projected to decrease by
approximately 0.5% in fiscal 1997. Annual budgeted expenditures decreased from
fiscal 1991 to fiscal 1992 by approximately 1.7%, increased by approximately
9.5% in fiscal 1993, increased by approximately 5.6% in fiscal 1994, increased
<PAGE>
by approximately 4.7% in fiscal 1995, and increased by approximately 4.0% in
fiscal 1996. Annual budgeted expenditures are estimated to increase by
approximately 4.8% in fiscal 1997. Ending fund balances in the budgeted
operating funds for fiscal 1990 were negative $1.104 billion. For fiscal 1991,
these funds attained positive ending balances of $237.1 million, of which $59.2
million was reserved in the Commonwealth's Stabilization Fund pursuant to state
finance law. Fiscal 1992 ended with positive fund balances of $549.4 million,
including $230.4 million in the Stabilization Fund. Fiscal 1993 ended with
positive fund balances of $549.4 million, including $309.5 million in the
Stabilization Fund. Fiscal 1994 ended with fund balances of $589.3 million,
including $382.9 million in the Stabilization Fund. Fiscal 1995 ended with fund
balances of $726 million, including $425.4 million in the Stabilization Fund.
Fiscal 1996 ended with fund balances of approximately $1,152.5 million,
including $543.3 million in the Stabilization Fund. This was a 58.7% increase
from fiscal 1995. Fiscal 1997 is estimated to show a year-end structural
imbalance of $467 million, of which approximately $337 million is attributable
to non-recurring factors (the largest being the $233.8 million personal income
tax reduction). Fiscal 1997 is estimated to end with fund balances of
approximately $684.6 million, which would be a 40.6% decrease from fiscal 1996.
1993 Fiscal Year
The Commonwealth ended fiscal 1993 with a surplus of revenues over
expenditures of $13.1 million and aggregate ending operating fund balance of
approximately $526.5 million. Budgeted revenues and other sources increased 4.7%
over fiscal 1992 and totaled approximately $14.710 billion, representing a 9.5%
increase over the prior fiscal year.
After payment of all Local Aid and retirement of short-term debt, the
Commonwealth showed a year-end cash position of approximately $662.2 million, as
compared to a projected $485.1 million.
1994 Fiscal Year
The Commonwealth is in the process of closing its fiscal 1994 financial
records. Financial information for fiscal year 1994 is unaudited.
The Department of Revenue's preliminary figures indicate fiscal 1994 tax
revenue collections were $10.606 billion, $88 million below the Department of
Revenue's fiscal year 1994 tax revenue estimate of $10.694 billion. Fiscal 1994
tax revenue collections were $676 million above fiscal 1993 tax revenues of
$9.930 billion. Budgeted revenues and other sources, including non-tax revenues,
collected in fiscal 1994 were estimated by the Executive Office for
Administration and Finance to have been approximately $15.551 billion. Budgeted
expenditures and other uses of funds in fiscal 1994 were approximately $15.533
billion.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599 million.
<PAGE>
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994; The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $632 million in fiscal 1996 and $875
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget as signed by the Governor includes $396
million in appropriations to satisfy this legislation.
1995 Fiscal Year
The Commonwealth has closed its fiscal 1995 financial records and published
its audited financial information. Fiscal 1995 tax revenue collections were
approximately $11.163 billion, approximately $12 million above the Department of
Revenue's revised fiscal year 1995 tax revenue estimate of $11.151 billion,
approximately $556 million, or 5.2%, above fiscal 1994 tax revenues of $10.607
billion. Budgeted revenues and other sources, including non-tax revenues,
collected in fiscal 1995 were approximately $16.387 billion, approximately $837
million, or 5.4%, above fiscal 1994 budgeted revenues of $15.550 billion.
Budgeted expenditures and other uses of funds in fiscal 1995 were approximately
$16.251 billion, approximately $728 million , or 4.7%, above fiscal 1994
budgeted expenditures and uses of $15.523 billion. The Commonwealth ended fiscal
1995 with an operating gain of $137 million and an ending fund balance of $726
million.
1996 Fiscal Year
The 1996 Comptroller's Preliminary Financial Report indicates that the
budgeted operating funds of the Commonwealth ended fiscal 1996 with a surplus of
revenues and other sources over expenditures and other uses of $426.4 million
resulting in aggregate ending fund balances in the budgeted operating funds of
the Commonwealth of approximately $1.153 billion. Budgeted revenues and other
sources for fiscal 1996 totalled approximately $17.323 billion, including tax
revenues of approximately $12.049 billion. Budgeted revenues and other sources
increased by approximately 5.7% from fiscal 1995 to fiscal 1996, while tax
revenues increased by approximately 7.9% for the same period. Income tax
withholding payments increased by approximately 8.0% from fiscal 1995, and total
income tax collections by approximately 12.3%. (The Department of Revenue
believes that the strong tax revenue growth in fiscal 1996 was due partly to
one-time factors that may not recur in fiscal 1997. These include the rise in
the stock and bond markets in calendar 1995, which may have created unusually
large capital gains and thus increases in personal income tax payments in fiscal
1996. These factors have been incorporated into the Department's forecast for
fiscal 1997 tax revenue.) Budgeted expenditures and other uses in fiscal 1996
totalled approximately $16.896 billion, an increase of approximately $645.7
million, or 4.0%, over fiscal 1995.
<PAGE>
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. Under state finance law, year-end
surplus amounts (as defined in the law) in excess of the amount that can remain
in the Stabilization Fund are transferred to the Tax Reduction Fund, to be
applied, subject to legislative appropriation, to the reduction of personal
income taxes. The balance in the Tax Reduction Fund, as reflected in the 1996
Comptroller's Preliminary Financial Report, is approximately $233.8 million.
The final fiscal 1996 appropriation bills approved by the Governor on July
10, 1996 and August 10, 1996 contained approximately $246.9 million in fiscal
1996 appropriations, approximately $38.2 million in fiscal 1997 appropriations
and approximately $221.7 million in fiscal 1996 appropriations continued for use
in fiscal 1997. Amounts carried forward from fiscal 1995 and deposited in the
Cost Relief Fund were appropriated in these bills for further subsidies to local
units of government for costs of water pollution abatement projects.
On July 30, 1996, the Governor approved additional bond legislation
authorizing approximately $2.4 billion in state transportation-related
expenditures (to be funded by approximately $1.269 billion of state bonds), as
well as $250 million (to be funded by state bonds) for the first phase of
forward funding the working capital needs of the MBTA, $20 million in state
bonds for capitalization grants to the Massachusetts Water Pollution Abatement
Trust and approximately $449.1 million in bonds to be issued by the MBTA. The
two transportation bills, when combined, satisfy the Governor's current requests
for transportation funding and allow the Commonwealth access to all remaining
unobligated federal assistance available to the state under the Intermodal
Surface Transportation Efficiency Act of 1991.
1997 Fiscal Year
The fiscal 1997 budget is based on numerous spending and revenue estimates,
the achievement of which cannot be assured. The budget was enacted by the
Legislature on June 20, 1996 and signed by the Governor on June 30, 1996. The
Budget provides for approximately $17.452 billion in fiscal 1997 expenditures.
The Executive Office for Administration and Finance projects that fiscal 1997
spending will total approximately $17.710 billion, a $712 million, or 4.5%
increase over fiscal 1996 spending. The Executive Office for Administration and
Finance estimates fiscal 1997 total budgeted revenues to be approximately
$17.242 billion, including approximately $12.123 billion in tax revenues. The
tax revenue estimate amounts to an increase in approximately $73.8 million, or
0.6%, over fiscal 1996 tax collections. The estimate is based on the consensus
revenue estimate of $12.177 billion agreed to by the Legislature and the
Governor in May, 1996, adjusted for actual fiscal 1996 tax collections and
various changes in law enacted after that date, including a $233.8 million
reduction in fiscal 1997 tax revenues funded by a fiscal 1996 transfer from the
General Fund to the Tax Reduction Fund, a change in the way state tax liability
is calculated for certain mutual fund service corporations, an increase in the
cigarette tax passed by the Legislature over the Governor's veto and a provision
in the fiscal 1997 budget increasing the number of auditors in the Department of
Revenue (projected in the budget to result in an approximate $21 million
increase in fiscal 1997 tax collections).
<PAGE>
Tax collections in September, 1996 totalled approximately $1.277 billion,
approximately $13.7 million, or 1.1% higher than collections in September, 1995.
The year-to-date tax collections, as of September, 1996, total approximately
$2.874 billion, approximately $71.9 million, or 2.6%, higher than collections in
the corresponding period in fiscal 1996. Such year-to-date collections are
approximately $20 million below the midpoint of the benchmark range ($2.807
billion to $2.982 billion) contemplated by the Department of Revenue's
estimates).
Fiscal 1997 non-tax revenues are estimated to total approximately $5.119
billion. After adjusting for the shifts to and from non-budgeted funds described
below, this represents a decrease of approximately $28 million, or 0.7%, below
fiscal 1996 non-tax revenues. This change is attributable almost entirely to
federal reimbursements received in fiscal 1996 that will not recur in fiscal
1997.
The Executive Office for Administration and Finance is currently evaluating
the impact of the federal welfare reform legislation enacted on August 22, 1996
on the Commonwealth's spending and revenue associated with public assistance
programs. Current estimates indicate no fiscal 1997 spending impact associated
with the passage of the federal reform.
The fiscal 1997 annual appropriation act includes increases in spending in
certain priority areas, including $254 million to fully fund the Education
Reform Act of 1993, $42.6 million in additional lottery local aid distributions
to Massachusetts cities and towns, $52 million for law enforcement and criminal
justice programs, $23.3 million in additional funding for higher education
campuses, and $47 million for new day care slots for participants in
transitional assistance programs. It also provides funding for certain other
increased costs, including Medicaid, pensions and debt service.
The fiscal 1997 annual appropriation acts includes a series of
reorganization proposals designed to streamline the operations of state
government, including a reduction in the number of cabinet secretariats from
eleven to six and the consolidation of many departments and purchasing
activities.
Cash Flow
As of June 30, 1996, the Commonwealth showed a cash position of
approximately $889 million, not including the Stabilization Fund. This compares
to a projected position of $645.5 million. The fiscal 1996 year-end cash
position reflects approximately $161.7 million in advance payments for fiscal
1997 expenses and approximately $110.0 million in capital expenditures for which
the Commonwealth had not yet issued bonds or notes to reimburse itself.
The State Treasurer's current cash flow projection for fiscal 1996 contains
monthly forecasts through the end of the fiscal year 1997 and projects a
year-end cash position of approximately $352.9 million. This projection is based
upon the budget enacted by the Legislature for fiscal 1997 and includes a $145
million contingency reserve.
<PAGE>
The Commonwealth anticipates borrowing for operating needs under its
commercial paper program in 1997. The Commonwealth also anticipates the issuance
of bond anticipation notes in 1997; such notes may be issued on a stand-alone
basis or through the commercial paper program. Legislation approved by the
Governor on August 10, 1996 raised the limit on outstanding commercial paper
issued as bond anticipation notes from $200 million to $400 million.
The year-end cash position projected for fiscal 1997 is likely to differ
from the estimated ending balance for the Commonwealth's budgeted operating
funds for fiscal 1997 due to timing differences and the effect of certain
non-budget items.
Revenues
In order to fund its programs and services, the Commonwealth collects a
variety of taxes and receives revenues from other non-tax sources, including the
federal government and various fees, fines, court revenues, assessments,
reimbursements, interest earnings and transfers from its non-budgeted funds. In
fiscal 1996, approximately 70.3% of the Commonwealth's annual revenues were
derived from state taxes. In addition, the federal government provided
approximately 16.9% of annual revenues, with the remaining 12.8% provided from
departmental revenues and transfers from non-budgeted funds.
The major components of state taxes are the income tax, which accounts for
55.7% of total projected tax revenues in fiscal 1996, the sales and use tax,
which accounted for 21.7%, and the business corporation tax, which accounted for
approximately 7.3%. Other tax and excise sources account for the remaining 15.3%
of total fiscal 1996 tax revenues.
Income Tax
The Commonwealth assesses personal income taxes at flat rates, according to
classes of income, after specified deductions and exemptions. A rate of 5.95% is
applied to income from employment, professions, trades, businesses,
partnerships, rents, royalties, taxable pensions and annuities and interest from
Massachusetts banks; and a rate of 12% is applied to other interest (although
interest on obligations of the United States and of the Commonwealth and its
political subdivisions is exempt), dividends; and a rate ranging from 12% on
capital gains from the sale of assets held for one year and less to 0% on
capital gains from the sale of certain assets held more than six years.
It should be noted that the Massachusetts Water Resources Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.5 billion in
1994 dollars. Work in the project began in 1988 and is expected to be completed
in 1999, with the most significant expenditures occurring between 1990 and 1999.
The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference.
<PAGE>
Under Chapter 151 of the Acts of 1990 up to 15% of state income tax revenue
is pledged to the payment of debt service on approximately $383.0 million of
outstanding Fiscal Recovery Bonds issued pursuant to Chapter 151.
Partially as a result of income tax rate increases, state income tax
revenues increased 7.9% from fiscal 1995 to fiscal 1996. State income tax
revenues are projected to decrease by 2.9% in fiscal 1997.
Limitations on Tax Revenues
In Massachusetts efforts to limit and reduce levels of taxation have been
underway for several years. Limits were established on state tax revenues by
legislation enacted on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The two measures are inconsistent in several
respects.
Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable state tax revenues be reduced by the aggregate amount
received by local governmental. units from any newly authorized or increased
local option taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. Unlike Chapter 29, as described below, the initiative
petition did not exclude principal and interest payments on Commonwealth debt
obligations from the scope of its tax limit. However, the preamble contained in
Chapter 62F provides that "although not specifically required by anything
contained in this chapter, it is assumed that from allowable state tax revenues
as defined herein the Commonwealth will give priority attention to the funding
of state financial assistance to local governmental units, obligations under the
state governmental pension systems, and payment of principal and interest on
debt and other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to
one-third of the positive percentage gain in Massachusetts wages and salaries,
as reported by the federal government, during the three calendar years
immediately preceding the end of a given fiscal year. Additionally, unlike
Chapter 62F, Chapter 29B allows for an increase in maximum state tax revenue to
fund an increase in local aid and excludes from its definition of state tax
revenues (i) income derived from local option taxes and excises, and (ii)
revenues needed to fund debt service costs.
<PAGE>
Tax revenues in fiscal 1991 through fiscal 1995 were lower than the limit
set by either Chapter 62F or Chapter 29B. The Executive Office for
Administration and Finance currently estimates that state tax revenues in fiscal
1996 will not reach the limit imposed by either of these statutes.
Commonwealth Programs and Services
Fiscal 1993 budgeted expenditures were $14.696 billion, an increase of 9.6%
from fiscal 1992. Fiscal 1994 budgeted expenditures were $15.533 billion, an
increase of 5.7% from fiscal 1993. Fiscal 1995 budgeted expenditures were
$16.259 billion, an increase of 4.7% from fiscal 1994. Fiscal 1996 budgeted
expenditures were $16.896 billion, an increase of 4.0% from fiscal 1995. It is
estimated that fiscal 1997 budgeted expenditures will be $17.710 billion, an
increase of 4.8% over fiscal 1996 levels.
Local Aid
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2, is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the Legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (1) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for identified capital project to be excluded from the limits
by a majority vote at a general or special election. At the time Proposition 2
1/2 was enacted, many cities and towns had property tax levels in excess of the
limit and were therefore required to roll back property taxes with a concurrent
loss of revenues. Between fiscal 1981 and fiscal 1996, the aggregate property
tax levy grew from $3.347 billion to $5.924 billion, representing an increase of
approximately 77%. By contrast according to federal Bureau of Labor Statistics,
the consumer price index for all urban consumers in Boston grew during the same
period by approximately 92%.
Commonwealth Financial Support for Local Governments
During the 1980's, the Commonwealth increased payments to its cities, towns
and regional school districts ("Local Aid") to mitigate the impact of
Proposition 2 1/2 on local programs and services. In fiscal 1997, approximately
19.9% of the Commonwealth's budget is estimated to be allocated to Local Aid.
Local Aid payments to cities, towns and regional school districts take the form
of both direct and indirect assistance.
<PAGE>
Direct Local Aid increased from fiscal 1992 to 2.547 billion in fiscal
1993, and increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures
for direct Local Aid were 2.976 billion, which was an increase of approximately
9.1% above the fiscal 1994 level. Fiscal 1996 expenditures for direct Local Aid
were $3.246 billion, which was an increase of approximately 9.1% above the
fiscal 1995 level. It is estimated that fiscal 1997 expenditures for direct
Local Aid will be $3.534 billion, an increase of approximately 8.9% above fiscal
1996.
Debt Service
During the 1980's, state financed capital expenditures grew substantially.
Capital spending by the Commonwealth in the Capital Projects Funds rose from
approximately $600.0 million in fiscal 1987 to $971.0 million in fiscal 1989. In
November 1988, the Executive Office for Administration and Finance established
an administrative limit on state financed capital spending in the Capital
Projects Funds of $925.0 million per fiscal year. Capital expenditures were
$694.1 million, $575.9 million, $760.9 million, $902.2 million and $908 million
in fiscal 1992, fiscal 1993, fiscal 1994, fiscal 1995 and fiscal 1996,
respectively. Capital expenditures are projected to be approximately $900.0
million in fiscal 1997.
The growth of capital expenditures during the 1980's accounts for the
significant rise in annual debt service expenditures since fiscal 1989. Debt
service payments on general obligation bonds and notes in fiscal 1992 were
$898.3 million, representing a 47% decrease from fiscal 1991, which resulted
from a $261.0 million one-time reduction achieved through the issuance of
refunding bonds in September and October 1991. Debt service expenditures for
fiscal 1993, fiscal 1994, fiscal 1995 and fiscal 1996 were $1.14 billion, $1.155
billion, $1.230 billion and $1.183 billion, respectively, and are projected to
be $1.293 billion for fiscal 1997. The amounts noted represent debt service
payments on Commonwealth debt (including the Fiscal Recovery Bonds and the
Special Obligation Bonds) but do not include debt service on notes issued to
finance certain Medicaid related liabilities, which were paid in full from
non-budgeted Funds. Also excluded are debt service contract assistance payments
to the MBTA ($238.0 million projected in fiscal 1997), the Massachusetts
Convention Center Authority ($24.6 million projected in fiscal 1997), the
Massachusetts Government Land Bank ($6.0 million projected in fiscal 1997), the
Massachusetts Water Pollution Abatement Trust ($24.6 million projected in fiscal
1997) and grants to municipalities under the school building assistance program
to defray a portion of the debt service costs on local school bonds ($187.9
million projected in fiscal 1997).
In January 1990, legislation was enacted to impose a limit on debt service
in Commonwealth budgets beginning in fiscal 1991. The law, as amended, which is
codified as Section 60B of Chapter 29 of the General Laws, provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt (excluding the
Fiscal Recovery Bonds) of the Commonwealth. This law may be amended or repealed
by the Legislature or may be superseded in the General Appropriation Act for any
year.
<PAGE>
It should be noted that the Massachusetts Water Resources Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.5 billion in
1994 dollars. Work in the project began in 1988 and is expected to be completed
in 1999, with the most significant expenditures occurring between 1990 and 1999.
The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference.
Ratings
In September, 1992, Standard & Poor's raised its ratings on the
Commonwealth's general obligation debt and related guaranteed bonds from "BBB"
to "A." Moody's also revised its rating from "Baa" to "A" and Fitch Investor's
maintained its "A" rating with a stable trend. In October, 1993, Standard &
Poor's and Fitch Investors raised Massachusetts' general obligation rating from
"A" to "A+." Moody's currently rates the Commonwealth's general obligation debt
to A1. No assurance can be given that the rating agencies will not further
adjust their ratings or their outlooks. A ratings change would probably affect
the value of the Commonwealth's general obligations as well as those of other
entities which rely on the Commonwealth for partial or full funding.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, in order to take advantage of market opportunities to achieve
a higher total return than would be available from an unmanaged portfolio of
securities, the Fund places no restrictions on portfolio turnover and it may
sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Code. The Fund may, therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur if the value of the lesser of purchases and
sales of portfolio securities for a particular year equaled the average monthly
value of portfolio securities owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the Fund and thus indirectly by its shareholders. It
may also result in the realization of larger amounts of net short-term capital
gains, distributions from which are taxable to shareholders as ordinary income
and may, under certain circumstances, make it more difficult for the Fund to
qualify as a regulated investment company under the Code.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies--Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
<PAGE>
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 50% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 25% of the outstanding
voting securities of any issuer (in determining the issuer of a tax-exempt
security, identification of the issuer will be based upon a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security).
2. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the Fund may not make any
additional investments while its outstanding borrowings exceed 5% of the
current value of its total assets.
3. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within seven days.
4. Invest more than an aggregate of 15% of the net assets of the Fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
(a) Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
(b) Purchase securities of any other investment company except as permitted by
the 1940 Act.
(c) Invest more than 15% of its net assets in securities which are illiquid.
<PAGE>
(d) Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction.
The Fund does not expect to own more than 25% of the outstanding voting
securities of any one issuer. Because municipal securities are not voting
securities, there is no limit on the percentage of a single issuer's municipal
bonds which the Fund may own except as described in the Prospectus under
"Investment Objectives and Policies." Consequently, the Fund may invest in a
greater percentage of the outstanding securities of a single issuer than would
an investment company which invests in voting securities.
Although it is allowed to do so, the Fund does not expect to invest in
securities (other than securities of the U.S. Government, its agencies and
instrumentalities and municipal securities) if more than 25% of its total assets
would be invested in a single industry. Although governmental issuers of
municipal securities are not considered part of any "industry," municipal
securities backed only by the assets and revenues of nongovernmental users
constitute an "industry." Thus, the Fund does not expect that more than 25% of
the Fund's total assets will be invested in obligations deemed to be issued by
nongovernmental users in any one industry (e.g., industrial development bonds
for health care facilities) and in taxable obligations of issuers in the same
industry. However, it is possible that the Fund may invest more than 25% of its
assets in a broader sector of the market for municipal securities.
Determining the issuer of a tax-exempt security, will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. Massachusetts Municipal Securities backed only by the
assets and revenues of nongovernmental users will be deemed to be issued by such
nongovernmental users. Any Massachusetts Municipal Security guaranteed or
otherwise backed by full faith and credit of a governmental entity would
generally be considered to represent a separate security issued by such
guaranteeing.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain yield, tax equivalent yield and total return information. The average
annual total return of the Fund for a period is computed by subtracting the net
asset value per share at the beginning of the period from the net asset value
per share at the end of the period (after adjusting for the reinvestment of any
income dividends and capital gain distributions), and dividing the result by the
net asset value per share at the beginning of the period. In particular, the
average annual total return of the Fund ("T") is computed by using the
redeemable value at the end of a specified period of time ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time ("n")
according to the formula P(1+T)n=ERV.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
<PAGE>
any non-recurring charges for the period stated. In particular, the yield is
determined according to the following formula:
Yield = 2[(A - B + 1)6 - 1]
CD
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
Tax equivalent yield is the net annualized taxable yield needed to produce
a specified tax exempt yield at a given tax rate based on a specified 30-day (or
one month) period, assuming semi-annual compounding of income. The taxable
equivalent yield for the Fund is based upon the Fund's current tax-exempt yield
and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield = Taxable
100% - Marginal Tax Rate Equivalent Yield
The average annual total return quotation for the Fund since inception
(November 2, 1992 to September 30, 1996) and for the fiscal year ended September
30, 1996, respectively, were 5.69% and 1.70%, respectively, and the average
annualized yield and the tax equivalent yield for the thirty day period ended
September 30, 1996 were 4.86% and 9.14%, respectively, assuming a combined
federal and Massachusetts tax rate of 46.85%.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents that rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return, yield and tax equivalent yield
quotations, the Fund may quote quarterly and annual performance on a net (with
management and administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- - - - --------------------------------------------------------------------------------
1992 2.27% 2.43%
1Q93 2.88 3.04
2Q93 2.72 2.88
3Q93 2.74 2.90
4Q93 1.55 1.71
1993 10.24 10.95
1Q94 (4.20) (4.04)
2Q94 1.02 1.18
3Q94 0.50 0.67
4Q94 (1.12) (0.96)
1994 (3.84) (3.20)
1Q95 4.86 5.02
2Q95 2.01 2.18
3Q95 2.69 2.87
4Q95 2.54 2.70
1995 12.64 13.38
<PAGE>
Quarter/Year Net Gross
- - - - --------------------------------------------------------------------------------
1Q96 (0.63) (0.47)
2Q96 0.77 0.92
3Q96 1.56 1.72
4Q96 2.32 2.50
1996 4.07 4.72
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future. The Fund's
advisory fee was not imposed, in whole or in part, and the Adviser reimbursed
operating expenses in varying amounts of the Fund during various periods since
the Fund's inception. In the absense of such arrangements, the performance of
the Fund would have been lower.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to various indices (or particular components thereof),
which are generally considered to be representative of the performance of
municipal securities such as the Lehman Muni 3-5-7-10 Index. Comparative
performance may also be expressed by reference to a ranking prepared by a mutual
fund monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President, Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Treasurer and Secretary Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President and Associated Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes of the 1940 Act.
</TABLE>
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser during the fiscal year ended
September 30, 1996.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended September 30, 1996:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Samuel C. Fleming 274 0 37,250
Benjamin M. Friedman 246 0 33,500
John H. Hewitt 246 0 33,500
Edward H. Ladd 0 0 0
Caleb Loring, III 246 0 33,500
Richard S. Wood 0 0 0
*As of the date of this Statement of Additional Information, there were 20 funds
in the fund complex. Total compensation is presented for the calendar year ended
December 31, 1996.
</TABLE>
Certain Shareholders
At December 31, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) approximately
117,904 (7.13%) of the then outstanding shares of the Fund. At that date, each
of the following persons beneficially owned 5% or more of the then outstanding
shares of the Fund:
Percentage of
Name and Address Outstanding Shares
- - - - --------------------------------------------------------------------------------
BDG & Co. 34%
Trust Department
150 Federal Street
Boston, MA 02110
Bob & Co. C/O Bank of Boston 10%
Mutual Funds Dept 45-02-93
PO Box 1809
Boston, MA 02105
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
the Fund pursuant to a written investment advisory agreement with the Trust. The
Adviser is a Massachusetts corporation organized in 1933 and is registered under
the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, George W. Noyes, Arthur H. Parker, Howard B.
Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney, Ralph S. Tate, and
Richard S. Wood.
<PAGE>
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. This fee is paid monthly. The rate and time at
which the fee is paid is described in the Prospectus. For the fiscal years ended
December 31, 1994, 1995 and 1996, the Adviser agreed not to impose $39,874,
$21,818 and $20,375 of its fees of $18,562, $124,213 and $98,478, respectively.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Adviser has
voluntarily agreed to limit the Fund's total operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.65% of the Fund's
average daily net assets. The Adviser may discontinue or modify such limitation
in the future at its discretion, although it has no current intention to do so.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect for successive periods of one year, but only
as long as each such continuance is approved annually (i) by either the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, and, in either event (ii) by vote of a
majority of the Trustees of the Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund or by the Adviser, on sixty days' written notice to the other
parties. The investment advisory agreement terminates in the event of its
assignment as defined in the 1940 Act.
<PAGE>
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include pre-clearance of all personal securities transactions
and a prohibition of purchasing initial public offerings of securities. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come before those of the Adviser, its affiliates and
their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
<PAGE>
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares redeemed
but, under certain conditions, the Fund may make payment wholly or partly in
portfolio securities. Portfolio securities paid upon redemption of Fund shares
will be valued at their then current market value. The Fund has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Acts which limits the
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Fund. The investment advisory fee paid by the Fund under
the advisory agreement will not be reduced as a result of the Adviser's receipt
of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each business day on which the New
York Stock Exchange is open as of the close of regular trading (normally 4:00
p.m. New York City time). Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value of the Fund's shares is determined as of the close of regular trading on
the New York Stock Exchange and is computed by dividing the value of all
securities and other assets of the Fund less all liabilities by the number of
shares outstanding, and adjusting to the nearest cent per share. Expenses and
fees, including the investment advisory fee, are accrued daily and taken into
account for the purpose of determining net asset value.
FEDERAL AND MASSACHUSETTS INCOME TAXES
Federal Income Taxation
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Code, and
intends to continue to so qualify in the future. As such and by complying with
the applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, the Fund
will not be subject to Federal income tax on its investment company taxable
income (i.e., all taxable income, after reduction by deductible expenses, other
than its "net capital gain," which is the excess, if any, of its net long-term
capital gain over its net short-term capital loss), net tax-exempt interest, and
net capital gain which are distributed to shareholders at least annually in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
The Fund will not distribute net long-term capital gains realized in any
year to the extent that a capital loss is carried forward from prior years
against such gain. For federal income tax purposes, the Fund is permitted to
carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net capital gains are offset by such losses, they would not
result in federal income tax liability to the Fund and, as noted above, would
not be distributed as such to shareholders. The Fund has $375,094 and $178,890
of capital loss carryforwards, which expire in 2002 and 2003, respectively,
available to offset future net capital gains.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
<PAGE>
annually, all or substantially all of its net taxable and tax-exempt income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid federal income and excise taxes.
Therefore, the Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's taxable gains.
Certain of the applicable tax rules may be modified if the Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures contracts in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to interest rate swaps, caps,
floors and collars are unclear in certain respects, and the Fund may be required
to account for these instruments under tax rules in a manner that, under certain
circumstances, may limit its transactions in these instruments.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose.
Taxable distributions include distributions attributable to income or gains
from the Fund's taxable investments or transactions, including (i) gains from
the sale of portfolio securities or the right to when-issued securities prior to
issuance or from options or futures transactions and (ii) income attributable to
repurchase agreements, securities lending, recognized market discount, interest
rate swaps, caps, floors or collars, and a portion of the discount from certain
stripped tax-exempt obligations or their coupons.
Distributions, if any, in excess of E&P will constitute a return of
capital, which will first reduce an investor's tax basis in Fund shares and
thereafter (after such basis is reduced to zero) will generally give rise to
capital gains. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the amount of cash they would have received had they
elected to receive the distributions in cash, divided by the number of shares
received.
<PAGE>
Distributions of tax-exempt interest ("exempt-interest dividends") timely
designated as such by the Fund will be treated as tax-exempt interest under the
Code, provided that the Fund qualifies as a regulated investment company and at
least 50% of the value of its assets at the end of each quarter of its taxable
year is invested in tax-exempt obligations. Shareholders are required to report
their receipt of tax-exempt interest, including such distributions, on their
federal income tax returns. The portion of the Fund's distributions designated
as exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprises of its total income during the period of any
particular shareholder's investment. The Fund will report to shareholders the
amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt obligations, shareholders
will be required to treat as an item of tax preference for federal alternative
minimum purposes that part of the Fund's exempt-interest dividends which is
derived from interest on these tax-exempt obligations. Exempt-interest dividends
derived from interest income from tax-exempt obligations that are not private
activity bonds may also be included in determining corporate "adjusted current
earnings" for purposes of computing the alternative minimum tax liability, if
any, of corporate shareholders of the Fund.
The Fund purchases tax-exempt obligations which are generally accompanied
by an opinion of bond counsel to the effect that interest on such securities is
not included in gross income for federal income tax purposes and, in most cases,
is exempt from Massachusetts income tax. It is not economically feasible to, and
the Fund therefore does not, make any additional independent inquiry into
whether such securities are in fact tax-exempt. Bond counsels' opinions will
generally be based in part upon covenants by the issuers and related parties
regarding continuing compliance with federal tax requirements. Tax laws enacted
during the last decade not only had the effect of limiting the purposes for
which tax-exempt bonds could be issued and reducing the supply of such bonds,
but also increased the number and complexity of requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
the Fund's distributions attributable to interest the Fund received on such bond
for the current year and for prior years could be characterized or
recharacterized as taxable income.
The Fund may purchase municipal obligations together with the right to
resell the securities to the seller at an agreed upon price or yield within a
specified period prior to the maturity date of the securities. Such a right to
resell is commonly known as a "put" and is also referred to as a "standby
commitment." The Fund may pay for a standby commitment either separately, in
cash, or in the form of a higher price for the securities which are acquired
<PAGE>
subject to the standby commitment, thus increasing the cost of securities and
reducing the yield otherwise available. Additionally, the Fund may purchase
beneficial interests in municipal obligations held by trusts, custodial
arrangements or partnerships and/or combined with third-party puts or other
types of features such as interest rate swaps; those investments may require the
Fund to pay "tender fees" or other fees for the various features provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of a true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. The Fund intends to take the position that
it is the owner of any municipal obligations acquired subject to a standby
commitment or other third party put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Service will agree with such position in any particular
case. Additionally, the federal income tax treatment of certain other aspects of
these investments, including the treatment of tender fees paid by the Fund, in
relation to various regulated investment company tax provisions is unclear.
However the Adviser intends to manage the Fund's portfolio in a manner designed
to minimize any adverse impact from the tax rules applicable to these
investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
Pursuant to published guidelines, the Service may deem indebtedness to have been
incurred for the purpose of purchasing or carrying shares of the Fund even
though the borrowed funds may not be directly traceable to the purchase of
shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to realized or unrealized appreciation in
the Fund's portfolio. Consequently, subsequent distributions from such
appreciation may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will (except as described below)
be long-term or short-term, depending upon the shareholder's tax holding period
for the shares. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
<PAGE>
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be disallowed to the extent of all exempt-interest dividends paid
with respect to such shares and, if not thus disallowed, will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
Massachusetts Income Taxation
Distributions from the Fund will be treated for Massachusetts tax purposes
as described in the Fund's prospectus, whether taken in cash or reinvested in
additional shares.
Recent tax legislation provides that, beginning in 1996, long-term capital
gains will generally be taxed in Massachusetts on a sliding scale at rates
ranging from 5% to 0%, with the applicable tax rate declining as the tax holding
period of the asset (beginning on the later of January 1, 1995 or the date of
actual acquisition) increases from more than one year to more than six years.
The legislation does not specify, and it is accordingly not clear, what
Massachusetts tax rate will be applicable to a mutual fund's capital gain
dividends, i.e., distributions from the excess of its net long-term capital gain
over its net short-term capital loss that are treated as long-term capital gains
under the Code, for taxable years beginning after 1995.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
<PAGE>
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986, as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
investment series of the Trust, including the approval of an investment advisory
contract and any change of investment policy requiring the approval of
shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
<PAGE>
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1995 and
September 30, 1996 included in this Statement of Additional Information have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in their report appearing elsewhere herein, and have been so included in
reliance upon the authority of the report of Coopers & Lybrand L.L.P. as experts
in accounting and auditing. The Fund's financial highlights for the period from
November 2, 1992 (commencement of operations) through December 31, 1992 were
audited by Deloitte & Touche LLP, independent auditors, and have been similarly
included in reliance upon the expertise of that firm. Coopers & Lybrand L.L.P.,
independent accountants, will audit the Fund's financial statements for the
fiscal year ending September 30, 1997.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Financial Statements for the Period Ended
September 30, 1996
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Financial Statements
Table of Contents
Page
Chairman's Message ..............................................3
Selected Financial Information ..................................4
Performance Highlights ..........................................5
Management Discussion:
Standish Massachusetts Intermediate Tax Exempt Bond Fund ...6,7
Standish Intermediate Tax Exempt Bond Fund .................6,7
Standish Small Cap Tax-Sensitive Equity Fund ...............8
Standish Tax-Sensitive Equity Fund .........................9
Statements of Assets and Liabilities ............................10
Statements of Operations ........................................11,12
Statements of Changes in Net Assets .............................13,14,15
Financial Highlights
Standish Massachusetts Intermediate Tax Exempt Bond Fund ...16
Standish Intermediate Tax Exempt Bond Fund .................17
Standish Small Cap Tax-Sensitive Equity Fund ...............18
Standish Tax-Sensitive Equity Fund .........................19
Portfolio of Investments
Standish Massachusetts Intermediate Tax Exempt Bond Fund ...20
Standish Intermediate Tax Exempt Bond Fund .................23
Standish Small Cap Tax-Sensitive Equity Fund ...............27
Standish Tax-Sensitive Equity Fund .........................31
Notes to Financial Statements ...................................34
Report of Independent Accountants ...............................39
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
October 18, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder: Enclosed you will find
the annual financial statements for the Standish Intermediate Tax Exempt Bond
Fund, the Standish Massachusetts Intermediate Tax Exempt Bond Fund, the Standish
Tax-Sensitive Equity Fund, and the Standish Small Cap Tax-Sensitive Equity Fund.
We are providing a combined report for these funds to reduce redundant reporting
and to supply the financial reporting related to our tax managed investment
capabilities in one comprehensive document.
These four funds have combined net assets of $77 million. The two tax-sensitive
funds have only been in operation since the beginning of 1996. In all cases, the
investment advisor is Standish, Ayer & Wood.
As of September 1996, Standish, Ayer & Wood managed assets for its clients of
$29 billion, including the Standish mutual fund assets of $4 billion. The
principal clients of the firm are corporate pension trusts, insurance companies,
endowments and foundations, and high net worth individuals. The firm remains
independent and is owned by investment professionals active in the operation of
the business. At mid year 1996, David W. Murray, the Treasurer of both Standish,
Ayer & Wood and the Standish, Ayer & Wood Investment Trust, elected to take
early retirement and James E. Hollis was elected interim Treasurer of the Trust.
We are grateful to Dave for twenty-two years of distinguished service to
Standish. There have been no other material changes in the structure of the firm
or its key personnel.
During the nine months of operation of the tax-sensitive equity funds, U.S.
equity markets have been very strong with the Standard & Poor's 500 Index
registering a total return of 13.50% and the Russell 2000 Index registering a
total return of 10.77%. Tax exempt bond market returns during this period, as
measured by a combination of the Lehman Municipal 3, 5, 7 and 10 year indices,
have been a mundane 2.11%. These municipal results have been relatively better
than those of most other fixed income sectors, as flat tax concerns have
subsided and municipal supply has been constrained.
The tax-sensitive equity funds have the objective of providing favorable after
tax returns through limited turnover and attempts to mitigate the amount of
realized capital gains. At Standish, we have noted for some time the adverse
impact for taxable investors of high portfolio turnover which triggers capital
gains, possibly including short-term gains that may result in an even greater
tax liability for investors. We believe there is a major opportunity to improve
after tax returns by limiting the portfolio turnover and managing the
recognition of capital gains.
During the last year, we at Standish have added resources to both investment
research and shareholder servicing. We appreciate the opportunity to serve you
and hope you will find the attached information helpful. We remain confident
that we have the resources and the organization to do a superior job, and we
will be working hard to fulfill your expectations in the years ahead.
Sincerely yours,
Edward H. Ladd
Chairman
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Selected Financial Information
for the period ended September 30, 1996
<TABLE>
<CAPTION>
Standish
Massachusetts Standish Standish
Intermediate Intermediate Small Cap Standish
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund (a) Bond Fund (a) Equity Fund (b) Equity Fund (b)
----------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net asset value - beginning of period $21.02 $21.40 $20.00 $20.00
Income from investment operations
Net investment income * 0.74 0.79 0.04 0.28
Net realized and unrealized gain (loss) (0.39) (0.28) 3.55 3.50
----------------- -------------- ---------------- ---------------
Total from investment operations 0.35 0.51 3.59 3.78
----------------- -------------- ---------------- ---------------
Less distributions declared to shareholders
From net investment income (0.74) (0.79) (0.02) (0.18)
----------------- -------------- ---------------- ---------------
Net asset value - end of period $20.63 $21.12 $23.57 $23.60
================= ============== ================ ===============
Total return 1.70% 2.43% 17.95% 18.97%
Ratios to average net assets
Expenses *t 0.65% 0.65% 0.00% 0.00%
Net investment income *t 4.78% 4.99% 0.41% 2.27%
Net assets at end of period (000 omitted) $32,136 $34,843 $6,896 $2,843
Portfolio turnover 35% 43% 57% 17%
Average broker commission paid per share - - $0.1058 $0.0419
* The Investment Adviser voluntarily did not impose a portion of its fee and
reimbursed the Funds for their operating expenses. Please refer to the
Financial Highlights on pages 16 to 19 for additional disclosure regarding
these ratios.
t Computed on an annualized basis
(a) For the nine months ended September 30, 1996.
(b) For the period January 2, 1996, commencement of investment operations,
through September 30, 1996.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Performance Highlights
for the period ended September 30, 1996
Total Return
- - - - ------------------------------------------------------------------------- -----------------
Tax Exempt Bond Funds (a)
Standish Mass. Intermediate Tax Exempt Fund 1.70%
Standish Intermediate Tax Exempt Bond Fund 2.43%
Lehman Muni 3-5-7-10 Index 2.11%
Tax-Sensitive Equity Funds (b)
Standish Tax-Sensitive Small Capitalization Equity Fund 17.95%
Russell 2000 Index 10.77%
Standish Tax-Sensitive Equity Fund 18.97%
S&P 500 Index 13.50%
(a) For the nine months ended September 30, 1996.
(b) For the period January 2, 1996 through September 30, 1996.
</TABLE>
The S&P 500 Index is generally considered to be representative of the
performance of unmanaged common stocks publicly traded on the U.S.
markets.
The Russell 2000 Index is generally considered to be representative of
unmanaged small capitalization stocks in the U.S. markets.
Lehman Brothers State General Obligation Bond 3, 5, 7, and 10 Year
Index is actually a subset of a broader index--the Lehman Brothers
Municipal Bond Index. The Municipal Bond Index is unmanaged and
designed to be a composite measure of the total return performance of
the municipal bond market, and includes approximately 1,800 bonds
(rated A or better, including bonds in the following sectors: state
general obligations, prerefunded, electrics, hospital, state housing,
industrial development/pollution control, and transportation).
Past performance is not predictive of future performance.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Management Discussion & Analysis
The bond markets have suffered through a dismal year thus far in 1996.
Thankfully, municipals have been perhaps the best performing sector in domestic
fixed income. The Standish Intermediate Tax Exempt Bond Fund has produced a
total return of 2.43% (after a fee reduction) for the year-to-date period
through September 30, 1996, well ahead of the benchmark performance index
(Lehman Muni 3-5-7-10) return of 2.11%, while the Standish Massachusetts
Intermediate Tax Exempt Bond Fund has produced a total return of 1.70% (after a
fee reduction) for the year-to-date, trailing the same index.
Most of 1996 witnessed reports showing economic growth to be stronger than the
market anticipated. This, of course, led to fears of inflation and the
expectation that the Federal Reserve would raise short term interest rates.
Consequently, bond prices declined and volatility was high. The year-to-date
taxable bond market performance as represented by the Lehman Aggregate Index and
the Lehman Government/Corporate Bond Index was below the tax exempt market at
1.84% and 1.77% respectively. Municipal bonds, however, proved to be far more
resilient than most taxable fixed income sectors. As fears of a "flat tax" waned
and municipal new issue supply remained modest, interest rates on tax-exempt
securities rose far less than those of Treasuries. Yield spreads between top
quality and lower quality paper also compressed during the year.
Standish Intermediate Tax Exempt Bond Fund
The fund underperformed in the first quarter of 1996, as we extended duration
into what turned out to be a significant market decline. By the second quarter,
however, performance had turned around. Several actions have helped make this a
successful year. Our increased exposure to California and New York credits has
benefited the fund, as stabilizing credit quality resulted in good performance
for these sectors. Our overweighting in "BBB" rated paper contributed
significantly as quality spreads tightened. We added to our housing bond
exposure as well, choosing bonds which have above market yields as well as
defensive characteristics. Finally, we have reduced the cost of trading by using
futures contracts to manage duration more effectively.
Standish Massachusetts Intermediate Tax Exempt Bond Fund
The Massachusetts market has underperformed the national municipal market this
year. Some states have benefited more from the strong national economic recovery
than has Massachusetts. Further, the hospital sector of the market remains
troubled, and the Massachusetts municipal market has a significant number of
health care credits. Nevertheless, when considering the heavy tax burden applied
to unearned income in the state, Massachusetts double tax-exempt bonds have
still proven to be an excellent choice in terms of after-tax returns in the bond
market.
During 1996, we have maintained our philosophy of not making major interest rate
bets, preferring instead to identify securities which appear to be undervalued
through research and trading. In addition, we have taken two steps to improve
the performance of the fund. We have increased our exposure to housing bonds,
choosing securities which we believe have above average yields as well as
defensive characteristics. Also, we have employed the use of futures contracts
to manage the portfolio's duration in a much more cost-effective manner (i.e.
reducing the number of trades and the bid-to-ask spread necessary to adjust
duration).
Raymond J. Kubiak Maria D. Furman
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Comparison of Change in Value of $100,000 Investment in
Standish Massachusetts Intermediate Tax Exempt Bond Fund,
Standish Intermediate Tax Exempt Bond Fund and the Lehman Muni 3-5-7-10 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Massachusetts
Intermediate Tax Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond
Fund compared with the Lehman Muni 3-5-7-10 Index for the period November 2,
1992 to September 30, 1996, based upon a $100,000 investment. Also included are
the average annual total returns for one year, three year, and since inception.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Management Discussion & Analysis
Small cap stocks have proven to be an extremely volatile asset class in 1996.
After a slow start, small caps rose very sharply in late spring, peaked in May,
and dropped abruptly through July. Peak to trough declines were some 30%. August
began a recovery which was not sustained in September. For the period from
January 2, 1996 (commencement of investment operations) to September 30, 1996,
the Standish Small Cap Tax-Sensitive Equity Fund gained 17.95%, after expense
reimbursement, compared to a gain of 10.77% for the Russell 2000 Index of Small
Cap Stocks.
Early in 1996 performance benefited from the smaller size of the companies in
the fund, as well as the fund's aggressive growth orientation. Similarly, during
the severe correction and subsequent slow recovery, these characteristics
penalized fund performance. Quarterly performance contribution was strongest in
the technology sector. Offsetting the good technology performance were poor
returns on consumer and health care stocks.
We continue to concentrate investments in rapidly growing, high quality smaller
companies with strong business positions. This leads to an emphasis on the
higher growth sectors, particularly the innovative areas of health care,
technology and business services. We invest in companies with a minimum of 20%
growth, very strong balance sheets, and leadership positions within their
operating niches.
We believe 1996 will prove to be a reasonable year for small cap stocks despite
their volatility. We are happy to report that, as of September 30, the fund had
no reportable realized capital gains to distribute to shareholders and has
recognized capital losses which may be used by the fund to offset future
realized capital gains, if any. We thank you for your support and interest in
the Small Cap Tax-Sensitive Fund.
Nicholas S. Battelle
<PAGE>
Comparison of Chnage in Value of $100,000 Investment in Standish Small
Cap Tax-Sensitive Equity Fund and the S&P 500 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Small Cap
Tax-Sensitive Equity Fund compared with the S&P 500 Index for the period January
2, 1996 to September 30, 1996, based upon a $100,000 investment. Also included
is the average annual total return since inception.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Management Discussion & Analysis
The returns from the stocks of large U.S. companies were excellent during the
first nine months of 1996, with the Standard and Poor's 500 Index up 13.50% for
the period. The Tax-Sensitive Equity Fund returned 18.97%, after expense
reimbursement, for this period, beating this benchmark by 5.47%.
Returns for the first nine months of 1996 were driven by an economy which
continued to grow steadily and without a hint of the inflation which is so
devastating to equity markets. Several market sectors did extremely well.
Optimistic consumers, almost fully employed, continued to spend and retail
stocks performed quite well. The technology sector was mixed but generally
strong, while selected banks and insurance companies showed reasonable earnings
growth. Interest sensitive stocks, such as telephone and electric utilities, did
poorly as interest rates rose.
Returns for the Tax-Sensitive Equity Fund were driven by individual stock
selection rather then heavy weightings in favored S&P sectors. The fund's best
returns were achieved by Consolidated Stores, a retail liquidator, which was up
100%, and American Travellers, a major insurer of nursing home stays, which rose
67%. Our worst disappointment came in Teradyne, as investors pounded
semiconductor and capital equipment stocks. But the fund did participate in the
surge experienced by other technology stocks as Adaptec, Compaq, Hewlett, Intel,
IBM and Varian were up an average of 28%.
We are happy to report that, as of September 30, our fund had no reportable
realized capital gains to distribute to shareholders and has recognized capital
losses which may be used by the fund to offset future realized capital gains, if
any. There will be a dividend payment, but returns will not be reduced by
further capital gains taxes.
Laurence A. Manchester
<PAGE>
Comparison of Chnage in Value of $100,000 Investment in Standish
Tax-Sensitive Equity Fund and the S&P 500 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Tax-Sensitive
Equity Fund compared with the S&P 500 Index for the period January 2, 1996 to
September 30, 1996, based upon a $100,000 investment. Also included is the
average annual total return since inception.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Assets and Liabilities
September 30, 1996
<TABLE>
<CAPTION>
Massachusetts
Intermediate Intermediate Small Cap
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund Bond Fund Equity Fund Equity Fund
- - - - --------------------------------------------------- ----------------- ------------- -------------- ---------------
Assets:
<S> <C> <C> <C> <C>
Investments, at value (Note 1A) * $ 31,908,048 $ 35,036,341 $ 6,720,966 $ 2,782,028
Cash - - 143,995 36,592
Receivable for investments sold - - 258,450 -
Receivable for fund shares sold - - 152,665 2,618
Dividends & interest receivable 489,513 545,442 1,966 3,126
Deferred organization expense (Note 1E) 3,092 4,163 16,073 16,082
Receivable from investment advisor (Note 3) - - 23,523 21,425
----------------- ------------- -------------- ---------------
Total assets 32,400,653 35,585,946 7,317,638 2,861,871
----------------- ------------- -------------- ---------------
Liabilities:
Distributions Payable 87,631 90,225 - -
Payable for investments purchased - 97,050 403,754 -
Payable for daily variation margin on open
financial futures contracts (Note 7) 2,938 1,188 - -
Payable for Delayed Delivery Transactions (Note 8) - 507,035 - -
Payable for fund shares redeemed 125,000 2,500 - -
Accrued custodian fee 16,844 17,162 8,881 10,470
Accrued investment advisory fee (Note 3) 24,870 19,444 - -
Accrued trustee fees (Note 3) 620 652 94 49
Other accrued expenses and other liabilities 6,667 7,978 9,042 8,410
----------------- ------------- -------------- ---------------
Total Liabilities 264,570 743,234 421,771 18,929
----------------- ------------- -------------- ---------------
Net assets $ 32,136,083 $ 34,842,712 $ 6,895,867 $ 2,842,942
================= ============= ============== ===============
Net assets consist of:
Paid-in capital $ 32,411,904 $ 34,179,759 $ 6,820,711 $ 2,538,959
Accumulated undistributed net investment income - - 5,180 12,585
Accumulated net realized investment gain (loss) (587,756) 18,747 (289,040) (21,876)
Net unrealized appreciation 311,935 644,206 359,016 313,274
----------------- ------------- -------------- ---------------
Net Assets $ 32,136,083 $ 34,842,712 $ 6,895,867 $ 2,842,942
================= ============= ============== ===============
Shares of beneficial interest outstanding 1,557,795 1,649,638 292,564 120,446
================= ============= ============== ===============
Net asset value, offering price,
and redemption price per share $ 20.63 $ 21.12 $ 23.5 $ 23.60
================= ============= ============== ===============
(Net assets/Shares outstanding)
* Identified cost of investments $ 31,629,887 $ 34,401,415 $ 6,361,949 $ 2,468,754
================= ============= ============== ===============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Operations
For the Period Ended September 30, 1996
Massachusetts
Intermediate Intermediate Small Cap
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund (a) Bond Fund (a) Equity Fund (b) Equity Fund (b)
- - - - ------------------------------------------------------ ----------------- --------------- ----------------- --------------
Investment Income
Interest income $ 1,327,319 $ 1,378,131 $ 6,588 $ 2,877
Dividend income - - 2,631 25,160
----------------- ------------- --------------- --------------
Total investment income 1,327,319 1,378,131 9,219 28,037
----------------- ------------- --------------- --------------
Expenses
Investment advisory fee (Note 3) 98,478 98,399 13,510 6,161
Trustee fees (Note 3) 1,114 1,158 123 65
Accounting, custody and transfer agent fees 58,060 60,894 37,783 30,741
Registration costs 466 12,774 2,184 2,366
Audit services 12,104 16,692 18,717 18,717
Legal fees 6,412 5,243 2,433 2,433
Amortization of organization costs 2,161 2,915 2,802 2,802
Miscellaneous 719 2,582 10 320
----------------- ------------- --------------- --------------
Total Expenses 179,514 200,657 77,562 63,605
----------------- ------------- --------------- --------------
Deduct:
Waiver of investment advisory fee 20,375 41,685 13,510 6,161
Reimbursement of Fund operating expenses - - 64,052 57,444
----------------- ------------- --------------- --------------
Total waiver of investment advisory fee and
reimbursement of operating expenses 20,375 41,685 77,562 63,605
----------------- ------------- --------------- --------------
Net expenses 159,139 158,972 0 0
----------------- ------------- --------------- --------------
Net investment income 1,168,180 1,219,159 9,219 28,037
----------------- ------------- --------------- --------------
Realized and unrealized gain (loss):
Net realized gain (loss)
Investment securities 71,451 57,082 (289,040) (21,876)
Financial futures (50,933) (3,947) - -
----------------- ------------- --------------- --------------
Net realized gain (loss) 20,518 53,135 (289,040) (21,876)
Change in net unrealized appreciation (depreciation)
Investment securities (664,889) (468,693) 359,016 313,274
Financial futures 33,774 9,280 - -
----------------- ------------- --------------- --------------
Change in net unrealized appreciation (depreciation) (631,115) (459,413) 359,016 313,274
Net realized and unrealized gain (loss) (610,597) (406,278) 69,976 291,398
----------------- ------------- --------------- --------------
Net increase in net assets from operations $ 557,583 $ 812,881 $ 79,195 $ 319,435
================= ============= =============== ==============
(a) For the nine months ended September 30, 1996.
(b) For the period January 2, 1996, commencement of investment operations, through September 30, 1996.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Operations
For the Year Ended December 31, 1995
Massachusetts
Intermediate Intermediate
Tax Exempt Tax Exempt
Bond Fund Bond Fund
- - - - ------------------------------------------------------ ----------------- -------------
Investment Income
Interest income $ 1,653,234 $ 1,550,770
Dividend income - -
----------------- -------------
Total investment income 1,653,234 1,550,770
----------------- -------------
Expenses
Investment advisory fee (Note 3) 124,213 115,482
Trustee fees (Note 3) 1,222 1,165
Accounting, custody and transfer agent fees 72,031 72,211
Registration costs 3,208 14,414
Audit services 16,088 15,919
Legal fees 1,240 1,131
Amortization of organization costs 2,850 4,410
Miscellaneous 2,321 985
----------------- -------------
Total Expenses 223,173 225,717
----------------- -------------
Deduct:
Waiver of investment advisory fee 21,818 38,426
Reimbursement of Fund operating expenses - -
----------------- -------------
Total waiver of investment advisory fee and
reimbursement of operating expenses 21,818 38,426
----------------- -------------
Net expenses 201,355 187,291
----------------- -------------
Net investment income 1,451,879 1,363,479
----------------- -------------
Realized and unrealized gain (loss):
Net realized gain (loss)
Investment securities (132,384) 257,404
Financial futures (11,785) (57,508)
----------------- -------------
Net realized gain (loss) (144,169) 199,896
Change in net unrealized appreciation (depreciation)
Investment securities 2,339,720 1,841,975
Financial futures - -
----------------- -------------
Change in net unrealized appreciation (depreciation) 2,339,720 1,841,975
Net realized and unrealized gain (loss) 2,195,551 2,041,871
----------------- -------------
Net increase in net assets from operations $ 3,647,430 $ 3,405,350
================= =============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Statements of Changes in Net Assets
Nine Months Year Year
Ended Ended Ended
9/30/96 12/31/95 12/31/94
- - - - ---------------------------------------------------------- ----------------- ----------------- --------------
Increase (decrease) in Net Assets
From Operations:
Net investment income $ 1,168,180 $ 1,451,879 $ 1,384,665
Net realized gain (loss) 20,518 (144,169) (464,105)
Change in net unrealized appreciation (depreciation) (631,115) 2,339,720 (2,123,372)
----------------- ----------------- --------------
Net increase in net assets from operations 557,583 3,647,430 (1,202,812)
----------------- ----------------- --------------
Distributions to shareholders:
From net investment income (1,168,180) (1,451,879) (1,384,665)
From realized capital gains - - (10,471)
----------------- ----------------- --------------
Total distributions to shareholders (1,168,180) (1,451,879) (1,395,136)
----------------- ----------------- --------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares 7,839,919 10,781,062 10,055,521
Net asset value of shares issued to shareholders in
payment of distributions declared 354,227 371,483 181,704
Cost of shares redeemed (8,012,503) (8,558,571) (9,490,499)
----------------- ----------------- --------------
Increase in net assets from Fund share transactions 181,643 2,593,974 746,726
----------------- ----------------- --------------
Net increase (decrease) in net assets (428,954) 4,789,525 (1,851,222)
Net assets:
Beginning of period 32,565,037 27,775,512 29,626,734
----------------- ----------------- --------------
End of period $ 32,136,083 $ 32,565,037 $ 27,775,512
================= ================= ==============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Statements of Changes in Net Assets
Nine Months Year Year
Ended Ended Ended
9/30/96 12/31/95 12/31/94
- - - - ------------------------------------------------------------ -------------- -------------- -------------
Increase (decrease) in Net Assets
From Operations:
Net investment income $ 1,219,159 $ 1,363,479 $ 957,255
Net realized gain (loss) 53,135 199,896 (234,284)
Change in net unrealized appreciation (depreciation) (459,413) 1,841,975 (1,284,419)
-------------- -------------- -------------
Net increase in net assets from operations 812,881 3,405,350 (561,448)
-------------- -------------- -------------
Distributions to shareholders:
From net investment income (1,219,159) (1,363,479) (957,255)
From realized capital gains - - (18,500)
-------------- -------------- -------------
Total distributions to shareholders (1,219,159) (1,363,479) (975,755)
-------------- -------------- -------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares 11,111,750 16,771,357 12,559,281
Net asset value of shares issued to shareholders in
payment of distributions declared 428,110 316,498 225,637
Cost of shares redeemed (9,156,263) (6,778,640) (7,865,733)
-------------- -------------- -------------
Increase in net assets from Fund share transactions 2,383,597 10,309,215 4,919,185
-------------- -------------- -------------
Net increase (decrease) in net assets 1,977,319 12,351,086 3,381,982
Net assets:
Beginning of period 32,865,393 20,514,307 17,132,325
-------------- -------------- -------------
End of period $ 34,842,712 $ 32,865,393 $ 20,514,307
============== ============== =============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Changes in Net Assets
For the Period Ended September 30, 1996
Small Cap
Tax-Sensitive Tax-Sensitive
Equity Fund (a) Equity Fund (a)
- - - - -------------------------------------------------------------- ---------------- -----------------
Increase (decrease) in Net Assets
From Operations:
Net investment income $ 9,219 $ 28,037
Net realized gain (loss) (289,040) (21,876)
Change in net unrealized appreciation 359,016 313,274
-------------- -----------------
Net increase in net assets from operations 79,195 319,435
-------------- -----------------
Distributions to shareholders:
From net investment income (4,039) (15,453)
-------------- -----------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares 6,823,260 2,539,035
Net asset value of shares issued to shareholders in
payment of distributions declared 2,858 14,425
Cost of shares redeemed (5,407) (14,500)
-------------- -----------------
Increase in net assets from Fund share transactions 6,820,711 2,538,960
-------------- -----------------
Net increase in net assets 6,895,867 2,842,942
Net assets:
Beginning of period 0 0
-------------- -----------------
End of period (including undistributed net $ 6,895,867 $ 2,842,942
============== =================
investment income of $5,180 and $12,585, respectively)
(a) For the period January 2, 1996, commencement of investment operations, through September 30, 1996.
</TABLE>
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Financial Highlights
<TABLE>
<CAPTION>
Nine Months Ended November 2, 1992
September 30, 1996 Year Ended December 31, (start of business) to
-------------------------------------
(Note 1F) 1995 1994 1993 December 31, 1992*
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.02 $19.55 $21.31 $20.32 $20.00
Income from investment operations
Net investment income ** 0.74 0.94 0.94 0.92 0.13
Net realized and unrealized gain (loss) (0.39) 1.47 (1.75) 1.13 0.32
-------- ----------- ----------- ----------- -----------
Total from investment operations 0.35 2.41 (0.81) 2.05 0.45
-------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income (0.74) (0.94) (0.94) (0.92) (0.13)
From realized capital gains - - (0.01) (0.14) -
-------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders (0.74) (0.94) (0.95) (1.06) (0.13)
-------- ----------- ----------- ----------- -----------
Net asset value - end of period $20.63 $21.02 $19.55 $21.31 $20.32
======== =========== =========== =========== ===========
Total return 1.70% 12.64% (3.84%) 10.24% 13.85t
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65%t 0.65% 0.65% 0.65% 0.65t
Net investment income ** 4.78%t 4.71% 4.67% 4.35% 4.05t
Net assets at end of period (000 omitted) $32,136 $32,565 $27,776 $29,627 $6,537
Portfolio turnover 35%x 77% 84% 94% 31%
** The investment adviser voluntarily did not impose a portion of its
investment advisory fee. If this reduction had not been undertaken, the net
investment income per share and the ratios would have been:
Net investment income per share $0.72 $0.95 $0.91 $0.86 $0.11
Ratios (to average net assets):
Expenses 0.73%t 0.72% 0.78% 0.95% 1.37t
Net investment income 4.70%t 4.64% 4.54% 4.05% 3.33t
* Audited by other auditors
t Computed on an annualized basis
x Commencing in fiscal 1996, securities which are puttable on demand have
been excluded from the portfolio turnover calculation
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Financial Highlights
Nine Months Ended November 2, 1992
September 30, 1996 Year Ended December 31, (start of business) to
------------------------------------
(Note 1F) 1995 1994 1993 December 31, 1992*
------------- ----------- ----------- ----------- ---------------------
Net asset value - beginning of period $21.40 $19.91 $21.44 $20.42 $20.00
Income from investment operations
Net investment income ** 0.79 0.98 0.95 0.93 0.14
Net realized and unrealized gain (loss) (0.28) 1.49 (1.51) 1.24 0.42
----------- ----------- ----------- ----------- --------------
Total from investment operations 0.51 2.47 (0.56) 2.17 0.56
----------- ----------- ----------- ----------- --------------
Less distributions declared to shareholders
From net investment income (0.79) (0.98) (0.95) (0.93) (0.14)
From realized capital gains - - (0.02) (0.22) -
----------- ----------- ----------- ----------- --------------
Total distributions declared to shareholders (0.79) (0.98) (0.97) (1.15) (0.14)
----------- ----------- ----------- ----------- --------------
Net asset value - end of period $21.12 $21.40 $19.91 $21.44 $20.42
=========== =========== =========== =========== ==============
Total return 2.43% 12.65% (2.68%) 10.78% 17.02t
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65%t 0.65% 0.65% 0.65% 0.65t
Net investment income ** 4.99%t 4.75% 4.62% 4.36% 4.16t
Net assets at end of period (000 omitted) $34,843 $32,865 $20,514 $17,132 $5,577
Portfolio turnover 43%x 140% 157% 126% 62%
** The investment adviser voluntarily did not impose a portion
of its investment advisory fee. If this reduction had not been
undertaken, the net investment income per share
and the ratios would have been:
Net investment income per share $0.76 $0.95 $0.90 $0.85 $0.12
Ratios (to average net assets):
Expenses 0.82%t 0.79% 0.89% 1.15% 1.47t
Net investment income 4.82%t 4.61% 4.38% 3.86% 3.34t
* Audited by other auditors
t Computed on an annualized basis
x Commencing in fiscal 1996, securities which are puttable on demand have
been excluded from the portfolio turnover calculation
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Financial Highlights
For the Period
January 2, 1996
(commencement of
investment operations)
to September 30, 1996
----------------------------
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income * 0.04
Net realized and unrealized gain (loss) 3.55
------------------------
Total from investment operations 3.59
------------------------
Less distributions declared to shareholders
From net investment income (0.02)
------------------------
Total distributions declared to shareholders (0.02)
------------------------
Net asset value - end of period $23.57
========================
Total return 17.95%
Ratios (to average net assets)/Supplemental Data
Expenses * 0.00t
Net investment income * 0.41t
Net assets at end of period (000 omitted) $6,896
Portfolio turnover 57%
Average broker commission paid per share $0.1058
* The investment adviser voluntarily did not impose its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
undertaken, the net investment income per share and the ratios would have been:
Net investment loss per share ($0.28)
Ratios (to average net assets):
Expenses 3.45t
Net investment loss (3.04t)
t Computed on an annualized basis
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Financial Highlights
For the Period
January 2, 1996
(commencement of
investment operations)
to September 30, 1996
------------------------
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income * 0.28
Net realized and unrealized gain (loss) 3.50
------------------------
Total from investment operations 3.78
------------------------
Less distributions declared to shareholders
From net investment income (0.18)
------------------------
Total distributions declared to shareholders (0.18)
------------------------
Net asset value - end of period $23.60
========================
Total return 18.97%
Ratios (to average net assets)/Supplemental Data
Expenses * 0.00%t
Net investment income * 2.27%t
Net assets at end of period (000 omitted) $2,843
Portfolio turnover 17%
Average broker commission paid per share $0.0419
* The investment adviser voluntarily did not impose its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
undertaken, the net investment income per share and the ratios would have been:
Net investment loss per share ($0.36)
Ratios (to average net assets):
Expenses 5.15%t
Net investment loss (2.88%t
t Computed on an annualized basis
</TABLE>
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- - - - --------------------------------------------------- --------- --------------- -------------- ----------------
Bonds - 97.5%
- - - - ---------------------------------------------------
General Obligations - 40.7%
- - - - ---------------------------------------------------
<S> <C> <C> <C> <C>
Amesbury MA State Qualified 5.%0 6/01/2003 $ 750,000 $ 750,000
Brockton MA State Qualified 5.55 12/15/2003 270,000 267,975
Brockton MA State Qualified 5.65 12/15/2004 300,000 297,750
Brockton MA State Qualified 5.70 6/15/2002 160,000 164,200
Brockton MA State Qualified 6.13 6/15/2018 250,000 253,438
Commonwealth of Massachusetts 6.25 7/01/2002 750,000 805,313
Commonwealth of Massachusetts 6.50 8/01/2001 480,000 516,600
Commonwealth of Massachusetts 6.90 10/01/2000 200,000 216,750
Commonwealth of Massachusetts 7.50 12/01/2000 400,000 443,000
Commonwealth of Massachusetts 7.50 6/01/2004 700,000 810,250
Lawrence MA State Qualified 5.13 9/15/2003 1,250,000 1,253,125
Lowell MA State Qualified 6.00 8/15/1999 775,000 801,156
Mass Bay Transportation Authority 6.45 3/01/2000 500,000 529,375
Mass Port Authority 5.50 7/01/2003 550,000 569,250
Mass Port Authority 7.13 7/01/2012 415,000 420,075
Mass St College Bldg Authority Project 7.50 5/01/2006 500,000 589,375
Mass St College Bldg Authority Project 7.50 5/01/2007 250,000 295,938
Massachusetts Bay Transportation Authority 6.25 3/01/2004 475,000 515,375
Puerto Rico Highway Authority 6.25 7/01/2004 800,000 869,000
Springfield MA 6.25 8/01/2006 1,000,000 1,075,000
University of Mass Building Authority State Guarantee 6.63 5/01/2007 1,000,000 1,105,000
Worcester, MA 6.00 7/01/2005 500,000 530,000
----------------
13,077,945
----------------
Housing Revenue - 6.4%
- - - - ---------------------------------------------------
Mass HFA Residential Development FNMA 6.50 12/01/2014 695,000 711,506
Mass HFA Residential Development FNMA t 6.88 11/15/2011 500,000 535,625
Mass HFA Residential Development FNMA 7.60 12/01/2014 500,000 535,625
Mass HFA Residential Development FNMA 8.80 8/01/2021 250,000 264,688
----------------
2,047,444
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - --------------------------------------------------- --------- --------------- -------------- ----------------
Insured Bonds - 12.6%
- - - - ---------------------------------------------------
Chelsea MA School District AMBAC 6.%0 6/15/2002 $ 225,000 $ 238,781
Chelsea MA School District AMBAC t 6.00 6/15/2004 750,000 799,688
Holyoke MA FSA 6.00 6/15/2007 800,000 840,000
Mass Educational Loan Authority AMBAC t 5.25 7/01/1999 545,000 554,538
Milford MA AMBAC 5.13 12/15/2014 500,000 471,250
New Bedford MA AMBAC 6.00 10/15/2005 575,000 612,375
Rockport MA AMBAC 6.80 12/15/2003 300,000 326,625
Worcester MA MBIA 5.80 8/01/1998 200,000 204,000
----------------
4,047,257
----------------
Lease Revenue - 3.0%
- - - - ---------------------------------------------------
Puerto Rico Housing Bank Appropriation 5.13 12/01/2004 250,000 244,063
Puerto Rico Housing Bank Appropriation 5.13 12/01/2005 750,000 725,625
----------------
969,688
----------------
LOC GIC - 7.2%
- - - - ---------------------------------------------------
Mass IFA Amesbury LOC: State Street 5.35 9/01/2000 455,000 461,825
Mass IFA Human Development LOC: Shawmut 6.25 4/15/2009 805,000 830,156
Mass IFA IBEW LOC: State Street 5.88 1/01/2005 225,000 229,781
Northborough MA IFA LOC: Bank of Boston 5.75 9/01/2002 765,000 782,213
----------------
2,303,975
----------------
Revenue Bonds - 27.6%
- - - - ---------------------------------------------------
Mass HEFA Anna Jaques Hospital 5.75 10/01/1998 440,000 443,850
Mass HEFA Central New England Health Systems 5.75 8/01/2003 500,000 462,500
Mass HEFA Charlton Hospital 7.00 7/01/2000 300,000 318,375
Mass HEFA Charlton Hospital 7.10 7/01/2001 300,000 322,500
Mass HEFA Daughters of Charity Hospital 5.50 7/01/2004 600,000 615,750
Mass HEFA Melrose Wakefield Hospital 6.35 7/01/2006 310,000 322,788
Mass HEFA New England Baptist Hospital 7.30 7/01/2011 715,000 763,263
Mass HEFA Youville Hospital HFA Secured 6.13 2/15/2015 650,000 662,188
Mass IFA Brooks School 5.60 7/01/2005 245,000 251,125
Mass IFA Brooks School 5.90 7/01/2013 410,000 412,050
Mass IFA Clark University 6.45 7/01/2001 300,000 319,125
Mass IFA Loomis Project 6.50 7/01/2002 350,000 356,125
Mass IFA Resource Recovery 6.15 7/01/2002 1,000,000 1,035,000
Mass IFA Springfield College 4.90 9/15/1999 715,000 711,425
Mass Municipal Wholesale Electric Co Power 6.38 7/01/2001 300,000 315,750
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - --------------------------------------------------- --------- --------------- -------------- ----------------
Mass Water Resource Authority 5.%5 3/01/2013 $ 500,000 $ 473,750
Mass Water Resource Authority 7.25 4/01/2001 200,000 219,750
New England Loan Marketing MA Student Loan 5.80 3/01/2002 850,000 878,688
----------------
8,884,002
----------------
TOTAL Bonds (Cost $31,052,150) 31,330,311
----------------
Short-Term Investments - 1.8%
- - - - ---------------------------------------------------
Short Term - 1.2%
- - - - ---------------------------------------------------
Mass St Updates 3.85 12/1/1997 * 400,000 400,000
Repurchase Agreement - 0.6%
- - - - ---------------------------------------------------
Prudential-Bache Repurchase Agreement, dated 9/30/96,
5.12% due 10/1/96, to pay $177,763 (Collateralized by
Federal National Mortgage Association, 7.252%, due
4/1/24, market value $181,292) at cost 177,737 177,737
----------------
TOTAL Short-Term Investments (Cost $577,737) 577,737
----------------
TOTAL INVESTMENTS (Cost $31,629,887) - 99.3% 31,908,048
Other Assets/(Liabilities) - 0.7% 228,035
----------------
NET ASSETS - 100.0% $ 32,136,083
================
The following abbreviations are used in this portfolio:
t - Denotes all or part of security pledged as a margin deposit (see Note 7).
* - Date shown reflects actual maturity date. Security puttable on a daily basis.
AMBAC - American Municipal Bond Assurance Corp. IBEW - International Brotherhood of Electrical Workers
FSA - Financial Security Association IFA - Industrial Finance Authority
HEFA - Health & Educational Facilities Authority LOC - Letter of Credit
HFA - Housing Finance Agency MBIA - Municipal Bond Insurance Association
FNMA - Federal National Mortgage Association
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - ----------------------------------------------------- --------- --------------- -------------- ---------------
Bonds - 98.0%
- - - - -----------------------------------------------------
General Obligations - 12.2%
- - - - -----------------------------------------------------
Cincinnati Public Schools OH 6.%5 6/15/2002 $ 600,000 $ 626,250
Commonwealth of Massachusetts 7.50 6/01/2004 500,000 578,750
Commonwealth of Massachusetts 3.85 12/01/1997 200,000 200,000
Detroit MI 6.00 4/01/2000 250,000 254,375
District of Columbia 5.80 6/01/2004 500,000 490,000
Honolulu HI 5.40 9/27/2007 500,000 500,625
Lawrence MA 5.38 9/15/2005 500,000 503,125
Lowell MA State Qualified 7.20 2/15/2000 500,000 535,625
Texas State Tpk Authority ** t 12.63 1/01/2020 400,000 562,000
---------------
4,250,750
---------------
Housing Revenue - 10.3%
- - - - -----------------------------------------------------
CA Housing Authority Summit Medical Center 5.50 5/01/2005 615,000 628,838
Colorado HEFA Rocky Mountain Adventist Hospital 6.00 2/01/1998 225,000 226,406
Colorado HFA Multi Family Insured Mortgage 7.90 10/01/2000 225,000 244,688
Florida HFA 0.00 7/15/2016 1,000,000 108,750
Mass HFA 7.60 12/01/2014 400,000 428,500
MI Housing Authority AMBAC 5.50 6/01/2018 490,000 490,000
MI Housing Authority AMBAC 6.40 4/01/2005 250,000 260,625
New Mexico Mortgage Finance Authority 5.75 7/01/2014 500,000 505,625
Penn Housing Finance Agency 5.35 10/01/2008 500,000 500,000
Texas Dept Housing & Community 0.00 3/01/2015 350,000 101,938
Virginia Housing Development Authority 0.00 11/01/2017 575,000 97,031
---------------
3,592,401
---------------
Insured Bonds - 22.6%
- - - - -----------------------------------------------------
Benton County WA School District AMBAC t 6.70 12/01/2006 580,000 651,775
CA Housing Authority MBIA 5.65 8/01/2025 400,000 402,000
Chicago IL O'Hare Airport MBIA 6.75 1/01/2006 500,000 555,000
DC Medlantic Hospital MBIA 7.00 8/15/2005 500,000 550,000
Denver CO Airport MBIA 7.50 11/15/2006 500,000 568,125
District of Columbia FSA 5.30 6/01/2004 500,000 501,250
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - ----------------------------------------------------- --------- --------------- -------------- ---------------
Grand Prairie TX Health AMBAC 6.%0 11/01/1999 $ 470,000 $ 479,988
Greater Detroit Resource Recovery AMBAC 6.25 12/13/2007 400,000 432,500
Jefferson County OH Asset Guaranty 6.63 12/01/2005 375,000 391,406
NH HEFA Allegheny Health MBIA 6.25 10/01/2008 300,000 305,250
OK Industrial Authority Health System AMBAC 7.00 8/15/2006 500,000 564,375
Orange County CA Transportation FGIC 4.80 2/15/2006 500,000 482,500
PA HEFA Allegheny Health MBIA 5.50 11/15/2008 405,000 408,544
SD HEFA Mckennan Hosp MBIA 6.00 7/01/2007 500,000 527,500
Tucson AZ COP Asset Guaranty 6.00 7/01/2004 500,000 520,625
Utah Student Loan AMBAC 7.45 11/01/2008 500,000 531,250
---------------
7,872,088
---------------
LOC GIC - 2.2%
- - - - -----------------------------------------------------
Emphoria VA IDB LOC: Bank of Boston 5.80 4/01/2004 200,000 201,612
Emphoria VA IDB LOC: Bank of Boston 5.80 4/01/2004 130,000 131,160
Northborough MA IFA LOC: Bank of Boston 5.75 9/01/2002 440,000 449,900
---------------
782,672
---------------
Revenue Bonds - 50.7%
- - - - -----------------------------------------------------
Alaska Industrial Development and Export Authority 5.25 4/01/1998 215,000 216,881
Alaska Industrial Development and Export Authority 5.50 4/01/2001 500,000 507,500
Alaska Industrial Development and Export Authority 6.20 4/01/2003 150,000 158,250
Allegheny County PA Industrial Development 5.30 12/01/1996 500,000 500,340
Battery Park NY Authority Junior Lien 5.20 11/01/2023 500,000 500,625
Bloomington MN Port Authority FSA 5.30 2/01/2007 1,000,000 1,011,250
Castle Rock CO Import Authority 5.75 12/01/2001 500,000 515,625
Dayton Ohio Special Facilities 6.05 10/01/2009 500,000 501,250
DC Medlantic Hospital 7.00 8/15/2005 500,000 534,375
District of Columbia Redevelopment Agency 5.63 11/01/2010 495,000 482,006
Eddyville Iowa Pollution Control Revenue 5.40 10/01/2006 500,000 509,375
Foothills CA Transportation Agency 0.00 1/01/2007 500,000 310,625
Gateway OH Special Tax 7.50 9/01/2005 500,000 537,500
Hot Springs AK Sales & Use 4.95 12/01/2008 250,000 248,438
Intermountain Power Agency Utah * 5.25 7/01/2003 500,000 511,875
Long Beach CA Aquarium 5.75 7/01/2005 200,000 196,500
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - ----------------------------------------------------- --------- --------------- -------------- ---------------
Los Angeles CA Building Authority 5.%0 5/01/2004 $ 500,000 $ 510,000
Mashantucket CT Pequot 6.25 9/01/2003 300,000 306,375
Mass IFA Boston Edison 5.75 2/01/2014 500,000 481,875
Mass IFA Loomis Project 6.50 7/01/2002 250,000 254,375
Mass IFA Resource Recovery 6.15 7/01/2002 150,000 155,250
Met Pier IL 6.25 7/01/2017 300,000 298,875
MT Higher Education 5.95 12/01/2012 440,000 444,950
New York Dormitory Authority t 5.50 7/01/2003 500,000 510,625
New York Dormitory Authority 6.00 7/01/2006 500,000 511,875
New York Med Center Long Island FHA 6.40 8/15/2014 495,000 512,325
New York Med Center Mercy FHA 5.40 8/15/2005 395,000 411,294
New York Med Center Mt. Sinai FHA 5.95 8/15/2009 235,000 239,113
New York Med Center St. Luke's FHA 5.60 8/15/2013 465,000 463,253
New York Med Center St. Vincent FHA 6.13 2/15/2014 515,000 531,738
New York Urban Development Corp. 6.00 1/01/2004 500,000 516,250
New York Urban Development Corp. t 6.25 4/01/2002 500,000 523,750
NH Education Auth. Brewster Acadamy 5.40 6/01/2001 505,000 506,894
NY Metropolitan Tran Authority 5.75 7/01/2015 500,000 482,500
OH Development Commission 5.45 6/01/1999 200,000 202,250
Orange County CA Recovery 5.80 7/01/2016 400,000 399,000
Orange County CA Transportation Sales Tax 6.00 2/15/2007 500,000 525,625
San Bernadino CA Certificates of Participation 5.25 8/01/2004 500,000 495,000
Volusia FL HEFA - Embry Project 5.50 10/15/2004 400,000 403,500
WA Public Power Supply Project 5.30 7/01/2002 500,000 503,125
Weld County Colorado IDA Conagra 6.75 12/15/2001 200,000 212,750
---------------
17,644,982
---------------
TOTAL Bonds (Cost $33,507,967) 34,142,893
---------------
Short-Term Investments - 2.6%
- - - - -----------------------------------------------------
Short Term - 2.0%
- - - - -----------------------------------------------------
Mass St Updates 3.85 12/1/1997 *700,000 700,000
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Value (Note 1A)
- - - - ----------------------------------------------------- -------------- ---------------
Repurchase Agreement - 0.6%
- - - - -----------------------------------------------------
Prudential-Bache Repurchase Agreement, dated 9/30/96,
5.12% due 10/1/96, to pay $193,476 (Collateralized by
Federal National Mortgage Association, 7.252, due 4/1/24,
market value $197,317) at cost $ 193,448 $ 193,448
---------------
TOTAL Short-Term Investments (Cost $893,448) 893,448
---------------
TOTAL INVESTMENTS (Cost $34,401,415) - 100.6% 35,036,341
Other Assets/(Liabilities) - (0.6%) (193,629)
---------------
NET ASSETS - 100.0% $ 34,842,712
===============
The following abbreviations are used in this portfolio:
t - Denotes all or part of security pledged as a margin deposit (see Note 7).
* - Delayed delivery contract.
** - Prerefunded security.
*** - Date shown reflects actual maturity date. Security puttable on a daily basis.
AMBAC - American Municipal Bond Assurance Corp. HFA - Housing Finance Agency
COP - Certificate of Participation IDA - Industrial Development Authority
FGIC - Financial Guaranty Insurance Co. IDB - Industrial Development Bond
FHA - Federal Housing Authority IFA - Industrial Finance Authority
FSA - Financial Security Association LOC - Letter of Credit
HEFA - Health & Educational Facilities Authority MBIA - Municipal Bond Insurance Association
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Common Stock - 97.5%
- - - - -----------------------------------------------------
Basic Industry - 3.5%
- - - - -----------------------------------------------------
Hughes Supply Inc. 2,400 $ 88,800
Intertape Polymer Group Inc. 3,700 82,788
OM Group Inc. 1,800 68,400
----------------
239,988
----------------
Capital Goods - 2.7%
- - - - -----------------------------------------------------
BE Aerospace Inc. * 4,900 101,063
Ultrak Inc. * 3,000 82,500
----------------
183,563
----------------
Consumer Cyclical - 4.6%
- - - - -----------------------------------------------------
Cannondale Corp. * 2,000 46,500
Custom Chrome Inc. * 3,700 67,988
Donna Karan International Inc. * 3,000 68,625
Golden Bear Golf Inc. * 2,600 51,350
ITI Technologies Inc. * 2,400 84,600
----------------
319,063
----------------
Consumer Stable - 6.3%
- - - - -----------------------------------------------------
Arbor Drug Inc. 2,600 56,550
Atlantic Coast Airlines Inc. * 4,700 55,225
Garden Ridge Corp. * 3,400 58,225
Midwest Express Holdings * 2,000 59,750
Opta Food Ingredients Inc. * 3,800 34,200
Performance Food Group Co. * 4,750 78,375
Robert Mondavi Corp. * 2,900 94,975
----------------
437,300
----------------
Financial - 4.9%
- - - - -----------------------------------------------------
American Travellers Corp. * 2,900 96,063
Inphynet Medical Management Inc. * 2,300 41,975
Olympic Financial Inc. * 3,300 81,263
S&P 400 Mid-Cap Depository Receipt 1,000 47,953
Texas Regional Bancshares 2,400 69,000
----------------
336,254
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Health Care - 27.8%
- - - - -----------------------------------------------------
Agouron Pharmaceuticals Inc. * 2,300 $ 100,338
Arbor Health Care Company * 3,300 77,138
Arris Pharmaceutical Corp. * 3,500 49,438
Ballard Medical Products 3,800 74,100
Chirex Inc. * 5,200 67,600
Conmed Corp. * 4,000 72,000
Corvel Corp. * 2,700 82,013
Dura Pharmaceuticals Inc. * 1,500 55,313
Emcare Holdings Inc. * 2,600 70,200
FPA Medical Management Inc. * 1,700 44,838
Fuisz Technologies Ltd. * 3,100 40,300
Genesis Health Ventures Inc. * 2,600 73,125
Healthplan Services Corp. * 3,400 74,375
Horizon Mental Health Management * 2,800 69,300
Impath Inc. * 2,900 35,525
Innotech Inc. * 3,500 35,438
Martek Biosciences * 2,500 62,500
Medarex Inc. * 7,000 56,875
Medcath Inc. * 3,400 57,800
Medquist Inc. * 3,000 60,750
Myriad Genetics Inc. * 2,000 51,000
National Surgery Centers * 2,200 61,600
Natures Sunshine Products Inc. 3,500 61,250
Occusystems Inc. * 1,500 45,000
Pharmaceutical Product Development * 1,900 51,300
Possis Medical Inc. * 3,100 55,025
Protocol Systems Inc. * 3,100 51,538
Rochester Medical Corp. * 3,400 56,525
Rural/Metro Corp. * 1,900 69,350
United Dental Care Inc. * 2,000 72,250
Vertex Pharmaceuticals Inc. * 2,800 82,600
----------------
1,916,404
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Services - 26.2%
- - - - -----------------------------------------------------
Air Express International Corp. 2,500 $ 70,625
Alternative Resources Corp. * 1,400 39,375
Analysts International Corp. 1,200 55,200
Applied Graphics Technology * 3,900 58,013
Barrett Business Services Inc. * 3,700 59,200
BET Holdings Inc. * 3,000 86,250
Central Parking Corp. 2,350 76,375
Coach USA Inc. * 3,300 88,275
Computer Task Group Inc. 2,300 71,588
Continental Waste Industries Inc. * 1,600 35,800
Cotelligent Group Inc. * 2,300 36,225
Data Processing Resources Corp. * 3,400 74,800
Emmis Broadcasting Corp. * 1,800 83,250
Evergreen Media Corp. * 1,650 51,563
LCC International Inc. * 1,800 32,850
Logan's Roadhouse Inc. * 2,600 52,325
May & Speh * 3,900 78,000
Natural Microsystems Corp. * 600 28,875
Newpark Resources Inc. * 2,700 98,213
Norrell Corp. 1,600 50,400
Oacis Healthcare Holdings * 3,100 37,975
On Assignment Inc. * 1,800 61,650
Pacific Gateway Exchange Inc. * 2,100 61,950
Personnel Group of America Inc. * 3,200 83,200
Prepaid Legal Services Inc. * 3,200 41,200
Remedy Temp Inc. * 2,000 42,500
Right Management Consultants * 2,800 67,900
Scandinavian Broadcast Systems Corp. * 3,700 83,250
Scientific Games Holdings Corp. * 2,800 58,450
Techforce Corp. * 5,700 42,038
----------------
1,807,315
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Technology - 21.5%
- - - - -----------------------------------------------------
Advanced Technology Material * 3,900 $ 52,650
Affiliated Computer Services Inc. * 900 52,875
Applix Inc. * 2,700 70,875
Aspen Technologies Inc. * 700 47,425
Black Box Corp. * 2,300 75,900
CCC Information Services Group * 3,200 67,200
Computer Horizons Corp. * 1,900 54,150
Cymer Inc. * 2,000 35,500
Datastream Systems Inc. * 1,200 36,300
Dupont Photomasks Inc. * 1,800 50,400
Etec Systems Inc. * 1,100 37,400
Gensym Corp. * 1,900 41,325
Harbinger Corp. * 1,100 27,500
Indus Group Inc. * 3,500 70,000
Intelligroup Inc. * 4,000 55,500
Lecroy Corp. * 2,600 67,600
MDL Information Systems * 2,000 63,250
Nichols Research Corp. * 2,600 77,350
P-Com Inc. * 1,800 44,550
Perceptron Inc. * 1,700 42,925
Periphonics Corp. * 1,300 50,691
Photronics Inc. * 2,000 62,000
Project Software & Development * 1,500 63,375
Sanmina Corp. * 1,600 64,400
TCSI Corp. * 5,500 72,875
Ultradata Corp. * 4,500 27,563
Videoserver Inc. * 2,000 69,500
----------------
1,481,079
----------------
TOTAL INVESTMENTS (Cost $6,361,949) - 97.5% 6,720,966
Other Assets/(Liabilities) - 2.5% 174,901
----------------
NET ASSETS - 100.0% $ 6,895,867
================
* Non-income producing security.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Common Stock - 97.9%
- - - - -----------------------------------------------------
Basic Industry - 5.1%
- - - - -----------------------------------------------------
CSX Corp. 400 $ 20,200
Morton International Inc. 1,800 71,550
Norfolk Southern Corp. 300 27,413
Praxair, Inc 600 25,800
----------------
144,963
----------------
Capital Goods - 15.8%
- - - - -----------------------------------------------------
Crane Company 1,600 71,000
Deere & Co. 1,500 63,000
Dover Corp. 1,000 47,750
Harris Corp. Inc. 1,100 71,638
Rockwell International Corp. 1,000 56,375
Textron Inc. 800 68,000
United Technologies Corp. 600 72,075
----------------
449,838
----------------
Consumer Cyclical - 12.2%
- - - - -----------------------------------------------------
Carnival Corp. 2,000 62,000
Clayton Homes 2,600 57,200
Consolidated Stores Corp. * 700 28,000
Jones Apparel Group Inc. * 600 38,250
Leggett & Platt Inc. 2,200 64,625
Pier 1 Imports Inc. 2,600 41,925
Waban Inc. * 2,400 54,900
----------------
346,900
----------------
Consumer Stable - 10.0%
- - - - -----------------------------------------------------
General Nutrition Companies * 2,000 35,125
Kroger Co. * 700 31,325
Media General Inc. 1,500 47,250
Philip Morris Companies Inc. 350 31,413
Richfood Holdings Inc. 1,300 48,425
Wallace Computer Services 2,300 64,975
Wendys International Inc. 1,200 25,800
----------------
284,313
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Energy - 9.2%
- - - - -----------------------------------------------------
Amoco Corp. 800 $ 56,400
British Petroleum PLC 608 76,000
Mobil Corp. 600 69,450
Texaco Inc. 650 59,800
----------------
261,650
----------------
Financial - 17.5%
- - - - -----------------------------------------------------
Advanta Corp. 700 32,195
American Bankers Insurance Group 1,300 65,000
American Travellers Corp. * 1,775 58,797
Bank of Boston Corp. 700 40,513
BankAmerica Corp. 700 57,488
Chase Manhattan Corp. 700 56,088
Federal National Mortgage Association 1,400 48,825
First USA Inc. 400 22,150
Northern Trust 700 46,025
Reliastar Financial Corp. 1,500 71,250
----------------
498,331
----------------
Health Care - 10.5%
- - - - -----------------------------------------------------
Abbott Laboratories 1,100 54,175
Bristol-Myers Squibb Co. 600 57,825
Columbia/HCA Healthcare Corp. 900 51,188
Schering-Plough Corp. 900 55,350
Sofamor/Danek Group, Inc. * 1,000 30,875
Watson Pharmaceutical Inc. * 1,300 48,750
----------------
298,163
----------------
Real Estate Investment Trust - 4.0%
- - - - -----------------------------------------------------
Macerich Company (The) 1,500 33,563
Merry Land & Investment Co. 1,300 27,788
Patriot American Hospitality 400 13,450
Starwood Lodging Trust 900 37,688
----------------
112,489
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Technology - 12.1%
- - - - -----------------------------------------------------
Adaptec Inc. * 1,000 60,000
Compaq Computer * 1,000 64,125
Hewlett-Packard Company 800 39,000
Intel Corp. 700 66,806
International Business Machine 400 49,800
Varian Associates Inc. 1,300 62,400
----------------
342,131
----------------
Utilities - 1.5%
- - - - -----------------------------------------------------
FPL Group Inc. 1,000 43,250
----------------
TOTAL INVESTMENTS (Cost $2,468,754) - 97.9% 2,782,028
Other Assets/(Liabilities) - 2.1% 60,914
----------------
NET ASSETS - 100.0% $ 2,842,942
================
* Non-income producing security.
</TABLE>
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Massachusetts Intermediate Tax Exempt Bond Fund
(Massachusetts Intermediate Tax Exempt Bond Fund) is a separate
non-diversified investment series of the Trust. Standish Intermediate
Tax Exempt Bond Fund (Intermediate Tax Exempt Bond Fund), Standish
Small Cap Tax-Sensitive Equity Fund (Small Cap Tax-Sensitive Equity
Fund) and Standish Tax-Sensitive Equity Fund (Tax-Sensitive Equity
Fund) are separate diversified investment series of the Trust (together
with the Massachusetts Intermediate Tax Exempt Bond Fund, individually
a "Fund" and collectively, the "Funds"). The following is a summary of
significant accounting policies consistently followed by the Funds in
the preparation of the financial statements. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A...Investment security valuations--
Municipal bonds are normally valued on the basis of valuations
furnished by a pricing service. Taxable obligations, if any, for which
price quotations are readily available are normally valued at the last
sales prices on the exchange or market on which they are primarily
traded, or if not listed or no sale, at the last quoted bid prices.
Equity securities for which quotations are readily available are valued
at the last sale prices or if no sale, at the closing bid prices in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short term instruments with less
than sixty-one days remaining to maturity when acquired by a Fund are
valued on an amortized cost basis. If a Fund acquires a short term
instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity
and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
B...Repurchase agreements--
It is the policy of each Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by each
Fund to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C...Securities transactions and income--
Securities transactions are recorded as of the trade date. Interest
income is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses
from securities sold are recorded on the identified cost basis.
D...Federal taxes--
As qualified regulated investment companies under Subchapter M of the
Internal Revenue Code, the Funds are not subject to income taxes to the
extent that each Fund distributes all of its taxable income for its
fiscal year. Dividends paid by the Massachusetts Intermediate Tax
Exempt Bond Fund and the Intermediate Tax Exempt Bond Fund
(collectively the "Bond Funds") from net interest earned on tax-exempt
municipal bonds are not includable by shareholders as gross income for
Federal income tax purposes because the Bond Funds intend to meet
certain requirements of the Internal Revenue Code applicable to
regulated investment companies which will enable the Bond Funds to pay
exempt-interest dividends.
<PAGE>
At September 30, 1996, the following Funds, for federal income tax
purposes, had capital loss carryovers as follows:
<TABLE>
<CAPTION>
Expiration Date September 30,
-------------------------------------------------------
2002 2003 2004 Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $ 375,094 $ 178,890 $ ----- $ 553,984
Small Cap Tax-Sensitive Equity Fund ----- ----- $ 240,551 $ 240,551
Tax-Sensitive Equity Fund ----- ----- $ 21,876 $ 21,876
</TABLE>
Such carryovers will reduce each Fund's taxable income arising from
future net realized gain on investments, if any, to the extent
permitted by the Internal Revenue Code and thus will reduce the amount
of distributions to shareholders which would otherwise be necessary to
relieve the Funds of any liability for federal income tax.
E...Deferred organization expense--
Costs associated with the Funds' organization and initial registration
are being amortized, on a straight-line basis, through October, 1997
for the Massachusetts Intermediate Tax Exempt Bond Fund and the
Intermediate Tax Exempt Bond Fund and through December, 2000 for the
Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity Fund.
F...Change in fiscal year end--
The Board of Trustees voted on February 9, 1996 to change the fiscal
year end of the Massachusetts Intermediate Tax Exempt Bond Fund and the
Intermediate Tax Exempt Bond Fund from December 31 to September
30.
(2).....Distributions to Shareholders:
Distributions on shares of the Bond Funds are declared daily from net
investment income and distributed monthly. Dividends from net
investment income, if any, will be distributed at least annually for
the Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity
Fund. Distributions on capital gains, if any, will be distributed
annually for all of the Funds. Distributions from net investment income
and capital gains, if any, are automatically reinvested in additional
shares of the applicable Fund unless the shareholder elects to receive
them in cash.Distributions are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax differences relating to
shareholder distributions will result in reclassifications to paid-in
capital.
(3).....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid at the following annual rates of
each Fund's average daily net assets: .40% for the Massachusetts
Intermediate Tax Exempt Bond Fund and the Intermediate Tax Exempt Bond
Fund, .60% for the Small Cap Tax-Sensitive Equity Fund and .50% for the
Tax-Sensitive Equity Fund. SA&W has agreed that the total Fund
operating expenses for any fiscal year will not exceed 0.65% of the
Fund's average daily net assets for the Massachusetts Intermediate Tax
Exempt Bond Fund and the Intermediate Tax Exempt Bond Fund, .90% for
the Small Cap Tax-Sensitive Equity Fund and 1.00% for the Tax-Sensitive
Equity Fund. For the period ended September 30, 1996 and the year ended
December 31, 1995, SA&W voluntarily did not impose $20,375 and $21,818,
respectively, of its advisory fee to the Massachusetts Intermediate Tax
Exempt Bond Fund and $41,685 and $38,426, respectively, to the
Intermediate Tax Exempt Bond Fund, which are reflected as reductions of
expenses in the respective Statements of Operations. For the period
ended September 30, 1996, SA&W voluntarily did not impose its
investment advisory fees of $13,510 and $6,161 and reimbursed operating
expenses of $64,052 and $57,444 for the Small Cap Tax-Sensitive Equity
Fund and Tax-Sensitive Equity Fund, respectively. These agreements are
voluntary and temporary and may be discontinued or revised by SA&W at
any time. The Funds pay no compensation directly to the Trust's
Trustees who are affiliated with SA&W nor to its officers, all of whom
receive remuneration for their services to the Funds from SA&W. Certain
of the trustees and officers of the trust are directors or officers of
SA&W.
<PAGE>
4)......Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations,
were as follows:
<TABLE>
<CAPTION>
Period Ending For the Year Ended
September 30, 1996 December 31, 1995
------------------------------------------------------------------
Purchases Sales Purchases Sales
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $ 11,013,527 $ 11,159,395 $ 26,333,975 $ 23,520,553
============= ============== ============== =============
Intermediate Tax Exempt Bond Fund $ 16,279,361 $ 14,065,880 $ 50,986,883 $ 40,572,529
============= ============== ============== =============
Small Cap Tax-Sensitive Equity Fund $ 8,506,998 $ 1,856,009
============= ==============
Tax-Sensitive Equity Fund $ 2,783,277 $ 293,127
============= ==============
</TABLE>
5)......Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in each Funds' shares
were as follows:
<TABLE>
<CAPTION>
Period Ended (a) Year Ended Year Ended
September 30, 1996 December 31, 1995 December 31, 1994
---------------- ---------------- -------------------
Massachusetts Intermediate Tax Exempt Bond Fund
<S> <C> <C> <C>
Shares sold 379,843 534,346 500,726
Shares issued to shareholders in payment of distributions declared 17,163 18,097 9,020
Shares redeemed (388,723) (423,607) (479,585)
---------------- --------------- ---------------
Net increase 8,283 128,836 30,161
================ =============== ===============
Intermediate Tax Exempt Bond Fund
Shares sold 524,041 821,564 612,015
Shares issued to shareholders in payment of distributions declared 20,313 15,149 11,043
Shares redeemed (430,546) (331,012) (392,041)
---------------- --------------- ---------------
Net increase 113,808 505,701 231,017
================ =============== ===============
Small Cap Tax-Sensitive Equity Fund
Shares sold 292,713
Shares issued to shareholders in payment of distributions declared 119
Shares redeemed (268)
----------------
Net increase 292,564
================
Tax-Sensitive Equity Fund
Shares sold 120,464
Shares issued to shareholders in payment of distributions declared 660
Shares redeemed (678)
----------------
Net increase 120,446
================
</TABLE>
(a) For the nine months ended September 30, 1996, for the Bond Funds
and for the period from January 2, 1996, commencement of investment
operations, to September 30, 1996, for the Small Cap Tax-Sensitive
Equity Fund and Tax-Sensitive Equity Fund.
At September 30, 1996, the Massachusetts Intermediate Tax Exempt Bond
Fund and the Small Cap Tax-Sensitive Equity Fund each had a shareholder
of record owning approximately 41% and 20% of the respective Funds'
outstanding voting shares.
<PAGE>
(6).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at September 30, 1996, as computed on a
federal income tax basis, were as follows:
<TABLE>
<CAPTION>
Net
Gross Gross Unrealized
Aggregate Unrealized Unrealized Appreciation
Cost Appreciation Depreciation (Depreciation)
------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $ 31,629,887 $ 430,367 $ (152,206) $ 278,161
Intermediate Tax Exempt Bond Fund $ 34,401,415 $ 713,234 $ (78,308) $ 634,926
Small Cap Tax-Sensitive Equity Fund $ 6,410,438 $ 588,568 $ (278,040) $ 310,528
Tax-Sensitive Equity Fund $ 2,468,754 $ 324,877 $ (11,603) $ 313,274
</TABLE>
(7).....Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Funds' Prospectuses and Statements of Additional
Information. The Funds may trade the following financial instruments
with off balance sheet risk:
Futures contracts--
The Funds may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Funds are required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by each Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in the value of hedged investments. In addition,
there is the risk that a Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Funds enter
into financial futures transactions primarily to manage their exposure
to certain markets and to changes in security prices and, with respect
to the Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity
Fund, to changes in foreign currencies.
At September 30, 1996, the Massachusetts Intermediate Tax Exempt Bond
Fund held the following futures contracts:
<TABLE>
<CAPTION>
Contract Position Expiration Date Underlying Face Unrealized
Amount at Value Gain/(Loss)
- - - - --------------------------------------------- ----------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Municipal Bond (5 contracts) Long 12/19/96 $ 569,688 $ 17,763
5 year U.S. Treasury Note (7 contracts) Long 12/31/96 739,156 5,946
10 year U.S. Treasury Note (6 contracts) Long 12/31/96 643,688 10,065
-------------- --------------
$ 1,952,532 $ 33,774
============== ==============
</TABLE>
<PAGE>
At September 30, 1996, the Intermediate Tax Exempt Bond Fund held the
following futures contracts:
<TABLE>
<CAPTION>
Contract Position Expiration Date Underlying Face Unrealized
Amount at Value Gain/(Loss)
- - - - --------------------------------------------- ----------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
5 year U.S. Treasury Note (5 contracts) Long 12/31/96 $ 527,969 $ 4,247
10 year U.S. Treasury Note (3 contracts) Long 12/31/96 321,844 5,033
-------------- --------------
$ 849,813 $ 9,280
============== ==============
</TABLE>
At September 30, 1996, the Bond Funds had segregated sufficient cash
and/or securities to cover margin requirements on open future
contracts.
At September 30, 1996, the Small Cap Tax-Sensitive Equity Fund and the
Tax-Sensitive Equity Fund had no open futures contracts.
Since the Massachusetts Intermediate Tax Exempt Bond Fund may invest a
substantial portion of its assets in issuers located in one state, it
will be more susceptible to factors adversely affecting issuers of that
state than would be a comparable general tax-exempt mutual fund.
(8).....Delayed Delivery Transactions:
The Bond Funds may purchase securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transactions. The price of the underlying
securities and the date when the securities will be delivered and paid
for are fixed at the time the transaction is negotiated. The Fund
instructs its custodian to segregate securities having a value at least
equal to the amount of the purchase commitment.
At September 30, 1996, the Intermediate Tax Exempt Bond Fund had
entered into the following delayed delivery transactions.
Type Security Settlement Date Amount
- - - - --------------- -------------------------------- ----------------- -----------
Buy Intermountain Power Agency Utah 10/4/96 $507,035
........Federal Income Tax Information (Unaudited)
Of the distributions paid by the Bond Funds from net investment income
for the nine months ended September 30, 1996, amounts that were tax
exempt for Federal income tax purposes are as follows:
Massachusetts Intermediate Tax Exempt Bond Fund $1,074,416
Intermediate Tax Exempt Bond Fund $1,211,455
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Massachusetts Intermediate Tax Exempt Bond Fund, Standish
Intermediate Tax Exempt Bond Fund, Standish Small Cap Tax-Sensitive Equity Fund,
and Standish Tax-Sensitive Equity Fund:
We have audited the accompanying statements of assets and liabilities of the
Standish, Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax
Exempt Bond Fund, Standish Intermediate Tax Exempt Bond Fund, Standish Small Cap
Tax-Sensitive Equity Fund, and Standish Tax-Sensitive Equity Fund, including the
schedule of portfolio investments as of September 30, 1996 and the related
statements of operations for the nine months ended September 30, 1996 and the
year ended December 31, 1995 for the Standish Massachusetts Intermediate Tax
Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond Fund, and for the
period from January 2, 1996 (start of business) to September 30, 1996 for the
Standish Small Cap Tax-Sensitive Equity Fund and the Standish Tax-Sensitive
Equity Fund; changes in net assets for the nine months ended September 30, 1996
and the two years in the period ended December 31, 1995 for the Standish
Massachusetts Intermediate Tax Exempt Bond Fund and the Standish Intermediate
Tax Exempt Bond Fund, and for the period from January 2, 1996 (start of
business) to September 30, 1996 for the Standish Small Cap Tax-Sensitive Equity
Fund and the Standish Tax-Sensitive Equity Fund; and the financial highlights
for the nine months ended September 30, 1996 and the three years in the period
ended December 31, 1995 for Standish Massachusetts Intermediate Tax Exempt Bond
Fund and the Standish Intermediate Tax Exempt Bond Fund, and for the period from
January 2, 1996 (start of business) to September 30, 1996 for the Standish Small
Cap Tax-Sensitive Equity Fund and the Standish Tax-Sensitive Equity Fund. These
financial statements 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 financial highlights for the
period from November 2, 1992 (start of business) to December 31, 1992, presented
herein for the Standish Massachusetts Intermediate Tax Exempt Bond Fund and the
Standish Intermediate Tax Exempt Bond Fund, were audited by other auditors,
whose report, dated February 12, 1993, expressed an unqualified opinion on such
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. 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
September 30, 1996 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
Standish, Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax
Exempt Bond Fund, Standish Intermediate Tax Exempt Bond Fund, Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax-Sensitive Equity Fund as of September
30, 1996; the results of operations for the nine months ended September 30, 1996
and the year ended December 31, 1995 for the Standish Massachusetts Intermediate
Tax Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond Fund, and for
the period from January 2, 1996 (start of business) to September 30, 1996 for
the Standish Small Cap Tax-Sensitive Equity Fund and the Standish Tax-Sensitive
Equity Fund; and the changes in net assets for the nine months ended September
30, 1996 and the two years in the period ended December 31, 1995 for the
Standish Massachusetts Intermediate Tax Exempt Bond Fund and the Standish
Intermediate Tax Exempt Bond Fund, and for the period from January 2, 1996
(start of business) to September 30, 1996 for the Standish Small Cap
Tax-Sensitive Equity Fund and the Standish Tax-Sensitive Equity Fund; and the
financial highlights for the nine months ended September 30, 1996, and the three
years in the period ended December 31, 1995, for Standish Massachusetts
Intermediate Tax Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond
Fund, and for the period from January 2, 1996 (start of business) to September
30, 1996 for the Standish Small Cap Tax-Sensitive Equity Fund and the Standish
Tax-Sensitive Equity Fund, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 19, 1996
<PAGE>
Prospectus dated January 27, 1997
PROSPECTUS
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STANDISH TAX-SENSITIVE EQUITY FUND
("Equity Fund")
Seeks to maximize after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of
companies that appear to be undervalued.
STANDISH SMALL CAP TAX-SENSITIVE EQUITY FUND ("Small Cap Fund")
Seeks to maximize after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of small
capitalization companies that appear to be undervalued.
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND ("Tax Exempt Fund")
Seeks to provide a high level of interest income exempt from federal income
taxes, while seeking preservation of shareholders' capital through investing the
Fund's assets in investment grade intermediate-term municipal securities.
Equity Fund, Small Cap Fund and Tax Exempt Fund (collectively, the "Funds")
are members of the Standish, Ayer & Wood family of funds. Each Fund is organized
as a separate diversified investment series of Standish, Ayer & Wood Investment
Trust (the "Trust"), an open-end management investment company. Each Fund's
investment adviser is Standish, Ayer & Wood, Inc., Boston, Massachusetts (the
"Adviser").
Investors may purchase shares of the Funds directly from the Trust's
principal underwriter, Standish Fund Distributors, L.P. (the "Principal
Underwriter"), at the address and phone number listed above without a sales
commission or other transaction charges. Unless waived by the Funds, the minimum
initial investment is $100,000. Additional investments may be made in amounts of
at least $10,000 ($5,000 for the Tax Exempt Fund).
This combined Prospectus is intended to set forth concisely the information
about the Funds and the Trust that a prospective investor should know before
investing. Investors are encouraged to read this Prospectus and retain it for
future reference. Additional information about the Funds and the Trust is
contained in a combined Statement of Additional Information which has been filed
with the Securities and Exchange Commission and is available upon request and
without charge by calling or writing to the Principal Underwriter at the
telephone number or address listed above. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUNDS INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information........................................2
Financial Highlights.......................................4
Investment Objectives and Policies.........................7
Risk Factors, Suitability and Other Investment Practices...9
Calculation of Performance Data...........................15
Dividends and Distributions...............................16
Purchase of Shares........................................16
Exchange of Shares........................................17
Redemption of Shares......................................17
Management................................................19
Federal Income Taxes......................................19
The Trust and Its Shares..................................21
Custodian, Transfer Agent and Dividend-Disbursing Agent...21
Independent Accountants...................................21
Legal Counsel.............................................21
Tax Certification Instruction.............................22
<PAGE>
The Equity Fund and the Small Cap Fund (together, the "Tax-Sensitive
Funds") are designed for investors in the upper federal income tax brackets who
are seeking the highest long-term after-tax total return. In seeking to achieve
its investment objective, the Equity Fund invests primarily in publicly traded
equity securities of United States companies and, to a lesser extent, of foreign
issuers. The Small Cap Fund invests primarily in publicly traded securities,
including securities being issued in initial public offerings, of small
capitalization companies located in the United States and, to a lesser extent,
in foreign countries. The Tax-Sensitive Funds do not normally invest in equity
securities that are restricted as to disposition by federal securities laws or
are otherwise illiquid but may do so to a limited extent under certain
circumstances.
The Tax Exempt Fund is designed for investors in the upper federal income
tax brackets who are seeking a higher level of federally tax-free income than is
normally provided by short-term tax exempt investments, and more price stability
than investments in long-term municipal bonds. Municipal bonds in which the Tax
Exempt Fund invests will be rated, at the time of purchase, within the four
highest ratings by Moody's Investor Services, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("Standard & Poor's") or Fitch Investors Service, Inc.
("Fitch") or, if unrated, determined to be of comparable credit quality.
There can, of course, be no guarantee that a Fund's objective will be
achieved. The Tax-Sensitive Funds are not tax-exempt funds. While the
Tax-Sensitive Funds are managed to consider the impact of federal and state
taxes on shareholders' investment returns, it is expected that the Tax-Sensitive
Funds will earn and distribute taxable income and realize and distribute capital
gains from time to time and neither Tax-Sensitive Fund will be managed
considering any particular state's tax laws.
<TABLE>
<CAPTION>
EXPENSE INFORMATION
Equity Small Cap Tax Exempt
Shareholder Transaction Expenses Fund Fund Fund
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases None None None
Maximum Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating Expenses Equity Small Cap Tax Exempt
(as a percentage of average net assets) Fund Fund Fund
Management Fees (after fee reduction) 0.00%1 0.00%2 0.23%3
12b-1 Fees None None None
Other Expenses (after expense limitation) 0.00%1 0.00%2 0.42%3
Total Fund Operating Expenses (after expense limitation) 0.00%1 0.00%2 0.65%3
------- -------- --------
(See the next page for footnotes.)
Example:
Hypothetically assume that each Fund's annual return is 5% and that its
operating expenses are exactly as just described. For every $1,000 you invested,
you would have paid the following expenses if you closed your account after the
number or years indicated:
Equity Small Cap Tax Exempt
Fund Fund Fund
After 1 Year $ 0 $ 0 $ 7
After 3 Years $ 0 $ 0 $21
After 5 Years N/A N/A $36
After 10 Years N/A N/A $81
</TABLE>
The purpose of the above table is to assist an investor in understanding
the various costs and expenses of the Funds that an investor in the Funds will
bear directly or indirectly. See "Management - Investment Adviser" and
"Management - Expenses." The figures shown in the caption "Other Expenses,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, and
in the hypothetical example are based upon expenses for the Funds' fiscal years
ended September 30, 1996 during which time the Adviser did not impose a portion
of its fee with respect to the Tax Exempt Fund and did not impose its fee and
reimbursed operating expenses with respect to the Tax-Sensitive Funds.
<PAGE>
1The Adviser has voluntarily agreed to limit the Equity Fund's Total
Fund Operating Expenses (excluding litigation, indemnification and other
extraordinary expenses) to 0.00% of the Equity Fund's average daily net assets.
This arrangement is voluntary and temporary and may be revised or discontinued
by the Adviser at any time. In the absence of a similar arrangement with the
Adviser, Management Fees, Other Expenses and Total Fund Operating Expenses of
the Equity Fund would have been 0.50%, 4.65% and 5.15% for the fiscal year ended
September 30, 1996.
2The Adviser has voluntarily agreed to limit the Small Cap Fund's Total
Fund Operating Expenses (excluding litigation, indemnification and other
extraordinary expenses) to 0.00% of the Small Cap Fund's average daily net
assets. This arrangement is voluntary and temporary and may be revised or
discontinued by the Adviser at any time. In the absence of a similar arrangement
with the Adviser, Management Fees, Other Expenses and Total Fund Operating
Expenses of the Small Cap Fund would have been 0.60%, 2.85% and 3.45% for the
fiscal year ended September 30, 1996.
3The Adviser has voluntarily agreed to limit the Tax Exempt Fund's Total
Fund Operating Expenses (excluding litigation, indemnification and other
extraordinary expenses) to 0.65% of the Tax Exempt Fund's average daily net
assets. This arrangement is voluntary and temporary and may be revised or
discontinued by the Adviser at any time. In the absence of a similar arrangement
with the Adviser, Management Fees and Total Fund Operating Expenses of the Tax
Exempt Fund would have been 0.40% and 0.82% for the fiscal year ended September
30, 1996.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, EACH FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
<PAGE>
FINANCIAL HIGHLIGHTS
The Tax Exempt Fund's financial highlights for the years ended December 31,
1993, 1994 and 1995 and each Fund's financial highlights for the fiscal year
ended September 30, 1996 have been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose reports, together with the financial statements
of the Funds are incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Intermediate Tax Exempt Bond Fund
Nine Months Ended November 2, 1992
September 30, 1996 Year Ended December 31, (start of business) to
------------------------------------
1995 1994 1993 December 31, 1992*
------------- ----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.40 $19.91 $21.44 $20.42 $20.00
Income from investment operations
Net investment income ** 0.79 0.98 0.95 0.93 0.14
Net realized and unrealized gain (loss) (0.28) 1.49 (1.51) 1.24 0.42
----------- ----------- ----------- ----------- --------------
Total from investment operations 0.51 2.47 (0.56) 2.17 0.56
----------- ----------- ----------- ----------- --------------
Less distributions declared to shareholders
From net investment income (0.79) (0.98) (0.95) (0.93) (0.14)
From realized capital gains - - (0.02) (0.22) -
----------- ----------- ----------- ----------- --------------
Total distributions declared to shareholders (0.79) (0.98) (0.97) (1.15) (0.14)
----------- ----------- ----------- ----------- --------------
Net asset value - end of period $21.12 $21.40 $19.91 $21.44 $20.42
=========== =========== =========== =========== ==============
Total return 2.43% 12.65% (2.68%) 10.78% 17.02t
Net assets at end of period (000 omitted) $34,843 $32,865 $20,514 $17,132 $5,577
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65%t 0.65% 0.65% 0.65% 0.65t
Net investment income ** 4.99%t 4.75% 4.62% 4.36% 4.16t
Portfolio turnover 43%x 140% 157% 126% 62%
** The investment adviser voluntarily did not impose a portion
of its investment advisory fee. If this reduction had not been
undertaken, the net investment income per share
and the ratios would have been:
Net investment income per share $0.76 $0.95 $0.90 $0.85 $0.12
Ratios (to average net assets):
Expenses 0.82%t 0.79% 0.89% 1.15% 1.47t
Net investment income 4.82%t 4.61% 4.38% 3.86% 3.34t
* Audited by other auditors
t Computed on an annualized basis
x Commencing in fiscal 1996, securities which are puttable on demand have
been excluded from the portfolio turnover calculation
</TABLE>
Further information about the performance of the Funds is contained in the
Funds' combined Annual Report, which may be obtained from the Principal
Underwriter without charge.
<PAGE>
FINANCIAL HIGHLIGHTS
(CONTINUED)
<TABLE>
<CAPTION>
Small Cap Tax-Sensitive Equity Fund
For the Period
January 2, 1996
(commencement of
investment operations)
to September 30, 1996
----------------------------
<S> <C>
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income * 0.04
Net realized and unrealized gain (loss) 3.55
------------------------
Total from investment operations 3.59
------------------------
Less distributions declared to shareholders
From net investment income (0.02)
------------------------
Total distributions declared to shareholders (0.02)
------------------------
Net asset value - end of period $23.57
========================
Total return 17.95%
Net assets at end of period (000 omitted) $6,896
Ratios (to average net assets)/Supplemental Data
Expenses * 0.00%t
Net investment income * 0.41%t
Portfolio turnover 57%
Average broker commission paid per share $0.1058
* The investment adviser voluntarily did not impose its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
undertaken, the net investment income per share and the ratios would have been:
Net investment loss per share ($0.28)
Ratios (to average net assets):
Expenses 3.45%t
Net investment loss (3.04%)t
t Computed on an annualized basis
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(CONTINUED)
<TABLE>
<CAPTION>
Tax-Sensitive Equity Fund
For the Period
January 2, 1996
(commencement of
investment operations)
to September 30, 1996
------------------------
<S> <C>
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income * 0.28
Net realized and unrealized gain (loss) 3.50
------------------------
Total from investment operations 3.78
------------------------
Less distributions declared to shareholders
From net investment income (0.18)
------------------------
Total distributions declared to shareholders (0.18)
------------------------
Net asset value - end of period $23.60
========================
Total return 18.97%
Net assets at end of period (000 omitted) $2,843
Ratios (to average net assets)/Supplemental Data
Expenses * 0.00%t
Net investment income * 2.27%t
Portfolio turnover 17%
Average broker commission paid per share $0.0419
* The investment adviser voluntarily did not impose its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
undertaken, the net investment income per share and the ratios would have been:
Net investment loss per share ($0.36)
Ratios (to average net assets):
Expenses 5.15%t
Net investment loss (2.88%t
t Computed on an annualized basis
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Tax-Sensitive Funds
The Tax-Sensitive Funds are designed for investors in the upper federal
income tax brackets who seek the highest long-term after-tax total return.
Taxable dividends from any source, other than long-term capital gains,
distributed to individuals by mutual funds are currently taxed at federal income
tax rates of up to 39.6%, and the effective tax rate may be higher due to
limitations at higher income levels on allowable deductions and exemptions.
Long-term capital gains distributed to individuals by mutual funds are currently
taxed at federal tax rates of up to 28%. Taxable dividends from any source,
including long-term capital gains, distributed to corporations by mutual funds
are currently taxed at federal income tax rates of up to 35%. Additionally,
state taxes on mutual fund distributions reduce after-tax returns.
The Tax-Sensitive Funds employ various techniques to seek the highest
long-term total return after considering the impact of federal and state income
taxes paid by shareholders on the Funds' distributions.
o The Tax-Sensitive Funds seek to minimize, to the
extent practicable, taxable dividend income by emphasizing securities with
low dividend yields and minimizing investments in income producing
obligations. The Tax-Sensitive Funds also intend to be substantially fully
invested in equity investments.
o When selling portfolio securities, each Tax-Sensitive Fund will generally
select the highest cost shares of the specific security (and/or, if gains
will be realized, shares that will produce long-term capital gains) in
order to reduce, to the extent practicable, the realization of capital
gains, particularly short-term capital gains. Additionally, each
Tax-Sensitive Fund may, in furtherance of its investment objective, sell
portfolio securities in order to realize capital losses. Realized capital
losses can be used to offset realized capital gains, thus reducing the
amount of capital gains a Fund will distribute.
o The Tax-Sensitive Funds intend to have relatively low annual portfolio
turnover rates under normal circumstances. For taxpayers in the highest tax
brackets, ordinary income is taxed at a higher tax rate than capital gains
on securities held for more than one year ("long-term capital gains").
Ordinary income includes dividends from a Fund's net investment income and
net short-term capital gains. Net long-term capital gains realized and
distributed by the Tax-Sensitive Funds are treated by shareholders as
long-term capital gains for federal income tax purposes. Therefore, each
Tax-Sensitive Fund intends, when practicable and prudent, to hold
appreciated portfolio securities for more than one year in order to reduce
the realization and, therefore, the distribution to shareholders of
short-term capital gains which are taxable to them as ordinary income.
Although the Tax-Sensitive Funds expect that they will generally use some
or all of the foregoing management techniques in considering the impact of
federal and state income taxes on a shareholder's investment returns, portfolio
management decisions may be made based on other criteria in particular cases,
where warranted by actual or anticipated economic, market or issuer-specific
<PAGE>
developments and the Tax-Sensitive Funds may from time to time employ investment
management techniques that produce taxable ordinary income. For example, a
particular security may be sold, even though a Fund may realize a short-term
capital gain, if the value of that security is believed to have peaked or is
anticipated to decline before the Fund would have held it for the long-term
holding period. Similarly, a Fund may from time to time be required to sell
securities it would otherwise have continued to hold in order to generate cash
to pay expenses or satisfy shareholder redemption requests. Further, certain
equity securities and debt obligations in which the Tax-Sensitive Funds will
invest will produce ordinary taxable income on a regular basis.
While attempting to reduce the impact of federal and state income taxes
paid by shareholders on Fund distributions, each Tax-Sensitive Fund will follow
a disciplined investment strategy, emphasizing stocks that the Adviser believes
to offer above average potential for capital growth while offering low dividend
yields. Although the precise application of the discipline will vary according
to market conditions, the Adviser intends to use statistical modeling techniques
that utilize stock specific factors, such as current price earnings ratios,
stability of earnings growth, forecasted changes in earnings growth, trends in
consensus analysts' estimates, and measures of earnings results relative to
expectations, to identify equity securities that are attractive as purchase
candidates. Once identified, these securities will be subject to further
fundamental analysis by the Adviser's professional staff before they are
included in a Fund's holdings. Securities selected for inclusion in a Fund's
portfolio will represent various industries and sectors.
Standish Tax-Sensitive Equity Fund
Investment Objective. The Equity Fund seeks to maximize after-tax total
return, consisting of long-term growth of capital with nominal current income,
through investment primarily in equity securities of companies that appear to be
undervalued.
Investment Policies. Under normal circumstances, at least 80% of the Equity
Fund's total assets are invested in equity and equity-related securities, such
as common stocks and preferred stocks. The Equity Fund may invest in equity
securities of foreign issuers that are listed on a U.S. securities exchange or
traded in the U.S. over-the-counter market, but will not invest more than 10% of
its total assets in such securities that are not so listed or traded. The Fund
currently intends to limit its investments in foreign securities to those that
are denominated or quoted in U.S. dollars.
Although the Equity Fund will prefer long-term capital gains to taxable
dividend income and interest income, the Fund may to a limited extent invest in
debt securities and preferred stocks that are convertible into, or exchangeable
for, common stocks. Generally, such securities will be rated, at the time of
investment, Aaa, Aa or A by Moody's or AAA, AA or A by Standard & Poor's or, if
not rated, are determined by the Adviser to be of comparable credit quality. Up
to 5% of the Fund's total assets invested in convertible debt securities and
preferred stocks may be rated, at the time of investment, Baa by Moody's or BBB
by Standard & Poor's or, if not rated, determined by the Adviser to be of
comparable credit quality. As a temporary matter and for defensive purposes, the
<PAGE>
Fund may purchase investment grade short-term debt securities, the amount of
which will depend on market conditions and the needs of the Fund. The Fund will
attempt to reduce risk by diversifying its investments within the investment
policy set forth above.
The Equity Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific equity market movements and currency exchange rate risks) or to seek
to enhance potential gain. Such strategies and techniques are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing its investment objective, the Equity Fund may:
(i) purchase and write (sell) put and call options on securities, equity indices
and other financial instruments; (ii) purchase and sell financial futures
contracts on U.S. equity indices and options thereon; (iii) enter into
repurchase agreements; (iv) enter into various currency transactions, such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (the Fund has no current intention to
engage in such transations); and (v) make short sales. These techniques may
produce taxable ordinary income and/or short-term or long-term capital gains.
Although the Fund does not normally invest in equity securities that are
restricted as to disposition by federal securities laws or are otherwise
illiquid, the Fund may so invest up to 15% of its net assets when, in the
opinion of the Adviser, investment opportunities presented by such securities
are particularly attractive. For further information concerning the securities
in which the Equity Fund may invest and the investment strategies and techniques
it may employ, see "Risk Factors, Suitability and Other Investment Practices and
Policies" below in this Prospectus.
Standish Small Cap Tax-Sensitive Equity Fund
Investment Objective. The Small Cap Fund seeks to maximize after-tax total
return, consisting of long-term growth of capital with nominal current income,
through investment primarily in equity securities of small capitalization
companies that appear to be undervalued.
Investment Policies. Under normal circumstances, at least 80% of the Small
Cap Fund's total assets are invested in equity and equity-related securities
(such as common stocks, preferred stocks and options, futures and other
strategic transactions based on common stocks) of small capitalization
companies. The Fund invests in publicly traded securities, including securities
issued in initial public offerings. The Fund may invest up to 15% of its total
assets in foreign equity securities, including securities of foreign issuers
that are listed on a U.S. exchange or traded in the U.S. over-the-counter
market. The Fund currently intends to limit its investments in foreign
securities to those that are denominated or quoted in U.S. dollars. As a
temporary matter and for defensive purposes, the Fund may purchase investment
grade short-term debt securities, the amount of which will depend on market
conditions and the needs of the Fund.
The common stocks of small growth capitalization in which the Small Cap
Fund invests have market capitalizations up to and including $700 million.
Market capitalization is determined by multiplying the number of fully diluted
<PAGE>
equity shares by the current market price per share. Morningstar Mutual Funds, a
leading mutual fund monitoring service, includes in the small-cap category all
funds that invest in companies with median market capitalizations of less than
$1 billion. The Fund expects to emphasize investments in companies involved with
value added products or services in expanding industries. At times, particularly
when the Adviser believes that securities of small capitalization companies are
overvalued, the Fund's portfolio may include securities of larger, more mature
companies, provided that the value of the securities of such larger, more mature
companies shall not exceed 20% of the Fund's total assets. The Fund will attempt
to reduce risk by diversifying its investments within the investment policy set
forth above.
The Small Cap Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific equity market movements and currency exchange rate risks) or to seek
to enhance potential gain. Such strategies and techniques are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing its investment objective, the Small Cap Fund
may: (i) purchase and write (sell) put and call options on securities, equity
indices and other financial instruments; (ii) purchase and sell financial
futures contracts on U.S. equity indices and options thereon; (iii) enter into
repurchase agreements; (iv) enter into various currency transactions, such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (the Fund has no current intention to
engage in such transactions); and (v) make short sales. These techniques may
produce taxable ordinary income and/or short-term or long-term capital gains.
Although the Fund does not normally invest in equity securities that are
restricted as to disposition by federal securities laws or are otherwise
illiquid, the Fund may so invest up to 15% of its net assets when, in the
opinion of the Adviser, investment opportunities presented by such securities
are particularly attractive. For further information concerning the securities
in which the Small Cap Fund may invest and the investment strategies and
techniques it may employ, see "Risk Factors, Suitability and Other Investment
Practices and Policies" below in this Prospectus.
Standish Intermediate Tax Exempt Bond Fund
Investment Objective. The Tax Exempt Fund seeks to provide a high level of
interest income exempt from federal income taxes, while seeking preservation of
shareholders' capital, through investing the Fund's assets primarily in
investment grade intermediate-term municipal securities. The investment
objective of the Fund is a fundamental policy that may not be changed without
shareholder approval.
Investment Policies. The Tax Exempt Fund seeks to achieve its objective by
investing in a diversified portfolio of municipal securities which are
obligations issued by or on behalf of states, territories and possessions
(including Puerto Rico, the U.S. Virgin Islands and Guam) of the United States,
and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest on which is, in the opinion of
bond counsel to the issuer, excluded from gross income for federal income tax
purposes.
<PAGE>
Although the Tax Exempt Fund invests primarily in investment grade
municipal bonds of any maturity, it intends to emphasize high quality
intermediate-term municipal bonds. The Fund's dollar-weighted average portfolio
maturity is normally in a range of three to ten years. However, the Fund may
purchase individual securities with effective maturities which are outside of
this range. A mutual fund with an average maturity longer than that of the Fund
will tend to have a higher yield, but will generally exhibit greater share price
volatility. Conversely, a mutual fund with a shorter maturity will generally
have a lower yield, but will generally offer more price stability. The Fund's
emphasis on high quality securities is expected to reduce its share price
volatility. Because the Fund holds investment grade municipal securities, the
income earned on shares of the Fund will tend to be less than it might be on a
portfolio emphasizing lower quality securities.
The Tax Exempt Fund may invest, without percentage limitations, in
municipal bonds rated at the time of purchase within one of the four highest
municipal bond ratings by Moody's (Aaa, Aa, A, Baa), Standard & Poor's (AAA, AA,
A, BBB) or Fitch (AAA, AA, A, BBB) or, if unrated, determined by the Adviser to
be of comparable credit quality. The Fund may invest in municipal notes rated
MIG-1 or MIG-2 by Moody's or at least SP-1 or SP-2 by Standard & Poor's or in
municipal notes that are not rated, provided that, in the opinion of the
Adviser, such notes are of a comparable credit quality. See "Securities Ratings"
below for a discussion of securities ratings generally and how these policies
apply to certain types of rated securities.
Although as a matter of fundamental policy it is authorized to do so, the
Tax Exempt Fund does not expect to invest more than 25% of its total assets in
any one of the following sectors of the municipal securities market: hospitals,
ports, airports, colleges and universities, turnpikes and toll roads, housing
bonds, lease rental bonds, industrial revenue bonds or pollution control bonds.
For the purposes of this limitation, securities whose credit is enhanced by bond
insurance, letters of credit or other means are not considered to belong to a
particular sector.
As a fundamental policy, at least 80% of the Tax Exempt Fund's net assets
will normally be invested in tax-exempt municipal securities. Municipal
securities pay interest income that is excluded from gross income for federal
income tax purposes. Also as a fundamental policy, during normal market
conditions, at least 65% of the Fund's net assets will be invested in municipal
bonds. There may be certain occasions, however, during which more than 20% of
the Tax Exempt Fund's net assets may be invested in taxable instruments. In
unusual circumstances, as a temporary defensive measure, the Fund may invest in
taxable, fixed income obligations when the Adviser believes that market
conditions, such as rising interest rates or other adverse factors, would cause
serious erosion of portfolio value. In addition, the Fund may also invest up to
20% of its net assets in taxable, fixed income obligations when there is a yield
disparity between taxable and municipal securities on an after-tax basis which
is favorable for taxable investments. The Fund's taxable investments will
generally be of comparable credit quality and maturity to the municipal
<PAGE>
securities in which the Fund invests and will be limited primarily to
obligations issued or guaranteed by the U.S. Government, its agencies,
instrumentalities or authorities; investment grade corporate debt securities;
prime commercial paper; certain certificates of deposit of domestic banks; and
repurchase agreements, secured by U.S. Government securities, with maturities
not in excess of seven days. To the extent that income dividends include income
from taxable sources, a portion of a shareholder's dividend income will be
taxable. See "Federal Income Taxes" in this Prospectus.
The Tax Exempt Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific fixed income market movements and interest rate risks), to seek to
manage the effective maturity or duration of fixed-income portfolio securities,
or to enhance potential gain. Such strategies and techniques are generally
accepted as part of modern portfolio management and are regularly utilized by
many mutual funds. In the course of pursuing its investment objective, the Tax
Exempt Fund may: (i) purchase and write (sell) put and call options on
securities, fixed-income indices and other financial instruments; (ii) purchase
and sell financial futures contracts and options thereon; (iii) enter into
repurchase agreements; (iv) purchase securities on a forward commitment, when
issued or delayed delivery basis; and (v) enter into various interest rate
transactions, such as swaps, caps, floors and collars. The Fund may also invest
up to 15% of its net assets in the aggregate of restricted securities, for which
there are no readily available marked quotations and other illiquid securities.
For further information concerning the securities in which the Tax Exempt Fund
may invest and the investment strategies and techniques it may employ, see "Risk
Factors, Suitability and Other Investment Practices and Policies" below in this
Prospectus.
RISK FACTORS, SUITABILITY AND
OTHER INVESTMENT PRACTICES
Because each Fund owns different types of investments, its performance is
affected by a variety of factors. The value of a Fund's investments and the
income they generate will vary from day to day, and generally reflect interest
rates, market conditions, and other company, political and economic news. When
you sell your shares, they may be worth more or less than what you paid for
them. Because of the uncertainty inherent in all investments, no assurance can
be given that any Fund will achieve its investment objective.
Investing in Small Capitalization Companies
The Small Cap Fund will emphasize, and the Equity Fund may invest in,
smaller, lesser-known companies. Although investments in securities of small
capitalization companies may present greater opportunities for growth, they also
involve greater risks than are customarily associated with investments in
larger, more mature, better known companies. Small capitalization securities may
be subject to more volatile market movements than larger capitalization
securities, such as those included in the S&P 500 Index. Small capitalization
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. Small
capitalization securities may be traded only in the over-the-counter market or
on a regional securities exchange and may not be traded daily or in the volume
typical of trading on a national securities exchange. As a result, the
disposition by a Fund of portfolio securities to meet redemptions or otherwise
may require the Fund to sell securities at a discount from market prices, over a
longer period of time or during periods when disposition is not desirable.
<PAGE>
The Small Cap and Equity Funds may participate in initial public offerings
for previously privately held companies whose securities are expected to be
liquid after the offering. Such companies may have a more limited operating
history and/or less experienced management than other companies in which the
Funds invest, which may pose additional risks. The Small Cap Fund will
participate in initial public offerings of companies that are expected to have
market capitalizations of up to $700 million after consummation of the offering.
Foreign Securities
Although the Equity Fund intends to invest primarily in equity securities
of U.S. issuers, the Equity Fund may invest (without limitation) in equity
securities of issuers located in any foreign country, which securities are
listed on a U.S. exchange or traded in the U.S. over-the-counter market. The
Equity Fund will not invest more than 10% of its total assets in foreign equity
securities that are not so listed or traded. Small Cap Fund may invest up to 15%
of its total assets in equity securities of issuers located in any foreign
country, including but, not limited to, securities of foreign issuers that are
listed on a U.S. exchange or traded in the U.S. over-the-counter market. The
Tax-Sensitive Funds may invest in sponsored and unsponsored American Depositary
Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs). Securities of foreign issuers, including emerging markets
companies, will be selected for investment by the Equity and Small Cap Funds if
the Adviser believes these securities will offer above average capital growth
potential. The Tax-Sensitive Funds currently intend to limit their investments
in foreign securities to those that are quoted or denominated in U.S. dollars.
Investing in securities of foreign companies and securities denominated in
foreign currencies or utilizing foreign currency transactions involve certain
risks of political, economic and legal conditions and developments not typically
associated with investing in securities of U.S. companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), civil disorder,
expropriation of assets of companies in which a Fund invests, nationalization of
such companies, imposition of withholding or other foreign taxes on dividend or
interest payments (or, in some cases, capital gains), and possible difficulty in
obtaining and enforcing judgments against a foreign issuer. Also, foreign
securities may not be as liquid and may be more volatile than comparable
domestic securities. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The Funds, in connection with purchases and
sales of foreign securities, other than securities denominated in U.S. dollars,
will incur transaction costs in converting currencies. Brokerage commissions in
foreign countries are generally fixed, and other transaction costs related to
securities exchanges are generally higher than in the U.S. Most foreign
<PAGE>
securities of the Funds are held by foreign subcustodians that satisfy certain
eligibility requirements. Foreign custodial costs relating to the Funds'
portfolio securities are higher than domestic custodial costs. In addition,
foreign settlement of securities transactions is subject to local law and custom
that is not, generally, as well established or as reliable as U.S. regulation
and custom applicable to settlements of securities transactions and,
accordingly, there is generally perceived to be a greater risk of loss in
connection with securities transactions in many foreign countries. Fixed
commissions on foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Finally, transactions in equity securities
effected on some foreign stock exchanges, and consequently the Funds'
investments on such exchanges, may not be settled promptly and therefore such
investments may be less liquid and subject to the risk of fluctuating currency
exchange rates pending settlement. The Equity Fund's policy of investing no more
than 10% of its total assets in foreign securities that are not listed on a U.S.
stock exchange or traded in the U.S. over-the-counter market and the Small Cap
Fund's policy of investing no more than 15% of its total assets in foreign
equity securities are intended to limit each Fund's exposure to the risks
associated with investments in foreign securities.
Investment by the Tax-Sensitive Funds in securities of issuers in emerging
markets involves risks in addition to those discussed above. Many emerging
market countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries. Moreover,
the economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Municipal Securities
Municipal securities in which the Tax Exempt Fund may invest include debt
obligations issued to obtain funds for various public purposes, including the
construction of a variety of public facilities such as bridges, highways,
housing, hospitals, mass transportation, schools, streets and water and sewer
works. Other public purposes for which municipal securities or bonds may be
issued include the refunding of outstanding obligations, obtaining funds for
general operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial revenue
bonds are, or have been under prior tax law, issued by or on behalf of public
authorities to obtain funds to provide privately operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity, or sewage or solid
waste disposal. The interest on certain such bonds (and the Fund's distributions
to its shareholders from such interest) may be a tax preference item for
purposes of the federal alternative minimum tax: these bonds are sometimes
referred to as "AMT Bonds" and are treated as taxable obligations for the
purposes of the Fund's policies. See "Federal Income Taxes" in this Prospectus.
Municipal bonds are issued in order to meet long-term capital needs and
generally have maturities of more than one year when issued. The two principal
<PAGE>
classifications of municipal bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the pledge of the municipality's faith,
credit and taxing power for the payment of principal and interest, and are
considered the safest type of municipal bond. Revenue bonds are payable only
from the revenues derived from a particular project or facility and are
generally dependent solely on a specific revenue source. Industrial revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user. Assessment bonds, which are issued by a specially created district
or project area which levies a tax (generally on its taxable property) to pay
for an improvement or project, may be considered to belong to either category.
There are, of course, other variations in the safety of municipal bonds, both
within a particular classification and between classifications, depending on
numerous factors. The Tax Exempt Fund is not limited with respect to the
categories of municipal securities it may acquire.
Municipal securities also include municipal notes, which are generally
issued to satisfy short-term capital needs and have maturities of one year or
less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. The Fund may also
invest in variable rate demand instruments, which are securities with long
stated maturities, but demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
Real Estate Investment Trusts
Each Tax-Sensitive Fund may invest in shares of real estate investment
trusts ("REITs"), which are pooled investment vehicles that invest in real
estate or real estate loans or interests. Investing in REITs involves risks
similar to those associated with investing in equity securities of small
capitalization companies as described above. REITs are dependent upon management
skills, are not diversified, and are subject to risks of project financing,
default by borrowers, self-liquidation, and the possibility of failing to
qualify for the exemption from taxation under the Internal Revenue Code.
Securities Ratings
In the case of a security proposed to be purchased by a Fund that is rated
differently by two or more rating services, the higher rating is used for
purposes of the Funds' rating policies; provided, however, all securities
purchased must also meet the credit standards of the Adviser. Securities rated
Baa by Moody's or BBB by Standard & Poor's and Fitch and unrated securities of
equivalent credit quality are considered medium grade obligations with
speculative characteristics. Adverse changes in economic conditions or other
circumstances are more likely to weaken the issuer's capacity to pay interest
and repay principal on these securities than is the case for issuers of higher
<PAGE>
rated securities. Prior to acquiring unrated securities for a Fund's portfolio,
the Adviser considers the terms of the offering and various other factors in
order to initially determine whether the securities are consistent with the
Fund's investment objective and policies and thereafter to determine the
issuer's comparative credit rating. In the event the rating on a security held
in a Fund's portfolio is downgraded by a rating service, such action will be
considered by the Adviser in its evaluation of the overall investment merits of
that security, but will not necessarily result in the sale of the security.
Temporary and Short-Term Investments
Notwithstanding a Fund's investment objective, each Fund may on occasion,
for temporary defensive purposes to preserve capital or to meet redemption
requests, hold part or all of its assets in cash and investment grade money
market instruments (i.e., securities with maturities of less than one year) and
short-term debt securities (i.e., securities with maturities of one to three
years). Each Fund may also invest uncommitted cash and cash needed to maintain
liquidity for redemptions in investment grade money market instruments and
short-term debt securities. Investments in such securities will be limited to
20% of a Fund's total assets unless the Fund is in a temporary defensive
position.
The money market instruments and short-term debt securities in which the
Funds may invest consist of obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; instruments
(including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances) of U.S. banks and foreign banks (the
Tax-Sensitive Funds only); repurchase agreements; and prime commercial paper of
U.S. companies and foreign companies (the Tax-Sensitive Funds only).
The Funds' investments in money market securities will be rated, at the
time of investment, P-1 by Moody's or A-1 by Standard & Poor's. At least 95% of
each Tax-Sensitive Fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the Adviser. Up to 5% of each Tax-Sensitive Fund's total assets
invested in short-term debt securities may be invested in securities which are
rated Baa by Moody's or BBB by Standard & Poor's or, if not rated, determined to
be of comparable credit quality by the Adviser.
The Tax Exempt Fund's investments in taxable securities, such as money
market and short-term debt securities, will generally be of comparable credit
quality and maturity to the municipal securities in the Tax Exempt Fund invests.
To the extent that income dividends distributed by the Tax Exempt Fund include
income from taxable sources, a portion of a shareholder's dividend income will
be taxable. See "Federal Income Taxes."
Each Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Funds will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into with commercial banks, brokers and dealers
considered creditworthy by the Adviser. If the other party or "seller" of a
repurchase agreement defaults, a Fund might suffer a loss to the extent that the
proceeds from the sale of the underlying securities and other collateral held by
the Fund in connection with the related repurchase agreement are less than the
<PAGE>
repurchase price. In addition, in the event of bankruptcy of the seller or
failure of the seller to repurchase the securities as agreed, a Fund could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement.
Strategic and Derivative Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates (Equity Fund and Small Cap Fund only), and broad
or specific market movements), to enhance potential gain or, with respect to the
Tax Exempt Fund, to manage the effective maturity or duration of fixed-income
portfolio securities. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Funds may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing their respective investment objectives, the Funds
may purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices (Equity Fund and Small Cap Fund only),
fixed-income indices (Tax Exempt Fund only) and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars. In
addition, Equity Fund and Small Cap Fund may enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures. The risks
associated with the Funds' transactions in options, futures and other types of
derivative securities including swaps may include some or all of the following:
market risk, leverage and volatility risk, correlation risk, credit risk and
liquidity and valuation risk. These investment techniques are referred to herein
as "Strategic Transactions." Strategic Transactions may be used in an attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets
fluctuations, currency exchange rate fluctuations (Equity Fund and Small Cap
Fund only), to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective duration or maturity of the Tax Exempt Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although the Funds will attempt to limit their net loss exposure
resulting from Strategic Transactions entered into for such purposes to not more
than 3% of their respective net assets at any one time and, to the extent
necessary, the Funds will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating a Fund's
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that the Equity Fund is underweighted in cyclical stocks and
<PAGE>
overweighted in consumer stocks, the Equity Fund may buy a cyclical index call
option and sell a cyclical index put option and sell a consumer index call
option and buy a consumer index put option. Under such circumstances, any
unrealized loss in the cyclical position would be netted against any unrealized
gain in the consumer position (and vice versa) for purposes of calculating the
Fund's net loss exposure. The ability of the Funds to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Funds will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Funds' activities involving Strategic
Transactions may be limited by the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company and by the Funds' tax-related objectives due to the fact that
Strategic Transactions may produce taxable income or short-term capital gain in
many cases and the applicable tax rules may make it more difficult to control
the timing of gains or losses.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Funds, force the purchase or sale, respectively of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Funds can realize on their respective investments or cause the
Funds to hold a security they might otherwise sell. The use of currency
transactions by the Equity Fund and Small Cap Fund can result in these Funds
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of a Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. The
writing of options could significantly increase a Fund's portfolio turnover rate
and, therefore, associated brokerage commissions or spreads. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, these transactions tend to limit any potential gain which might
result from an increase in value of such position. The loss incurred by the
<PAGE>
Funds in writing options on futures and entering into futures transactions is
potentially unlimited, however as described above, each Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Further information concerning the Funds'
Strategic Transactions is set forth in the Statement of Additional Information.
Short-Selling
The Tax-Sensitive Funds may make short sales, which are transactions in
which a Fund sells a security it does not own in anticipation of a decline in
the market value of that security or in order to defer the realization of gain
or loss for federal income tax purposes on a similar security previously sold by
the Fund. To complete a short sale transaction, a Fund must borrow the security
sold short in order to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay to the lender amounts equal to any dividends or interest
which accrue during the period of the loan. To borrow the security, the Fund may
also be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until a Fund replaces a borrowed security in connection with a short sale,
the Fund will: (a) maintain daily a segregated account not with the broker,
containing cash or U.S. Government securities, at such a level that the amount
deposited in the account plus the amount deposited with the broker as collateral
will equal the current value of the security sold short or (b) otherwise cover
its short position.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. A Fund will realize a gain if the security
declines in price between those dates by an amount greater than premium and
transaction costs. This result is the opposite of what one would expect from a
cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium or
amounts in lieu of dividends or interest that the Fund may be required to pay in
connection with a short sale.
A Fund's loss on a short sale as a result of an increase in the price of a
security sold short is potentially unlimited. The Equity and Small Cap Funds may
purchase call options to provide a hedge against an increase in the price of a
security sold short. When a Fund purchases a call option it must pay a premium
to the person writing the option and a commission to the broker selling the
option. If the option is exercised by the Fund, the premium and the commission
paid may be more than the amount of the brokerage commission charged if the
security were to be purchased directly. See "Strategic and Derivative
Transactions" above.
<PAGE>
The Tax-Sensitive Funds anticipate that the frequency of short sales will
vary substantially in different periods, and they do not intend that any
specified portion of their assets, as a matter of practice, will be in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of the respective Fund's net assets.
In addition to the short sales discussed above, the Tax-Sensitive Funds may
make short sales "against-the-box." A short sale is against-the-box if the Fund,
at all times when a short position is open, owns an equal amount of securities
sold short or securities convertible into or exchangeable, without payment of
any further consideration, for an equal amount of the securities of the same
issuer as the securities sold short. The proceeds of the short sale are held by
a broker until the settlement date at which time the Fund delivers the security
to close the short position. The Fund receives the net proceeds from the short
sale.
When-Issued Securities and "Delayed Delivery" Securities
The Tax Exempt Fund may commit up to 40% of its total assets to purchase
securities on a "when-issued" or "delayed delivery" basis, but will only do so
with the intention of actually acquiring the securities. The payment obligation
and the interest rate on these securities will be fixed at the time the Fund
enters into the commitment, but no income will accrue to the Fund until the
securities are delivered and paid for. Unless the Fund has entered into an
offsetting agreement to sell the securities, cash or liquid securities equal to
the amount of the Fund's commitment will be segregated with the Fund's custodian
to secure the Fund's obligation and to ensure that it is not leveraged. The
market value of the securities when they are delivered may be less than the
amount paid by the Fund. The Fund may sell portfolio securities on a delayed
delivery basis. The market value of the securities when they are delivered may
be more than the amount to be received by the Fund.
Stand-By Commitments
To facilitate liquidity, the Tax Exempt Fund may enter into "stand-by
commitments" permitting it to resell municipal securities to the original seller
at a specified price. Stand-by commitments generally involve no additional cost
to the Fund, but may, however, reduce the yields available on securities subject
to stand-by commitments.
Third Party Puts
The Tax Exempt Fund may purchase long-term fixed rate bonds which have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender or put its bonds to the institution
and receive the face value thereof. These third party puts are available in
several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features. The financial institution
granting the put option does not provide credit enhancement, and typically, if
there is a default on or significant downgrading of the bond, or a loss of its
tax-exempt status, the put option will terminate automatically and the risk to
the Fund will be that of holding a long-term bond. These third party puts will
not be considered to shorten the Fund's maturity.
<PAGE>
Illiquid and Restricted Securities
The Equity and Small Cap Funds will normally invest in publicly traded
equity securities and, excluding equity securities received as distributions on
portfolio securities, will not normally hold equity securities which are
illiquid and securities that are subject to legal or contractual restrictions on
resale (i.e., private placements), including securities eligible for resale in
reliance on Rule 144A under the Securities Act of 1933. Each Fund, including the
Tax Exempt Fund, may however invest up to 15% of its net assets in illiquid and
restricted securities when, in the opinion of the Adviser, investment
opportunities presented by such securities are particularly attractive. Illiquid
investments include securities that are not readily marketable, repurchase
agreements maturing in more than seven days, time deposits with a notice or
demand period of more than seven days, certain over-the-counter options, and
restricted securities. The purchase price and subsequent valuation of restricted
and illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market exists.
Market Changes
Each Fund's net asset value fluctuates as a result of changes in the market
value of portfolio securities. The value of equity securities will fluctuate as
a result of a variety of factors including, but not limited to, general
conditions in the equity markets and the issuer's earning prospects, perceived
value, dividend paying ability, growth rate, market position in the market in
which it operates, and level of financial leverage. Yields on debt securities
depend on a variety of factors, such as general conditions in the money and bond
markets, and the size, maturity and rating of a particular issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to greater potential capital appreciation and depreciation.
The market prices of debt securities usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise. Changes by recognized rating services in their ratings of debt securities,
including municipal securities, and in the ability of an issuer to make payments
of interest and repayments of principal will also affect the value of these
investments. Changes in the value of debt securities held in a Fund's portfolio
will not affect cash income derived from those securities but will affect a
Fund's net asset value.
Portfolio Turnover
It is not the policy of any Fund to purchase or sell securities for trading
purposes, and the Tax-Sensitive Funds intend to have low annual portfolio
turnover rates in order to reduce the realization and, therefore, the
distribution to shareholders of capital gains. The Tax Exempt Fund places no
restrictions on portfolio turnover. Notwithstanding the foregoing with respect
to the Tax-Sensitive Funds, a Fund may generally change its portfolio
investments at any time in accordance with the Adviser's appraisal of factors
affecting any particular issuer or market, or the economy in general. The Funds'
portfolio turnover rates are listed in the section captioned "Financial
Highlights." A rate of turnover of 100% would occur, for example, if the value
of the lesser of purchases and sales of portfolio securities for a particular
<PAGE>
year equaled the average monthly value of portfolio securities owned during the
year (excluding securities with a maturity date of one year or less at the date
of acquisition). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of transaction costs which must be borne directly
by a Fund and thus indirectly by its shareholders. It may also result in the
realization of larger amounts of short-term capital gains, a Fund's
distributions of which are taxable to shareholders as ordinary income, and may
under certain circumstances make it more difficult for the Fund to qualify as a
regulated investment company under the Internal Revenue Code.
Investment Restrictions and Diversification
Except as otherwise noted, the foregoing investment policies are
non-fundamental policies which may be changed by the Trust's Board of Trustees
without the approval of shareholders of the affected Fund. The investment
objectives of each of the Equity Fund and the Small Cap Fund are
non-fundamental. If there is a change in either of these Fund's investment
objective, shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial positions and needs. Each of
the Funds has adopted certain fundamental policies that may not be changed
without the approval of their respective shareholders. See "Investment
Restrictions" in the combined Statement of Additional Information.
Each Fund is diversified, as defined in the Investment Company Act of 1940.
As such, each Fund has a fundamental policy that limits its investments so that,
with respect to 75% of its total assets (i) no more than 5% of the Fund's total
assets will be invested in the securities of a single issuer and (ii) each Fund
will purchase no more than 10% of the outstanding voting securities of a single
issuer. These limitations do not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, repurchase agreements
collateralized by U.S. Government securities or investments in other registered
investment companies.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of a Fund's assets will not constitute a violation of the
restriction.
Other Investment Companies
Each of the Equity Fund and the Small Cap Fund may invest up to 10% of its
total assets in the securities of other investment companies but may not invest
more than 5% of its total assets in the securities of any one investment company
or acquire more than 3% of the voting securities of any other investment
company. For example, the Equity Fund may invest in Standard & Poor's Depositary
Receipts (commonly referred to as "Spiders"), which are exchange-traded shares
of a closed-end investment company that are designed to replicate the price
performance and dividend yield of the Standard & Poor's 500 Composite Stock
Price Index. The Funds will indirectly bear their proportionate share of any
management fees and other expenses paid by investment companies in which they
invest in addition to the advisory and administration fees paid by the Funds.
<PAGE>
Each of the Equity Fund and the Small Cap Fund is authorized to invest all
of its assets in the securities of a single open-end registered investment
company (a "pooled fund") having substantially identical investment objectives,
policies and restrictions as such Fund, notwithstanding any other investment
restriction or policy. Such a structure is commonly referred to as
"master/feeder." If authorized by the Trustees and subject to shareholder
approval (if then required by applicable law), a Fund would seek to achieve its
investment objective by investing in a pooled fund which would invest in a
portfolio of securities that complies with the Fund's investment objective,
policies and restrictions. The Trustees currently do not intend to authorize
investing in a pooled fund in connection with a master/feeder structure.
Suitability
None of the Funds is intended to provide an investment program meeting all
of the requirements of an investor. Notwithstanding each Fund's ability to
spread risk by holding securities of a number of portfolio companies,
shareholders should be able and prepared to bear the risk of investment losses
which may accompany the investments contemplated by the Funds.
Because the Tax-Sensitive Funds are managed to seek the highest long-term
total return after considering the impact of federal and state income taxes paid
by shareholders on the Funds' distributions and the Tax Exempt Fund seeks to
provide a high level of interest income exempt from federal income taxes, the
Funds may not be suitable investments for non-taxable investors or persons
investing through tax deferred vehicles (e.g., individual retirement accounts
(IRAs) or other qualified pension and retirement plans).
CALCULATION OF PERFORMANCE DATA
From time to time the Funds may advertise their total returns and the Tax
Exempt Fund may also advertise its yield and tax equivalent yield. Total return,
yield and tax equivalent yield figures are based on historical earnings and are
not intended to indicate future performance. The "total return" of a Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Tax Exempt Fund is computed by dividing the net
investment income per share earned during the period stated in the advertisement
by the maximum offering price (net asset value) per share on the last day of the
period (using the average number of shares entitled to receive dividends). For
the purpose of determining net investment income, the calculation includes among
expenses of the Tax Exempt Fund all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated.
<PAGE>
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund, such as
the Tax Exempt Fund, which invests primarily in tax-exempt obligations. It is
computed by dividing the tax-exempt portion of the Tax Exempt Fund's yield
(calculated as indicated above) by one, minus a stated income tax rate and
adding the product to the taxable portion (if any) of the Tax Exempt Fund's
yield.
Taxable Equivalent Yield Table
Federal
Marginal Taxable Equivalent Rates Based on Tax-Exempt Yield of:
Tax Rate 4% 5% 6% 7% 8% 9% 10%
- - - - --------------------------------------------------------------------------------
31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
Each Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical cumulative
total returns, distribution returns, non-standardized yield (Tax Exempt Fund
only), results of actual or hypothetical investments, changes in dividends,
distributions or share values, or any graphic illustration of such data. From
time to time, each Fund may also compare its performance with that of other
mutual funds with similar investment objectives, to relevant indices, and to
performance rankings prepared by recognized mutual fund statistical services. In
addition, a Fund's performance may be compared to alternative investment or
savings vehicles and/or to indices or indicators of economic activity. This data
may cover any period of a Fund's operations and may or may not include the
impact of taxes or other factors.
The following table sets forth the historical total return performance of
all tax-sensitive components of fee paying, domestic equity portfolios under
discretionary management by the Adviser that have substantially similar
investment objectives, policies and strategies as the Equity Fund (the
"Tax-Sensitive Equity Components") as measured by the Standish, Ayer & Wood Tax
Sensitive Equity Composite (the "Composite"). As of December 31, 1996, the
Composite consisted of 24 Tax-Sensitive Equity Components representing
approximately $57.8 million in assets. The performance data of the Tax-Sensitive
Equity Components, as represented by the Composite, has been computed in
accordance with the SEC's standardized formula. Because the gross performance
data does not reflect the deduction of investment advisory fees attributable to
the Tax-Sensitive Equity Components, the net performance data may be more
relevant to potential investors in the Equity Fund in their analysis of the
historical experience of the Adviser in managing tax-sensitive components of
equity portfolios with investment objectives, policies and strategies
substantially similar to those of the Equity Fund. The performance of the
Tax-Sensitive Equity Components would be diminished if cash positions of the
related portfolios were allocated to the Tax-Sensitive Equity Components.
<PAGE>
STANDISH, AYER & WOOD TAX-SENSITIVE EQUITY COMPOSITE PERFORMANCE
Average Annual
Total Return For 6 Year
The Periods Ended Cumulative
December 31, 1996 Total Return
----------------- ------------
3 Years 5 Years
The Composite
Equal Weighted Gross 19.98% 17.45% 190.20%
Equal Weighted Net 19.47% 16.95% 181.50%
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
The Composite
- - - - -------------
Equal weighted
gross total
return -1.83% 32.23% 12.60% 14.94% -4.83% 38.60% 30.93%
Equal weighted
net total
return -2.33% 31.73% 12.10% 14.44% -5.33% 38.10% 30.43%
Size weighted
gross total
return -0.12% 32.16% 10.78% 14.44% -4.17% 38.18% 31.15%
Size weighted
net total
return -0.62% 31.66% 10.28% 13.94% -4.67% 37.68% 30.65%
The performance of the Tax-Sensitive Equity Components is not that of any
of the Funds, including the Equity Fund, and is not necessarily indicative of
any Fund's future results. Each Fund's actual total return may vary
significantly from the past and future performance of these Components. While
the Tax-Sensitive Equity Components incur inflows and outflows of cash from
clients, there can be no assurance that the continuous offering of the Fund's
shares and each Fund's obligation to redeem its shares will not impact the
Fund's performance. In the opinion of Adviser, so long as the Equity Fund has at
least $1.5 million in net assets, the relative difference in the size between
the Equity Fund and the Tax-Sensitive Equity Components should not affect the
relevance of the performance of the Tax-Sensitive Equity Components to a
potential investor in the Equity Fund. Investment returns and the net asset
value of shares of each Fund, including the Equity Fund, will fluctuate in
response to market and economic conditions as well as other factors and an
investment in a Fund involves the risk of loss.
STANDISH TAX-SENSITIVE EQUITY FUND PERFORMANCE
Total Return for the period January 2, 1996
(commencement of operations) through
December 31, 1996
-----------------
Equity Fund 30.61%1
- - - - ------
1 The Adviser voluntarily agreed not to impose its advisory fee and
reimbursed the Fund for its operating expenses during the period indicated. Had
these arrangements not been in effect, the Fund's total return would be lower.
Performance data is based on historical results and is not intended to indicate
future performance.
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each Fund will declare and distribute, at least annually, dividends from
short-term and long-term capital gains, if any, after reduction by capital
losses. The Tax-Sensitive Funds will declare and distribute, at least annually,
any dividends from net investment income. The Tax Exempt Fund will declare daily
and distribute monthly dividends from net investment income. Dividends from net
investment income and capital gains distributions, if any, are automatically
reinvested in additional shares of the appropriate Fund unless the shareholder
elects to receive them in cash. It is possible that a Fund may use equalization
tax accounting in furtherance of its tax objective, which may affect the amount,
timing and character of its distributions. See the Statement of Additional
Information for further information.
PURCHASE OF SHARES
Shares of the Funds may be purchased directly from the Principal
Underwriter, which offers shares of the Funds to the public on a continuous
basis. Shares are sold at the net asset value per share next computed after the
purchase order and payment for the shares is received in good order by the
Principal Underwriter or its agent and payment for the shares is received by the
Funds' custodian. Please see the Funds' account application or call the
Principal Underwriter for instructions on how to make payment of shares to the
Funds' custodian. Unless waived by the Funds, the minimum initial investment is
$100,000. Additional investments may be made in amounts of at least $10,000
($5,000 for the Tax Exempt Fund).
Shares of the Funds may also be purchased through securities dealers.
Orders for the purchase of Fund shares received by dealers by the close of
regular trading on the New York Stock Exchange on any business day and
transmitted to the Principal Underwriter by the close of its business day
(normally 4:00 p.m., New York time) will be effected as of the close of regular
trading on the New York Stock Exchange on that day, provided that payment for
the shares is also received by the Funds' custodian on that day. Otherwise,
orders will be effected at the net asset value per share determined on the next
business day. It is the responsibility of dealers to transmit orders so that
they will be received by the Principal Underwriter by the close of its business
day. Shares of the Funds purchased through dealers may be subject to transaction
fees, no part of which will be received by the Funds, the Principal Underwriter
or the Adviser.
Each Fund's net asset value per share is computed on each day on which the
New York Stock Exchange is open as of the close of regular trading (normally
4:00 p.m. New York time). The net asset value per share is calculated by
determining the value of all a Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Equity and other
taxable securities are valued at the last sales prices, on the valuation date,
on the exchange or national securities market on which they are primarily
traded. Equity and other taxable securities not listed on an exchange or
national securities market, or securities for which there are no reported
transactions, are valued at the last quoted bid prices. Municipal securities are
valued by the Adviser or by an independent pricing service approved by the
Trustees, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The Tax Exempt
Fund believes that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations of municipal
securities made by the Adviser or provided by such pricing service will be based
upon fair value determined on the basis of the factors listed above (which may
<PAGE>
also include use of yield equivalents or matrix pricing). Securities for which
quotations are not readily available and all other assets will be valued at fair
value as determined in good faith by the Adviser in accordance with procedures
approved by the Trustees. Money market instruments with less than sixty days
remaining to maturity when acquired by a Fund are valued on an amortized cost
basis. If a Fund acquires a money market instrument with more than sixty days
remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon its value on such date unless the Trustees determine during such sixty-day
period that amortized cost does not represent fair value. Additional information
concerning the Funds' valuation policies is contained in the Statement of
Additional Information.
Prospective investors should consider the tax implications of buying shares
of a Fund prior to an anticipated taxable dividend or capital gain distribution
from that Fund. A portion of the purchase price of such shares may be
attributable to the taxable income already earned by the Fund and/or net capital
gains already realized by the Fund that will be included in the anticipated
distribution. The distribution will, nevertheless, generally be taxable to the
investor even if it reduces the net asset value of the Fund's shares below the
investor's cost and economically represents a return of a portion of the
investor's purchase price.
In the sole discretion of the Adviser, each Fund may accept securities
instead of cash for the purchase of Fund shares. The Adviser will determine that
any securities acquired in this manner are consistent with the investment
objective, policies and restrictions of the particular Fund. The securities will
be valued in the manner stated above. The purchase of Fund shares for securities
instead of cash may cause an investor who contributes them to realize a taxable
gain or loss with respect to the securities transferred to the Fund.
Consequently, prospective investors should consult with their own tax advisers
before acquiring Fund shares in exchange for appreciated or depreciated
securities in order to evaluate fully the effect on their particular tax
situations.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of each Fund's shares, (ii) to reject purchase orders when in the best
interest of the particular Fund and (iii) to modify or eliminate the minimum
initial investment requirement in Fund shares. The Funds' investment minimums do
not apply to accounts for which the Adviser or any of its affiliates serves as
investment adviser or to employees of the Adviser or any of its affiliates or to
members of such persons' immediate families. The Funds' investment minimums
apply to the aggregate value invested in omnibus accounts rather than to the
investment of underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Funds may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Funds redeemed in an
<PAGE>
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter. Shares of a fund
purchased in an exchange transaction are sold at their net asset value next
determined after the exchange request is received by the Principal Underwriter
or its agent and payment for the shares is received by the fund into which your
shares are to be exchanged. Until receipt of the purchase price by the fund into
which your shares are to be exchanged (which may take up to three business
days), your money will not be invested. To obtain a current prospectus for any
of the other funds in the Standish, Ayer & Wood family of funds, please call the
Principal Underwriter at (800) 221-4795. Please consider the differences in
investment objectives and expenses of a fund as described in its prospectus
before making an exchange.
Written Exchanges
Shares of the Funds may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be available for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Funds' custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Funds may be redeemed by any of the methods described below
at the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
<PAGE>
Written Redemption
Shares of the Funds may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Funds' transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Funds may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
<PAGE>
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Funds' custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but none of the Funds nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Funds and the Funds' custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Funds employ reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that they reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor any of the Funds, nor
the Funds' custodian, nor their respective officers or employees, will be liable
for any loss, expense or cost arising out of any request for a telephonic
redemption or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Funds intend to
employ personal identification or written confirmation of transactions
procedures, and if they do not, the Funds may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the applicable Fund's
portfolio investments at the time of redemption or repurchase. Each Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Funds may
make payments wholly or partially in portfolio securities. Please see the
Statement of Additional Information for further information regarding the Funds'
ability to satisfy redemption requests in-kind.
Because of the cost of maintaining shareholder accounts, the Funds may
redeem, at net asset value, the shares in any account that has a value of less
than $25,000 ($10,000 for the Tax Exempt Fund) as a result of redemptions or
transfers. Before doing so, the applicable Fund will notify the shareholder that
the value of the shares in the account is less than the specified minimum and
will allow the shareholder 30 days to make an additional investment in an amount
that will increase the value of the account to at least $25,000 ($10,000 for the
Tax Exempt Fund). The Funds may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
<PAGE>
MANAGEMENT
Trustees
Each Fund is a separate investment series of Standish, Ayer
& Wood Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to each Fund pursuant to
separate investment advisory agreements with the Trust and manages each Fund's
investments and affairs subject to the supervision of the Trustees of the Trust.
The Adviser is a Massachusetts corporation incorporated in 1933 and is a
registered investment adviser under the Investment Advisers Act of 1940.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. The Adviser or its affiliate, Standish International Management
Company, L.P. ("SIMCO"), serves as the investment adviser to each of the funds
in the Standish, Ayer & Wood family of funds.
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of December
31, 1996, Standish managed approximately $30.6 billion in assets.
The Equity Fund's portfolio manager is Laurence A. Manchester. During the
past five years, Mr. Manchester has served as a Vice President and Director of
the Adviser.
The Small Cap Fund's portfolio manager is Nicholas S. Battelle. During the
past five years, Mr. Battelle has served as a Vice President and Director of the
Adviser.
The Tax Exempt Fund's portfolio managers are Maria D. Furman and Raymond J.
Kubiak. During the past five years, Ms. Furman has served as a Vice President
and Managing Director of the Adviser since Jan. 1996 and Mr. Kubiak has been a
Vice President and, since 1995, a Director of the Adviser.
Subject to the supervision and direction of the Trustees of the Trust, the
Adviser manages each Fund's portfolio in accordance with its stated investment
objective and policies, recommends investment decisions for the Funds, places
orders to purchase and sell securities on behalf of the Funds, and permits the
Funds to use the name "Standish." The Adviser provides all necessary office
space and services of executive personnel for administering the affairs of the
Funds. For these services, each Fund pays the Adviser a fee monthly equal on an
annual basis to the following percentages of each Fund's average daily net asset
value: Equity Fund--0.50%, Small Cap Fund--0.60% and Tax Exempt Fund--0.40%. For
the fiscal years ended September 30, 1996, the Funds paid fees to the Adviser at
the following rates (expressed as a percentage of each Fund's average daily net
assets): Equity Fund - 0.00%; Small Cap Fund - 0.00%; and Tax Exempt Fund -
0.25%. The Adviser voluntarily agreed not to impose $6,161, $13,510 and $41,685
of its advisory fee for the Equity Fund, Small Cap Fund and Tax Exempt Fund,
respectively.
<PAGE>
Expenses
Expenses of the Trust that relate to more than one series are allocated
among such series by the Adviser and SIMCO in a manner considered to be
equitable, primarily on the basis of relative net asset values. Each Fund bears
all expenses of its operations other than those incurred by the Adviser under
the investment advisory agreement. Among other expenses, each Fund will pay
investment advisory fees; bookkeeping, share pricing and shareholder servicing
fees and expenses; custodian fees and expenses; legal and auditing fees;
expenses of prospectuses, statements of additional information and shareholder
reports which are furnished to existing shareholders; registration and reporting
fees and expenses; and Trustees' fees and expenses. The Principal Underwriter
bears, without subsequent reimbursement, the distribution expenses attributable
to the offering and sale of Fund shares.
The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
(excluding litigation, indemnification and other extraordinary expenses) of each
Fund to the following percentages of each Fund's average daily net assets:
Equity Fund--0.00%; Small Cap Fund--0.00%; and Tax Exempt Fund--0.65%. These
agreements are voluntary and temporary and may be discontinued or revised by the
Adviser at any time. If Total Fund Operating Expenses (as defined above) would
exceed any expense limitation, the compensation due the Adviser for such fiscal
year shall be proportionately reduced by the amount of such excess by a
reduction or refund thereof at the time such compensation is payable after the
end of each calendar month, subject to readjustment during the fiscal year. For
the fiscal years ended September 30, 1996, the Equity Fund, Small Cap Fund and
Tax Exempt Fund paid expenses of $0, $0 and $158,972 after expense reductions of
$63,605, $77,562 and $41,685, respectively.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Funds. The Adviser will generally seek to obtain
the best available price and most favorable execution with respect to all
transactions for the Funds. It is not anticipated that the Tax Exempt Fund will
incur a significant amount of brokerage expenses because municipal securities
are generally traded on a "net" basis in principal transactions without the
addition or deduction of brokerage commissions or transfer taxes.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers that execute orders to purchase
and sell portfolio securities for the Funds.
FEDERAL INCOME TAXES
Each Fund is treated as a separate entity for federal income tax purposes.
Each Fund intends to continue to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, each Fund will not be subject to federal income
tax on any net investment income and net realized capital gains that are
distributed to shareholders in accordance with certain timing requirements of
the Code.
<PAGE>
A Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Funds during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders of the Equity Fund and Small Cap Fund which are taxable
entities or persons will be subject to federal income tax on dividends and
capital gain distributions (as defined below) made by these Funds. Dividends
paid by the Equity Fund and Small Cap Fund from net investment income, certain
net foreign currency gains, and any excess of net short-term capital gain over
net long-term capital loss will be taxable to shareholders as ordinary income,
whether received in cash or Fund shares. The portion of such dividends
attributable to qualifying dividends that Equity Fund or Small Cap Fund
receives, if any, may qualify for the corporate dividends received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code.
The Tax Exempt Fund intends to satisfy applicable requirements of the Code
so that its distributions to shareholders of the tax-exempt interest it earns
will qualify as "exempt-interest dividends," which shareholders are entitled to
treat as tax-exempt interest. Any portion of an exempt-interest dividend that is
attributable to the interest that the Tax Exempt Fund receives on certain
tax-exempt obligations that are "private activity bonds" and, for corporate
shareholders, the entire exempt-interest dividend, may increase a shareholder's
liability, if any, for alternative minimum tax.
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Funds.
Shares of the Tax Exempt Fund may not be an appropriate investment for persons
who are "substantial users" of facilities financed by industrial development or
private activity bonds, or persons related to "substantial users." Consult your
tax adviser if you think this may apply to you.
Shareholders in the Tax Exempt Fund which are taxable entities or persons
will be subject to federal income tax on capital gain distributions (as defined
below) from the Tax Exempt Fund and on any other dividends they receive from the
Tax Exempt Fund that are not exempt-interest dividends. Dividends paid by the
Tax Exempt Fund from any taxable net investment income, such as interest income
from taxable debt obligations, accrued market discount recognized by the Fund,
or repurchase agreements, and any excess of net short-term capital gain over net
long-term capital loss will be taxable to shareholders as ordinary income,
whether received in cash or Fund shares. None of the Tax Exempt Fund's exempt-
interest dividends, taxable income dividends or capital gain distributions will
qualify for the corporate dividends received deduction.
<PAGE>
Dividends paid by any Fund from net capital gain (the excess of net
long-term capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the applicable Fund. Capital gain distributions
do not qualify for the corporate dividends received deduction. Dividends and
capital gain distributions by a Fund may also be subject to state and local or
foreign taxes.
The Equity Fund and the Small Cap Fund anticipate that they may be subject
to foreign withholding taxes or other foreign taxes on income (possibly
including capital gains) on certain foreign investments (if any), which will
reduce the yield on those investments. Such taxes may be reduced or eliminated
pursuant to an income tax treaty in some cases. These Funds do not expect to
qualify to pass such foreign taxes and any associated tax deductions or credits
through to their shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules disallow any losses on
the sale or exchange of shares of the Tax Exempt Fund with a tax holding period
of six months or less, to the extent the shareholder received exempt-interest
dividends with respect to such shares, and recharacterize as long-term any
otherwise allowable losses on the sale or exchange of the shares of any Fund
with a tax holding period of six months or less, to the extent the shareholder
received a capital gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on taxable dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Funds with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary taxable dividends from the Funds and,
unless a current IRS Form W-8 or an acceptable substitute is furnished to the
Funds, to backup withholding on certain payments from the Funds.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, that a Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations and/or tax-exempt municipal obligations issued by or on behalf of
the particular state in which the shareholder is subject to tax or a political
subdivision thereof, provided in some states that certain thresholds for
holdings of such obligations and/or reporting requirements are satisfied.
After the close of each calendar year, each Fund will send a notice to its
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
<PAGE>
THE TRUST AND ITS SHARES
Each Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of each Fund. Each share of each Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Funds have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Funds do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Funds do not have preemptive or conversion rights.
Certificates representing shares of the Funds will not be issued.
The Trust has established series of its shares of beneficial interest,
including the Funds, and may establish additional series at any time. Each
series is a separate taxpayer, eligible to qualify as a separate regulated
investment company for federal income tax purposes. The calculation of the net
asset value of a series and the tax consequences of investing in a series will
be determined separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a meeting of shareholders of the Trust will be called to elect
Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
<PAGE>
Subject to Trustee approval and shareholder approval (if then required),
each of the Equity Fund and the Small Cap Fund may pursue its investment
objective by investing all of its investable assets in a pooled fund.
Inquiries concerning the Funds should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus. Although each Fund is offering only its own shares, since the Funds
use this combined Prospectus, it is possible that one Fund might become liable
for a misstatement or omission in this Prospectus regarding another Fund. The
Trustees have considered this factor in approving the use of this combined
Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, serves as the Funds' transfer and dividend-disbursing agent and as
custodian of all cash and securities of the Funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit each
Fund's financial statements annually.
LEGAL COUNSEL
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Principal Underwriter and the Adviser.
- - - - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. Amounts withheld and forwarded to the IRS can be credited as
a payment of tax when completing your federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
<PAGE>
STANDISH TAX-SENSITIVE EQUITY FUND
STANDISH TAX-SENSITIVE SMALL CAP FUND
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
<PAGE>
January 27, 1997
STANDISH TAX-SENSITIVE EQUITY FUND
STANDISH SMALL CAP TAX-SENSITIVE EQUITY FUND
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the combined
Prospectus dated January 27, 1997, as amended and/or supplemented from time to
time (the "Prospectus"), of Standish Tax-Sensitive Equity Fund ("Equity Fund"),
Standish Small Cap Tax-Sensitive Equity Fund ("Small Cap Fund") and Standish
Intermediate Tax Exempt Bond Fund ("Tax Exempt Fund"), each a separate
investment series of Standish, Ayer & Wood Investment Trust (the "Trust"). The
Equity Fund, Small Cap Fund and Tax Exempt Fund are sometimes referred to herein
individually as the "Fund" and collectively as the "Funds." This Statement of
Additional Information should be read in conjunction with the Funds' Prospectus,
a copy of which may be obtained without charge by writing or calling Standish
Fund Distributors, L.P., the Trust's principal underwriter (the "Principal
Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Contents
Investment Objectives and Policies.........................2
Investment Restrictions...................................10
Calculation of Performance Data...........................12
Management................................................14
Redemption of Shares......................................20
Portfolio Transactions....................................20
Determination of Net Asset Value..........................20
Federal Income Taxes......................................20
The Trust and Its Shares..................................23
Additional Information....................................24
Experts and Financial Statements..........................24
Financial Statements......................................25
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds' Prospectus describes the investment objective and policies of
each Fund. The following discussion supplements the description of the Funds'
investment policies in the Prospectus. Each Fund's investment adviser is
Standish, Ayer & Wood, Inc. (the "Adviser").
Portfolio Maturity (Tax Exempt Fund)
Under normal market conditions, the Tax Exempt Fund will maintain a
dollar-weighted average portfolio maturity of between three and ten years. This
means that the dollar-weighted average duration of the Fund's portfolio
investments will be less than the duration of a U.S. Treasury obligation with a
remaining stated maturity of three to ten years. Duration represents the
weighted average maturity of expected cash flows (i.e., interest and principal
payments) on one or more debt obligations, discounted to their present values.
The duration of an obligation is always less than or equal to its stated
maturity and is related to the degree of the volatility in the market value of
the obligation. In computing the duration of its portfolio, the Tax Exempt Fund
will have to estimate the duration of debt obligations that are subject to
prepayment or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that the Fund's dollar-weighted average
portfolio maturity will not exceed ten years, the Fund may invest in individual
debt obligations of any maturity, including obligations with a remaining stated
maturity of less than three or more than ten years. For purposes of the Fund's
investment policy, an instrument will be treated as having a maturity earlier
than its stated maturity date if the instrument has technical features (such as
puts or demand features) or a variable rate of interest which, in the judgment
of the Adviser, will result in the instrument being valued in the market as
though it has the earlier maturity.
Municipal Securities
The Tax Exempt Fund may invest in all kinds of municipal securities,
including municipal notes, municipal bonds, private activity bonds and variable
rate demand instruments.
Because the Tax Exempt Fund holds investment grade municipal securities,
the income earned on shares of the Fund will tend to be less than it might be on
a portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions the
power or ability of any one or more issuers to pay when due principal of and
interest on its or their municipal obligations may be materially affected.
Although the Tax Exempt Fund's quality standards are designed to minimize the
credit risk of investing in the Fund, that risk cannot be entirely eliminated.
Municipal Notes
The Tax Exempt Fund may invest in municipal notes. Municipal notes are
generally issued to satisfy short-term capital needs and generally have
maturities of one year or less. Municipal notes include: tax anticipation notes;
revenue anticipation notes; bond anticipation notes; and construction loan
notes.
<PAGE>
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes in which
the Tax Exempt Fund may invest which are issued for different purposes and
secured differently from those described above.
Municipal Bonds
The Tax Exempt Fund may invest in municipal bonds. Municipal bonds, which
meet longer term capital needs and generally have maturities of more than one
year when issued, have two principal classifications:
"General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
<PAGE>
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
Other Municipal Securities
There is a variety of hybrid and special types of municipal securities as
well as numerous differences in the security of municipal securities both within
and between the two principal classifications above.
Variable Rate Demand Instruments
The Tax Exempt Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit the Fund to demand payment of the
unpaid principal balance plus accrued interest upon a specified number of days'
notice to the issuer or its agent. The demand feature may be backed by a bank
letter of credit or guarantee issued with respect to such instrument. A bank
that issues a repurchase commitment may receive a fee from the Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that the Tax Exempt Fund may purchase
are payable on demand on not more than seven calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily to up to six months, and the adjustments are based upon the current
interest rate environment as provided in the respective instruments. The Adviser
will select the variable rate demand instruments that the Fund will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
the Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria of the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. Because the adjustment of interest rates on the variable rate
demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
<PAGE>
The maturity of the variable rate demand instruments held by the Tax Exempt
Fund will ordinarily be deemed to be the longer of (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment.
Restricted and Illiquid Municipal Securities
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Tax Exempt Fund. Thus, the issue
may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale unless an
exemption from such registration is available, municipal securities which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for many municipal securities which were not publicly offered initially.
Securities purchased for the Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in the Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to the Tax Exempt Fund's
investments enhance marketability. In addition, stand-by commitments and demand
obligations also enhance marketability.
Foreign Securities
Foreign securities may be purchased and sold by the Equity and Small Cap
Funds in over-the-counter markets (but persons affiliated with the Fund will not
act as principal in such purchases and sales) or on stock exchanges located in
the countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market. Foreign
stock markets are generally not as developed or efficient as those in the United
States. While growing in volume, they usually have substantially less volume
than the New York Stock Exchange, and securities of some foreign companies are
less liquid and more volatile than securities of comparable United States
companies. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on United States exchanges, although the Equity and
Small Cap Funds will endeavor to achieve the most favorable net results on their
foreign portfolio transactions. There is generally less government supervision
and regulation of stock exchanges, brokers and listed companies abroad than in
the United States.
The dividends and interest payable on certain of the Equity and Small Cap
Funds' foreign portfolio securities may be subject to foreign withholding taxes
and in some cases capital gains from such securities may also be subject to
foreign tax, thus reducing the net amount of income or gain available for
distribution to the Equity and Small Cap Funds' respective shareholders.
<PAGE>
Investors should understand that the expense ratios of the Equity and Small
Cap Funds may be higher than that of investment companies investing exclusively
in domestic securities because of the cost of maintaining the custody of foreign
securities.
The Equity and Small Cap Funds may invest in foreign securities which take
the form of sponsored and unsponsored American Depository Receipts ("ADRs"),
Global Depository Receipts ("GDRs") and European Depository Receipts ("EDRs") or
other similar instruments representing securities of foreign issuers (together,
"Depository Receipts"). ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. Prices of
ADRs are quoted in U.S. dollars and are traded in the United States on exchanges
or over-the-counter and are sponsored and issued by domestic banks. EDRs and
GDRs are receipts evidencing an arrangement with a non-U.S. bank. EDRs and GDRs
are not necessarily quoted in the same currency as the underlying security. To
the extent that a Fund acquires Depository Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored Depository Receipts), there may be an increased possibility that
the Fund would not become aware of and be able to respond to corporate actions,
such as stock splits or rights offerings involving the foreign issuer, in a
timely manner. In addition, certain benefits which may be associated with the
security underlying the Depository Receipt may not inure to the benefit of the
holder of such Depository Receipt. Further, the lack of information may result
in inefficiencies in the valuation of such instruments. Investment in Depository
Receipts does not eliminate all the risks inherent in investing in securities of
non-U.S. issuers. The market value of Depository Receipts is dependent upon the
market value of the underlying securities and fluctuations in the relative value
of the currencies in which the Depository Receipt and the underlying securities
are quoted. However, by investing in Depository Receipts, such as ADRs, that are
quoted in U.S. dollars, a Fund will avoid currency risks during the settlement
period for purchases and sales.
Money Market Instruments and Repurchase Agreements
The money market instruments in which each Fund may invest include
short-term U.S. Government securities, commercial paper (promissory notes issued
by corporations to finance their short- term credit needs) of foreign (Equity
and Small Cap Funds only) and domestic issuers, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
<PAGE>
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or
Duff 1+ by Duff & Phelps, which are the highest ratings assigned by these rating
services (even if rated lower by one or more of the other agencies), or which,
if not rated or rated lower by one or more of the agencies and not rated by the
other agency or agencies, are judged by the Adviser to be of equivalent quality
to the securities so rated. In determining whether securities are of equivalent
quality, the Adviser may take into account, but will not rely entirely on,
ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which a Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Funds (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Funds until they are repurchased. The Trustees will
monitor the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Funds.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
a Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic and Derivative Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to seek to hedge various market risks (such as
interest rates, currency exchange rates (Equity and Small Cap Funds) and broad
or specific fixed-income (Tax Exempt Fund) or equity (Equity and Small Cap
Funds) market movements), to manage the effective maturity or duration of
fixed-income securities (Tax Exempt Fund), or to enhance potential gain. Such
strategies are generally accepted as part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments used by the Funds may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing their respective investment objectives, the Funds
may purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices (Equity Fund and Small Cap Fund only),
fixed-income indices (Tax Exempt Fund only) and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars. In
addition, Equity Fund and Small Cap Fund may enter into various currency
transactions such as currency forward contracts, currency futures contracts,
<PAGE>
currency swaps or options on currencies or currency futures. The risks
associated with the Funds' transactions in options, futures and other types of
derivative securities including swaps may include some or all of the following:
market risk, leverage and volatility risk, correlation risk, credit risk and
liquidity and valuation risk. These investment techniques are referred to herein
as "Strategic Transactions." Strategic Transactions may be used in an attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets
fluctuations, currency exchange rate fluctuations (Equity Fund and Small Cap
Fund only), to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective duration or maturity of the Tax Exempt Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although each Fund will attempt to limit its net loss exposure
resulting from Strategic Transactions entered into for such purposes to not more
than 3% of its net assets at any one time and, to the extent necessary, the
Funds will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating a Fund's net loss
exposure from such Strategic Transactions, an unrealized gain from a particular
Strategic Transaction position would be netted against an unrealized loss from a
related Strategic Transaction position. For example, if the Adviser believes
that the Equity Fund is underweighted in cyclical stocks and overweighted in
consumer stocks, the Equity Fund may buy a cyclical index call option and sell a
cyclical index put option and sell a consumer index call option and buy a
consumer index put option. Under such circumstances, any unrealized loss in the
cyclical position would be netted against any unrealized gain in the consumer
position (and vice versa) for purposes of calculating the Fund's net loss
exposure. The ability of the Funds to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Funds will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The Funds' activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company or by the Funds' objective to minimize taxable distributions.
Risks of Strategic and Derivative Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
<PAGE>
to the Funds, force the purchase or sale, respectively of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Funds can realize on their respective investments or cause the
Funds to hold a security they might otherwise sell. The use of currency
transactions by the Equity Fund and Small Cap Fund can result in these Funds
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of a Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. The
writing of options could significantly increase a Fund's portfolio turnover rate
and, therefore, associated brokerage commissions or spreads. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, these transactions tend to limit any potential gain which might
result from an increase in value of such position. The loss incurred by the
Funds in writing options on futures and entering into futures transactions is
potentially unlimited, however, as described above, each Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 3% of its net assets at any one time and, to
the extent necessary, the Funds will close out transactions in order to comply
with this limitation. Futures markets are highly volatile and the use of futures
may increase the volatility of the Fund's net asset value. Finally, entering
into futures contracts would create a greater ongoing potential financial risk
than would purchases of options where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value and the net result may be less favorable than if the
Strategic Transactions had not been utilized.
Risks of Strategic and Derivative Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
<PAGE>
States, (iii) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (iv) lower trading
volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of a Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
...A put option gives the purchaser of the option, in consideration for
the payment of a premium, the right to sell, and the writer the obligation to
buy (if the option is exercised) the underlying security, commodity, index, or
other instrument at the exercise price. For instance, a Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised) the underlying instrument at
the exercise price. A Fund may purchase a call option on a security, currency
(Equity and Small Cap Funds), futures contract, index or other instrument to
seek to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Funds are authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to such
options. The discussion below uses the OCC as an example, but is also applicable
to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
<PAGE>
A Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Funds will generally sell (write) OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting a Fund to require the
Counterparty to sell the option back to the Fund at a formula price within seven
days. OTC options purchased by the Funds and portfolio securities "covering" the
amount of the Funds' obligation pursuant to an OTC option sold by them (the cost
of the sell-back plus the in-the-money amount, if any) are subject to the Funds'
restriction on illiquid securities, unless determined to be liquid in accordance
with procedures adopted by the Board of Trustees. For OTC options written with
"primary dealers" pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price. The Funds expect generally to
enter into OTC options that have cash settlement provisions, although they are
not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency (Equity and Small Cap Funds) or other
instrument underlying an OTC option it has entered into with a Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Funds will engage in OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received,
combined with any credit enhancements, a long-term debt rating of A from S&P or
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or which issue debt that is determined to be of
equivalent credit quality by the Adviser.
<PAGE>
If a Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
Each Fund may purchase and sell (write) call options on equity (Equity and
Small Cap Funds) and debt (Tax Exempt Fund) securities including U.S. Treasury
and agency securities, municipal notes and bonds (Tax Exempt Fund) and
Eurodollar instruments that are traded on U.S. and foreign securities exchanges
and in the over-the-counter markets, and on securities indices, currencies
(Equity and Small Cap Funds) and futures contracts. All call options sold by the
Funds must be "covered" (i.e., the Fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though a Fund will
receive the option premium to help offset any loss, the Fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call option sold by a Fund also exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
Each Fund may purchase and sell (write) put options on equity (Equity and
Small Cap Funds) and debt (Tax Exempt Fund) securities including U.S. Treasury
and agency securities, municipal notes and bonds (Tax Exempt Fund) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies (Equity and Small Cap Funds)
and futures contracts. A Fund will not sell put options if, as a result, more
than 50% of the Fund's total assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that a
Fund may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Funds may cover
call options on a securities index by owning securities whose price changes are
<PAGE>
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian) upon conversion or exchange of other securities in their
portfolios.
General Characteristics of Futures
Each Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures. Futures are generally bought and sold on
the commodities exchanges where they are listed and involve payment of initial
and variation margin as described below. The sale of futures contracts creates a
firm obligation by a Fund, as seller, to deliver to the buyer the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). The purchase of futures contracts creates a corresponding
obligation by a Fund, as purchaser, to purchase a financial instrument at a
specific time and price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position upon exercise of the option.
The Funds' use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Funds may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net the amount the positions
were "in the money" at the time of purchase) do not exceed 5% of each Fund's
respective net asset value, after taking into account unrealized profits and
losses on such positions. Typically, maintaining a futures contract or selling
an option thereon requires a Fund to deposit with its custodian for the benefit
of a futures commission merchant, as security for its obligations an amount of
cash or other specified assets (initial margin) which initially is typically 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited directly with the futures commission merchant thereafter on a daily
basis as the value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the Funds. If a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
<PAGE>
Combined Transactions
Each Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
(Equity and Small Cap Funds), multiple currency transactions (including forward
currency contracts) (Equity and Small Cap Funds) and interest rate transactions
("component" transactions), instead of a single Strategic Transaction, as part
of a single or combined strategy when, in the opinion of the Adviser it is in
the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Currency Transactions
The Equity and Small Cap Funds may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed-upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A Fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) whose obligations are determined to be of
equivalent credit quality by the Adviser.
The Equity and Small Cap Funds' dealings in forward currency contracts and
other currency transactions such as futures, options, options on futures and
swaps will generally be limited to hedging involving either specific
transactions or portfolio positions. See "Strategic and Derivative
Transactions." Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
<PAGE>
Each of the Equity and Small Cap Funds may also cross-hedge currencies by
entering into transactions to purchase or sell one or more currencies that are
expected to decline in value in relation to other currencies to which the Fund
has or in which the Fund expects to have portfolio exposure. For example, a Fund
may hold a French security and the Adviser may believe that French francs will
deteriorate against German marks. The Fund would sell French francs to reduce
its exposure to that currency and buy German marks. This strategy would be a
hedge against a decline in the value of French francs, although it would expose
the Fund to declines in the value of the German mark relative to the U.S.
dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Equity and Small Cap Funds may
also engage in proxy hedging. Proxy hedging is often used when the currency to
which the Fund's portfolio is exposed is difficult to hedge or to hedge against
the dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a Fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the Fund's securities denominated in
linked currencies. For example, if the Adviser considers that the Austrian
schilling is linked to the German deutschemark (the "D-mark"), a Fund holds
securities denominated in schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars. Proxy hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Funds if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Funds are engaging in proxy hedging. If a Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
<PAGE>
Swaps, Caps, Floors, Spreads and Collars
Among the Strategic Transactions into which each of the Funds may enter are
interest rate, currency rate (Equity and Small Cap Funds only) and index swaps
and the purchase or sale of related caps, floors, spreads and collars. The Funds
expect to enter into these transactions primarily for hedging purposes,
including, but not limited to, preserving a return or spread on a particular
investment or portion of its portfolio, protecting against currency fluctuations
(Equity and Small Cap Funds only) as a duration management technique (Tax Exempt
Fund only) or protecting against an increase in the price of securities a Fund
anticipates purchasing at a later date. Swaps, caps, floors, spreads and collars
may also be used to enhance potential gain in circumstances where hedging is not
involved although, as described above, each Fund will attempt to limit its net
loss exposure resulting from swaps, caps, floors, spreads and collars and other
Strategic Transactions entered into for such purposes to not more than 3% of its
net assets at any one time. A Fund will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar or
a spread is a combination of a cap and a floor that preserves a certain rate of
return within a predetermined range of interest rates or values.
The Funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Funds will not enter into any
swap, cap, floor, spread or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the Adviser. If there is a
default by the Counterparty, a Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, spreads and collars are more recent innovations for which
standardized documentation has not yet been fully developed. Swaps, caps,
<PAGE>
floors, spreads and collars are considered illiquid for purposes of each Fund's
policy regarding illiquid securities, unless it is determined, based upon
continuing review of the trading markets for the specific security, that such
security is liquid. The Board of Trustees has adopted guidelines and delegated
to the Adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors, spreads and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors, spreads and collars are illiquid, and are subject to each Fund's
limitation on investing in illiquid securities.
Eurodollar Contracts
Each Fund may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
Each Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. A Fund will
not enter into Strategic Transactions that expose the Fund to an obligation to
another party unless it owns either (i) an offsetting position in securities or
other options, futures contracts or other instruments or (ii) cash, receivables
or liquid securities with a value sufficient to cover its potential obligations.
The Funds may have to comply with any applicable regulatory requirements
designed to make sure that mutual funds do not use leverage in Strategic
Transactions, and if required, will set aside cash and other assets in a
segregated account with the custodian bank in the amount prescribed. In that
case, the Funds' custodian would maintain the value of such segregated account
equal to the prescribed amount by adding or removing additional cash or other
assets to account for fluctuations in the value of the account and the
applicable Fund's obligations on the related Strategic Transactions. Assets held
in a segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or a Fund's ability to meet redemption requests or
other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Tax Exempt Fund may commit up to 40% of its net assets to purchase
securities on a "when-issued" and "delayed delivery" basis, which means that
delivery and payment for the securities will normally take place 15 to 45 days
<PAGE>
after the date of the transaction. The payment obligation and interest rate on
the securities are fixed at the time the Fund enters into the commitment, but
interest will not accrue to the Fund until delivery of and payment for the
securities. Although the Tax Exempt Fund will only make commitments to purchase
"when-issued" and "delayed delivery" securities with the intention of actually
acquiring the securities, the Fund may sell the securities before the settlement
date if deemed advisable by the Adviser.
Unless the Tax Exempt Fund has entered into an offsetting agreement to sell
the securities purchased on a when issued or delayed delivery basis, cash or
liquid obligations with a market value at least equal to the amount of the
Fund's commitment will be segregated with the Fund's custodian bank. If the
market value of these securities declines, additional cash or securities will be
segregated daily so that the aggregate market value of the segregated securities
equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Tax
Exempt Fund. Changes in market value may be based upon the public's perception
of the creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise. The Tax Exempt
Fund may sell portfolio securities on a delayed delivery basis. The market value
of the securities when they are delivered may be more than the amount to be
received by the Fund.
Other Investment Companies
The Equity and Small Cap Funds may each, subject to authorization by the
Trustees, invest all of its investable assets in the securities of a single
open-end registered investment company (a "Portfolio"). If authorized by the
Trustees, a Fund would seek to achieve its investment objective by investing in
a Portfolio, which Portfolio would invest in a portfolio of securities that
complies with the Fund's investment objectives, policies and restrictions. The
Trustees do not intend to authorize investing in this manner at this time.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental and non-fundamental policies in
addition to those described under "Investment Objectives and Policies" in the
Prospectus. A Fund's fundamental policies cannot be changed unless the change is
approved by the lesser of (i) 67% or more of the voting securities present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
that Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Fund. A Fund's non-fundamental policies
may be changed by the Board of Trustees, without shareholder approval, in
accordance with applicable laws, regulations or regulatory policy.
Standish Intermediate Tax Exempt Bond Fund
As a matter of fundamental policy, the Tax Exempt Fund may not:
1. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
<PAGE>
2. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
3. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
4. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
5. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
6. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the Fund may not make any
additional investments while its outstanding borrowings exceed 5% of the
current value of its total assets.
7. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within 7 days.
8. Invest more than an aggregate of 15% of the net assets of the Fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
Standish Tax-Sensitive Equity Fund and Standish Small Cap
Tax-Sensitive Equity Fund
As a matter of fundamental policy, each of the Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax-Sensitive Equity Fund may not:
1. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to U.S. Government
securities or mortgage-backed securities issued or guaranteed as to
principal or interest by the U.S. Government, its agencies or
instrumentalities; provided, however, that the Fund may invest all or part
of its investable assets in an open-end registered investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
2. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 3 below, making loans in accordance with
paragraph 8 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Fund's investment policies
or within the meaning of paragraph 6 below, are not deemed to be senior
securities.
<PAGE>
3. Borrow money, except in amounts not to exceed 33 1/3% of the value of the
Fund's total assets (including the amount borrowed) taken at market value
(i) from banks for temporary or short-term purposes or for the clearance of
transactions, (ii) in connection with the redemption of Fund shares or to
finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to fulfill
commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the Fund
may enter into reverse repurchase agreements and forward roll transactions.
For purposes of this investment restriction, investments in short sales,
futures contracts, options on futures contracts, securities or indices and
forward commitments shall not constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933; provided,
however, that the Fund may invest all or part of its investable assets in
an open-end registered investment company with substantially the same
investment objective, policies and restrictions as the Fund.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
9. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if:
a. such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such issuer;
or
b. such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund;
<PAGE>
provided, however, that the Fund may invest all or part of its
investable assets in an open-end registered investment company with
substantially the same investment objective, policies and restrictions
as the Fund.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
As a matter of non-fundamental policy, each Fund may not:
(a) Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
(b) Purchase securities of any other investment company except as permitted by
the 1940 Act.
(c) Invest more than 15% of its net assets in securities which are illiquid.
(d) Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets.
As a matter of non-fundamental policy, the Tax Exempt Fund may not own more
than 10% of the outstanding voting securities of any one issuer. Because
municipal securities are not voting securities, there is no limit on the
percentage of a single issuer's municipal bonds which the Tax Exempt Fund may
own so long as, as to 75% of its total assets, it does not invest more than 5%
of its total assets in the securities of the issuer. Consequently, the Tax
Exempt Fund may invest in a greater percentage of the outstanding securities of
a single issuer than would an investment company which invests in voting
securities.
Although it is allowed to do so, the Tax Exempt Fund does not expect to
invest in securities (other than securities of the U.S. Government, its agencies
or instrumentalities and municipal securities) if more than 25% of the current
value of its total assets would be invested in a single industry. Although
governmental issuers of municipal securities are not considered part of any
"industry," municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be issued by such
nongovernmental users (e.g., industrial development bonds) and constitute an
"industry." Thus, the Tax Exempt Fund does not expect that more than 25% of its
assets will be invested in obligations deemed to be issued by nongovernmental
users in any one industry (e.g., industrial development bonds for health care
facilities) and in taxable obligations of issuers in the same industry. However,
it is possible that the Tax Exempt Fund may invest more than 25% of its assets
in a broader sector of the market for municipal securities.
<PAGE>
Determining the issuer of a tax-exempt security will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. A security guaranteed or otherwise backed by full
faith and credit of a governmental entity would generally be considered to
represent a separate security issued by such guaranteeing entity and by the
primary obligor. However, a guarantee of a security shall not be deemed to be a
security issued by the guarantor if the value of all securities guaranteed by
the guarantor and owned by the Tax Exempt Fund is less than 10% of the value of
the total assets of the Fund. Securities backed only by the assets and revenues
of nongovernmental users will be deemed to be issued by such nongovernmental
users.
The Equity and Small Cap Funds have no current intention of lending
portfolio securities or entering into reverse repurchase agreements or forward
roll transactions. None of the Funds have any current intention to borrow money
for other than temporary of emergency purposes.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the Equity and Small Cap Funds may each invest all of its
assets in the securities of a single open-end registered investment company with
substantially the same fundamental investment objectives, restrictions and
policies as the Fund.
---------------------
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of a Fund's assets will not constitute a violation of the
restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each Fund may, from time to time, advertise
certain total return information and the Tax Exempt Fund may also advertise
certain yield and tax equivalent yield information. The average annual total
return of a Fund for a period is computed by subtracting the net asset value per
share at the beginning of the period from the net asset value per share at the
end of the period (after adjusting for the reinvestment of any income dividends
and capital gain distributions), and dividing the result by the net asset value
per share at the beginning of the period. In particular, the average annual
total return of a Fund ("T") is computed by using the redeemable value at the
end of a specified period of time ("ERV") of a hypothetical initial investment
of $1,000 ("P") over a period of time ("n") according to the formula
P(1+T)n=ERV.
The yield of the Tax Exempt Fund is computed by dividing the net investment
income per share earned during the period stated in the advertisement by the
maximum offering price per share on the last day of the period. For the purpose
of determining net investment income, the calculation includes, among expenses
of the Tax Exempt Fund, all recurring fees that are charged to all shareholder
accounts and any non-recurring charges for the period stated. In particular, the
yield is determined according to the following formula:
Yield = 2[(A - B + 1)6 - 1]
CD
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
<PAGE>
Tax equivalent yield is the net annualized taxable yield needed to produce
a specified tax exempt yield at a given tax rate based on a specified 30-day (or
one month) period, assuming semi-annual compounding of income. The taxable
equivalent yield for the Tax Exempt Fund is based upon the Fund's current
tax-exempt yield and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield
-------------------------- = Taxable Equivalent Yield
100% - Marginal Tax Rate
The average annual total return quotation for the Tax Exempt Fund since
inception (November 2, 1992 to September 30, 1996) and for the period January 1,
1996 through September 30, 1996 were 6.48% and 2.43%, respectively, and the
average annualized yield for the thirty day period ended September 30, 1996 was
4.89%. The Tax Exempt Fund's tax equivalent yield for the thirty day period
ended September 30, 1996 was 8.10%, assuming a federal income tax rate of 39.6%.
The average annual total return quotations for the Equity Fund and the Small Cap
Fund since inception (January2, 1996) to September 30, 1996 were 18.97% and
17.95%, respectively.
The Tax Exempt Fund may also quote non-standardized yield, such as
yield-to-maturity ("YTM"). YTM represents the rate of return an investor will
receive if a long-term, interest bearing investment, such as a bond, is held to
its maturity date. YTM does not take into account purchase price, redemption
value, time to maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield and tax equivalent yield
(Tax Exempt Fund) quotations, each Fund may quote quarterly and annual
performance on a net (with management fees and other operating expenses
deducted) and gross basis. The Funds' net and gross performance is as follows:
Tax Exempt Fund
Quarter/Year Net Gross
- - - - --------------------------------------------------------------------------------
1992 2.79% 2.95%
1Q93 3.46% 3.62%
2Q93 2.63% 2.79%
3Q93 2.94% 3.10%
4Q93 1.35% 1.51%
1993 10.78% 11.47%
1Q94 -3.95% -3.79%
2Q94 1.67% 1.83%
3Q94 0.98% 1.15%
4Q94 -1.29% -1.13%
1994 -2.68% -2.02%
1Q95 4.61% 4.77%
2Q95 1.95% 2.12%
3Q95 2.76% 2.95%
4Q95 2.77% 2.94%
1995 12.65% 13.39%
<PAGE>
Quarter/Year Net Gross
- - - - --------------------------------------------------------------------------------
1Q96 -0.42% -0.27%
2Q96 0.91% 1.05%
3Q96 1.93% 2.08%
4Q96 2.28% 2.46%
1996 4.76% 5.41%
Tax-Sensitive Equity
Quarter/Year Net Gross
- - - - --------------------------------------------------------------------------------
1Q96 6.60% 6.60%
2Q96 3.42% 3.42%
3Q96 7.91% 7.91%
4Q96 9.78% 9.78%
1996 30.61% 30.61%
Small Cap Tax-Sensitive Equity
Quarter/Year Net Gross
- - - - --------------------------------------------------------------------------------
1Q96 7.55% 7.55%
2Q96 12.27% 12.27%
3Q96 -2.32% -2.32%
4Q96 2.78% 2.78%
1996 21.23% 21.23%
These performance quotations should not be considered as representative of
any Fund's performance for any specified period in the future. Each Fund's
advisory fee was not imposed, in whole or in part, and the Adviser reimbursed
operating expenses in varying amounts of certain Funds during various periods
since each Fund's inception. In the absence of such arrangements, the
performance of each Fund would have been lower.
<PAGE>
Each Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Tax
Exempt Fund may compare its performance to various indices (or particular
components thereof), which are generally considered to be representative of the
performance of all municipal securities such as the Lehman Muni 3-5-7-10 Index.
The Equity and Small Cap Funds may each compare their respective performance to
the S&P 500 Index, which is generally considered to be representative of the
performance of unmanaged common stocks that are publicly traded in the United
States securities markets. In addition, the Small Cap Fund may compare its
performance to the Russell 2000 Index and the Russell 2000 Growth Index. The
Russell 2000 Index is generally considered to be representative of unmanaged
small capitalization stocks in the United States markets and the Russell 2000
Growth Index is generally considered to be representative of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
Comparative performance may also be expressed by reference to a ranking prepared
by a mutual fund monitoring service or by one or more newspapers, newsletters or
financial periodicals. Performance comparisons may be useful to investors who
wish to compare the Fund's past performance to that of other mutual funds and
investment products. Of course, past performance is not a guarantee of future
results.
<PAGE>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President, Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Treasurer and Secretary Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - - - ---------------------------------------------------------------------------------------------------------------
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.; formerly, Consultant,
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes of the 1940 Act.
</TABLE>
<PAGE>
Compensation of Trustees and Officers
The Funds pay no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of a Fund's shares) with the Trust or the Adviser during the Funds'
fiscal years ended September 30, 1996.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Funds' fiscal years ended September 30, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Aggregate Aggregate Benefits Compensation
Compensation Compensation Compensation Accrued as from Funds and
from the from the from the Small Part of Other Funds in
Name of Trustee Tax Exempt Fund Equity Fund Cap Fund Fund's Expenses Complex*
- - - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0
Samuel C. Fleming 292 25 60 0 37,250
Benjamin M. Friedman 262 22 54 0 33,500
John H. Hewitt 262 22 54 0 33,500
Edward H. Ladd 0 0 0 0
Caleb Loring, III 262 22 54 0 33,500
Richard S. Wood 0 0 0 0 0
-------------
*As of the date of this Statement of Additional Information, there were 20
mutual funds in the fund complex. Total compensation is presented for the
calendar year ended December 31, 1996.
</TABLE>
Certain Shareholders
At December 31, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) 11,413.530 shares
(7.09%) of the then outstanding shares of the Tax-Sensitive Equity Fund,
16,891.951 shares (3.67%) of the then outstanding shares of the Tax-Sensitive
Small Cap Fund and less than 1% of the then outstanding shares of the
Intermediate Tax Exempt Fund. At that date, each of the following persons
beneficially owned 5% or more of the then outstanding shares of the Tax Exempt
Fund:
Percentage of
Name and Address Outstanding Shares
- - - - --------------------------------------------------------------------------------
BDG & Co. 16%
Bingham Dana & Gould
Trust Development
150 Federal Street
Boston, MA 02110
YK Investment Partnership 9%
191 Waukegan Road
Suite 209
Northfield, IL 60093
At December 31, 1996, each of the following persons beneficially owned 5%
or more of the then outstanding shares of the Tax Sensitive Equity Fund:
Percentage of
Name and Address Outstanding Shares
- - - - --------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 12%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Saturn & Co. 8%
FBO Juan Enriquez Trust
102 Highland Street
W. Newton, MA 02165
<PAGE>
Forest Products Insurance Exchange 7%
3601 Minnesota Drive
Minneapolis, MN 55435
Michael Putnam Trust 5%
Department of Classics
Brown University
Providence, RI 02912
Elizabeth M. Enriquez-Ortiz 5%
40 IH-35N #4A3
Austin, TX 78701
Additionally, at December 31, 1996 each of the following persons
beneficially owned 5% or more of the then outstanding shares of the Small
Capitalization Tax-Sensitive Equity Fund:
Percentage of
Name and Address Outstanding Shares
- - - - --------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 27%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Wendel & Co. #006709 12%
The Bank of New York
P.O. Box 1066
Wall Street Station
NY, NY 10268
BDG & Co. Trustee for Ivy Lane Foundation 11%
150 Federal Street
Boston, MA 02110
Bob & Co. C/O Bank of Boston 6%
Mutual Funds Dept 45-02-93
PO Box 1809
Boston, MA 02105
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
each Fund pursuant to separate written investment advisory agreements with the
Trust. The Adviser is a Massachusetts corporation organized in 1933 and is
registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, George W. Noyes, Arthur H. Parker, Howard B.
Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney, Ralph S. Tate, and
Richard S. Wood.
Certain services provided by the Adviser under the investment advisory
agreements are described in the Prospectus. In addition to those services, the
Adviser provides each Fund with office space for managing its affairs, with the
services of required executive personnel, and with certain clerical services and
facilities. These services are provided by the Adviser without reimbursement by
the Funds for any costs incurred. Under each investment advisory agreement, the
Adviser is paid a fee based upon a percentage of each Fund's average daily net
asset value computed as described in the Prospectus. This fee is paid monthly.
With respect to the Tax Exempt Fund: (a) for the fiscal year ended December
31, 1994, the Adviser agreed not to impose $50,193 of its fee, which would
otherwise have been $82,694; (b) for the fiscal year ended December 31, 1995,
the Adviser agreed not to impose $38,426 of its fee, which would otherwise have
been $115,482; and (c) for the fiscal year ended September 30, 1996, the Adviser
agreed not to impose $41,685 of its fee, which would otherwise have been
$98,399. For the period from January 2, 1996 through September 30, 1996, the
Adviser agreed not to impose any of its fees for the Equity Fund and Small Cap
Fund, which otherwise would have been $6,161 and $13,510, respectively. In
addition, during the same period, the Adviser reimbursed operating expenses of
the Equity Fund and the Small Cap Fund in the amount of $57,444 and $64,052,
respectively.
Pursuant to the investment advisory agreements, each Fund bears the
expenses of its operations other than those incurred by the Adviser pursuant to
the investment advisory agreements. Among other expenses, each Fund will pay
share pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses.
The Adviser has voluntarily agreed for the Tax Exempt Fund, Equity Fund and
Small Cap Fund to limit Total Fund Operating Expenses (excluding litigation,
indemnification and other extraordinary expenses) of each such Fund to 0.65%,
0.00% and 0.00% of the Tax Exempt Fund's, Equity Fund's and Small Cap Fund's
respective average daily net assets. These agreements are voluntary and
temporary and may be discontinued or revised by the Adviser at any time. If any
expense limit is exceeded, the compensation due the Adviser for such fiscal year
shall be proportionately reduced by the amount of such excess by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month, subject to readjustment during the fiscal year.
<PAGE>
Unless terminated as provided below, the Equity Fund's and the Small Cap
Fund's investment advisory agreements continue in full force and effect until
December 31, 1997 and for successive periods of one year thereafter, and the Tax
Exempt Fund's investment advisory agreement continues in full force and effect
for successive periods of one year, but only as long as each such continuance is
approved annually (i) by either the Trustees of the Trust or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the applicable Fund, and, in either event (ii) by vote of a majority of the
Trustees of the Trust who are not parties to the investment advisory agreement
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval. Each
investment advisory agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Trust or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the applicable
Fund or by the Adviser, on sixty days' written notice to the other parties. The
investment advisory agreements terminate in the event of their "assignment," as
defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Funds, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Funds and their shareholders come before those of the
Adviser, its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Funds' shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Funds' shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Funds' shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to a Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
<PAGE>
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable with respect to a Fund at any time without penalty by
a vote of a majority of the Trustees of the Trust, a vote of a majority of the
Trustees who are not "interested persons" of the Trust, or by a vote of the
holders of a majority of the applicable Fund's outstanding shares, in any case
without payment of any penalty on not more than 60 days' written notice to the
other party. The offices of the Principal Underwriter are located at One
Financial Center, 26th Floor, Boston, Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date
of payment upon redemption for more than seven days (i) for any period during
which the New York Stock Exchange is closed (other than customary weekend or
holiday closings) or trading on the exchange is restricted; (ii) for any period
during which an emergency exists as a result of which disposal by a Fund of
securities owned by it or determination by a Fund of the value of its net assets
is not reasonably practicable; or (iii) for such other periods as the SEC may
permit for the protection of shareholders of the Funds.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in Fund portfolio securities. Portfolio securities paid upon redemption
of Fund shares will be valued at their then current market value. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing each Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Funds and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the respective Fund. In addition, if the
Adviser determines in good faith that the amount of commissions charged by a
broker is reasonable in relation to the value of the brokerage and research
services provided by such broker, a Fund may pay commissions to such broker in
an amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
<PAGE>
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Funds effect their securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Funds. The investment advisory fees paid by the Funds
under the advisory agreements will not be reduced as a result of the Adviser's
receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for a Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Funds. In
making such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value is calculated each business day on which the
New York Stock Exchange is open. Currently the New York Stock Exchange is not
open on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of a Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m., New York time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value. Portfolio securities are valued in the manner described in the
Prospectus.
FEDERAL INCOME TAXES
Each series of the Trust, including each Fund, is treated as a separate
entity for accounting and tax purposes. Each Fund presently qualifies and
intends to continue to qualify as a "regulated investment company" under
Subchapter M of the Code. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, a Fund will not be subject
to Federal income tax on its investment company taxable income (i.e., all
income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss), net tax-exempt interest (if any) and net capital
gain which are distributed to shareholders at least annually in accordance with
the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Funds intend under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
The Funds are not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Funds qualify as regulated investment companies under
<PAGE>
the Code, they will also not be required to pay any Massachusetts income tax.
The Funds will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Funds and, as noted above, would not be distributed as such
to shareholders. The Equity Fund and the Small Cap Fund have $21,876 and
$240,551, respectively, of capital loss carryforwards, which expire on September
30, 2004, available to offset future net capital gains.
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions (Equity
and Small Cap Funds only) undertaken by a Fund may cause the Fund to recognize
gains or losses from marking to market even though its positions have not been
sold or terminated and affect the character as long-term or short-term (or, in
the case of certain currency forwards, options and futures (Equity and Small Cap
Funds only), as ordinary income or loss) and timing of some capital gains and
losses realized by a Fund. Also, certain losses of a Fund on its transactions
involving options, futures or forward contracts and/or offsetting portfolio
positions may be deferred rather than being taken into account currently in
calculating the Fund's taxable income or gain. Certain of the applicable tax
rules may be modified if a Fund is eligible and chooses to make one or more of
certain tax elections that may be available. These transactions may therefore
affect the amount, timing and character of a Fund's distributions to
shareholders. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to interest rate swaps or currency
swaps (Equity and Small Cap Funds only), and interest rate caps, floors and
collars are unclear in certain respects, and the Funds may be required to
account for these instruments under tax rules in a manner that, under certain
circumstances, may limit their transactions in these instruments.
If either the Equity Fund or the Small Cap Fund acquires stock in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, rents, royalties or capital
gain) or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
Federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Equity and Small Cap Funds would not be able to pass
through to their shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any
such election would require the electing Fund to recognize taxable income or
gain without the concurrent receipt of cash. The Equity and Small Cap Funds may
limit and/or manage their stock holdings in passive foreign investment companies
to minimize their tax liability or maximize their return from these investments.
<PAGE>
Foreign exchange gains and losses realized by the Equity and Small Cap
Funds in connection with certain transactions involving foreign
currency-denominated debt securities, if any, certain foreign currency futures
and options, foreign currency forward contracts, foreign currencies, or payables
or receivables denominated in a foreign currency are subject to Section 988 of
the Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of
distributions to shareholders. Any such transactions that are not directly
related to a Fund's investment in stock or securities, possibly including
speculative currency positions or currency derivatives not used for hedging
purposes, may increase the amount of gain it is deemed to recognize from the
sale of certain investments held for less than three months, which gain is
limited under the Code to less than 30% of its annual gross income, and could
under future Treasury regulations produce income not among the types of
"qualifying income" from which each Fund must derive at least 90% of its annual
gross income.
The Equity and Small Cap Funds may be subject to withholding and other
taxes imposed by foreign countries with respect to their investments in foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Investors would be entitled to claim U.S. foreign tax
credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code, only if more than 50% of the value of the
Equity Fund's or Small Cap Fund's respective total assets at the close of any
taxable year were to consist of stock or securities of foreign corporations and
the applicable Fund were to file an election with the Internal Revenue Service.
Because the Equity and Small Cap Funds generally do not expect to meet this 50%
requirement, investors generally will not directly take into account the foreign
taxes, if any, paid by the Equity and Small Cap Funds, and will generally not be
entitled to any related tax deductions or credits. Such taxes will reduce the
amounts the Equity and Small Cap Funds would otherwise have available to
distribute.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
<PAGE>
For purposes of the dividends received deduction available to corporations,
dividends, if any, received by the Equity and Small Cap Funds from U.S. domestic
corporations in respect of the stock of such corporations held by the Equity and
Small Cap Funds, for U.S. Federal income tax purposes, for at least a minimum
holding period, generally 46 days, and distributed and designated by the Equity
and Small Cap Funds may be treated as qualifying dividends. Distributions by the
Tax Exempt Fund will not qualify for the dividends received deduction. Corporate
shareholders must meet the minimum holding period requirement referred to above
with respect to their shares of the Equity and Small Cap Funds in order to
qualify for the deduction and, if they borrow to acquire such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability. Additionally, any corporate shareholder
should consult its tax adviser regarding the possibility that its basis in its
shares may be reduced, for Federal income tax purposes, by reason of
"extraordinary dividends" received with respect to the shares, for the purpose
of computing its gain or loss on redemption or other disposition of the shares.
Taxable distributions by the Tax Exempt Fund include distributions
attributable to income or gains from the Tax Exempt Fund's taxable investments
or transactions, including (i) gains from the sale of portfolio securities or
the right to when-issued securities prior to issuance or from options or futures
transactions and (ii) income attributable to repurchase agreements, securities
lending, recognized market discount, interest rate swaps, caps, floors or
collars, and a portion of the discount from certain stripped tax-exempt
obligations or their coupons.
Distributions by the Tax Exempt Fund of tax-exempt interest
("exempt-interest dividends") timely designated as such by the Tax Exempt Fund
will be treated as tax-exempt interest under the Code, provided that the Tax
Exempt Fund qualifies as a regulated investment company and at least 50% of the
value of its assets at the end of each quarter of its taxable year is invested
in tax-exempt obligations. Shareholders are required to report their receipt of
tax-exempt interest, including such distributions, on their federal income tax
returns. The portion of the Tax Exempt Fund's distributions designated as
exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprises of its total income during the period of any
particular shareholder's investment. The Tax Exempt Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the Tax Exempt Fund may invest is treated as an
item of tax preference for purposes of the federal alternative minimum tax. To
the extent that the Tax Exempt Fund invests in these types of tax-exempt
obligations, shareholders will be required to treat as an item of tax preference
for federal alternative minimum purposes that part of the Tax Exempt Fund's
exempt-interest dividends which is derived from interest on these tax-exempt
obligations. Exempt-interest dividends derived from interest income from
tax-exempt obligations that are not private activity bonds may also be included
in determining corporate "adjusted current earnings" for purposes of computing
the alternative minimum tax liability, if any, of corporate shareholders of the
Tax Exempt Fund.
<PAGE>
If the Tax Exempt Fund invests in certain zero coupon securities,
increasing rate securities or, in general, other securities with original issue
discount (or with market discount if the Tax Exempt Fund elects to include
market discount in income currently), the Tax Exempt Fund must accrue income on
such investments prior to the receipt of the corresponding cash payments.
However, the Tax Exempt Fund must distribute, at least annually, all or
substantially all of its net taxable and tax-exempt income, including such
accrued income, to shareholders to qualify as a regulated investment company
under the Code and avoid federal income and excise taxes. Therefore, the Tax
Exempt Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements. The Equity and
Small Cap Funds would be subject to the same tax rules but do not expect to
acquire such investments.
The Tax Exempt Fund purchases tax-exempt obligations which are generally
accompanied by an opinion of bond counsel to the effect that interest on such
securities is not included in gross income for federal income tax purposes. It
is not economically feasible to, and the Tax Exempt Fund therefore does not,
make any additional independent inquiry into whether such securities are in fact
tax-exempt. Bond counsels' opinions will generally be based in part upon
covenants by the issuers and related parties regarding continuing compliance
with federal tax requirements. Tax laws enacted during the last decade not only
had the effect of limiting the purposes for which tax-exempt bonds could be
issued and reducing the supply of such bonds, but also increased the number and
complexity of requirements that must be satisfied on a continuing basis in order
for bonds to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligation was issued. In that event, a portion of the Tax Exempt Fund's
distributions attributable to interest the Fund received on such bond for the
current year and for prior years could be characterized or recharacterized as
taxable income.
The Tax Exempt Fund may purchase municipal obligations together with the
right to resell the securities to the seller at an agreed upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Fund may purchase beneficial interests in municipal obligations held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts or other types of features such as interest rate swaps; those investments
may require the Tax Exempt Fund to pay "tender fees" or other fees for the
various features provided.
<PAGE>
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of a true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. The Tax Exempt Fund intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or other third party put and that tax-exempt interest earned
with respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that the Service will agree with such position in any
particular case. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the treatment of tender fees paid by the
Tax Exempt Fund, in relation to various regulated investment company tax
provisions is unclear. However the Adviser intends to manage the Tax Exempt
Fund's portfolio in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax Exempt Fund will not be deductible for federal income tax
purposes to the extent it is deemed related to exempt-interest dividends paid by
the Tax Exempt Fund. Pursuant to published guidelines, the Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Tax Exempt Fund even though the borrowed funds may not be directly
traceable to the purchase of shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
(except in the case of the Tax Exempt Fund) and/or realized or unrealized
appreciation in a Fund's portfolio. Consequently, subsequent distributions from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
The Funds may consider the use of equalization accounting for any taxable
year if it would further the goal of reducing taxable distributions to
shareholders for such year. Under equalization accounting, a Fund's earnings and
profits are allocated in part to redemption proceeds paid by the Fund: although
a redeeming shareholder's tax treatment would not be affected by such an
allocation, in certain circumstances the amounts of realized net income and/or
net capital gains the Fund is required to distribute may be reduced through the
use of equalization accounting. Hence, if a Fund determines that it will use
equalization accounting for a particular year, the amount, timing and character
of its distributions for that year may be affected. The Funds would consider
<PAGE>
using equalization accounting for a particular year only if they determine that
such use is consistent with their tax objectives and would produce a benefit for
such year that outweighs any additional tax or accounting complexities or costs.
Upon a redemption (including a repurchase) of shares of the Funds, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will (except as described below)
be long-term or short-term, depending upon the shareholder's tax holding period
for the shares. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will, with respect to the Tax Exempt Fund, be disallowed to the extent
of all exempt-interest dividends paid with respect to such shares and, with
respect to any Fund, the allowable loss on such a redemption will be treated as
a long-term capital loss to the extent of any amounts treated as distributions
of long-term capital gain with respect to such shares.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Funds is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Funds and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Funds. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Funds.
THE TRUST AND ITS SHARES
Each Fund is an investment series of Standish, Ayer & Wood Investment
Trust, an unincorporated business trust organized under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
dated August 13, 1986, as amended from time to time (the "Declaration"). Under
the Declaration, the Trustees have authority to issue an unlimited number of
shares of beneficial interest, par value $.01 per share, of the Funds. Each
<PAGE>
share of a Fund represents an equal proportionate interest in the Fund with each
other share and is entitled to such dividends and distributions as are declared
by the Trustees. Shareholders are not entitled to any preemptive, conversion or
subscription rights. All shares, when issued, will be fully paid and
non-assessable by the Trust. Upon any liquidation of a Fund, shareholders are
entitled to share pro rata in the net assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of a Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Pursuant to the Declaration of Trust and subject to shareholder approval
(if then required), the Trustees may authorize each Fund to invest all or part
of its investable assets in a single open-end investment company that has
substantially the same investment objectives, policies and restrictions as the
Fund. As of the date of this Statement of Additional Information, the Board does
not have any plan to authorize any Fund to so invest its assets.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
<PAGE>
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
ADDITIONAL INFORMATION
The Funds' Prospectus and this Statement of Additional Information omit
certain information contained in the Trust's registration statement filed with
the SEC, which may be obtained from the SEC's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the fee prescribed by the
rules and regulations promulgated by the SEC.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements of the Tax Exempt Fund for the fiscal years ended
December 31, 1995 and September 30, 1996 and financial statements of the Equity
Fund and the Small Cap Fund for the period January 2, 1996 (inception) through
September 30, 1996 incorporated by reference from the Funds' annual report to
shareholders in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere therein and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P., as experts in accounting
and auditing. Financial highlights of the Tax Exempt Fund for the period from
November 2, 1992 (commencement of operations) through December 31, 1992 were
audited by Deloitte & Touche LLP, independent auditors, and have been similarly
included in reliance upon the expertise of that firm. Coopers & Lybrand L.L.P.,
independent accountants, will audit each Fund's financial statements for the
current fiscal year ending September 30, 1997.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Financial Statements for the Period Ended
September 30, 1996
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Financial Statements
Table of Contents
Page
Chairman's Message ..............................................3
Selected Financial Information ..................................4
Performance Highlights ..........................................5
Management Discussion:
Standish Massachusetts Intermediate Tax Exempt Bond Fund ...6,7
Standish Intermediate Tax Exempt Bond Fund .................6,7
Standish Small Cap Tax-Sensitive Equity Fund ...............8
Standish Tax-Sensitive Equity Fund .........................9
Statements of Assets and Liabilities ............................10
Statements of Operations ........................................11,12
Statements of Changes in Net Assets .............................13,14,15
Financial Highlights
Standish Massachusetts Intermediate Tax Exempt Bond Fund ...16
Standish Intermediate Tax Exempt Bond Fund .................17
Standish Small Cap Tax-Sensitive Equity Fund ...............18
Standish Tax-Sensitive Equity Fund .........................19
Portfolio of Investments
Standish Massachusetts Intermediate Tax Exempt Bond Fund ...20
Standish Intermediate Tax Exempt Bond Fund .................23
Standish Small Cap Tax-Sensitive Equity Fund ...............27
Standish Tax-Sensitive Equity Fund .........................31
Notes to Financial Statements ...................................34
Report of Independent Accountants ...............................39
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
October 18, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder: Enclosed you will find
the annual financial statements for the Standish Intermediate Tax Exempt Bond
Fund, the Standish Massachusetts Intermediate Tax Exempt Bond Fund, the Standish
Tax-Sensitive Equity Fund, and the Standish Small Cap Tax-Sensitive Equity Fund.
We are providing a combined report for these funds to reduce redundant reporting
and to supply the financial reporting related to our tax managed investment
capabilities in one comprehensive document.
These four funds have combined net assets of $77 million. The two tax-sensitive
funds have only been in operation since the beginning of 1996. In all cases, the
investment advisor is Standish, Ayer & Wood.
As of September 1996, Standish, Ayer & Wood managed assets for its clients of
$29 billion, including the Standish mutual fund assets of $4 billion. The
principal clients of the firm are corporate pension trusts, insurance companies,
endowments and foundations, and high net worth individuals. The firm remains
independent and is owned by investment professionals active in the operation of
the business. At mid year 1996, David W. Murray, the Treasurer of both Standish,
Ayer & Wood and the Standish, Ayer & Wood Investment Trust, elected to take
early retirement and James E. Hollis was elected interim Treasurer of the Trust.
We are grateful to Dave for twenty-two years of distinguished service to
Standish. There have been no other material changes in the structure of the firm
or its key personnel.
During the nine months of operation of the tax-sensitive equity funds, U.S.
equity markets have been very strong with the Standard & Poor's 500 Index
registering a total return of 13.50% and the Russell 2000 Index registering a
total return of 10.77%. Tax exempt bond market returns during this period, as
measured by a combination of the Lehman Municipal 3, 5, 7 and 10 year indices,
have been a mundane 2.11%. These municipal results have been relatively better
than those of most other fixed income sectors, as flat tax concerns have
subsided and municipal supply has been constrained.
The tax-sensitive equity funds have the objective of providing favorable after
tax returns through limited turnover and attempts to mitigate the amount of
realized capital gains. At Standish, we have noted for some time the adverse
impact for taxable investors of high portfolio turnover which triggers capital
gains, possibly including short-term gains that may result in an even greater
tax liability for investors. We believe there is a major opportunity to improve
after tax returns by limiting the portfolio turnover and managing the
recognition of capital gains.
During the last year, we at Standish have added resources to both investment
research and shareholder servicing. We appreciate the opportunity to serve you
and hope you will find the attached information helpful. We remain confident
that we have the resources and the organization to do a superior job, and we
will be working hard to fulfill your expectations in the years ahead.
Sincerely yours,
Edward H. Ladd
Chairman
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Selected Financial Information
for the period ended September 30, 1996
<TABLE>
<CAPTION>
Standish
Massachusetts Standish Standish
Intermediate Intermediate Small Cap Standish
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund (a) Bond Fund (a) Equity Fund (b) Equity Fund (b)
----------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net asset value - beginning of period $21.02 $21.40 $20.00 $20.00
Income from investment operations
Net investment income * 0.74 0.79 0.04 0.28
Net realized and unrealized gain (loss) (0.39) (0.28) 3.55 3.50
----------------- -------------- ---------------- ---------------
Total from investment operations 0.35 0.51 3.59 3.78
----------------- -------------- ---------------- ---------------
Less distributions declared to shareholders
From net investment income (0.74) (0.79) (0.02) (0.18)
----------------- -------------- ---------------- ---------------
Net asset value - end of period $20.63 $21.12 $23.57 $23.60
================= ============== ================ ===============
Total return 1.70% 2.43% 17.95% 18.97%
Ratios to average net assets
Expenses *t 0.65% 0.65% 0.00% 0.00%
Net investment income *t 4.78% 4.99% 0.41% 2.27%
Net assets at end of period (000 omitted) $32,136 $34,843 $6,896 $2,843
Portfolio turnover 35% 43% 57% 17%
Average broker commission paid per share - - $0.1058 $0.0419
* The Investment Adviser voluntarily did not impose a portion of its fee and
reimbursed the Funds for their operating expenses. Please refer to the
Financial Highlights on pages 16 to 19 for additional disclosure regarding
these ratios.
t Computed on an annualized basis
(a) For the nine months ended September 30, 1996.
(b) For the period January 2, 1996, commencement of investment operations,
through September 30, 1996.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Performance Highlights
for the period ended September 30, 1996
Total Return
- - - - ------------------------------------------------------------------------- -----------------
Tax Exempt Bond Funds (a)
Standish Mass. Intermediate Tax Exempt Fund 1.70%
Standish Intermediate Tax Exempt Bond Fund 2.43%
Lehman Muni 3-5-7-10 Index 2.11%
Tax-Sensitive Equity Funds (b)
Standish Tax-Sensitive Small Capitalization Equity Fund 17.95%
Russell 2000 Index 10.77%
Standish Tax-Sensitive Equity Fund 18.97%
S&P 500 Index 13.50%
(a) For the nine months ended September 30, 1996.
(b) For the period January 2, 1996 through September 30, 1996.
</TABLE>
The S&P 500 Index is generally considered to be representative of the
performance of unmanaged common stocks publicly traded on the U.S.
markets.
The Russell 2000 Index is generally considered to be representative of
unmanaged small capitalization stocks in the U.S. markets.
Lehman Brothers State General Obligation Bond 3, 5, 7, and 10 Year
Index is actually a subset of a broader index--the Lehman Brothers
Municipal Bond Index. The Municipal Bond Index is unmanaged and
designed to be a composite measure of the total return performance of
the municipal bond market, and includes approximately 1,800 bonds
(rated A or better, including bonds in the following sectors: state
general obligations, prerefunded, electrics, hospital, state housing,
industrial development/pollution control, and transportation).
Past performance is not predictive of future performance.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Management Discussion & Analysis
The bond markets have suffered through a dismal year thus far in 1996.
Thankfully, municipals have been perhaps the best performing sector in domestic
fixed income. The Standish Intermediate Tax Exempt Bond Fund has produced a
total return of 2.43% (after a fee reduction) for the year-to-date period
through September 30, 1996, well ahead of the benchmark performance index
(Lehman Muni 3-5-7-10) return of 2.11%, while the Standish Massachusetts
Intermediate Tax Exempt Bond Fund has produced a total return of 1.70% (after a
fee reduction) for the year-to-date, trailing the same index.
Most of 1996 witnessed reports showing economic growth to be stronger than the
market anticipated. This, of course, led to fears of inflation and the
expectation that the Federal Reserve would raise short term interest rates.
Consequently, bond prices declined and volatility was high. The year-to-date
taxable bond market performance as represented by the Lehman Aggregate Index and
the Lehman Government/Corporate Bond Index was below the tax exempt market at
1.84% and 1.77% respectively. Municipal bonds, however, proved to be far more
resilient than most taxable fixed income sectors. As fears of a "flat tax" waned
and municipal new issue supply remained modest, interest rates on tax-exempt
securities rose far less than those of Treasuries. Yield spreads between top
quality and lower quality paper also compressed during the year.
Standish Intermediate Tax Exempt Bond Fund
The fund underperformed in the first quarter of 1996, as we extended duration
into what turned out to be a significant market decline. By the second quarter,
however, performance had turned around. Several actions have helped make this a
successful year. Our increased exposure to California and New York credits has
benefited the fund, as stabilizing credit quality resulted in good performance
for these sectors. Our overweighting in "BBB" rated paper contributed
significantly as quality spreads tightened. We added to our housing bond
exposure as well, choosing bonds which have above market yields as well as
defensive characteristics. Finally, we have reduced the cost of trading by using
futures contracts to manage duration more effectively.
Standish Massachusetts Intermediate Tax Exempt Bond Fund
The Massachusetts market has underperformed the national municipal market this
year. Some states have benefited more from the strong national economic recovery
than has Massachusetts. Further, the hospital sector of the market remains
troubled, and the Massachusetts municipal market has a significant number of
health care credits. Nevertheless, when considering the heavy tax burden applied
to unearned income in the state, Massachusetts double tax-exempt bonds have
still proven to be an excellent choice in terms of after-tax returns in the bond
market.
During 1996, we have maintained our philosophy of not making major interest rate
bets, preferring instead to identify securities which appear to be undervalued
through research and trading. In addition, we have taken two steps to improve
the performance of the fund. We have increased our exposure to housing bonds,
choosing securities which we believe have above average yields as well as
defensive characteristics. Also, we have employed the use of futures contracts
to manage the portfolio's duration in a much more cost-effective manner (i.e.
reducing the number of trades and the bid-to-ask spread necessary to adjust
duration).
Raymond J. Kubiak Maria D. Furman
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Comparison of Change in Value of $100,000 Investment in
Standish Massachusetts Intermediate Tax Exempt Bond Fund,
Standish Intermediate Tax Exempt Bond Fund and the Lehman Muni 3-5-7-10 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Massachusetts
Intermediate Tax Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond
Fund compared with the Lehman Muni 3-5-7-10 Index for the period November 2,
1992 to September 30, 1996, based upon a $100,000 investment. Also included are
the average annual total returns for one year, three year, and since inception.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Management Discussion & Analysis
Small cap stocks have proven to be an extremely volatile asset class in 1996.
After a slow start, small caps rose very sharply in late spring, peaked in May,
and dropped abruptly through July. Peak to trough declines were some 30%. August
began a recovery which was not sustained in September. For the period from
January 2, 1996 (commencement of investment operations) to September 30, 1996,
the Standish Small Cap Tax-Sensitive Equity Fund gained 17.95%, after expense
reimbursement, compared to a gain of 10.77% for the Russell 2000 Index of Small
Cap Stocks.
Early in 1996 performance benefited from the smaller size of the companies in
the fund, as well as the fund's aggressive growth orientation. Similarly, during
the severe correction and subsequent slow recovery, these characteristics
penalized fund performance. Quarterly performance contribution was strongest in
the technology sector. Offsetting the good technology performance were poor
returns on consumer and health care stocks.
We continue to concentrate investments in rapidly growing, high quality smaller
companies with strong business positions. This leads to an emphasis on the
higher growth sectors, particularly the innovative areas of health care,
technology and business services. We invest in companies with a minimum of 20%
growth, very strong balance sheets, and leadership positions within their
operating niches.
We believe 1996 will prove to be a reasonable year for small cap stocks despite
their volatility. We are happy to report that, as of September 30, the fund had
no reportable realized capital gains to distribute to shareholders and has
recognized capital losses which may be used by the fund to offset future
realized capital gains, if any. We thank you for your support and interest in
the Small Cap Tax-Sensitive Fund.
Nicholas S. Battelle
<PAGE>
Comparison of Chnage in Value of $100,000 Investment in Standish Small
Cap Tax-Sensitive Equity Fund and the S&P 500 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Small Cap
Tax-Sensitive Equity Fund compared with the S&P 500 Index for the period January
2, 1996 to September 30, 1996, based upon a $100,000 investment. Also included
is the average annual total return since inception.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Management Discussion & Analysis
The returns from the stocks of large U.S. companies were excellent during the
first nine months of 1996, with the Standard and Poor's 500 Index up 13.50% for
the period. The Tax-Sensitive Equity Fund returned 18.97%, after expense
reimbursement, for this period, beating this benchmark by 5.47%.
Returns for the first nine months of 1996 were driven by an economy which
continued to grow steadily and without a hint of the inflation which is so
devastating to equity markets. Several market sectors did extremely well.
Optimistic consumers, almost fully employed, continued to spend and retail
stocks performed quite well. The technology sector was mixed but generally
strong, while selected banks and insurance companies showed reasonable earnings
growth. Interest sensitive stocks, such as telephone and electric utilities, did
poorly as interest rates rose.
Returns for the Tax-Sensitive Equity Fund were driven by individual stock
selection rather then heavy weightings in favored S&P sectors. The fund's best
returns were achieved by Consolidated Stores, a retail liquidator, which was up
100%, and American Travellers, a major insurer of nursing home stays, which rose
67%. Our worst disappointment came in Teradyne, as investors pounded
semiconductor and capital equipment stocks. But the fund did participate in the
surge experienced by other technology stocks as Adaptec, Compaq, Hewlett, Intel,
IBM and Varian were up an average of 28%.
We are happy to report that, as of September 30, our fund had no reportable
realized capital gains to distribute to shareholders and has recognized capital
losses which may be used by the fund to offset future realized capital gains, if
any. There will be a dividend payment, but returns will not be reduced by
further capital gains taxes.
Laurence A. Manchester
<PAGE>
Comparison of Chnage in Value of $100,000 Investment in Standish
Tax-Sensitive Equity Fund and the S&P 500 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Tax-Sensitive
Equity Fund compared with the S&P 500 Index for the period January 2, 1996 to
September 30, 1996, based upon a $100,000 investment. Also included is the
average annual total return since inception.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Assets and Liabilities
September 30, 1996
<TABLE>
<CAPTION>
Massachusetts
Intermediate Intermediate Small Cap
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund Bond Fund Equity Fund Equity Fund
- - - - --------------------------------------------------- ----------------- ------------- -------------- ---------------
Assets:
<S> <C> <C> <C> <C>
Investments, at value (Note 1A) * $ 31,908,048 $ 35,036,341 $ 6,720,966 $ 2,782,028
Cash - - 143,995 36,592
Receivable for investments sold - - 258,450 -
Receivable for fund shares sold - - 152,665 2,618
Dividends & interest receivable 489,513 545,442 1,966 3,126
Deferred organization expense (Note 1E) 3,092 4,163 16,073 16,082
Receivable from investment advisor (Note 3) - - 23,523 21,425
----------------- ------------- -------------- ---------------
Total assets 32,400,653 35,585,946 7,317,638 2,861,871
----------------- ------------- -------------- ---------------
Liabilities:
Distributions Payable 87,631 90,225 - -
Payable for investments purchased - 97,050 403,754 -
Payable for daily variation margin on open
financial futures contracts (Note 7) 2,938 1,188 - -
Payable for Delayed Delivery Transactions (Note 8) - 507,035 - -
Payable for fund shares redeemed 125,000 2,500 - -
Accrued custodian fee 16,844 17,162 8,881 10,470
Accrued investment advisory fee (Note 3) 24,870 19,444 - -
Accrued trustee fees (Note 3) 620 652 94 49
Other accrued expenses and other liabilities 6,667 7,978 9,042 8,410
----------------- ------------- -------------- ---------------
Total Liabilities 264,570 743,234 421,771 18,929
----------------- ------------- -------------- ---------------
Net assets $ 32,136,083 $ 34,842,712 $ 6,895,867 $ 2,842,942
================= ============= ============== ===============
Net assets consist of:
Paid-in capital $ 32,411,904 $ 34,179,759 $ 6,820,711 $ 2,538,959
Accumulated undistributed net investment income - - 5,180 12,585
Accumulated net realized investment gain (loss) (587,756) 18,747 (289,040) (21,876)
Net unrealized appreciation 311,935 644,206 359,016 313,274
----------------- ------------- -------------- ---------------
Net Assets $ 32,136,083 $ 34,842,712 $ 6,895,867 $ 2,842,942
================= ============= ============== ===============
Shares of beneficial interest outstanding 1,557,795 1,649,638 292,564 120,446
================= ============= ============== ===============
Net asset value, offering price,
and redemption price per share $ 20.63 $ 21.12 $ 23.5 $ 23.60
================= ============= ============== ===============
(Net assets/Shares outstanding)
* Identified cost of investments $ 31,629,887 $ 34,401,415 $ 6,361,949 $ 2,468,754
================= ============= ============== ===============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Operations
For the Period Ended September 30, 1996
Massachusetts
Intermediate Intermediate Small Cap
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund (a) Bond Fund (a) Equity Fund (b) Equity Fund (b)
- - - - ------------------------------------------------------ ----------------- --------------- ----------------- --------------
Investment Income
Interest income $ 1,327,319 $ 1,378,131 $ 6,588 $ 2,877
Dividend income - - 2,631 25,160
----------------- ------------- --------------- --------------
Total investment income 1,327,319 1,378,131 9,219 28,037
----------------- ------------- --------------- --------------
Expenses
Investment advisory fee (Note 3) 98,478 98,399 13,510 6,161
Trustee fees (Note 3) 1,114 1,158 123 65
Accounting, custody and transfer agent fees 58,060 60,894 37,783 30,741
Registration costs 466 12,774 2,184 2,366
Audit services 12,104 16,692 18,717 18,717
Legal fees 6,412 5,243 2,433 2,433
Amortization of organization costs 2,161 2,915 2,802 2,802
Miscellaneous 719 2,582 10 320
----------------- ------------- --------------- --------------
Total Expenses 179,514 200,657 77,562 63,605
----------------- ------------- --------------- --------------
Deduct:
Waiver of investment advisory fee 20,375 41,685 13,510 6,161
Reimbursement of Fund operating expenses - - 64,052 57,444
----------------- ------------- --------------- --------------
Total waiver of investment advisory fee and
reimbursement of operating expenses 20,375 41,685 77,562 63,605
----------------- ------------- --------------- --------------
Net expenses 159,139 158,972 0 0
----------------- ------------- --------------- --------------
Net investment income 1,168,180 1,219,159 9,219 28,037
----------------- ------------- --------------- --------------
Realized and unrealized gain (loss):
Net realized gain (loss)
Investment securities 71,451 57,082 (289,040) (21,876)
Financial futures (50,933) (3,947) - -
----------------- ------------- --------------- --------------
Net realized gain (loss) 20,518 53,135 (289,040) (21,876)
Change in net unrealized appreciation (depreciation)
Investment securities (664,889) (468,693) 359,016 313,274
Financial futures 33,774 9,280 - -
----------------- ------------- --------------- --------------
Change in net unrealized appreciation (depreciation) (631,115) (459,413) 359,016 313,274
Net realized and unrealized gain (loss) (610,597) (406,278) 69,976 291,398
----------------- ------------- --------------- --------------
Net increase in net assets from operations $ 557,583 $ 812,881 $ 79,195 $ 319,435
================= ============= =============== ==============
(a) For the nine months ended September 30, 1996.
(b) For the period January 2, 1996, commencement of investment operations, through September 30, 1996.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Operations
For the Year Ended December 31, 1995
Massachusetts
Intermediate Intermediate
Tax Exempt Tax Exempt
Bond Fund Bond Fund
- - - - ------------------------------------------------------ ----------------- -------------
Investment Income
Interest income $ 1,653,234 $ 1,550,770
Dividend income - -
----------------- -------------
Total investment income 1,653,234 1,550,770
----------------- -------------
Expenses
Investment advisory fee (Note 3) 124,213 115,482
Trustee fees (Note 3) 1,222 1,165
Accounting, custody and transfer agent fees 72,031 72,211
Registration costs 3,208 14,414
Audit services 16,088 15,919
Legal fees 1,240 1,131
Amortization of organization costs 2,850 4,410
Miscellaneous 2,321 985
----------------- -------------
Total Expenses 223,173 225,717
----------------- -------------
Deduct:
Waiver of investment advisory fee 21,818 38,426
Reimbursement of Fund operating expenses - -
----------------- -------------
Total waiver of investment advisory fee and
reimbursement of operating expenses 21,818 38,426
----------------- -------------
Net expenses 201,355 187,291
----------------- -------------
Net investment income 1,451,879 1,363,479
----------------- -------------
Realized and unrealized gain (loss):
Net realized gain (loss)
Investment securities (132,384) 257,404
Financial futures (11,785) (57,508)
----------------- -------------
Net realized gain (loss) (144,169) 199,896
Change in net unrealized appreciation (depreciation)
Investment securities 2,339,720 1,841,975
Financial futures - -
----------------- -------------
Change in net unrealized appreciation (depreciation) 2,339,720 1,841,975
Net realized and unrealized gain (loss) 2,195,551 2,041,871
----------------- -------------
Net increase in net assets from operations $ 3,647,430 $ 3,405,350
================= =============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Statements of Changes in Net Assets
Nine Months Year Year
Ended Ended Ended
9/30/96 12/31/95 12/31/94
- - - - ---------------------------------------------------------- ----------------- ----------------- --------------
Increase (decrease) in Net Assets
From Operations:
Net investment income $ 1,168,180 $ 1,451,879 $ 1,384,665
Net realized gain (loss) 20,518 (144,169) (464,105)
Change in net unrealized appreciation (depreciation) (631,115) 2,339,720 (2,123,372)
----------------- ----------------- --------------
Net increase in net assets from operations 557,583 3,647,430 (1,202,812)
----------------- ----------------- --------------
Distributions to shareholders:
From net investment income (1,168,180) (1,451,879) (1,384,665)
From realized capital gains - - (10,471)
----------------- ----------------- --------------
Total distributions to shareholders (1,168,180) (1,451,879) (1,395,136)
----------------- ----------------- --------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares 7,839,919 10,781,062 10,055,521
Net asset value of shares issued to shareholders in
payment of distributions declared 354,227 371,483 181,704
Cost of shares redeemed (8,012,503) (8,558,571) (9,490,499)
----------------- ----------------- --------------
Increase in net assets from Fund share transactions 181,643 2,593,974 746,726
----------------- ----------------- --------------
Net increase (decrease) in net assets (428,954) 4,789,525 (1,851,222)
Net assets:
Beginning of period 32,565,037 27,775,512 29,626,734
----------------- ----------------- --------------
End of period $ 32,136,083 $ 32,565,037 $ 27,775,512
================= ================= ==============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Statements of Changes in Net Assets
Nine Months Year Year
Ended Ended Ended
9/30/96 12/31/95 12/31/94
- - - - ------------------------------------------------------------ -------------- -------------- -------------
Increase (decrease) in Net Assets
From Operations:
Net investment income $ 1,219,159 $ 1,363,479 $ 957,255
Net realized gain (loss) 53,135 199,896 (234,284)
Change in net unrealized appreciation (depreciation) (459,413) 1,841,975 (1,284,419)
-------------- -------------- -------------
Net increase in net assets from operations 812,881 3,405,350 (561,448)
-------------- -------------- -------------
Distributions to shareholders:
From net investment income (1,219,159) (1,363,479) (957,255)
From realized capital gains - - (18,500)
-------------- -------------- -------------
Total distributions to shareholders (1,219,159) (1,363,479) (975,755)
-------------- -------------- -------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares 11,111,750 16,771,357 12,559,281
Net asset value of shares issued to shareholders in
payment of distributions declared 428,110 316,498 225,637
Cost of shares redeemed (9,156,263) (6,778,640) (7,865,733)
-------------- -------------- -------------
Increase in net assets from Fund share transactions 2,383,597 10,309,215 4,919,185
-------------- -------------- -------------
Net increase (decrease) in net assets 1,977,319 12,351,086 3,381,982
Net assets:
Beginning of period 32,865,393 20,514,307 17,132,325
-------------- -------------- -------------
End of period $ 34,842,712 $ 32,865,393 $ 20,514,307
============== ============== =============
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Statements of Changes in Net Assets
For the Period Ended September 30, 1996
Small Cap
Tax-Sensitive Tax-Sensitive
Equity Fund (a) Equity Fund (a)
- - - - -------------------------------------------------------------- ---------------- -----------------
Increase (decrease) in Net Assets
From Operations:
Net investment income $ 9,219 $ 28,037
Net realized gain (loss) (289,040) (21,876)
Change in net unrealized appreciation 359,016 313,274
-------------- -----------------
Net increase in net assets from operations 79,195 319,435
-------------- -----------------
Distributions to shareholders:
From net investment income (4,039) (15,453)
-------------- -----------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares 6,823,260 2,539,035
Net asset value of shares issued to shareholders in
payment of distributions declared 2,858 14,425
Cost of shares redeemed (5,407) (14,500)
-------------- -----------------
Increase in net assets from Fund share transactions 6,820,711 2,538,960
-------------- -----------------
Net increase in net assets 6,895,867 2,842,942
Net assets:
Beginning of period 0 0
-------------- -----------------
End of period (including undistributed net $ 6,895,867 $ 2,842,942
============== =================
investment income of $5,180 and $12,585, respectively)
(a) For the period January 2, 1996, commencement of investment operations, through September 30, 1996.
</TABLE>
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Financial Highlights
<TABLE>
<CAPTION>
Nine Months Ended November 2, 1992
September 30, 1996 Year Ended December 31, (start of business) to
-------------------------------------
(Note 1F) 1995 1994 1993 December 31, 1992*
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.02 $19.55 $21.31 $20.32 $20.00
Income from investment operations
Net investment income ** 0.74 0.94 0.94 0.92 0.13
Net realized and unrealized gain (loss) (0.39) 1.47 (1.75) 1.13 0.32
-------- ----------- ----------- ----------- -----------
Total from investment operations 0.35 2.41 (0.81) 2.05 0.45
-------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income (0.74) (0.94) (0.94) (0.92) (0.13)
From realized capital gains - - (0.01) (0.14) -
-------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders (0.74) (0.94) (0.95) (1.06) (0.13)
-------- ----------- ----------- ----------- -----------
Net asset value - end of period $20.63 $21.02 $19.55 $21.31 $20.32
======== =========== =========== =========== ===========
Total return 1.70% 12.64% (3.84%) 10.24% 13.85t
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65%t 0.65% 0.65% 0.65% 0.65t
Net investment income ** 4.78%t 4.71% 4.67% 4.35% 4.05t
Net assets at end of period (000 omitted) $32,136 $32,565 $27,776 $29,627 $6,537
Portfolio turnover 35%x 77% 84% 94% 31%
** The investment adviser voluntarily did not impose a portion of its
investment advisory fee. If this reduction had not been undertaken, the net
investment income per share and the ratios would have been:
Net investment income per share $0.72 $0.95 $0.91 $0.86 $0.11
Ratios (to average net assets):
Expenses 0.73%t 0.72% 0.78% 0.95% 1.37t
Net investment income 4.70%t 4.64% 4.54% 4.05% 3.33t
* Audited by other auditors
t Computed on an annualized basis
x Commencing in fiscal 1996, securities which are puttable on demand have
been excluded from the portfolio turnover calculation
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Financial Highlights
Nine Months Ended November 2, 1992
September 30, 1996 Year Ended December 31, (start of business) to
------------------------------------
(Note 1F) 1995 1994 1993 December 31, 1992*
------------- ----------- ----------- ----------- ---------------------
Net asset value - beginning of period $21.40 $19.91 $21.44 $20.42 $20.00
Income from investment operations
Net investment income ** 0.79 0.98 0.95 0.93 0.14
Net realized and unrealized gain (loss) (0.28) 1.49 (1.51) 1.24 0.42
----------- ----------- ----------- ----------- --------------
Total from investment operations 0.51 2.47 (0.56) 2.17 0.56
----------- ----------- ----------- ----------- --------------
Less distributions declared to shareholders
From net investment income (0.79) (0.98) (0.95) (0.93) (0.14)
From realized capital gains - - (0.02) (0.22) -
----------- ----------- ----------- ----------- --------------
Total distributions declared to shareholders (0.79) (0.98) (0.97) (1.15) (0.14)
----------- ----------- ----------- ----------- --------------
Net asset value - end of period $21.12 $21.40 $19.91 $21.44 $20.42
=========== =========== =========== =========== ==============
Total return 2.43% 12.65% (2.68%) 10.78% 17.02t
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65%t 0.65% 0.65% 0.65% 0.65t
Net investment income ** 4.99%t 4.75% 4.62% 4.36% 4.16t
Net assets at end of period (000 omitted) $34,843 $32,865 $20,514 $17,132 $5,577
Portfolio turnover 43%x 140% 157% 126% 62%
** The investment adviser voluntarily did not impose a portion
of its investment advisory fee. If this reduction had not been
undertaken, the net investment income per share
and the ratios would have been:
Net investment income per share $0.76 $0.95 $0.90 $0.85 $0.12
Ratios (to average net assets):
Expenses 0.82%t 0.79% 0.89% 1.15% 1.47t
Net investment income 4.82%t 4.61% 4.38% 3.86% 3.34t
* Audited by other auditors
t Computed on an annualized basis
x Commencing in fiscal 1996, securities which are puttable on demand have
been excluded from the portfolio turnover calculation
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Financial Highlights
For the Period
January 2, 1996
(commencement of
investment operations)
to September 30, 1996
----------------------------
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income * 0.04
Net realized and unrealized gain (loss) 3.55
------------------------
Total from investment operations 3.59
------------------------
Less distributions declared to shareholders
From net investment income (0.02)
------------------------
Total distributions declared to shareholders (0.02)
------------------------
Net asset value - end of period $23.57
========================
Total return 17.95%
Ratios (to average net assets)/Supplemental Data
Expenses * 0.00t
Net investment income * 0.41t
Net assets at end of period (000 omitted) $6,896
Portfolio turnover 57%
Average broker commission paid per share $0.1058
* The investment adviser voluntarily did not impose its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
undertaken, the net investment income per share and the ratios would have been:
Net investment loss per share ($0.28)
Ratios (to average net assets):
Expenses 3.45t
Net investment loss (3.04t)
t Computed on an annualized basis
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Financial Highlights
For the Period
January 2, 1996
(commencement of
investment operations)
to September 30, 1996
------------------------
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income * 0.28
Net realized and unrealized gain (loss) 3.50
------------------------
Total from investment operations 3.78
------------------------
Less distributions declared to shareholders
From net investment income (0.18)
------------------------
Total distributions declared to shareholders (0.18)
------------------------
Net asset value - end of period $23.60
========================
Total return 18.97%
Ratios (to average net assets)/Supplemental Data
Expenses * 0.00%t
Net investment income * 2.27%t
Net assets at end of period (000 omitted) $2,843
Portfolio turnover 17%
Average broker commission paid per share $0.0419
* The investment adviser voluntarily did not impose its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
undertaken, the net investment income per share and the ratios would have been:
Net investment loss per share ($0.36)
Ratios (to average net assets):
Expenses 5.15%t
Net investment loss (2.88%t
t Computed on an annualized basis
</TABLE>
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- - - - --------------------------------------------------- --------- --------------- -------------- ----------------
Bonds - 97.5%
- - - - ---------------------------------------------------
General Obligations - 40.7%
- - - - ---------------------------------------------------
<S> <C> <C> <C> <C>
Amesbury MA State Qualified 5.%0 6/01/2003 $ 750,000 $ 750,000
Brockton MA State Qualified 5.55 12/15/2003 270,000 267,975
Brockton MA State Qualified 5.65 12/15/2004 300,000 297,750
Brockton MA State Qualified 5.70 6/15/2002 160,000 164,200
Brockton MA State Qualified 6.13 6/15/2018 250,000 253,438
Commonwealth of Massachusetts 6.25 7/01/2002 750,000 805,313
Commonwealth of Massachusetts 6.50 8/01/2001 480,000 516,600
Commonwealth of Massachusetts 6.90 10/01/2000 200,000 216,750
Commonwealth of Massachusetts 7.50 12/01/2000 400,000 443,000
Commonwealth of Massachusetts 7.50 6/01/2004 700,000 810,250
Lawrence MA State Qualified 5.13 9/15/2003 1,250,000 1,253,125
Lowell MA State Qualified 6.00 8/15/1999 775,000 801,156
Mass Bay Transportation Authority 6.45 3/01/2000 500,000 529,375
Mass Port Authority 5.50 7/01/2003 550,000 569,250
Mass Port Authority 7.13 7/01/2012 415,000 420,075
Mass St College Bldg Authority Project 7.50 5/01/2006 500,000 589,375
Mass St College Bldg Authority Project 7.50 5/01/2007 250,000 295,938
Massachusetts Bay Transportation Authority 6.25 3/01/2004 475,000 515,375
Puerto Rico Highway Authority 6.25 7/01/2004 800,000 869,000
Springfield MA 6.25 8/01/2006 1,000,000 1,075,000
University of Mass Building Authority State Guarantee 6.63 5/01/2007 1,000,000 1,105,000
Worcester, MA 6.00 7/01/2005 500,000 530,000
----------------
13,077,945
----------------
Housing Revenue - 6.4%
- - - - ---------------------------------------------------
Mass HFA Residential Development FNMA 6.50 12/01/2014 695,000 711,506
Mass HFA Residential Development FNMA t 6.88 11/15/2011 500,000 535,625
Mass HFA Residential Development FNMA 7.60 12/01/2014 500,000 535,625
Mass HFA Residential Development FNMA 8.80 8/01/2021 250,000 264,688
----------------
2,047,444
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - --------------------------------------------------- --------- --------------- -------------- ----------------
Insured Bonds - 12.6%
- - - - ---------------------------------------------------
Chelsea MA School District AMBAC 6.%0 6/15/2002 $ 225,000 $ 238,781
Chelsea MA School District AMBAC t 6.00 6/15/2004 750,000 799,688
Holyoke MA FSA 6.00 6/15/2007 800,000 840,000
Mass Educational Loan Authority AMBAC t 5.25 7/01/1999 545,000 554,538
Milford MA AMBAC 5.13 12/15/2014 500,000 471,250
New Bedford MA AMBAC 6.00 10/15/2005 575,000 612,375
Rockport MA AMBAC 6.80 12/15/2003 300,000 326,625
Worcester MA MBIA 5.80 8/01/1998 200,000 204,000
----------------
4,047,257
----------------
Lease Revenue - 3.0%
- - - - ---------------------------------------------------
Puerto Rico Housing Bank Appropriation 5.13 12/01/2004 250,000 244,063
Puerto Rico Housing Bank Appropriation 5.13 12/01/2005 750,000 725,625
----------------
969,688
----------------
LOC GIC - 7.2%
- - - - ---------------------------------------------------
Mass IFA Amesbury LOC: State Street 5.35 9/01/2000 455,000 461,825
Mass IFA Human Development LOC: Shawmut 6.25 4/15/2009 805,000 830,156
Mass IFA IBEW LOC: State Street 5.88 1/01/2005 225,000 229,781
Northborough MA IFA LOC: Bank of Boston 5.75 9/01/2002 765,000 782,213
----------------
2,303,975
----------------
Revenue Bonds - 27.6%
- - - - ---------------------------------------------------
Mass HEFA Anna Jaques Hospital 5.75 10/01/1998 440,000 443,850
Mass HEFA Central New England Health Systems 5.75 8/01/2003 500,000 462,500
Mass HEFA Charlton Hospital 7.00 7/01/2000 300,000 318,375
Mass HEFA Charlton Hospital 7.10 7/01/2001 300,000 322,500
Mass HEFA Daughters of Charity Hospital 5.50 7/01/2004 600,000 615,750
Mass HEFA Melrose Wakefield Hospital 6.35 7/01/2006 310,000 322,788
Mass HEFA New England Baptist Hospital 7.30 7/01/2011 715,000 763,263
Mass HEFA Youville Hospital HFA Secured 6.13 2/15/2015 650,000 662,188
Mass IFA Brooks School 5.60 7/01/2005 245,000 251,125
Mass IFA Brooks School 5.90 7/01/2013 410,000 412,050
Mass IFA Clark University 6.45 7/01/2001 300,000 319,125
Mass IFA Loomis Project 6.50 7/01/2002 350,000 356,125
Mass IFA Resource Recovery 6.15 7/01/2002 1,000,000 1,035,000
Mass IFA Springfield College 4.90 9/15/1999 715,000 711,425
Mass Municipal Wholesale Electric Co Power 6.38 7/01/2001 300,000 315,750
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - --------------------------------------------------- --------- --------------- -------------- ----------------
Mass Water Resource Authority 5.%5 3/01/2013 $ 500,000 $ 473,750
Mass Water Resource Authority 7.25 4/01/2001 200,000 219,750
New England Loan Marketing MA Student Loan 5.80 3/01/2002 850,000 878,688
----------------
8,884,002
----------------
TOTAL Bonds (Cost $31,052,150) 31,330,311
----------------
Short-Term Investments - 1.8%
- - - - ---------------------------------------------------
Short Term - 1.2%
- - - - ---------------------------------------------------
Mass St Updates 3.85 12/1/1997 * 400,000 400,000
Repurchase Agreement - 0.6%
- - - - ---------------------------------------------------
Prudential-Bache Repurchase Agreement, dated 9/30/96,
5.12% due 10/1/96, to pay $177,763 (Collateralized by
Federal National Mortgage Association, 7.252%, due
4/1/24, market value $181,292) at cost 177,737 177,737
----------------
TOTAL Short-Term Investments (Cost $577,737) 577,737
----------------
TOTAL INVESTMENTS (Cost $31,629,887) - 99.3% 31,908,048
Other Assets/(Liabilities) - 0.7% 228,035
----------------
NET ASSETS - 100.0% $ 32,136,083
================
The following abbreviations are used in this portfolio:
t - Denotes all or part of security pledged as a margin deposit (see Note 7).
* - Date shown reflects actual maturity date. Security puttable on a daily basis.
AMBAC - American Municipal Bond Assurance Corp. IBEW - International Brotherhood of Electrical Workers
FSA - Financial Security Association IFA - Industrial Finance Authority
HEFA - Health & Educational Facilities Authority LOC - Letter of Credit
HFA - Housing Finance Agency MBIA - Municipal Bond Insurance Association
FNMA - Federal National Mortgage Association
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - ----------------------------------------------------- --------- --------------- -------------- ---------------
Bonds - 98.0%
- - - - -----------------------------------------------------
General Obligations - 12.2%
- - - - -----------------------------------------------------
Cincinnati Public Schools OH 6.%5 6/15/2002 $ 600,000 $ 626,250
Commonwealth of Massachusetts 7.50 6/01/2004 500,000 578,750
Commonwealth of Massachusetts 3.85 12/01/1997 200,000 200,000
Detroit MI 6.00 4/01/2000 250,000 254,375
District of Columbia 5.80 6/01/2004 500,000 490,000
Honolulu HI 5.40 9/27/2007 500,000 500,625
Lawrence MA 5.38 9/15/2005 500,000 503,125
Lowell MA State Qualified 7.20 2/15/2000 500,000 535,625
Texas State Tpk Authority ** t 12.63 1/01/2020 400,000 562,000
---------------
4,250,750
---------------
Housing Revenue - 10.3%
- - - - -----------------------------------------------------
CA Housing Authority Summit Medical Center 5.50 5/01/2005 615,000 628,838
Colorado HEFA Rocky Mountain Adventist Hospital 6.00 2/01/1998 225,000 226,406
Colorado HFA Multi Family Insured Mortgage 7.90 10/01/2000 225,000 244,688
Florida HFA 0.00 7/15/2016 1,000,000 108,750
Mass HFA 7.60 12/01/2014 400,000 428,500
MI Housing Authority AMBAC 5.50 6/01/2018 490,000 490,000
MI Housing Authority AMBAC 6.40 4/01/2005 250,000 260,625
New Mexico Mortgage Finance Authority 5.75 7/01/2014 500,000 505,625
Penn Housing Finance Agency 5.35 10/01/2008 500,000 500,000
Texas Dept Housing & Community 0.00 3/01/2015 350,000 101,938
Virginia Housing Development Authority 0.00 11/01/2017 575,000 97,031
---------------
3,592,401
---------------
Insured Bonds - 22.6%
- - - - -----------------------------------------------------
Benton County WA School District AMBAC t 6.70 12/01/2006 580,000 651,775
CA Housing Authority MBIA 5.65 8/01/2025 400,000 402,000
Chicago IL O'Hare Airport MBIA 6.75 1/01/2006 500,000 555,000
DC Medlantic Hospital MBIA 7.00 8/15/2005 500,000 550,000
Denver CO Airport MBIA 7.50 11/15/2006 500,000 568,125
District of Columbia FSA 5.30 6/01/2004 500,000 501,250
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - ----------------------------------------------------- --------- --------------- -------------- ---------------
Grand Prairie TX Health AMBAC 6.%0 11/01/1999 $ 470,000 $ 479,988
Greater Detroit Resource Recovery AMBAC 6.25 12/13/2007 400,000 432,500
Jefferson County OH Asset Guaranty 6.63 12/01/2005 375,000 391,406
NH HEFA Allegheny Health MBIA 6.25 10/01/2008 300,000 305,250
OK Industrial Authority Health System AMBAC 7.00 8/15/2006 500,000 564,375
Orange County CA Transportation FGIC 4.80 2/15/2006 500,000 482,500
PA HEFA Allegheny Health MBIA 5.50 11/15/2008 405,000 408,544
SD HEFA Mckennan Hosp MBIA 6.00 7/01/2007 500,000 527,500
Tucson AZ COP Asset Guaranty 6.00 7/01/2004 500,000 520,625
Utah Student Loan AMBAC 7.45 11/01/2008 500,000 531,250
---------------
7,872,088
---------------
LOC GIC - 2.2%
- - - - -----------------------------------------------------
Emphoria VA IDB LOC: Bank of Boston 5.80 4/01/2004 200,000 201,612
Emphoria VA IDB LOC: Bank of Boston 5.80 4/01/2004 130,000 131,160
Northborough MA IFA LOC: Bank of Boston 5.75 9/01/2002 440,000 449,900
---------------
782,672
---------------
Revenue Bonds - 50.7%
- - - - -----------------------------------------------------
Alaska Industrial Development and Export Authority 5.25 4/01/1998 215,000 216,881
Alaska Industrial Development and Export Authority 5.50 4/01/2001 500,000 507,500
Alaska Industrial Development and Export Authority 6.20 4/01/2003 150,000 158,250
Allegheny County PA Industrial Development 5.30 12/01/1996 500,000 500,340
Battery Park NY Authority Junior Lien 5.20 11/01/2023 500,000 500,625
Bloomington MN Port Authority FSA 5.30 2/01/2007 1,000,000 1,011,250
Castle Rock CO Import Authority 5.75 12/01/2001 500,000 515,625
Dayton Ohio Special Facilities 6.05 10/01/2009 500,000 501,250
DC Medlantic Hospital 7.00 8/15/2005 500,000 534,375
District of Columbia Redevelopment Agency 5.63 11/01/2010 495,000 482,006
Eddyville Iowa Pollution Control Revenue 5.40 10/01/2006 500,000 509,375
Foothills CA Transportation Agency 0.00 1/01/2007 500,000 310,625
Gateway OH Special Tax 7.50 9/01/2005 500,000 537,500
Hot Springs AK Sales & Use 4.95 12/01/2008 250,000 248,438
Intermountain Power Agency Utah * 5.25 7/01/2003 500,000 511,875
Long Beach CA Aquarium 5.75 7/01/2005 200,000 196,500
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Rate Maturity Value (Note 1A)
- - - - ----------------------------------------------------- --------- --------------- -------------- ---------------
Los Angeles CA Building Authority 5.%0 5/01/2004 $ 500,000 $ 510,000
Mashantucket CT Pequot 6.25 9/01/2003 300,000 306,375
Mass IFA Boston Edison 5.75 2/01/2014 500,000 481,875
Mass IFA Loomis Project 6.50 7/01/2002 250,000 254,375
Mass IFA Resource Recovery 6.15 7/01/2002 150,000 155,250
Met Pier IL 6.25 7/01/2017 300,000 298,875
MT Higher Education 5.95 12/01/2012 440,000 444,950
New York Dormitory Authority t 5.50 7/01/2003 500,000 510,625
New York Dormitory Authority 6.00 7/01/2006 500,000 511,875
New York Med Center Long Island FHA 6.40 8/15/2014 495,000 512,325
New York Med Center Mercy FHA 5.40 8/15/2005 395,000 411,294
New York Med Center Mt. Sinai FHA 5.95 8/15/2009 235,000 239,113
New York Med Center St. Luke's FHA 5.60 8/15/2013 465,000 463,253
New York Med Center St. Vincent FHA 6.13 2/15/2014 515,000 531,738
New York Urban Development Corp. 6.00 1/01/2004 500,000 516,250
New York Urban Development Corp. t 6.25 4/01/2002 500,000 523,750
NH Education Auth. Brewster Acadamy 5.40 6/01/2001 505,000 506,894
NY Metropolitan Tran Authority 5.75 7/01/2015 500,000 482,500
OH Development Commission 5.45 6/01/1999 200,000 202,250
Orange County CA Recovery 5.80 7/01/2016 400,000 399,000
Orange County CA Transportation Sales Tax 6.00 2/15/2007 500,000 525,625
San Bernadino CA Certificates of Participation 5.25 8/01/2004 500,000 495,000
Volusia FL HEFA - Embry Project 5.50 10/15/2004 400,000 403,500
WA Public Power Supply Project 5.30 7/01/2002 500,000 503,125
Weld County Colorado IDA Conagra 6.75 12/15/2001 200,000 212,750
---------------
17,644,982
---------------
TOTAL Bonds (Cost $33,507,967) 34,142,893
---------------
Short-Term Investments - 2.6%
- - - - -----------------------------------------------------
Short Term - 2.0%
- - - - -----------------------------------------------------
Mass St Updates 3.85 12/1/1997 *700,000 700,000
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Intermediate Tax Exempt Bond Fund
Portfolio of Investments
September 30, 1996
Par Value
Security Value (Note 1A)
- - - - ----------------------------------------------------- -------------- ---------------
Repurchase Agreement - 0.6%
- - - - -----------------------------------------------------
Prudential-Bache Repurchase Agreement, dated 9/30/96,
5.12% due 10/1/96, to pay $193,476 (Collateralized by
Federal National Mortgage Association, 7.252, due 4/1/24,
market value $197,317) at cost $ 193,448 $ 193,448
---------------
TOTAL Short-Term Investments (Cost $893,448) 893,448
---------------
TOTAL INVESTMENTS (Cost $34,401,415) - 100.6% 35,036,341
Other Assets/(Liabilities) - (0.6%) (193,629)
---------------
NET ASSETS - 100.0% $ 34,842,712
===============
The following abbreviations are used in this portfolio:
t - Denotes all or part of security pledged as a margin deposit (see Note 7).
* - Delayed delivery contract.
** - Prerefunded security.
*** - Date shown reflects actual maturity date. Security puttable on a daily basis.
AMBAC - American Municipal Bond Assurance Corp. HFA - Housing Finance Agency
COP - Certificate of Participation IDA - Industrial Development Authority
FGIC - Financial Guaranty Insurance Co. IDB - Industrial Development Bond
FHA - Federal Housing Authority IFA - Industrial Finance Authority
FSA - Financial Security Association LOC - Letter of Credit
HEFA - Health & Educational Facilities Authority MBIA - Municipal Bond Insurance Association
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Common Stock - 97.5%
- - - - -----------------------------------------------------
Basic Industry - 3.5%
- - - - -----------------------------------------------------
Hughes Supply Inc. 2,400 $ 88,800
Intertape Polymer Group Inc. 3,700 82,788
OM Group Inc. 1,800 68,400
----------------
239,988
----------------
Capital Goods - 2.7%
- - - - -----------------------------------------------------
BE Aerospace Inc. * 4,900 101,063
Ultrak Inc. * 3,000 82,500
----------------
183,563
----------------
Consumer Cyclical - 4.6%
- - - - -----------------------------------------------------
Cannondale Corp. * 2,000 46,500
Custom Chrome Inc. * 3,700 67,988
Donna Karan International Inc. * 3,000 68,625
Golden Bear Golf Inc. * 2,600 51,350
ITI Technologies Inc. * 2,400 84,600
----------------
319,063
----------------
Consumer Stable - 6.3%
- - - - -----------------------------------------------------
Arbor Drug Inc. 2,600 56,550
Atlantic Coast Airlines Inc. * 4,700 55,225
Garden Ridge Corp. * 3,400 58,225
Midwest Express Holdings * 2,000 59,750
Opta Food Ingredients Inc. * 3,800 34,200
Performance Food Group Co. * 4,750 78,375
Robert Mondavi Corp. * 2,900 94,975
----------------
437,300
----------------
Financial - 4.9%
- - - - -----------------------------------------------------
American Travellers Corp. * 2,900 96,063
Inphynet Medical Management Inc. * 2,300 41,975
Olympic Financial Inc. * 3,300 81,263
S&P 400 Mid-Cap Depository Receipt 1,000 47,953
Texas Regional Bancshares 2,400 69,000
----------------
336,254
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Health Care - 27.8%
- - - - -----------------------------------------------------
Agouron Pharmaceuticals Inc. * 2,300 $ 100,338
Arbor Health Care Company * 3,300 77,138
Arris Pharmaceutical Corp. * 3,500 49,438
Ballard Medical Products 3,800 74,100
Chirex Inc. * 5,200 67,600
Conmed Corp. * 4,000 72,000
Corvel Corp. * 2,700 82,013
Dura Pharmaceuticals Inc. * 1,500 55,313
Emcare Holdings Inc. * 2,600 70,200
FPA Medical Management Inc. * 1,700 44,838
Fuisz Technologies Ltd. * 3,100 40,300
Genesis Health Ventures Inc. * 2,600 73,125
Healthplan Services Corp. * 3,400 74,375
Horizon Mental Health Management * 2,800 69,300
Impath Inc. * 2,900 35,525
Innotech Inc. * 3,500 35,438
Martek Biosciences * 2,500 62,500
Medarex Inc. * 7,000 56,875
Medcath Inc. * 3,400 57,800
Medquist Inc. * 3,000 60,750
Myriad Genetics Inc. * 2,000 51,000
National Surgery Centers * 2,200 61,600
Natures Sunshine Products Inc. 3,500 61,250
Occusystems Inc. * 1,500 45,000
Pharmaceutical Product Development * 1,900 51,300
Possis Medical Inc. * 3,100 55,025
Protocol Systems Inc. * 3,100 51,538
Rochester Medical Corp. * 3,400 56,525
Rural/Metro Corp. * 1,900 69,350
United Dental Care Inc. * 2,000 72,250
Vertex Pharmaceuticals Inc. * 2,800 82,600
----------------
1,916,404
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Services - 26.2%
- - - - -----------------------------------------------------
Air Express International Corp. 2,500 $ 70,625
Alternative Resources Corp. * 1,400 39,375
Analysts International Corp. 1,200 55,200
Applied Graphics Technology * 3,900 58,013
Barrett Business Services Inc. * 3,700 59,200
BET Holdings Inc. * 3,000 86,250
Central Parking Corp. 2,350 76,375
Coach USA Inc. * 3,300 88,275
Computer Task Group Inc. 2,300 71,588
Continental Waste Industries Inc. * 1,600 35,800
Cotelligent Group Inc. * 2,300 36,225
Data Processing Resources Corp. * 3,400 74,800
Emmis Broadcasting Corp. * 1,800 83,250
Evergreen Media Corp. * 1,650 51,563
LCC International Inc. * 1,800 32,850
Logan's Roadhouse Inc. * 2,600 52,325
May & Speh * 3,900 78,000
Natural Microsystems Corp. * 600 28,875
Newpark Resources Inc. * 2,700 98,213
Norrell Corp. 1,600 50,400
Oacis Healthcare Holdings * 3,100 37,975
On Assignment Inc. * 1,800 61,650
Pacific Gateway Exchange Inc. * 2,100 61,950
Personnel Group of America Inc. * 3,200 83,200
Prepaid Legal Services Inc. * 3,200 41,200
Remedy Temp Inc. * 2,000 42,500
Right Management Consultants * 2,800 67,900
Scandinavian Broadcast Systems Corp. * 3,700 83,250
Scientific Games Holdings Corp. * 2,800 58,450
Techforce Corp. * 5,700 42,038
----------------
1,807,315
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Small Cap Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Technology - 21.5%
- - - - -----------------------------------------------------
Advanced Technology Material * 3,900 $ 52,650
Affiliated Computer Services Inc. * 900 52,875
Applix Inc. * 2,700 70,875
Aspen Technologies Inc. * 700 47,425
Black Box Corp. * 2,300 75,900
CCC Information Services Group * 3,200 67,200
Computer Horizons Corp. * 1,900 54,150
Cymer Inc. * 2,000 35,500
Datastream Systems Inc. * 1,200 36,300
Dupont Photomasks Inc. * 1,800 50,400
Etec Systems Inc. * 1,100 37,400
Gensym Corp. * 1,900 41,325
Harbinger Corp. * 1,100 27,500
Indus Group Inc. * 3,500 70,000
Intelligroup Inc. * 4,000 55,500
Lecroy Corp. * 2,600 67,600
MDL Information Systems * 2,000 63,250
Nichols Research Corp. * 2,600 77,350
P-Com Inc. * 1,800 44,550
Perceptron Inc. * 1,700 42,925
Periphonics Corp. * 1,300 50,691
Photronics Inc. * 2,000 62,000
Project Software & Development * 1,500 63,375
Sanmina Corp. * 1,600 64,400
TCSI Corp. * 5,500 72,875
Ultradata Corp. * 4,500 27,563
Videoserver Inc. * 2,000 69,500
----------------
1,481,079
----------------
TOTAL INVESTMENTS (Cost $6,361,949) - 97.5% 6,720,966
Other Assets/(Liabilities) - 2.5% 174,901
----------------
NET ASSETS - 100.0% $ 6,895,867
================
* Non-income producing security.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Common Stock - 97.9%
- - - - -----------------------------------------------------
Basic Industry - 5.1%
- - - - -----------------------------------------------------
CSX Corp. 400 $ 20,200
Morton International Inc. 1,800 71,550
Norfolk Southern Corp. 300 27,413
Praxair, Inc 600 25,800
----------------
144,963
----------------
Capital Goods - 15.8%
- - - - -----------------------------------------------------
Crane Company 1,600 71,000
Deere & Co. 1,500 63,000
Dover Corp. 1,000 47,750
Harris Corp. Inc. 1,100 71,638
Rockwell International Corp. 1,000 56,375
Textron Inc. 800 68,000
United Technologies Corp. 600 72,075
----------------
449,838
----------------
Consumer Cyclical - 12.2%
- - - - -----------------------------------------------------
Carnival Corp. 2,000 62,000
Clayton Homes 2,600 57,200
Consolidated Stores Corp. * 700 28,000
Jones Apparel Group Inc. * 600 38,250
Leggett & Platt Inc. 2,200 64,625
Pier 1 Imports Inc. 2,600 41,925
Waban Inc. * 2,400 54,900
----------------
346,900
----------------
Consumer Stable - 10.0%
- - - - -----------------------------------------------------
General Nutrition Companies * 2,000 35,125
Kroger Co. * 700 31,325
Media General Inc. 1,500 47,250
Philip Morris Companies Inc. 350 31,413
Richfood Holdings Inc. 1,300 48,425
Wallace Computer Services 2,300 64,975
Wendys International Inc. 1,200 25,800
----------------
284,313
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Energy - 9.2%
- - - - -----------------------------------------------------
Amoco Corp. 800 $ 56,400
British Petroleum PLC 608 76,000
Mobil Corp. 600 69,450
Texaco Inc. 650 59,800
----------------
261,650
----------------
Financial - 17.5%
- - - - -----------------------------------------------------
Advanta Corp. 700 32,195
American Bankers Insurance Group 1,300 65,000
American Travellers Corp. * 1,775 58,797
Bank of Boston Corp. 700 40,513
BankAmerica Corp. 700 57,488
Chase Manhattan Corp. 700 56,088
Federal National Mortgage Association 1,400 48,825
First USA Inc. 400 22,150
Northern Trust 700 46,025
Reliastar Financial Corp. 1,500 71,250
----------------
498,331
----------------
Health Care - 10.5%
- - - - -----------------------------------------------------
Abbott Laboratories 1,100 54,175
Bristol-Myers Squibb Co. 600 57,825
Columbia/HCA Healthcare Corp. 900 51,188
Schering-Plough Corp. 900 55,350
Sofamor/Danek Group, Inc. * 1,000 30,875
Watson Pharmaceutical Inc. * 1,300 48,750
----------------
298,163
----------------
Real Estate Investment Trust - 4.0%
- - - - -----------------------------------------------------
Macerich Company (The) 1,500 33,563
Merry Land & Investment Co. 1,300 27,788
Patriot American Hospitality 400 13,450
Starwood Lodging Trust 900 37,688
----------------
112,489
----------------
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Standish Tax-Sensitive Equity Fund
Portfolio of Investments
September 30, 1996
Value
Security Shares (Note 1A)
- - - - ----------------------------------------------------- --------------- ------------------
Technology - 12.1%
- - - - -----------------------------------------------------
Adaptec Inc. * 1,000 60,000
Compaq Computer * 1,000 64,125
Hewlett-Packard Company 800 39,000
Intel Corp. 700 66,806
International Business Machine 400 49,800
Varian Associates Inc. 1,300 62,400
----------------
342,131
----------------
Utilities - 1.5%
- - - - -----------------------------------------------------
FPL Group Inc. 1,000 43,250
----------------
TOTAL INVESTMENTS (Cost $2,468,754) - 97.9% 2,782,028
Other Assets/(Liabilities) - 2.1% 60,914
----------------
NET ASSETS - 100.0% $ 2,842,942
================
* Non-income producing security.
</TABLE>
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Massachusetts Intermediate Tax Exempt Bond Fund
(Massachusetts Intermediate Tax Exempt Bond Fund) is a separate
non-diversified investment series of the Trust. Standish Intermediate
Tax Exempt Bond Fund (Intermediate Tax Exempt Bond Fund), Standish
Small Cap Tax-Sensitive Equity Fund (Small Cap Tax-Sensitive Equity
Fund) and Standish Tax-Sensitive Equity Fund (Tax-Sensitive Equity
Fund) are separate diversified investment series of the Trust (together
with the Massachusetts Intermediate Tax Exempt Bond Fund, individually
a "Fund" and collectively, the "Funds"). The following is a summary of
significant accounting policies consistently followed by the Funds in
the preparation of the financial statements. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A...Investment security valuations--
Municipal bonds are normally valued on the basis of valuations
furnished by a pricing service. Taxable obligations, if any, for which
price quotations are readily available are normally valued at the last
sales prices on the exchange or market on which they are primarily
traded, or if not listed or no sale, at the last quoted bid prices.
Equity securities for which quotations are readily available are valued
at the last sale prices or if no sale, at the closing bid prices in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short term instruments with less
than sixty-one days remaining to maturity when acquired by a Fund are
valued on an amortized cost basis. If a Fund acquires a short term
instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity
and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
B...Repurchase agreements--
It is the policy of each Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by each
Fund to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C...Securities transactions and income--
Securities transactions are recorded as of the trade date. Interest
income is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses
from securities sold are recorded on the identified cost basis.
D...Federal taxes--
As qualified regulated investment companies under Subchapter M of the
Internal Revenue Code, the Funds are not subject to income taxes to the
extent that each Fund distributes all of its taxable income for its
fiscal year. Dividends paid by the Massachusetts Intermediate Tax
Exempt Bond Fund and the Intermediate Tax Exempt Bond Fund
(collectively the "Bond Funds") from net interest earned on tax-exempt
municipal bonds are not includable by shareholders as gross income for
Federal income tax purposes because the Bond Funds intend to meet
certain requirements of the Internal Revenue Code applicable to
regulated investment companies which will enable the Bond Funds to pay
exempt-interest dividends.
<PAGE>
At September 30, 1996, the following Funds, for federal income tax
purposes, had capital loss carryovers as follows:
<TABLE>
<CAPTION>
Expiration Date September 30,
-------------------------------------------------------
2002 2003 2004 Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $ 375,094 $ 178,890 $ ----- $ 553,984
Small Cap Tax-Sensitive Equity Fund ----- ----- $ 240,551 $ 240,551
Tax-Sensitive Equity Fund ----- ----- $ 21,876 $ 21,876
</TABLE>
Such carryovers will reduce each Fund's taxable income arising from
future net realized gain on investments, if any, to the extent
permitted by the Internal Revenue Code and thus will reduce the amount
of distributions to shareholders which would otherwise be necessary to
relieve the Funds of any liability for federal income tax.
E...Deferred organization expense--
Costs associated with the Funds' organization and initial registration
are being amortized, on a straight-line basis, through October, 1997
for the Massachusetts Intermediate Tax Exempt Bond Fund and the
Intermediate Tax Exempt Bond Fund and through December, 2000 for the
Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity Fund.
F...Change in fiscal year end--
The Board of Trustees voted on February 9, 1996 to change the fiscal
year end of the Massachusetts Intermediate Tax Exempt Bond Fund and the
Intermediate Tax Exempt Bond Fund from December 31 to September
30.
(2).....Distributions to Shareholders:
Distributions on shares of the Bond Funds are declared daily from net
investment income and distributed monthly. Dividends from net
investment income, if any, will be distributed at least annually for
the Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity
Fund. Distributions on capital gains, if any, will be distributed
annually for all of the Funds. Distributions from net investment income
and capital gains, if any, are automatically reinvested in additional
shares of the applicable Fund unless the shareholder elects to receive
them in cash.Distributions are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax differences relating to
shareholder distributions will result in reclassifications to paid-in
capital.
(3).....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid at the following annual rates of
each Fund's average daily net assets: .40% for the Massachusetts
Intermediate Tax Exempt Bond Fund and the Intermediate Tax Exempt Bond
Fund, .60% for the Small Cap Tax-Sensitive Equity Fund and .50% for the
Tax-Sensitive Equity Fund. SA&W has agreed that the total Fund
operating expenses for any fiscal year will not exceed 0.65% of the
Fund's average daily net assets for the Massachusetts Intermediate Tax
Exempt Bond Fund and the Intermediate Tax Exempt Bond Fund, .90% for
the Small Cap Tax-Sensitive Equity Fund and 1.00% for the Tax-Sensitive
Equity Fund. For the period ended September 30, 1996 and the year ended
December 31, 1995, SA&W voluntarily did not impose $20,375 and $21,818,
respectively, of its advisory fee to the Massachusetts Intermediate Tax
Exempt Bond Fund and $41,685 and $38,426, respectively, to the
Intermediate Tax Exempt Bond Fund, which are reflected as reductions of
expenses in the respective Statements of Operations. For the period
ended September 30, 1996, SA&W voluntarily did not impose its
investment advisory fees of $13,510 and $6,161 and reimbursed operating
expenses of $64,052 and $57,444 for the Small Cap Tax-Sensitive Equity
Fund and Tax-Sensitive Equity Fund, respectively. These agreements are
voluntary and temporary and may be discontinued or revised by SA&W at
any time. The Funds pay no compensation directly to the Trust's
Trustees who are affiliated with SA&W nor to its officers, all of whom
receive remuneration for their services to the Funds from SA&W. Certain
of the trustees and officers of the trust are directors or officers of
SA&W.
<PAGE>
4)......Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations,
were as follows:
<TABLE>
<CAPTION>
Period Ending For the Year Ended
September 30, 1996 December 31, 1995
------------------------------------------------------------------
Purchases Sales Purchases Sales
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $ 11,013,527 $ 11,159,395 $ 26,333,975 $ 23,520,553
============= ============== ============== =============
Intermediate Tax Exempt Bond Fund $ 16,279,361 $ 14,065,880 $ 50,986,883 $ 40,572,529
============= ============== ============== =============
Small Cap Tax-Sensitive Equity Fund $ 8,506,998 $ 1,856,009
============= ==============
Tax-Sensitive Equity Fund $ 2,783,277 $ 293,127
============= ==============
</TABLE>
5)......Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in each Funds' shares
were as follows:
<TABLE>
<CAPTION>
Period Ended (a) Year Ended Year Ended
September 30, 1996 December 31, 1995 December 31, 1994
---------------- ---------------- -------------------
Massachusetts Intermediate Tax Exempt Bond Fund
<S> <C> <C> <C>
Shares sold 379,843 534,346 500,726
Shares issued to shareholders in payment of distributions declared 17,163 18,097 9,020
Shares redeemed (388,723) (423,607) (479,585)
---------------- --------------- ---------------
Net increase 8,283 128,836 30,161
================ =============== ===============
Intermediate Tax Exempt Bond Fund
Shares sold 524,041 821,564 612,015
Shares issued to shareholders in payment of distributions declared 20,313 15,149 11,043
Shares redeemed (430,546) (331,012) (392,041)
---------------- --------------- ---------------
Net increase 113,808 505,701 231,017
================ =============== ===============
Small Cap Tax-Sensitive Equity Fund
Shares sold 292,713
Shares issued to shareholders in payment of distributions declared 119
Shares redeemed (268)
----------------
Net increase 292,564
================
Tax-Sensitive Equity Fund
Shares sold 120,464
Shares issued to shareholders in payment of distributions declared 660
Shares redeemed (678)
----------------
Net increase 120,446
================
</TABLE>
(a) For the nine months ended September 30, 1996, for the Bond Funds
and for the period from January 2, 1996, commencement of investment
operations, to September 30, 1996, for the Small Cap Tax-Sensitive
Equity Fund and Tax-Sensitive Equity Fund.
At September 30, 1996, the Massachusetts Intermediate Tax Exempt Bond
Fund and the Small Cap Tax-Sensitive Equity Fund each had a shareholder
of record owning approximately 41% and 20% of the respective Funds'
outstanding voting shares.
<PAGE>
(6).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at September 30, 1996, as computed on a
federal income tax basis, were as follows:
<TABLE>
<CAPTION>
Net
Gross Gross Unrealized
Aggregate Unrealized Unrealized Appreciation
Cost Appreciation Depreciation (Depreciation)
------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $ 31,629,887 $ 430,367 $ (152,206) $ 278,161
Intermediate Tax Exempt Bond Fund $ 34,401,415 $ 713,234 $ (78,308) $ 634,926
Small Cap Tax-Sensitive Equity Fund $ 6,410,438 $ 588,568 $ (278,040) $ 310,528
Tax-Sensitive Equity Fund $ 2,468,754 $ 324,877 $ (11,603) $ 313,274
</TABLE>
(7).....Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Funds' Prospectuses and Statements of Additional
Information. The Funds may trade the following financial instruments
with off balance sheet risk:
Futures contracts--
The Funds may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Funds are required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by each Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in the value of hedged investments. In addition,
there is the risk that a Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Funds enter
into financial futures transactions primarily to manage their exposure
to certain markets and to changes in security prices and, with respect
to the Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity
Fund, to changes in foreign currencies.
At September 30, 1996, the Massachusetts Intermediate Tax Exempt Bond
Fund held the following futures contracts:
<TABLE>
<CAPTION>
Contract Position Expiration Date Underlying Face Unrealized
Amount at Value Gain/(Loss)
- - - - --------------------------------------------- ----------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Municipal Bond (5 contracts) Long 12/19/96 $ 569,688 $ 17,763
5 year U.S. Treasury Note (7 contracts) Long 12/31/96 739,156 5,946
10 year U.S. Treasury Note (6 contracts) Long 12/31/96 643,688 10,065
-------------- --------------
$ 1,952,532 $ 33,774
============== ==============
</TABLE>
<PAGE>
At September 30, 1996, the Intermediate Tax Exempt Bond Fund held the
following futures contracts:
<TABLE>
<CAPTION>
Contract Position Expiration Date Underlying Face Unrealized
Amount at Value Gain/(Loss)
- - - - --------------------------------------------- ----------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
5 year U.S. Treasury Note (5 contracts) Long 12/31/96 $ 527,969 $ 4,247
10 year U.S. Treasury Note (3 contracts) Long 12/31/96 321,844 5,033
-------------- --------------
$ 849,813 $ 9,280
============== ==============
</TABLE>
At September 30, 1996, the Bond Funds had segregated sufficient cash
and/or securities to cover margin requirements on open future
contracts.
At September 30, 1996, the Small Cap Tax-Sensitive Equity Fund and the
Tax-Sensitive Equity Fund had no open futures contracts.
Since the Massachusetts Intermediate Tax Exempt Bond Fund may invest a
substantial portion of its assets in issuers located in one state, it
will be more susceptible to factors adversely affecting issuers of that
state than would be a comparable general tax-exempt mutual fund.
(8).....Delayed Delivery Transactions:
The Bond Funds may purchase securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transactions. The price of the underlying
securities and the date when the securities will be delivered and paid
for are fixed at the time the transaction is negotiated. The Fund
instructs its custodian to segregate securities having a value at least
equal to the amount of the purchase commitment.
At September 30, 1996, the Intermediate Tax Exempt Bond Fund had
entered into the following delayed delivery transactions.
Type Security Settlement Date Amount
- - - - --------------- -------------------------------- ----------------- -----------
Buy Intermountain Power Agency Utah 10/4/96 $507,035
........Federal Income Tax Information (Unaudited)
Of the distributions paid by the Bond Funds from net investment income
for the nine months ended September 30, 1996, amounts that were tax
exempt for Federal income tax purposes are as follows:
Massachusetts Intermediate Tax Exempt Bond Fund $1,074,416
Intermediate Tax Exempt Bond Fund $1,211,455
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Massachusetts Intermediate Tax Exempt Bond Fund, Standish
Intermediate Tax Exempt Bond Fund, Standish Small Cap Tax-Sensitive Equity Fund,
and Standish Tax-Sensitive Equity Fund:
We have audited the accompanying statements of assets and liabilities of the
Standish, Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax
Exempt Bond Fund, Standish Intermediate Tax Exempt Bond Fund, Standish Small Cap
Tax-Sensitive Equity Fund, and Standish Tax-Sensitive Equity Fund, including the
schedule of portfolio investments as of September 30, 1996 and the related
statements of operations for the nine months ended September 30, 1996 and the
year ended December 31, 1995 for the Standish Massachusetts Intermediate Tax
Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond Fund, and for the
period from January 2, 1996 (start of business) to September 30, 1996 for the
Standish Small Cap Tax-Sensitive Equity Fund and the Standish Tax-Sensitive
Equity Fund; changes in net assets for the nine months ended September 30, 1996
and the two years in the period ended December 31, 1995 for the Standish
Massachusetts Intermediate Tax Exempt Bond Fund and the Standish Intermediate
Tax Exempt Bond Fund, and for the period from January 2, 1996 (start of
business) to September 30, 1996 for the Standish Small Cap Tax-Sensitive Equity
Fund and the Standish Tax-Sensitive Equity Fund; and the financial highlights
for the nine months ended September 30, 1996 and the three years in the period
ended December 31, 1995 for Standish Massachusetts Intermediate Tax Exempt Bond
Fund and the Standish Intermediate Tax Exempt Bond Fund, and for the period from
January 2, 1996 (start of business) to September 30, 1996 for the Standish Small
Cap Tax-Sensitive Equity Fund and the Standish Tax-Sensitive Equity Fund. These
financial statements 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 financial highlights for the
period from November 2, 1992 (start of business) to December 31, 1992, presented
herein for the Standish Massachusetts Intermediate Tax Exempt Bond Fund and the
Standish Intermediate Tax Exempt Bond Fund, were audited by other auditors,
whose report, dated February 12, 1993, expressed an unqualified opinion on such
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. 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
September 30, 1996 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
Standish, Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax
Exempt Bond Fund, Standish Intermediate Tax Exempt Bond Fund, Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax-Sensitive Equity Fund as of September
30, 1996; the results of operations for the nine months ended September 30, 1996
and the year ended December 31, 1995 for the Standish Massachusetts Intermediate
Tax Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond Fund, and for
the period from January 2, 1996 (start of business) to September 30, 1996 for
the Standish Small Cap Tax-Sensitive Equity Fund and the Standish Tax-Sensitive
Equity Fund; and the changes in net assets for the nine months ended September
30, 1996 and the two years in the period ended December 31, 1995 for the
Standish Massachusetts Intermediate Tax Exempt Bond Fund and the Standish
Intermediate Tax Exempt Bond Fund, and for the period from January 2, 1996
(start of business) to September 30, 1996 for the Standish Small Cap
Tax-Sensitive Equity Fund and the Standish Tax-Sensitive Equity Fund; and the
financial highlights for the nine months ended September 30, 1996, and the three
years in the period ended December 31, 1995, for Standish Massachusetts
Intermediate Tax Exempt Bond Fund and the Standish Intermediate Tax Exempt Bond
Fund, and for the period from January 2, 1996 (start of business) to September
30, 1996 for the Standish Small Cap Tax-Sensitive Equity Fund and the Standish
Tax-Sensitive Equity Fund, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 19, 1996
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Highlights of the following series of the Registrant are
included in the related Prospectuses: Standish Intermediate Tax Exempt Bond
Fund, Standish Massachusetts Intermediate Tax Exempt Bond Fund, Standish Small
Cap Tax- Sensitive Equity Fund and Standish Tax-Sensitive Equity Fund.
The following financial statements are included in the Statements of
Additional Information of the above-referenced series of the Registrant:
Schedule of Portfolio Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Exhibits:
(1) Agreement and Declaration of Trust dated
August 13, 1986*
(1A) Certificate of Designation of Standish Fixed Income Fund**
(1B) Certificate of Designation of Standish International Fund**
(1C) Certificate of Designation of Standish Securitized Fund**
(1D) Certificate of Designation of Standish Short-Term Asset Reserve Fund**
(1E) Certificate of Designation of Standish Marathon Fund*
(1F) Certificate of Amendment dated November 21, 1989*
(1G) Certificate of Amendment dated November 29, 1989*
(1H) Certificate of Amendment dated April 24, 1990*
C-1
<PAGE>
(1I) Certificate of Designation of Standish Equity Fund**
(1J) Certificate of Designation of Standish International Fixed Income Fund**
(1K) Certificate of Designation of Standish Intermediate Tax Exempt Bond
Fund*
(1L) Certificate of Designation of Standish Massachusetts Intermediate Tax
Exempt Bond Fund*
(1M) Certificate of Designation of Standish Global Fixed Income Fund*
(1N) Certificate of Designation of Standish Controlled Maturity Fund and
Standish Fixed Income Fund II**
(1O) Certificate of Designation of Standish Tax-Sensitive Small Cap Equity
Fund and Standish Tax-Sensitive Equity Fund**
(1P) Form of Certificate of Designation of Standish Equity Asset Fund,
Standish Small Capitalization Equity Asset Fund, Standish Fixed Income
Asset Fund and Standish Global Fixed Income Asset Fund**
(1Q) Form of Certificate of Designation of Standish Small Capitalization
Equity Fund II**
(2) Bylaws of the Registrant*
(3) Not applicable
(4) Not applicable
(5A) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Securitized Fund**
(5B) Form of Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Short-Term Asset
Reserve Fund**
(5C) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish International Fixed Income
Fund**
C-2
<PAGE>
(5D) Assignment of Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish International Fixed
Income Fund**
(5E) Form of Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Intermediate Tax
Exempt Bond Fund**
(5F) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Massachusetts Intermediate Tax
Exempt Bond Fund**
(5G) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Controlled Maturity Fund**
(5H) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Fixed Income Fund II**
(5I) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Small Cap Tax-Sensitive Equity
Fund**
(5J) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Tax-Sensitive Equity Fund**
(6A) Underwriting Agreement between the Registrant and Standish Fund
Distributors, L.P.**
(6B) Revised Appendix A to Underwriting Agreement between the
Registrant and Standish Fund Distributors, L.P. with respect to Standish
Equity Asset Fund, Standish Small Capitalization Equity Asset Fund,
Standish Fixed Income Asset Fund and Standish Global Fixed Income
Asset Fund**
(6C) Revised Appendix A to Underwriting Agreement between the
Registrant and Standish Fund Distributors, L.P. with respect to Standish
Small Capitalization Equity Fund II**
(7) Not applicable
(8A) Master Custody Agreement between the Registrant and Investors Bank
& Trust Company**
C-3
<PAGE>
(8B) Revised Appendix A to Master Custody Agreement between the
Registrant and Investors Bank & Trust Company with respect to
Standish Equity Asset Fund, Standish Small Capitalization
Equity Asset Fund, Standish Fixed Income Asset Fund and
Standish Global Fixed Income Asset Fund**
(8C) Revised Appendix A to Master Custody Agreement between the
Registrant and Investors Bank & Trust with respect to Standish Small
Capitalization Equity Fund II**
(9A) Transfer Agency and Service Agreement between the Registrant and
Investors Bank & Trust Company**
(9B) Revised Exhibit A to Transfer Agency and Service Agreement
between the Registrant and Investors Bank & Trust Company with
respect to Standish Equity Asset Fund, Standish Small
Capitalization Equity Asset Fund, Standish Fixed Income Asset
Fund and Standish Global Fixed
Income Asset Fund**
(9C) Revised Exhibit A to Transfer Agency and Service Agreement between
the Registrant and Investors Bank & Trust Company with respect to
Standish Small Capitalization Equity Fund II**
(9D) Master Administration Agreement between the Registrant and Investors
Bank & Trust Company**
(9E) Revised Exhibit A to Master Administration Agreement between
the Registrant and Investors Bank & Trust Company with respect
to Standish Equity Asset Fund, Standish Small Capitalization
Equity Asset Fund, Standish Fixed Income Asset Fund and
Standish Global Fixed Income Asset Fund**
(9F) Revised Exhibit A to Master Administration Agreement between the
Registrant and Investors Bank & Trust Company with respect to
Standish Small Capitalization Equity Fund II*
(9G) Form of Administrative Services Agreement between Standish, Ayer &
Wood, Inc. and the Registrant on behalf of Standish Fixed Income Fund,
Standish Equity Fund, Standish Small Cap Equity Fund and Standish
Global Fixed Income Fund**
C-4
<PAGE>
(9H) Revised Exhibit A to Administrative Services Agreement between
Standish, Ayer & Wood, Inc. and the Registrant with respect to Standish
Equity Asset Fund, Standish Small Capitalization Equity Asset Fund,
Standish Fixed Income Asset Fund and Standish Global Fixed Income
Asset Fund**
(9I) Revised Exhibit A to Administrative Services Agreement between
Standish, Ayer & Wood, Inc. and the Registrant on behalf of Standish
Small Capitalization Equity Fund II**
(10A) Opinion and Consent of Counsel for Standish Fixed Income Fund**
(10B) Opinion and Consent of Counsel for Standish Securitized Fund**
(10C) Opinion and Consent of Counsel for Standish Short-Term Asset Reserve
Fund**
(10D) Opinion and Consent of Counsel for Standish Small Capitalization
Equity Fund (formerly Standish Marathon Fund)**
(10E) Opinion and Consent of Counsel for Standish Equity Fund**
(10F) Opinion and Consent of Counsel for Standish International Fixed
Income Fund**
(10G) Opinion and Consent of Counsel for Standish Intermediate Tax Exempt
Bond Fund**
(10H) Opinion and Consent of Counsel for Standish Massachusetts
Intermediate Tax Exempt Bond Fund**
(10I) Opinion and Consent of Counsel for Standish Global Fixed Income
Fund**
(10J) Opinion and Consent of Counsel for the Registrant**
(11A) Consent of Independent Public Accountants***
(11B) Consent of Independent Public Accountants***
(12) Not applicable
(13) Form of Initial Capital Agreement between the Registrant and Standish,
Ayer & Wood, Inc.**
C-5
<PAGE>
(14) Not applicable
(15) Not applicable
(16) Performance Calculations**
(17A) Financial Data Schedule of Standish Intermediate Tax Exempt Bond
Fund***
(17B) Financial Data Schedule of Standish Massachusetts Intermediate Tax
Exempt Bond Fund***
(17C) Financial Data Schedule of Standish Small Cap Tax-Sensitive Equity
Fund***
(17D) Financial Data Schedule of Standish Tax-Sensitive Equity Fund***
(18) Not applicable
(19A) Power of Attorney for Registrant (Richard S. Wood)**
(19B) Power of Attorney for Registrant (James E. Hollis, III)**
(19C) Power of Attorney for Registrant (Samuel C. Fleming)**
(19D) Power of Attorney for Registrant (Benjamin M. Friedman)**
(19E) Power of Attorney for Registrant (John H. Hewitt)**
(19F) Power of Attorney for Registrant (Edward H. Ladd)**
(19G) Power of Attorney for Registrant (Caleb Loring III)**
(19H) Power of Attorney for Registrant (D. Barr Clayson)**
(19I) Power of Attorney for Standish, Ayer & Wood Master Portfolio (Richard
S. Wood)**
(19J) Power of Attorney for Standish, Ayer & Wood Master Portfolio (Samuel
C. Fleming, Benjamin M. Friedman, John H. Hewitt, Edward H. Ladd,
Caleb Loring III, Richard S. Wood and D. Barr Clayson)**
--------------------
* Filed as an exhibit to Registration
</TABLE>
C-6
<PAGE>
Statement No. 33-10615 and incorporated
herein by reference thereto.
** Filed as an exhibit to Registration
Statement No. 33-8214 and incorporated
herein by reference thereto.
*** Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common
control with the Registrant.
Item 26. Number of Holders of Securities
Set forth below is the number of record holders, as of December 31,
1996, of the shares of each series of the Registrant.
Number of Record
Title of Class Holders
- - - - -------------- -------
Shares of beneficial interest, par value $.01, of:
Standish Fixed Income Fund 471
Standish Securitized Fund 12
Standish Short-Term Asset
Reserve Fund 93
Standish International Fixed
Income Fund 199
Standish Global Fixed Income Fund 47
Standish Equity Fund 142
Standish Small Capitalization
Equity Fund 421
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 86
Standish Intermediate Tax Exempt
Bond Fund 107
Standish International Equity Fund 187
Standish Controlled Maturity Fund 16
Standish Fixed Income Fund II 4
Standish Small Cap Tax-Sensitive
Equity Fund 115
C-7
<PAGE>
Standish Tax-Sensitive Equity Fund 46
Standish Equity Asset Fund 0
Standish Small Capitalization
Equity Asset Fund 0
Standish Fixed Income Asset Fund 0
Standish Global Fixed Income Asset Fund 0
Standish Small Capitalization Equity Fund II 20
Item 27. Indemnification
Under the Registrant's Agreement and Declaration of Trust, any past or
present Trustee or officer of the Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably incurred
by him in connection with any action, suit or proceeding to which he may be a
party or is otherwise involved by reason of his being or having been a Trustee
or officer of the Registrant. The Agreement and Declaration of Trust of the
Registrant does not authorize indemnification where it is determined, in the
manner specified in the Declaration, that such Trustee or officer has not acted
in good faith in the reasonable belief that his actions were in the best
interest of the Registrant. Moreover, the Declaration does not authorize
indemnification where such Trustee or officer is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such Trustee, officer or controlling person
against the Registrant in connection with the securities being registered, and
the Commission is still of the same opinion, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of the officers and Directors of
Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), the investment adviser to
all series of
C-8
<PAGE>
the Registrant other than Standish International Equity Fund, Standish Global
Fixed Income Fund, Standish International Fixed Income Fund, Standish Fixed
Income Fund, Standish Equity Fund, Standish Small Capitalization Equity Fund,
Standish Equity Asset Fund, Standish Small Capitalization Equity Asset Fund,
Standish Fixed Income Asset Fund, Standish Global Fixed Income Asset Fund and
Standish Small Capitalization Equity Fund II are listed on the Form ADV of
Standish, Ayer & Wood as currently on file with the Commission (File No.
801-584), the text of which is hereby incorporated by reference.
The business and other connections of the officers and partners of
Standish International Management Company, L.P. ("Standish International"), the
investment adviser to Standish International Equity Fund and Standish
International Fixed Income Fund, are listed on the Form ADV of Standish
International as currently on file with the Commission (File No. 801-639338),
the text of which is hereby
incorporated by reference.
The following sections of each such Form ADV are incorporated herein by
reference:
(a) Items 1 and 2 of Part 2;
(b) Section IV, Business Background, of
each Schedule D.
Item 29. Principal Underwriter
(a)Standish Fund Distributors, L.P. serves as the principal
underwriter of each of the series of the Registrant as listed in Item 26 above.
(b)Directors and Officers of Standish Fund Distributors, L.P.:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
James E. Hollis, III Chief Executive Officer Vice President
Beverly E. Banfield Chief Operating Officer Vice President
The General Partner of Standish Fund Distributors, L.P. is Standish, Ayer &
Wood, Inc.
(c) Not applicable.
C-9
<PAGE>
Item 30. Location of Accounts and Records
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its principal office, located at One Financial Center, Boston, Massachusetts
02111. Certain records, including records relating to the Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main offices of the Registrant's transfer and
dividend disbursing agent and custodian.
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) Not applicable.
(b) With respect to Standish Small Capitalization Equity Fund II,
Standish Equity Asset Fund, Standish Small Capitalization Equity
Asset Fund, Standish Fixed Income Asset Fund and Standish
Global Fixed Income Asset Fund, the Registrant undertakes to file
a post-effective amendment, using financial statements which
need not be certified, within four to six months from the effective
date of the applicable Post-Effective Amendment to its
Registration Statement registering shares of such Funds.
(c) The Registrant undertakes to furnish each person to
whom a Prospectus is delivered a copy of Registrant's
latest annual report to shareholders, upon request
and without charge.
C-10
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement (which satisfies the
requirements for filing pursuant to Rule 485(b) under the Securities Act of
1933) to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Boston and The Commonwealth of Massachusetts on the 22nd day of
January, 1997.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ James E. Hollis, III
James E. Hollis, III, Treasurer
The term "Standish, Ayer & Wood Investment Trust" means and refers to
the Trustees from time to time serving under the Agreement and Declaration of
Trust of the Registrant dated August 13, 1986, a copy of which is on file with
the Secretary of State of The Commonwealth of Massachusetts. The obligations of
the Registrant hereunder are not binding personally upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Registrant, but
bind only the trust property of the Registrant, as provided in the Agreement and
Declaration of Trust of the Registrant. The execution of this Registration
Statement has been authorized by the Trustees of the Registrant and this
Registration Statement has been signed by an authorized officer of the
Registrant, acting as such, and neither such authorization by such Trustees nor
such execution by such officer shall be deemed to have been made by any of them,
but shall bind only the trust property of the Registrant as provided in its
Declaration of Trust.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
C-11
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Richard S. Wood* Trustee and President January 22, 1997
- - - - ------------------------
Richard S. Wood (principal executive officer)
/s/ James E. Hollis, III Treasurer (principal January 22, 1997
- - - - ------------------------
James E. Hollis, III financial and accounting
officer) and Secretary
D. Barr Clayson* Trustee January 22, 1997
D. Barr Clayson
Samuel C. Fleming* Trustee January 22, 1997
Samuel C. Fleming
Benjamin M. Friedman* Trustee January 22, 1997
Benjamin M. Friedman
John H. Hewitt* Trustee January 22, 1997
John H. Hewitt
Edward H. Ladd* Trustee January 22, 1997
Edward H. Ladd
Caleb Loring III* Trustee January 22, 1997
Caleb Loring III
*By: /s/ James E. Hollis, III
James E. Hollis, III
Attorney-In-Fact
</TABLE>
C-12
<PAGE>
EXHIBIT INDEX
Exhibit
(11A) Consent of Independent Public Accountants
(11B) Consent of Independent Public Accountants
(17A) Financial Data Schedule of Standish Intermediate Tax Exempt Bond Fund
(17B) Financial Data Schedule of Standish Massachusetts Intermediate Tax
Exempt Bond Fund
(17C) Financial Data Schedule of Standish Small Cap Tax-Sensitive Equity Fund
(17D) Financial Data Schedule of Standish Tax-Sensitive Equity Fund
C-13
Consent of Independent Accountants
We consent to the inclusion in Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A (1993 Act File Number 33-8214) of Standish,
Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax Exempt
Fund, Standish Intermediate Ta x Exempt Fund, Standish Small Cap Tax-Sensitive
Equity Fund, Standish Tax-Sensitive Equity Fund (the "Funds") of our report
dated November 19, 1996, on our audit of the financial statements and financial
highlights of the Funds, which report is included in the Annual Report to
Shareholders for the period ended September 30, 1996, which is also included in
this Registration Statement.
We also consent to the references to our Firm under the caption "The
Funds Financial Highlights" in the Prospectus and under the caption "Independent
Accountants" in the Statement of Additional Information of the Registration
Statement.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 22, 1997
Exhibit 11b
INDEPENDENT AUDITORS' CONSENT
We consent to this Post-Effective Amendment No. 79 to Registration Statement No.
33-8214 of Standish, Ayer & Wood Investment Trust (including Standish
Tax-Sensitive Equity Fund, Standish Small Cap Tax-Sensitive Equity Fund,
Standish Intermediate Tax Exempt Bond Fund and Standish Massachusetts Tax Exempt
Bond Fund) to the reference to us under the heading "Experts and Financial
Statements" appearing in the Statement of Additional Information, which is a
part of such Registration Statement.
Boston, Massachusetts
January 22, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish Massachusetts Intermediate
Tax Exempt Bond Fund form N-SAR for the period ended
September 30, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 08
<NAME> Standish Mass. Int. Tax Exempt Bond Fund
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 31,629,887
<INVESTMENTS-AT-VALUE> 31,908,048
<RECEIVABLES> 489,513
<ASSETS-OTHER> 3,092
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,400,653
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 264,570
<TOTAL-LIABILITIES> 264,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,411,904
<SHARES-COMMON-STOCK> 1,557,795
<SHARES-COMMON-PRIOR> 1,549,512
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (587,756)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 311,935
<NET-ASSETS> 32,136,083
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,327,319
<OTHER-INCOME> 0
<EXPENSES-NET> 159,139
<NET-INVESTMENT-INCOME> 1,168,180
<REALIZED-GAINS-CURRENT> 20,518
<APPREC-INCREASE-CURRENT> (631,115)
<NET-CHANGE-FROM-OPS> 557,583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,168,180
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 379,843
<NUMBER-OF-SHARES-REDEEMED> 388,723
<SHARES-REINVESTED> 17,163
<NET-CHANGE-IN-ASSETS> (428,954)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (608,275)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 98,478
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 179,514
<AVERAGE-NET-ASSETS> 32,644,004
<PER-SHARE-NAV-BEGIN> 21.02
<PER-SHARE-NII> 0.74
<PER-SHARE-GAIN-APPREC> (0.39)
<PER-SHARE-DIVIDEND> (0.74)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.63
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish Intermediate Tax Exempt Bond
Fund form N-SAR for the period ended September 30,
1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 09
<NAME> Standish Intermediate Tax Exempt Bond Fund
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 34,401,415
<INVESTMENTS-AT-VALUE> 35,036,341
<RECEIVABLES> 545,442
<ASSETS-OTHER> 4,163
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 35,585,946
<PAYABLE-FOR-SECURITIES> 97,050
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 646,184
<TOTAL-LIABILITIES> 743,234
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,179,759
<SHARES-COMMON-STOCK> 1,649,638
<SHARES-COMMON-PRIOR> 1,535,830
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,747
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 644,206
<NET-ASSETS> 34,842,712
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,378,131
<OTHER-INCOME> 0
<EXPENSES-NET> 158,972
<NET-INVESTMENT-INCOME> 1,219,159
<REALIZED-GAINS-CURRENT> 53,135
<APPREC-INCREASE-CURRENT> (459,413)
<NET-CHANGE-FROM-OPS> 812,881
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,219,159
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 524,041
<NUMBER-OF-SHARES-REDEEMED> 430,546
<SHARES-REINVESTED> 20,313
<NET-CHANGE-IN-ASSETS> 1,977,319
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (34,388)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 98,399
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 200,657
<AVERAGE-NET-ASSETS> 32,609,508
<PER-SHARE-NAV-BEGIN> 21.40
<PER-SHARE-NII> 0.79
<PER-SHARE-GAIN-APPREC> (0.28)
<PER-SHARE-DIVIDEND> (0.79)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.12
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish Small Cap Tax-Sensitive
Equity Fund form N-SAR for the period ended
September 30, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 14
<NAME> Standish Small Cap Tax-Sensitive Equity Fund
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 6,361,949
<INVESTMENTS-AT-VALUE> 6,720,966
<RECEIVABLES> 436,604
<ASSETS-OTHER> 160,068
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,317,638
<PAYABLE-FOR-SECURITIES> 403,754
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,017
<TOTAL-LIABILITIES> 421,771
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,820,711
<SHARES-COMMON-STOCK> 292,564
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 5,180
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (289,040)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 359,016
<NET-ASSETS> 6,895,867
<DIVIDEND-INCOME> 2,631
<INTEREST-INCOME> 6,588
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 9,219
<REALIZED-GAINS-CURRENT> (289,040)
<APPREC-INCREASE-CURRENT> 359,016
<NET-CHANGE-FROM-OPS> 79,195
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,039
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 292,713
<NUMBER-OF-SHARES-REDEEMED> 268
<SHARES-REINVESTED> 119
<NET-CHANGE-IN-ASSETS> 6,895,867
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,510
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 77,562
<AVERAGE-NET-ASSETS> 3,017,742
<PER-SHARE-NAV-BEGIN> 20.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 3.55
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 23.57
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish Tax-Sensitive Equity Fund
form N-SAR for the period ended September 30, 1996
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 15
<NAME> Standish Tax-Sensitive Equity Fund
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 2,468,754
<INVESTMENTS-AT-VALUE> 2,782,028
<RECEIVABLES> 27,169
<ASSETS-OTHER> 52,674
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,861,871
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,929
<TOTAL-LIABILITIES> 18,929
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,538,959
<SHARES-COMMON-STOCK> 120,446
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 12,585
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,876)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 313,274
<NET-ASSETS> 2,842,942
<DIVIDEND-INCOME> 25,160
<INTEREST-INCOME> 2,877
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 28,037
<REALIZED-GAINS-CURRENT> (21,876)
<APPREC-INCREASE-CURRENT> 313,274
<NET-CHANGE-FROM-OPS> 319,435
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,453
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 120,464
<NUMBER-OF-SHARES-REDEEMED> 678
<SHARES-REINVESTED> 660
<NET-CHANGE-IN-ASSETS> 2,842,942
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,161
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,605
<AVERAGE-NET-ASSETS> 1,655,556
<PER-SHARE-NAV-BEGIN> 20.00
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 3.50
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 23.60
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
