As filed with the Securities and Exchange Commission on December 24, 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. 86 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 90 |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:
|_| Immediately upon filing pursuant to Rule 485(b)
|_| On [Date] pursuant to Rule 485(b)
|X| 60 days after filing pursuant to Rule 485(a)(1)
|_| On [Date] pursuant to Rule 485(a)(1)
|_| 75 days after filing pursuant to Rule 485(a)(2)
----------------------
As filed with the Securities and Exchange Commission on December 24, 1997.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST(1)
Cross-Reference Sheet Pursuant to Rule 495(a)
Part A Prospectus
Form Item Cross-Reference
- --------- ---------------
Item 1. Cover Page Cover Page
Item 2. Synopsis "Fund Comparison
Highlights" and "Expense
Information"
Item 3. Condensed Financial "Financial Highlights"
Item 4. General Description Cover Page, "The Funds
of Registrant and Their Shares", "Investment
Objective and Policies", "Description
of Securities and Related Risks" and
"Investment Techniques and Related
Risks"
Item 5. Management of the Fund "Management" and "Custodian,
Transfer Agent and Dividend
Disbursing Agent"
Item 6. Capital Stock and "The Funds and Their 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 Shares"
Being Offered
Item 8. Redemption or Repurchase "Redemption of Shares"
Item 9. Pending Legal Proceedings Not Applicable
- ----------
(1) This Post-Effective Amendment to the Registrant's Registration Statement
is being filed with respect to the following series of the Registrant: 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. The Prospectuses and Statements of Additional Information for the
other series of the Registrant are not effected hereby and, therefore, are not
included herewith.
<PAGE>
Part B Statement of Additional
Form Item Information Cross-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 Objectives 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 Funds and Their Shares"
Other Securities
Item 19. Purchase, Redemption "Purchase and Redemption of Shares"
and Pricing of Securities and "Determination of Net Asset
Being Offered Value"
Item 20. Tax Status "Federal and Massachusetts Income Tax"
Item 21. Underwriters Management
Item 22. Calculation of "Calculation of Performance
Performance Data Data"
Item 23. Financial Statements "Experts and Financial Statements"
<PAGE>
STANDISH FUNDS(SM)
Prospectus
.............
January 28, 1997
STANDISH GROUP OF TAX-SENSITIVE AND TAX EXEMPT FUNDS
The Standish Group of Tax-Sensitive and Tax Exempt Funds includes the
Standish Tax-Sensitive Equity Fund, Standish Small Cap Tax-Sensitive Equity
Fund, Standish Intermediate Tax Exempt Bond Fund and Standish Massachusetts
Intermediate Tax Exempt Bond Fund. Each Fund is organized as a separate
diversified investment series of Standish, Ayer & Wood Investment Trust, an open
end investment company (the "Trust"). Standish, Ayer & Wood, Inc. ("Standish")
is the investment adviser to each Fund.
<PAGE>
Prospective investors can obtain more information about the Funds, including
an application and Investor Guide, by calling Standish Fund Distributors, L.P.
at (800) 729-0066.
Standish's primary investment management and research focus is at the
security and industry/sector level. Standish seeks to add value to each Fund's
portfolio by selecting undervalued investments, rather than by varying the
average maturity of a Fund's portfolio to reflect interest rate forecasts.
Standish utilizes fundamental credit and sector valuation techniques to evaluate
what it considers to be less efficient markets and sectors of the fixed income
marketplace in an attempt to select securities with the potential for the
highest return. Standish has been providing investment counseling to mutual
funds, other institutional investors and high net worth individuals for more
than sixty years. Standish offers a broad array of investment services that
includes U.S., international and global management of fixed income and equity
securities for mutual funds and separate accounts. Privately held by twenty-one
employee/directors and headquartered in Boston, Massachusetts, the firm employs
over eighty investment professionals with a total staff of more than two
hundred.
Investors may purchase shares of the Funds directly from the Trust's
principal underwriter, Standish Fund Distributors, L.P. ( "Standish Fund
Distributors"), 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 Funds).
This Prospectus, dated January 28, 1998, sets forth concisely the information
about the Funds that a prospective investor should know before investing and
should be retained for future reference. Additional information has been filed
with the Securities and Exchange Commission in a Statement of Additional
Information dated January 28, 1998, as amended or supplemented from time to
time. The Statement of Additional Information is incorporated by reference into
this Prospectus and is available without charge upon request by calling (800)
729-0066.
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.
Shares of the Funds are not available for sale in every state. This
Prospectus is not intended to be an offer to sell shares, nor may an offer to
purchase shares be accepted from investors, in those states where shares of the
Funds may not legally be sold. Contact Standish Fund Distributors to determine
whether the Funds are available for sale in your state.
<PAGE>
TABLE OF CONTENTS
Fund Comparison Highlights
Expense Information
Financial Highlights
Investment Objectives and Policies
The Tax-Sensitive Funds
The Tax-Sensitive Equity Fund
The Small Cap Tax-Sensitive Equity Fund
The Tax Exempt Funds
The Intermediate Tax Exempt Bond Fund
The Massachusetts Intermediate Tax
Exempt Bond Fund
Description of Securities and Related Risks
Investment Techniques and Related Risks....
Calculation of Performance Data
Dividends and Distributions
Purchase of Shares
Net Asset Value
Exchange of Shares
Redemption of Shares
Management
Federal Income Taxes
The Funds and Their Shares
Custodian, Transfer Agent and
Dividend-Disbursing Agent
Independent Accountants
Legal Counsel
Tax Certification Instructions
<PAGE>
Fund Comparison Highlights
The following table highlights information contained in this Prospectus and
is qualified in its entirety by the more detailed information contained within.
For a complete description of each Fund's distinct investment objective and
policies, see "Investment Objectives and Policies," "Description of Securities
and Related Risks" and "Investment Techniques and Related Risks." There can be
no assurance that a Fund's investment objective will be achieved.
<PAGE>
<TABLE>
<S> <C> <C>
Investment Objective Maximize after-tax total Maximize after-tax total
return, consisting of return, consisting of
long-term growth of capital long-term growth of capital
with nominal current income, with nominal current income,
through investment primarily through investment primarily
in equity securities of in equity securities of small
companies that appear to be capitalization companies that
undervalued appear to be undervalued
Key Strategy Employ various techniques to Employ various techniques to
seek the highest long-term seek the highest long-term
total return after total return after
considering the impact of considering the impact of
Federal and state income Federal and state income
taxes paid by shareholders taxes paid by shareholders on
on the Fund's distributions the Fund's distributions
Primary Types of Obligations Emphasize stocks believed to Emphasize rapidly growing,
offer above average high quality companies with
potential for capital growth market capitalizations less
through the use of than $1 billion that are
statistical modeling involved with value added
techniques and fundamental products or services
analysis
Market Capitalization of No limit; general range is $1 billion or less at time of
Companies Focused on by the Fund medium to large purchase
capitalization
Foreign Securities Yes; no limit for securities Yes; limited to 15% of total
listed on a U.S. exchange or assets
traded in the U.S. over-the-
counter ("OTC") market but
limited to 10% of total
assets for foreign
securities which are not so
listed or traded
Benchmark Index S&P 500 Russell 2000 Growth
Investment Objective High level of interest High level of interest income
income exempt from federal exempt from Massachusetts and
income taxes, while seeking Federal income taxes, while
preservation of capital seeking preservation of
through investment in capital through investment in
investment grade investment grade
intermediate-term municipal intermediate-term municipal
securities securities
Primary Types of Municipal securities of Municipal securities of
Obligations states, territories and issuers located in
possessions of the United Massachusetts and other
States, and the District of qualifying issuers (including
Columbia and their political Puerto Rico, the U.S. Virgin
subdivisions, agencies, Islands and Guam) the
interest on which is excluded
from gross income for
<PAGE>
authorities and Federal
instrumentalities the income tax purposes and
interest on which is exempt from Massachusetts
excluded from gross income personal income tax
for Federal income tax
purposes
Credit Quality Exclusively investment grade Exclusively investment grade
with an emphasis on high with an emphasis on high
quality quality
Below Investment Grade No No
Average Effective 3-10 years 3-10 years
Portfolio Maturity
(Dollar-Weighted)
Foreign Securities No No
Selected
Benchmark Index Lehman Brothers State Lehman Brothers State General
General Obligation Bond 3, Obligation Bond 3, 5, 7 and
5, 7 and 10 Year Indices 10 Year Indices
</TABLE>
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Equity Small Intermediate Massachusetts
Fund Cap Tax Exempt Tax Exempt
Fund Fund Fund
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases None None None None
Maximum Sales Load Imposed on Reinvested
Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees None None None None
<CAPTION>
Annual Operating Expenses Equity Small Intermediate Massachusetts
(as a percentage of average net assets) Fund Cap Tax Exempt Tax Exempt
Fund Fund Fund
<S> <C> <C> <C> <C>
Management Fees (after fee reduction)* 0.00% 0.11% 0.31% 0.30%
12b-1 Fees None None None None
Other Expenses+ (after expense limitation)* 0.50% 0.64% 0.34% 0.35%
---- ---- ---- ----
Total Fund Operating Expenses (after expense
limitation)* 0.50% 0.75% 0.65% 0.65%
==== ==== ==== ====
</TABLE>
- -------------------
*Standish has voluntarily and temporarily agreed to limit certain expenses of
each Fund. In the absence of such agreements, the Management Fees, Other
Expenses and Total Operating Expenses (as a percentage of average net assets)
for the fiscal year ended September 30, 1997 would have been: Equity Fund --
0.50%, 1.23% and 1.73%; Small Cap Fund -- 0.60%, 0.64% and 1.24%; Intermediate
Tax Exempt Fund -- 0.40%, 0.34% and 0.74%; and Massachusetts Tax Exempt Fund --
0.40%, 0.35% and 0.75%. The Equity Fund and the Small Cap Fund were subject to
different expense limitations during the fiscal year ended September 30, 1997.
Standish may revise or discontinue these agreements at any time although it has
no current intention to do so.
+Other Expenses include custodian and transfer agent fees, registration costs,
payments for insurance and audit and legal services.
Example
Hypothetically assume that each Fund's annual return is 5% and that its
operating expenses are exactly as described. For every $1,000 invested, an
investor would have paid the following expenses if an account were closed after
the number of years indicated:
Equity Small Intermediate Massachusetts
Fund Cap Tax Exempt Tax Exempt
Fund Fund Fund
After 1 Year $5 $8 $7 $7
After 3 years 16 24 21 21
After 5 Years 28 42 36 36
After 10 Years 63 93 81 81
The purpose of the above table is to assist an investor in understanding
the various costs and expenses that an investor in each Fund will bear directly
or indirectly. Total operating expenses are based on expenses for each Fund's
fiscal year ended September 30, 1997 as adjusted for current expense
limitations. The example is included solely for illustrative purposes and should
not be considered a representation of future performance or expenses. Actual
expenses may be more or less than those shown. See "Management" for additional
information about each Fund's expenses.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the periods after 1992 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. Financial highlights for prior periods were audited by
other independent accountants. The Funds' annual reports, which contain
additional information about the Funds' performance, may be obtained from
Standish Fund Distributors without charge.
Intermediate Tax Exempt Bond Fund
<TABLE>
<CAPTION>
Nine For the Period
Fiscal Months November 2, 1992
Year Ended Ended Fiscal Year Ended (start of business)
September 30, September 30, December 31, to December 31,
1997 1996 1995 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning period $21.12 $21.40 $19.91 $21.44 $20.42 $20.00
Income from investment operations
Net investment income** 1.01 0.79 0.98 0.95 0.93 0.14
Net realized and unrealized gain (loss) 0.74 (0.28) 1.49 (1.51) 1.24 0.42
Total from investment operations 1.75 0.51 2.47 (0.56) 2.17 0.56
Less distributions declared to shareholders
From net investment income (1.01) (0.79) (0.98) (0.95) (0.93) (0.14)
From realized capital gains (0.08) -- -- (0.02) (0.22) --
Total distributions declared to (1.09) (0.79) (0.98) (0.97) (1.15) (0.14)
shareholders
Net asset value - end of period $21.78 $21.12 $21.40 $19.91 $21.44 $20.42
Total return 8.27% 2.43% 12.65% (2.68%) 10.78% 17.02%t
Net assets at end of period (000 omitted) $52,723 $34,843 $32,865 $20,514 $17,132 $5,577
Ratios (to average net assets)/Supplemental Data
Expenses** 0.65% 0.65%t 0.65% 0.65% 0.65% 0.65%t
Net investment income** 4.74% 4.99%t 4.75% 4.62% 4.36% 4.16%t
Portfolio turnover 23%x 43%x 140% 157% 126% 62%
</TABLE>
- ----------
** The 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income per share $0.99 $0.76 $0.95 $0.90 $0.85 $0.12
Ratios (to average net assets);
Expenses 0.74% 0.82%t 0.79% 0.89% 1.15% 1.47%t
Net investment income 4.65% 4.82%t 4.61% 4.38% 3.86% 3.34%t
</TABLE>
* Audited by other auditors.
<PAGE>
t Computed on an annualized basis.
x Commencing in fiscal 1996, securities which are puttable daily have been
excluded from the portfolio turnover calculation.
<PAGE>
FINANCIAL HIGHLIGHTS
(CONTINUED)
Mass. Intermediate Tax Exempt Bond Fund
<TABLE>
<CAPTION>
Nine For the Period
Fiscal Months November 2, 1992
Year Ended Ended Fiscal Year Ended (start of business)
September 30, September 30, December 31, to December 31,
1997 1996 1995 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning period $20.63 $21.02 $19.55 $21.31 $20.32 $20.00
Income from investment operations
Net investment income** 0.97 0.74 0.94 0.94 0.92 0.13
Net realized and unrealized gain (loss) 0.55 (0.39) 1.47 (1.75) 1.13 0.32
Total from investment operations 1.52 0.35 2.41 (0.81) 2.05 0.45
Less distributions declared to shareholders
From net investment income (0.97) (0.74) (0.94) (0.94) (0.92) (0.13)
From realized capital gains -- -- -- (0.01) (0.14) --
Total distributions declared (0.97) (0.74) (0.94) (0.95) (1.06) (0.13)
to shareholders
Net asset value - end of period $21.18 $20.63 $21.02 $19.55 $21.31 $20.32
Total return 7.55% 1.70% 12.64% (3.84%) 10.24% 13.85%t
Net assets at end of period (000 omitted) $38,401 $32,136 $32,565 $27,776 $29,627 $6,537
Ratios (to average net assets)/Supplemental Data
Expenses** 0.65% 0.65%t 0.65% 0.65% 0.65% 0.65%t
Net investment income** 4.67% 4.78%t 4.71% 4.67% 4.35% 4.05%t
Portfolio turnover 25%x 35%x 77% 84% 94% 31%
</TABLE>
- ----------
** The Adviser voluntarily did not impose a portion of its investment advisory
fee and limited the Fund's expenses. Had these actions not been undertaken,
the net investment income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income per share $0.95 $0.72 $0.95 $0.91 $0.86 $0.11
Ratios (to average net assets);
Expenses 0.75% 0.73%t 0.72% 0.78% 0.95% 1.37%t
Net investment income 4.57% 4.70%t 4.64% 4.54% 4.05% 3.33%t
</TABLE>
* Audited by other auditors.
t Computed on an annualized basis.
x Commencing in fiscal 1996, securities which are puttable daily have been
excluded from the portfolio turnover calculation.
<PAGE>
FINANCIAL HIGHLIGHTS
(CONTINUED)
Small Cap Tax-Sensitive Equity Fund
Fiscal Year For the Period
Ended January 2, 1996
September 30, (commencement of
1997 operations) to
September 30, 1996
Net asset value - beginning period $23.57 $20.00
Income from investment operations
Net investment income* 0.02 0.04
Net realized and unrealized gain (loss) 9.05 3.55
Total from investment operations 9.07 3.59
Less distributions declared to shareholders
From net investment income (0.03) (0.02)
Net asset value - end of period $32.61 $23.57
Total return 38.50% 17.95%
Net assets at end of period (000 $32,761 $6,896
omitted)
Ratios (to average net
assets)/Supplemental Data
Expenses* 0.21% 0.00%
Net investment income* 0.08% 0.41%
Portfolio turnover 102% 57%
Average broker commission paid per share(1) $0.0429 $0.1058
- ----------
* The Adviser voluntarily did not impose some or all of its investment advisory
fee and limited the Fund's expenses. Had these actions not been undertaken,
the net investment income per share and the ratios would have been:
Net investment loss per share $(0.16) $(0.28)
Ratios (to average net assets):
Expenses 1.24% 3.45%t
Net investment income (0.95)% (3.04)%t
t Computed on an annualized basis.
- ----------
1 Amount represents the average commission rate paid to brokers on the purchase
and sale of equity securities.
<PAGE>
FINANCIAL HIGHLIGHTS
(CONTINUED)
Tax-Sensitive Equity Fund
Fiscal Year For the Period
Ended January 2, 1996
September 30, (commencement of
1997** operations) to
September 30, 1996
Net asset value - beginning period $23.60 $20.00
Income from investment operations
Net investment income* 0.39 0.28
Net realized and unrealized gain (loss) 11.58 3.50
Total from investment operations 11.97 3.78
Less distributions declared to shareholders
From net investment income (0.33) (0.18)
Net asset value - end of period 35.24 $23.60
Total return 51.19% 18.97%
Net assets at end of period (000 $12,819 $2,843
omitted)
Ratios (to average net
assets)/Supplemental Data
Expenses* 0.20% 0.00%
Net investment income* 1.31% 2.27%
Portfolio turnover 25% 17%
Average broker commission paid per share(2) $0.0497 $0.0419
- ----------
* The Adviser voluntarily did not impose some or all its investment advisory
fee and limited the Fund's expenses. Had these actions not been undertaken,
the net investment income per share and the ratios would have been:
Net investment loss per share $0.04 $(0.36)
Ratios (to average net assets):
Expenses 1.73% 5.15%t
Net investment income (0.22)% (2.88)%t
t Computed on an annualized basis.
** Calculated based on average shares outstanding.
- ----------
2 Amount represents the average commission rate paid to brokers on the
purchase and sale of equity securities.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Strategy for the Tax-Sensitive Funds
The Tax-Sensitive Equity Fund and the Small Cap Tax-Sensitive Equity Fund
(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.
The Taxpayer Relief Act of 1997 (the "Act") was recently enacted into law
and establishes different maximum rates of taxation for individuals on long-term
capital gains. Prior to the Act, long- term capital gains distributed to
individuals by mutual funds or recognized upon the sale of fund shares were
taxed at federal tax rates of up to 28%. Subject to future legislative or
regulatory developments, such gains recognized currently should generally be
taxable to individual upper-bracket investors at the maximum federal tax rates
of either (i) 28% if the assets were held for more than one year but not more
than 18 months or (ii) 20% if the assets were held more than 18 months. Taxable
dividends from any source other than long-term capital gains distributed to
individuals by mutual funds continue to be taxable as ordinary income, 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. 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. Shareholders should consult their own
tax advisers about the effects of the Act in light of their particular
circumstances.
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 (but not the tax laws or requirements of any particular state) paid by
shareholders on the Funds' distributions.
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.
When selling portfolio securities, each Tax-Sensitive Fund will generally
select (i) the highest cost shares of the specific security in order to reduce,
to the extent practicable, the realization of capital gains, particularly
short-term capital gains, and/or (ii) if gains will be realized, shares of the
specific security with holding periods longer than 18 months (if any) when
appropriate in order to allow individual investors in the Tax-Sensitive Funds to
benefit from the lower capital gains tax rate. 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.
The Equity Fund intends to have relatively low annual portfolio turnover
rates under normal circumstances. For noncorporate 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"), as described
above. Net long-term capital gains in excess of net short-term capital loss
realized and distributed by the Tax-Sensitive Funds is treated by shareholders
as long-term capital gains taxable at the maximum rates described above for
federal income tax purposes. Therefore, the Equity Fund intends, when
practicable and prudent, to hold appreciated portfolio securities for more than
one year, and for more than 18 months where appropriate in light of investment
considerations, 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 and to seek to maximize the portion of its distributions
of long-term capital gains qualified for the most favorable tax rate. Because of
the nature of the securities of small capitalization companies in which the
Small Cap Fund will primarily invest (including those issued in initial public
offerings), the Small Cap Fund does not place any restrictions on portfolio
turnover and may, from time to time, have a high portfolio turnover rate. This
policy may have the effect of causing the Small Cap Fund to realize and,
therefore, distribute short-term capital gains which are taxable to shareholders
as ordinary income.
<PAGE>
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
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 the
Tax-Sensitive Funds are managed to consider the impact of federal and state
taxes on shareholders' investment returns, neither Tax-Sensitive Fund will be
managed considering any particular state's tax laws.
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.
Equity Securities. The equity and equity-related securities in which each
Tax-Sensitive Fund invests consist of exchange-traded and OTC common and
preferred stocks, but may also include warrants, rights, convertible securities,
depositary receipts, depositary shares, trust certificates, shares of other
investment companies, limited partnership interests and equity participations
(collectively, "equity securities").
Investment Strategy for the Tax Exempt Funds
The Intermediate Tax Exempt Bond Fund and the Massachusetts Intermediate
Tax Exempt Bond Fund (the "Tax Exempt Funds") are designed for investors in the
upper federal income tax brackets who are seeking a higher level of federally
tax free income and, in the case of Massachusetts Intermediate Tax Exempt Bond
Fund, Massachusetts tax-free income than is normally provided by short-term tax
exempt investments, and more price stability than investments in long-term
municipal bonds.
Standish's primary investment management and research focus is at the
security and industry/sector level. Standish seeks to add value to each Tax
Exempt Fund's portfolio by selecting under-valued investments, rather than by
varying the average maturity of a Fund's portfolio to reflect interest rate
forecasts. Standish utilizes fundamental credit and sector valuation techniques
to evaluate what it considers to be less efficient markets and sectors of the
municipal securities marketplace in an attempt to select securities with the
potential for the highest return.
Maturity. Although each Tax Exempt Fund may invest in municipal securities
of any maturity, the Funds intend to emphasize intermediate-term municipal
securities. Under normal market conditions, each Tax Exempt Fund's average
dollar-weighted effective portfolio maturity will vary from three to ten years.
However, the Tax Exempt Funds may purchase individual securities with
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effective maturities that are outside of this range. A mutual fund with an
average portfolio maturity longer than that of the Tax Exempt Funds will tend to
have a higher yield, but will generally exhibit greater share price volatility.
Conversely, a mutual fund with a short-term maturity will generally have a lower
yield, but will generally offer more price stability.
Credit Quality. Although each Tax Exempt Fund invests primarily in
municipal securities that are considered investment grade at the time of
purchase, the Funds intend to emphasize high quality municipal bonds. The Tax
Exempt Funds' emphasis on high quality securities is expected to reduce their
share price volatility. Because the Funds hold investment grade municipal
securities, the income earned on shares of the Funds will tend to be less than
it might be on a portfolio emphasizing lower quality securities. Investment
grade municipal securities are those that are rated at least Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group
("Standard & Poor's"), Duff and Phelps ("Duff") or Fitch Investor Service, Inc.
("Fitch") or, if unrated, determined by Standish to be of comparable credit
quality. High grade municipal securities are those that are rated within the top
three investment grade ratings (i.e., Aaa, Aa or A by Moody's or AAA, AA or A by
Standard & Poor's, Duff or Fitch) or, if unrated, determined by Standish to be
of comparable credit quality. The Fund also may invest in municipal notes rated
at least MIG-1 or MIG-2 by Moody's or at least SP-1 or SP-2 by Standard & Poor's
or, if unrated, determined by Standish to be of comparable credit quality. If a
security is rated differently by two or more rating agencies, Standish uses the
highest rating to compute a Fund's credit quality and also to determine the
security's rating category. If the rating of a security held by a Tax Exempt
Fund is downgraded below investment grade, Standish will determine whether to
retain that security in the Fund's portfolio. Securities rated Baa by Moody's or
BBB by Standard & Poor's, Duff or Fitch are generally considered medium grade
obligations and have some speculative characteristics. Adverse changes in
economic conditions or other circumstances are more likely to weaken the medium
grade issuer's capability to pay interest and repay principal than is the case
for high grade securities.
* * *
Each Fund's specific investment objective and policies are set forth below
and will assist the investor in differentiating each Fund's unique
characteristics. Because of the uncertainty inherent in all investments, no
assurance can be given that a Fund will achieve its investment objective. See
"Description of Securities and Related Risks" and "Investment Techniques and
Related Risks" below for additional information.
The Tax-Sensitive Equity Fund
Investment Objective. The Equity Fund's investment objective is 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.
Principal Investments. Under normal circumstances, at least 80% of the
Equity Fund's total assets are invested in equity and equity-related
securities.
Other Investments. 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. OTC 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
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time of investment, Aaa, Aa or A by Moody's or AAA, AA or A by Standard &
Poor's, Duff or Fitch or, if unrated, will be 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, Duff or Fitch or, if
unrated, determined by the Adviser to be of comparable credit quality. 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 Equity Fund may enter into repurchase agreements, engage in short
selling and invest in restricted and illiquid securities, although it intends to
invest in restricted and illiquid securities on an occasional basis only. The
Fund may purchase and sell put and call options, enter into futures contracts,
purchase and sell options on such futures contracts and engage in currency
transactions. These techniques may produce taxable ordinary income (or loss)
and/or short-term or long-term capital gains (or losses). The Fund will attempt
to reduce risk by diversifying its investments within the investment policy set
forth above. See "Description of Securities and Related Risks" and "Investment
Techniques and Related Risks" below for additional information.
The Small Cap Tax-Sensitive Equity Fund
Investment Objective. The Small Cap Fund's investment objective is 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.
Principal Investments. Under normal circumstances, at least 80% of the
Small Cap Fund's total assets are invested in equity and equity-related
securities of small capitalization companies. The Small Cap Fund will focus its
investments in small capitalization companies that have market capitalizations
less than $1 billion. When Standish believes that securities of small
capitalization companies are over-valued, the Small Cap Fund may invest in
securities of larger, more mature companies, provided that such investments do
not exceed 20% of the Fund's total assets. The Small Cap Fund may participate in
initial public offerings for previously privately held companies which are
expected to have market capitalizations less than $1 billion after the
consummation of the offering, and whose securities are expected to be liquid
after the offering. Companies with small market capitalizations may have more
limited operating histories and/or less experienced management than larger
capitalization companies and investment in such companies may pose additional
risks.
Other Investments. The Small Cap Fund may invest up to 15% of its total
assets in equity securities of foreign issuers, including issuers located in
emerging markets. 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 Small Cap Fund may enter into repurchase agreements, engage in short
selling and invest in restricted and illiquid securities, although it intends to
invest in restricted and illiquid securities on an occasional basis only. The
Small Cap Fund may purchase and sell put and call options, enter into futures
contracts, purchase and sell options on such futures contracts and engage in
currency transactions. These techniques may produce taxable ordinary income (or
loss) and/or short-term or long-term capital gains (or losses). The Fund will
attempt to reduce risk by diversifying its investments within the investment
policy set forth above. See "Description of Securities and Related Risks" and
"Investment Techniques and Related Risks" below for additional information.
The Intermediate Tax Exempt Bond Fund
<PAGE>
Investment Objective. The Intermediate Tax Exempt Fund's investment
objective is 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.
Principal Investments. Under normal market conditions, substantially all
and at least 80% of the Intermediate Tax Exempt Fund's net assets are invested
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. Also
under normal market conditions, at least 65% of the Fund's net assets are
invested in municipal bonds. These two investment policies of the Fund are
fundamental and may not be changed without shareholder approval.
Maturity. Under normal market conditions, the Intermediate Tax Exempt
Fund's dollar-weighted average portfolio maturity will vary from three to ten
years.
Credit Quality. Although the Intermediate Tax Exempt Fund invests
exclusively in investment grade municipal securities, it intends to emphasize
high quality municipal securities.
Other Investments. Although as a matter of fundamental policy it is
authorized to do so, the Intermediate 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.
Under normal market conditions, the Fund may invest up to 20% of its net
assets in taxable, fixed income securities (i.e., 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
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. As a temporary matter and for defensive purposes,
the Fund may purchase taxable, fixed income obligations in excess of 20% of its
net assets, the amount of which will depend on market conditions and the needs
of the Fund. 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 Intermediate Tax Exempt Fund may purchase and sell put and call
options, enter into futures contracts, purchase and sell options on such future
contracts, enter into various interest rate transactions such as swaps, caps,
floors and collars, purchase securities on a forward commitment, when issued or
delayed delivery basis and enter into repurchase agreements.
The Massachusetts Intermediate Tax Exempt Bond Fund
Investment Objective. The Massachusetts Tax Exempt 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
<PAGE>
intermediate-term municipal securities. The investment objective of the Fund is
a fundamental policy that may not be changed without shareholder approval.
Principal Investments. Under normal market conditions, substantially all
and at least 80% of the Massachusetts Tax Exempt Fund's net assets are invested
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"). Also under normal market conditions, at least 65% of the
Fund's net assets are invested in municipal bonds. These two investment policies
of the Fund are fundamental and may not be changed without shareholder approval.
Maturity. Under normal market conditions, the Massachusetts Tax Exempt
Fund's dollar-weighted average portfolio maturity will vary from three to ten
years.
Credit Quality. Although the Massachusetts Tax Exempt Fund invests
exclusively in investment grade Massachusetts Municipal Securities, it intends
to emphasize high quality Massachusetts Municipal Securities.
Other Investments. Although as a matter of fundamental policy it is
authorized to do so, the Massachusetts 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.
Under normal market conditions, the Fund may invest up to 20% of its net
assets in taxable, fixed income securities and municipal securities that are not
Massachusetts Municipal Securities (i.e., when there is a yield disparity
between 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. As a temporary matter
and for defensive purposes, the Fund may purchase taxable, fixed income
obligations and municipal securities that are not Massachusetts Municipal
Securities in excess of 20% of its net assets, the amount of which will depend
on market conditions and the needs of the Fund. 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 Income Taxes" in this Prospectus.
The Massachusetts Tax Exempt Fund may purchase and sell put and call
options, enter into futures contracts, purchase and sell options on such future
contracts, enter into various interest rate transactions such as swaps, caps,
floors and collars, purchase securities on a forward commitment, when issued or
delayed delivery basis and enter into repurchase agreements.
DESCRIPTION OF SECURITIES AND RELATED RISKS
General Risks
<PAGE>
Investments in the Funds involve certain risks. The Tax-Sensitive Funds
invest primarily in equity and equity-related securities and are subject to the
risks associated with investments in such securities. The Tax-Sensitive Funds
are also subject to the risks associated with direct investments in foreign
securities. The Tax Exempt Funds invest primarily in municipal securities and
are subject to risks associated with investments in such securities. These risks
include interest rate risk, default risk, and call and extension risk. The
Massachusetts Tax Exempt Fund is also subject to the specific risks associated
with investments in Massachusetts Municipal Securities.
Interest Rate Risk. When interest rates decline, the market value of
municipal securities tends to increase. Conversely, when interest rates
increase, the market value of municipal securities tends to decline. The
volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in municipal securities are subject
to the risk that the issuer of the security could default on its obligations
causing a Tax Exempt Fund to sustain losses on such investments. A default could
impact both interest and principal payments.
Call Risk and Extension Risk. Municipal securities may be subject to both
call risk and extension risk. Call risk exists when the issuer may exercise a
right to pay principal on an obligation earlier than scheduled which would cause
cash flows to be returned earlier than expected. This typically results when
interest rates have declined and a Tax Exempt Fund will suffer from having to
reinvest in lower yielding securities. Extension risk exists when the issuer may
exercise a right to pay principal on an obligation later than scheduled which
would cause cash flows to be returned later than expected. This typically
results when interest rates have increased and a Tax Exempt Fund will suffer
from the inability to invest in higher yield securities.
Investing in 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. OTC 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. The Small
Cap Fund may invest up to 15% of its total assets in equity securities of
issuers located in any foreign country. 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 the securities of foreign issuers involves risks that are not
typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Investments in foreign issuers may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency blockage).
A decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or denominated
relative to the U.S. dollar would reduce the value of the portfolio security.
Commissions on transactions in foreign securities may be higher than those for
similar transactions on domestic stock markets and foreign custodial costs are
higher than domestic custodial costs. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have on occasion been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign issuer
than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading volume than
U.S. securities markets and securities of many foreign issuers are less liquid
and more volatile than securities of comparable U.S.
<PAGE>
issuers. Furthermore, with respect to certain foreign countries, there is a
possibility of nationalization, expropriation or confiscatory taxation,
imposition of withholding or other taxes on divided or interest payments (or in
some cases, capital gains), limitations on the removal of funds or other assets,
political or social instability or diplomatic developments which could affect
investment in those countries.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currency in which a
Tax-Sensitive Fund's investments are denominated relative to the U.S. dollar
will affect the Fund's net asset value. Exchange rates are generally affected by
the forces of supply and demand in the international currency markets, the
relative merits of investing in different countries and the intervention or
failure to intervene of U.S. or foreign governments and central banks. Some
emerging market countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, emerging markets are subject to
the risk of restrictions upon the free conversion of their currencies into other
currencies. Any devaluations relative to the U.S. dollar in the currencies in
which a Tax-Sensitive Fund's securities are quoted would reduce the Fund's net
asset value per share.
Each Tax-Sensitive Fund may enter into forward foreign currency exchange
contracts and cross currency forward contracts with banks or other foreign
currency brokers or dealers to purchase or sell foreign currencies at a future
date and may purchase and sell foreign currency futures contracts and
cross-currency futures contracts to seek to hedge against changes in foreign
currency exchange rates, although the Tax-Sensitive Funds have no current
intention to engage in such transactions. A forward foreign currency exchange
contract is a negotiated agreement between the contracting parties to exchange a
specified amount of currency at a specified future time at a specified rate. A
cross- currency forward contract is a forward contract that uses one currency
which historically moves in relation to a second currency to hedge against
changes in that second currency. See "Strategic Transactions" within the
"Investment Techniques and Related Risks" section for a further discussion of
the risks associated with currency transactions.
Emerging Markets. Subject to their policies of investing in foreign
securities, the Tax-Sensitive Funds may each invest up to 10% of their total
assets in issuers located in emerging markets generally and up to 3% of their
total assets in issuers of any one specific emerging market country, including
issuers in Asia (including Russia), Eastern Europe, Latin and South America, the
Mediterranean and Africa. The Tax-Sensitive Funds may also invest in currencies
of such countries and may engage in strategic transactions in the markets of
such countries, although they have no current intention to do so. Investment in
securities of issuers in emerging markets may involve a high degree of risk and
may be considered speculative. These investments carry all of the risks of
investing in securities of foreign issuers to a heightened degree. These
heightened risks include: (i) greater risks of expropriation, confiscatory
taxation, nationalization and less social, political and economic stability;
(ii) the small current size of the markets for securities of emerging market
issuers and the currently low or nonexistent volume of trading combined with
frequent artificial limits on daily price movements, resulting in lack of
liquidity and in price uncertainty; (iii) certain national policies which may
restrict a Tax-Sensitive Fund's investment opportunities, including limitations
on aggregate holdings by foreign investors and restrictions on investing in
issuers or industries deemed sensitive to relevant national interests; (iv) the
absence of developed legal structures governing private or foreign investment in
private property; and (v) inflation and rapid fluctuations in interest rates
that have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
Specific Risks
The following sections include descriptions of specific risks that are
associated with a Fund's purchase of a particular type of security or the
utilization of a specific investment technique.
<PAGE>
Common Stocks. The Tax-Sensitive Funds purchase common stocks. Common
stocks are shares of a corporation or other entity that entitle the holder to a
pro rata share of the profits of the corporation, if any, without preference
over any other shareholder or class of shareholders, including holders of the
entity's preferred stock and other senior equity. Common stock usually carries
with it the right to vote and frequently an exclusive right to do so.
Small Capitalization Stocks. The Small Cap Fund invests primarily, and the
Equity Fund may invest to a lesser extent, in securities of small capitalization
companies. Although investments in small capitalization companies may present
greater opportunities for growth, they also involve greater risks than are
customarily associated with investments in larger, more established companies.
The securities of small companies may be subject to more volatile market
movements than securities of larger, more established companies. Smaller
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. The
securities of small capitalization companies may be traded only on the OTC
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 Tax-Sensitive Fund of securities in order 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.
Convertible Securities. Each Tax-Sensitive Fund may invest in convertible
debt and preferred stock. Convertible debt securities and preferred stock
entitle the holder to acquire the issuer's stock by exchange or purchase for a
predetermined rate. Convertible securities are subject both to the credit and
interest rate risks associated with fixed income securities and to the stock
market risk associated with equity securities.
Warrants. Each Tax-Sensitive Fund may purchase warrants. Warrants acquired
by a Fund entitle it to buy common stock from the issuer at a specified price
and time. Warrants are subject to the same market risks as stocks, but may be
more volatile in price. A Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before the expiration dates.
Depositary Receipts and Depositary Shares. The Tax-Sensitive Funds may
purchase depository receipts and depository shares. Depositary receipts and
depositary shares are typically issued by a U.S. or foreign bank or trust
company and evidence ownership of underlying securities of a U.S. or foreign
issuer. Unsponsored programs are organized independently and without the
cooperation of the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current as for sponsored
depositary instruments and their prices may be more volatile than if they were
sponsored by the issuers of the underlying securities. Examples of such
investments include, but are not limited to, American Depositary Receipts and
Shares ("ADRs" and "ADSs"), Global Depositary Receipts and Shares ("GDRs" and
"GDSs") and European Depositary Receipts and Shares ("EDRs" and "EDSs").
Investments in REITs. Each Tax-Sensitive Fund may invest in shares of real
estate investment trusts, 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. 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 Code.
Corporate Debt Obligations. Each Fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
corporations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and
<PAGE>
may also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity.
U.S. Government Securities. Each Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association), (b)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association), (c) the discretionary authority of the
U.S. Government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation), or (d) only the credit of the agency. No assurance can be given
that the U.S. Government will provide financial support to U.S. Government
agencies, instrumentalities or sponsored enterprises in the future. U.S.
Government securities also include Treasury receipts, zero coupon bonds, U.S.
Treasury inflationary index bonds, deferred interest securities and other
stripped U.S. Government securities, where the interest and principal components
of stripped U.S. Government securities are traded independently.
Municipal Securities. Municipal securities in which the Tax Exempt Funds
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 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 each Tax Exempt 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 Tax Exempt Funds' 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
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 Funds are not limited with respect to the
categories of municipal securities they 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 Funds 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
<PAGE>
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.
Certain Risk Considerations Relating to Massachusetts Municipal
Securities. The Massachusetts Tax Exempt 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.
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. 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 AA-. 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 towns 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.
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
<PAGE>
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 1997.
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%.
INVESTMENT TECHNIQUES AND RELATED RISKS
Strategic Transactions. Each Fund may, but is not required to, utilize
various investment strategies to seek to hedge market risks (such as interest
rates, currency exchange rates and broad or specific equity or fixed income
market movements), to manage the effective maturity or duration of fixed income
securities (Tax Exempt Funds only) 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 each Fund may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing their investment objectives, each Fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity indices (Tax-Sensitive Funds only), fixed income indices (Tax
Exempt Funds only), and other financial instruments; purchase and sell financial
futures contracts and options thereon; enter into various interest rate
transactions such as caps, swaps, floors and collars (Tax Exempt Funds only);
and, to the extent a Tax-Sensitive Fund invests in foreign securities, enter
into currency transactions such as forward foreign currency exchange contracts,
cross-currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to seek 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 or
currency exchange rate fluctuations, to seek to protect a Fund's unrealized
gains in the value of portfolio securities, to facilitate the sale of such
securities for investment purposes, to seek to manage the effective maturity or
duration of the Tax Exempt Funds' portfolios 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.
The ability of a Fund to utilize Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market and currency and
interest rate movements, which cannot be assured. Each Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Funds' activities involving Strategic
Transactions may be limited in order to enable the Funds to satisfy the
requirements of the Code for qualification as a regulated investment company and
by the Funds' tax-related objectives due to the fact that Strategic Transactions
<PAGE>
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, interest rate or currency 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 a 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 a Fund can realize on its investments
or cause a Fund to hold a security it might otherwise sell or sell a security it
might otherwise hold.
The use of options and futures transactions entails certain other risks.
Futures markets are highly volatile and the use of futures may increase the
volatility of a Fund's net asset value. 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 associated brokerage commissions or spreads. In addition,
futures and options markets may not be liquid in all circumstances and certain
OTC options may have no markets. As a result, in certain markets, a Fund might
not be able to close out a transaction without incurring substantial losses.
Losses resulting from the use of Strategic Transactions could reduce a Fund's
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. 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 position, at the same time, such transactions can
limit any potential gain which might result from an increase in value of such
position. The loss incurred by a Fund in writing options and entering into
futures transactions is potentially unlimited.
The use of currency transactions can result in a Fund 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. Each Fund will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for non-hedging purposes to 3% of net
assets. In calculating a Fund's net loss exposure from such Strategic
Transaction, an unrealized gain from a particular Strategic Transaction position
would be netted against an unrealized loss from a related position. See the
Statement of Additional Information for further information regarding the use of
Strategic Transactions.
When-Issued and Delayed Delivery Securities. Each Tax Exempt Fund may
invest up to 40% of its net assets in when-issued and delayed delivery
securities. Although a Tax Exempt Fund will generally purchase securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities, the Tax Exempt Funds may dispose of these securities prior to
settlement, if the Adviser deems it appropriate to do so which may result in
taxable gains or losses. The payment obligation and interest rate on these
securities is fixed at the time a Fund enters into the commitment, but no income
will accrue to the Fund until they are delivered and paid for. Unless a Fund has
entered into an offsetting agreement to sell the securities, cash or liquid
assets equal to the amount of the Fund's commitment must be segregated to secure
the Fund's obligation and to partially offset the leverage inherent in these
securities. The market value of the securities when they are delivered may be
less than the amount paid by the Fund.
Repurchase Agreements. Each Fund may invest up to 15% of its net assets in
repurchase agreements. In a repurchase agreement, a Fund buys a security at one
price and simultaneously agrees to
<PAGE>
sell it back at a higher price. Delays or losses could result if the other party
to the agreement defaults or becomes insolvent. Repurchase agreements acquired
by a 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.
Short Sales. Each Tax-Sensitive Fund may engage in short sales and short
sales against the box. In a short sale, a Fund sells a security it does not own
in anticipation of a decline in the market value of the security. In a short
sale against the box, a Fund either owns or has the right to obtain at no extra
cost the security sold short. The broker holds the proceeds of the short sale
until the settlement date, at which time the Fund delivers the security (or an
identical security) to cover the short position. The Fund receives the net
proceeds from the short sale. When a Fund enters into a short sale other than
against the box, the Fund must first borrow the security to make delivery to the
buyer and must place cash or liquid assets in a segregated account that is
marked to market daily. Short sales other than against the box involve unlimited
exposure to loss. No securities will be sold short if, after giving effect to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of a Fund's net assets.
Restricted and Illiquid Securities. Each Fund may invest up to 15% of its
net assets in illiquid securities; however, the Tax-Sensitive Funds invest in
these securities only on an occasional basis. Illiquid securities are those 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, swap
transactions, certain OTC options and certain restricted securities. Based upon
continuing review of the trading markets for a specific restricted security, the
security may be determined to be eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 and, therefore, to
be liquid. Also, certain illiquid securities may be determined to be liquid if
they are found to satisfy relevant liquidity requirements.
The Board of Trustees has adopted guidelines and delegated to the Adviser
the daily function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Board of Trustees
however retains oversight and is ultimately responsible for such determinations.
The purchase price and subsequent valuation of illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Investments in Other Investment Companies. Each Fund is permitted to
invest up to 10% of its total assets in shares of registered investment
companies and up to 5% of its total assets in any one registered investment
company as long as that investment does not represent more than 3% of the total
voting stock of the acquired investment company. Investments in the securities
of other investment companies may involve duplication of advisory fees and other
expenses. The Funds may invest in investment companies that are designed to
replicate the composition and performance of a particular index. For example,
Standard & Poor's Depositary Receipts ("SPDRs") are exchange-traded shares of a
closed-end investment company designed to replicate the price performance and
dividend yield of the Standard & Poor's 500 Composite Stock Price Index.
Investments in index baskets involve the same risks associated with a direct
investment in the types of securities included in the baskets.
Each Tax-Sensitive 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, a Tax-Sensitive 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
<PAGE>
and restrictions. The Trustees currently do not intend to authorize investing in
a pooled fund in connection with a master/feeder structure.
Stand-By Commitments. To facilitate liquidity, the Tax Exempt Funds may
enter into "stand-by commitments" permitting them to resell municipal securities
to the original seller at a specified price. Stand-by commitments generally
involve no additional cost to the Funds, but may, however, reduce the yields
available on securities subject to stand-by commitments.
Third Party Put. The Tax Exempt Funds may purchase long-term fixed rate
bonds which have been coupled with an option granted by a third party financial
institution allowing the Funds at specified intervals to tender or put their
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 Funds will be that of holding a long-term
bond. These third party puts will not be considered to shorten a Fund's
maturity.
Portfolio Turnover and Short-Term Trading. It is not the policy of any
Fund to purchase or sell securities for trading purposes, and the Equity Fund
generally intends to have low annual portfolio turnover rates in order to reduce
the realization and, therefore, the distribution to shareholders of capital
gains. The Small Cap Fund and the Tax Exempt Funds place no restrictions on
portfolio turnover. Notwithstanding the foregoing, each Fund will sell a
portfolio security without regard to the length of time such security has been
held if, in the Adviser's view, the security meets the criteria for disposal. A
high rate of portfolio turnover (100% or more) involves correspondingly higher
transaction costs which must be borne directly by a Fund and thus indirectly by
its shareholders. It may also result in a Fund's realization of larger amounts
of short-term capital gains, distributions from which are taxable to
shareholders as ordinary income. See "Financial Highlights" for each Fund's
portfolio turnover rates.
Temporary Defensive 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
<PAGE>
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 Funds' 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 which the Tax Exempt Funds
invest. To the extent that income dividends distributed by the Tax Exempt Funds
include income from taxable sources, a portion of a shareholder's dividend
income will be taxable. See "Federal Income Taxes."
Portfolio Diversification and Concentration. The Massachusetts Tax Exempt
Fund is non-diversified which generally means that, with respect to 50% of the
Fund's total assets, it may invest more than 5% of its total assets in the
securities of a single issuer. Each of the other Funds is diversified, which
generally means that, with respect to 75% of its total assets (i) no more than
5% of the Fund's total assets may 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. Because of the relatively small number of
issuers of Massachusetts Municipal Securities, the Massachusetts Tax Exempt 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 securities, such as the Intermediate Tax Exempt Fund. Therefore, the
Massachusetts Tax Exempt Fund would be more susceptible than a diversified fund
to any single adverse economic or political occurrence or development affecting
Massachusetts issuers. The Massachusetts Tax Exempt 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 Tax-Sensitive Funds will not concentrate (invest 25% or more of their
total assets) in the securities of issuers in any one industry. Although they
are authorized to do so, the Tax Exempt Funds do not expect to concentrate
(invest 25% or more of their 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.
Investing a significant amount of a Tax Exempt Fund's assets in the securities
of issuers in any one industry will cause the Fund's net asset value to be more
sensitive to events affecting that industry. The Funds' policies concerning
diversification and concentration are fundamental and may not be changed without
shareholder approval.
Investment Restrictions. The investment objectives of the Tax-Sensitive
Funds are not fundamental and may be changed by the Board of Trustees without
the approval of shareholders. If there is a change in a Tax-Sensitive Fund's
investment objective, shareholders should consider whether the Tax-Sensitive
Fund remains an appropriate investment in light of their current financial
situation. The investment objectives of the Tax Exempt Funds are fundamental and
may not be changed except with the approval of shareholders. Except as otherwise
specified, each Fund's investment policies set forth in this Prospectus are
non-fundamental and may be changed without shareholder approval. Each Fund has
adopted fundamental policies which may not be changed without the approval of
the applicable Fund's shareholders. See "Investment Restrictions" in the
Statement of Additional Information. If any percentage restriction 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.
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
<PAGE>
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 Funds seek to
provide a high level of interest income exempt from federal and, in the case of
the Massachusetts Tax Exempt Fund, Massachusetts 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).
<PAGE>
CALCULATION OF PERFORMANCE DATA
From time to time each Fund may advertise its average annual total return.
The Tax Exempt Funds may also advertise their yields and tax-equivalent yields.
Average annual total return is determined by computing the average annual
percentage change in the value of $1,000 invested at the maximum public offering
price for specified periods ending with the most recent calendar quarter,
assuming reinvestment of all dividends and distributions at net asset value. The
total return calculation assumes a complete redemption of the investment at the
end of the relevant period. Each Fund may also from time to time advertise total
return on a cumulative, average, year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
The "yield" of a 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 (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 Funds 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 a 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 Fund's yield.
Taxable Equivalent Yield Table (Federal)
- ---------
Federal
Marginal
Tax Rate
Taxable Equivalent Rates Based on Tax-Exempt Yield of:
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%
<PAGE>
Taxable Equivalent Yield Table (Federal/MA combined)
- ---------
Combined
Federal
and MA
Marginal
Tax Rate*
Taxable Equivalent Rates Based on Tax-Exempt Yield of:
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 (i) a Massachusetts tax rate of 12% and federal tax rates of 31%, 36%
and 39.6%, respectively, and (ii) full deductibility of Massachusetts income
taxes on the investor's federal income tax return.
From time to time, a Fund may compare its performance in publications with
that of other mutual funds with similar investment objectives, to stock, bond
and other 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 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 S&P 500 Index. The S&P 500 Index is a market weighted compilation of
500 common stocks selected on a statistical basis by Standard & Poor's. Total
return for the S&P 500 Index assumes reinvestment of dividends. The S&P 500
Index is typically composed of issues in the following sectors: industrial,
financial, public utilities and transportation. Most stocks that comprise the
S&P 500 Index are traded on the New York Stock Exchange, although some are
traded on the American Stock Exchange and in the OTC market.
The Russell 2000 Index. The Russell 2000 Index is composed of
approximately 2,000 small capitalization common stocks and is generally
representative of unmanaged small capitalization stocks in the U.S. markets. A
company's stock market capitalization is the total market value of its floating
outstanding shares.
The Russell 2000 Growth Index. The Russell 2000 Growth Index is composed
of approximately 2,000 small capitalization common stocks and is generally
considered to be representative of those Russell 2000 companies with higher
price-to-book ratios and forecasted growth.
The Lehman Brothers State General Obligation Bond 3-5-7-10 Indices. The
Lehman Brothers State General Obligation Bond 3-5-7-10 Indices are actually
subsets of a broad 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 over 33,000
bond issues (rated BBB or better).
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
<PAGE>
Composite (the "Composite"). As of September 30, 1997, the Composite consisted
of 25 Tax-Sensitive Equity Components representing approximately $76 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. The fees and expenses paid by the Tax-Sensitive Equity
Components generally differ in type and amount to varying extents from the fees
and expenses paid by the Equity Fund, which will affect the relevance of the
performance presented in the Composite to investors in the Equity Fund.
<PAGE>
STANDISH, AYER & WOOD TAX-SENSITIVE EQUITY COMPOSITE PERFORMANCE
7 Year
Average Annual Cumulative
Total Return For Total Return For
The Periods Ended The Period Ended
September 30, 1997 September 30, 1997
------------------ ------------------
3 Years 5 Years
------- -------
The Composite
Equal Weighted Gross 33.93% 24.04% 23.29%
Equal Weighted Net 33.43% 23.54% 22.79%
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
The Composite
Equal weighted 30.40% 13.09% 24.22% -1.62% 28.93% 26.83% 46.93%
gross total return
Equal weighted net 29.90% 12.59% 23.72% -2.12% 28.43% 26.33% 46.43%
total return
Size weighted 30.65% 12.79% 23.34% -1.28% 28.92% 26.48% 48.52%
gross total return
Size weighted net 30.15% 12.29% 22.84% -1.78% 28.42% 25.98% 48.02%
total return
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. (The Equity Fund's performance is set forth below.)
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, they do so less frequently than
mutual funds, such as the Funds. Accordingly, there can be no assurance that the
continuous offering of the Equity Fund's shares and the Equity Fund's obligation
to redeem its shares will not impact the Equity Fund's performance relative to
the Composite's performance. In the opinion of the 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
<TABLE>
<CAPTION>
Average Annual Total Return
For the Periods Ended Cumulative Total Return
September 30, 1997 For the Period January 2, 1996 To
1 Year Since Inception(1) September 30, 1997(1)
------ ------------------ ---------------------
<S> <C> <C> <C>
Equity Fund 51.19% 39.86% 79.87%
</TABLE>
- ----------
(1) The Equity Fund commenced operations on January 2, 1996.
DIVIDENDS AND DISTRIBUTIONS
<PAGE>
Each Fund's dividends from realized capital gains, if any, after reduction
by capital losses, will be declared and distributed at least annually. The
Tax-Sensitive Funds will declare and distribute, at least annually, any
dividends from net investment income. The Tax Exempt Funds 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 Standish Fund
Distributors, which offers the Funds' 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 Standish Fund Distributors or its
agent and payment for the shares is received by the Funds' custodian, Investors
Bank & Trust Company (the "Custodian"). Please see the Funds' account
application or call (800) 221-4795 for instructions on how to make payment of
Fund shares. Each Fund requires minimum initial investments of $100,000.
Additional investments must be in amounts of at least $10,000 for the Tax-
Sensitive Funds and $5,000 for the Tax Exempt Funds. Certificates for Fund
shares are not issued.
Shares of the Funds may also be purchased through securities
broker-dealers. Orders for the purchase of Fund shares received by
broker-dealers by the close of regular trading on the New York Stock Exchange
("NYSE") on any business day and transmitted to Standish Fund Distributors or
its agent 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 NYSE on that day, if
payment for the shares is also received by the Custodian that day. Otherwise,
orders will be effected at the net asset value per share determined on the next
business day, if payment for the shares is also received by the next business
day. It is the responsibility of broker-dealers to transmit orders so that they
will be received by Standish Fund Distributors or its agent by the close of its
business day. Shares of the Funds purchased through broker-dealers may be
subject to transaction fees, no part of which will be received by the Funds,
Standish Fund Distributors or the Adviser.
In the sole discretion of the Adviser, each Fund may accept securities
instead of cash for the purchase of shares. The Adviser will determine that any
securities acquired in this manner are consistent with the investment objective,
policies and restrictions of the applicable Fund. The securities will be valued
in the manner stated below. The purchase of Fund shares by a transfer of
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.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of a Fund's shares, (ii) to reject purchase orders when in the best
interest of a Fund, (iii) to modify or eliminate the minimum initial or
subsequent investment in Fund shares and (iv) to eliminate duplicate mailing of
Fund materials to shareholders who reside at the same address. A 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. A Fund's
investment minimums apply to the aggregate value invested in omnibus accounts
rather than to the investment of underlying participants in such omnibus
accounts.
NET ASSET VALUE
<PAGE>
Each Fund's net asset value per share is computed on each day on which the
NYSE is open as of the close of regular trading on the NYSE (normally 4:00 p.m.
New York time). The net asset value per share is calculated by determining the
value of all of 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 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 Funds believe that reliable
market quotations for municipal securities are generally not readily available
for purposes of valuing their 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 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 unless
the Trustees determine that amortized cost does not represent fair value. 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.
EXCHANGE OF SHARES
Shares of the Funds may be exchanged for shares of one or more other funds
in the Standish Fund family subject to the terms and restrictions imposed on the
purchase of shares of such funds. Shares of a Fund redeemed in an exchange
transaction are valued at their net asset value next determined after the
exchange request is received by Standish Fund Distributors 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 Standish Fund
Distributors or its agent and payment for the shares is received by the fund
into which shares are to be exchanged. Until receipt of the purchase price by
the fund into which 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 fund family, please call (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 Standish Fund Distributors, P.O. Box 1407, One Financial Center, Boston,
Massachusetts 02111-1407. 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 Standish Fund Distributors 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.
<PAGE>
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 Standish Fund Distributors. 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 Standish Fund
Distributors or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed account application and payment for the
shares to be redeemed have been received.
Written Redemption. Shares of each Fund may be redeemed by written order
to Standish Fund Distributors, P.O. Box 1407, One Financial Center, 26th Floor,
Boston, Massachusetts 02111-1407. 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 NYSE'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. Standish Fund Distributors reserves the right to waive the
requirement that signatures be guaranteed. 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 Standish Fund
Distributors 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 they are assured that good funds have
been collected for the purchase of the 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 Standish Fund Distributors 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.
<PAGE>
Repurchase Order. In addition to telephonic and written redemption of Fund
shares, Standish Fund Distributors may accept telephone orders from brokers or
dealers for the repurchase of Fund shares. The repurchase price is the net asset
value per share next determined after receipt of the repurchase order by
Standish Fund Distributors or its agent and the payment for the shares by the
Funds' custodian. Brokers and dealers are obligated to transmit repurchase
orders to Standish Fund Distributors or its agent prior to the close of Standish
Fund Distributor'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 Standish Fund Distributors 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, Standish Fund Distributors, the Trust and the 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 follow telephonic instructions that they reasonably believe to
be genuine, neither the Adviser, Standish Fund Distributors, the Trust, the
applicable Fund, the 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, a 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. During these periods, 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.
Each Fund may redeem, at net asset value, the shares in any account which
has a value of less than $25,000 for the Tax-Sensitive Funds or $10,000 for the
Tax Exempt Funds 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 to increase the value of the account to an amount at
least equal to the stated minimums.
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, the Trustees of the
Trust are ultimately responsible for the management of its business and affairs.
See "Management" in the Statement of Additional Information for more information
about the Trustees and officers of the Trust.
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
<PAGE>
advisory agreements. 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. As of December 31, 1997, Standish and its affiliates
managed approximately $[34] 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.
Each Tax Exempt Fund has two portfolio managers: 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 January 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, places orders to
purchase and sell securities and permits the Funds to use the name "Standish."
For these services, each Fund pays the Adviser a fee monthly equal at a stated
annual percentage rate of such Fund's average daily net asset value:
Actual Rate Paid for the
Contractual Advisory Fiscal Year Ended
Fee Annual Rate September 30, 1997
--------------- ------------------
Tax-Sensitive Equity Fund 0.50% 0.00%
Small Cap Tax-Sensitive Equity Fund 0.60% 0.00%
Intermediate Tax Exempt Bond Fund 0.40% 0.31%
Massachusetts Intermediate Tax 0.40% 0.30%
Exempt Bond Fund
- ----------
*Standish has voluntarily and temporarily agreed to limit total expenses
(excluding brokerage commissions, taxes and extraordinary expenses) of the
Equity Fund, the Small Cap Fund, the Intermediate Tax Exempt Fund and the
Massachusetts Tax Exempt Fund to 0.50%, 0.75%, 0.65% and 0.65%, respectively, of
the applicable Fund's average daily net assets. (The Tax-Sensitive Funds were
subject to different expense limitations for part of the 1997 fiscal year.)
Standish may revise or discontinue these agreements at any time although it has
no current intention to do so. If an expense limit is exceeded, the compensation
due to Standish shall be proportionately reduced by the amount of such excess by
a reduction or refund thereof, subject to readjustment during the period during
which such limit is in place.
Expenses. Expenses of the Trust that relate to more than one series are
allocated among such series by the Adviser in an equitable manner. 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 pays
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. Standish Fund Distributors
bears the distribution expenses attributable to the offering and sale of Fund
shares without subsequent reimbursement.
Each Fund's total annual operating expenses for the fiscal year ended
September 30, 1997 are described above under the caption "Financial Highlights."
<PAGE>
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 Funds 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. The Adviser may also consider the extent to which a broker or
dealer provides research to the Adviser and the number of fund shares sold by
the broker or dealer in making its selection.
FEDERAL INCOME TAXES
Each Fund is a separate entity for federal tax purposes and intends to
qualify for each taxable year for taxation as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). If it
qualifies as a regulated investment company, each Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in accordance with certain timing and other requirements of the
Code.
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
treated by 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 reinvested in 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.
Each 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 a 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 Funds 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 Funds which are taxable entities or persons
will be subject to federal income tax on capital gain distributions (as defined
below) from the Tax Exempt Funds and on any other dividends they receive from
the Tax Exempt Funds that are not exempt-interest dividends. Dividends paid by a
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 from 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
<PAGE>
Exempt Funds' exempt-interest dividends, taxable income dividends or capital
gain distributions will qualify for the corporate dividends received deduction.
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 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 are taxable
for noncorporate shareholders at maximum federal income tax rates of 28% or 20%,
or in rare cases 25%, depending upon the source. 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 may be subject to foreign
withholding taxes or other foreign taxes on income (possibly including capital
gains) from certain foreign investments (if any), which will reduce the yield or
return from 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 for shareholders
that are subject to tax. 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 dividends (other than
exempt-interest 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 tax 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
property 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.
Massachusetts Taxation of Distributions From the Massachusetts Tax Exempt Fund
To the extent that the Massachusetts Tax Exempt Fund's exempt-interest
dividends are derived from interest on Massachusetts Municipal Securities and
are 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
<PAGE>
receives on direct U.S. Government obligations will not be subject to
Massachusetts personal income tax. For Massachusetts personal income tax
purposes, long-term capital gains are generally taxed at a maximum rate of 5%,
with the applicable tax rate decreasing in a prescribed manner as the tax
holding period of the capital asset increases. The applicable statutory
provision does not address the determination of the tax rates applicable to a
mutual fund's capital gain distributions. The Massachusetts Department of
Revenue (the "DOR") has proposed regulations pursuant to which capital gain
distributions would be taxed at the maximum 5% rate unless a mutual fund reports
to the DOR and the shareholder within a prescribed time period the portions of
the distributions attributable to gains in each separate holding period
category, in which case each such portion would be taxed at the rate applicable
to the appropriate holding period category. The Massachusetts Tax Exempt Fund
intends to provide information regarding its distributions in accordance with
applicable laws. 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 tax status of
distributions to shareholders for such calendar year.
Investors should consider the tax consequences of investing shortly prior
to an anticipated taxable dividend or capital gain distribution. At the time of
an investor's purchase of Fund shares, a portion of a Fund's net asset value per
share may represent realized but undistributed net income or net capital gains,
and this portion may be especially significant in amount before an annual or
other periodic dividend or capital gain distribution. Distributions on such
shares after their purchase that are paid from such income or gains will
generally be taxable even though they reduce the net asset value of those shares
and may economically represent a return of a portion of the purchase price.
THE FUNDS AND THEIR SHARES
The Trust was organized on August 13, 1986 as a Massachusetts business
trust. In addition to the Funds offered in this Prospectus, the Trust offers
other series to the public. Shareholders of each Fund are entitled to one full
or fractional vote for each share of that Fund. There is no cumulative voting
and shares have no preemption or conversion rights. All series of the Trust vote
together except as provided in the 1940 Act or the Declaration of Trust. The
Trust does not intend to hold annual meetings of shareholders. The Trustees will
call special meetings of shareholders to the extent required by the Trust's
Declaration of Trust or the 1940 Act. The 1940 Act requires the Trustees, under
certain circumstances, to call a meeting to allow shareholders to vote on the
removal of a Trustee and to assist shareholders in communicating with each
other. Certificates for Fund shares are not issued.
Inquiries concerning the Funds should be made by contacting Standish Fund
Distributors at the address and telephone number listed on the back cover of
this Prospectus.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Funds' transfer and dividend-disbursing agent
and as custodian of all cash and securities of the Funds.
<PAGE>
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, Standish Fund Distributors and the Adviser.
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. A 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 GROUP OF TAX-SENSITIVE AND TAX EXEMPT FUNDS
Investment Adviser Independent Accountants
Standish, Ayer & Wood, Inc. Coopers & Lybrand L.L.P.
One Financial Center One Post Office Square
Boston, Massachusetts 02111 Boston, Massachusetts 02109
Principal Underwriter Legal Counsel
Standish Fund Distributors, L.P. Hale and Dorr LLP
One Financial Center 60 State Street
Boston, Massachusetts 02111 Boston, Massachusetts 02109
Custodian
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
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>
January 28, 1998
[STANDISH LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STATEMENT OF ADDITIONAL INFORMATION
Standish Tax-Sensitive Equity Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish Intermediate Tax Exempt Bond Fund
Standish Massachusetts Intermediate Tax Exempt Bond Fund
This combined Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the combined
Prospectus dated January 28, 1998, as amended and/or supplemented from time to
time (the "Prospectus"), of Standish Tax-Sensitive Equity Fund ("Equity Fund")
and Standish Small Cap Tax-Sensitive Equity Fund ("Small Cap Fund"), Standish
Intermediate Tax Exempt Bond Fund ("Intermediate Tax Exempt Fund") and Standish
Massachusetts Intermediate Tax Exempt Bond Fund ("Massachusetts Tax Exempt
Fund"), each a separate investment series of Standish, Ayer & Wood Investment
Trust (the "Trust"). The Equity Fund and the Small Cap Fund are referred to
herein as the "Tax-Sensitive Funds" and the Intermediate Tax Exempt Fund and the
Massachusetts Tax Exempt Fund are referred to herein as the "Tax Exempt Funds."
Each of the Tax-Sensitive Funds and Tax-Exempt Funds 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
("Standish Fund Distributors"), 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
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Investment Objectives and Policies Determination of Net Asset Value
Investment Restrictions Federal and Massachusetts Income Taxes
Calculation of Performance Data The Funds and Their Shares
Management Additional Information
Purchase and Redemption of Shares Experts and Financial Statements
Portfolio Transactions
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INVESTMENT OBJECTIVES AND POLICIES
The 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 and Duration (Tax Exempt Funds). Under normal market
conditions, the Tax Exempt Funds will maintain a dollar-weighted average
portfolio maturity of between three and ten years. This means that the
dollar-weighted average duration of the Tax Exempt Funds' portfolio investments
will be less than the duration of a U.S. Treasury obligation with a remaining
stated maturity of three to ten years.
The effective maturity of an individual portfolio security in which the
Tax Exempt Funds invest is defined as the period remaining until the earliest
date when a Fund can recover the principal amount of such security through
mandatory redemption or prepayment by the issuer, the exercise by the Fund of a
put option, demand feature or tender option granted by the issuer or a third
party or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
reset dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors and cannot be predicted with
certainty. In general, securities may be subject to greater prepayment rates in
a declining interest rate environment. Conversely, in an increasing interest
rate environment, the rate of prepayment may be expected to decrease. A higher
than anticipated rate of unscheduled principal prepayments on securities
purchased at a premium or a lower than anticipated rate of unscheduled payments
on securities purchased at a discount may result in a lower yield (and total
return) to a Tax Exempt Fund than was anticipated at the time the securities
were purchased. A Fund's reinvestment of unscheduled prepayments may be made at
rates higher or lower than the rate payable on such security, thus affecting the
return realized by the Fund.
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. Duration of an individual
portfolio security is a measure of the security's price sensitivity taking into
account expected cash flow and prepayments under a wide range of interest rate
scenarios. In computing the duration of its portfolio, each 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, under normal market conditions,
each Tax Exempt Fund's dollar-weighted average portfolio maturity will not
exceed ten years, the Funds 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. The Tax Exempt Funds may each use various
techniques to shorten or lengthen the option- adjusted duration of its
portfolio, including without limitation the acquisition of debt obligations at a
premium or discount, the use of futures contracts and the use of interest rate
swaps, caps, floors and collars.
Municipal Securities. The Tax Exempt Funds may invest in all kinds of
municipal securities, including without limitation municipal notes, municipal
bonds, private activity bonds and variable rate demand instruments.
Because the Tax Exempt Funds invest in investment grade municipal
securities, the income earned on shares of the Funds 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
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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 Funds' quality standards are
designed to minimize the credit risk of investing in the Funds, that risk cannot
be entirely eliminated.
Municipal Notes. The Tax Exempt Funds 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.
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 the Federal National Mortgage
Association ("Fannie Mae") or the Government National Mortgage Association
("Ginnie Mae"). There are, of course, a number of other types of notes in which
the Funds may invest which are issued for different purposes and secured
differently from those described above.
Municipal Bonds. The Tax Exempt Funds 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.
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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 Funds 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 Funds 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 Funds 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 Funds 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 may determine that an unrated variable rate demand instrument meets the
Funds' 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 Funds. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the Funds.
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.
The maturity of the variable rate demand instruments held by a 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 Funds. 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.
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The Tax Exempt Funds limit investments in securities which are not readily
marketable to less than 15% of net assets. 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 Funds'
investments enhance marketability. In addition, stand-by commitments and demand
obligations also enhance marketability.
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 Massachusetts Tax Exempt 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 increase by approximately 0.4% 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 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 4.9% in fiscal 1997. 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. Fiscal 1997 is estimated to show a year-end
structural imbalance of $309.9 million, of which approximately $255 million is
attributable to non-recurring factors (the largest being the $150.0 million
personal income tax reduction). Fiscal 1997 is estimated to end with fund
balances of approximately $862.9 million, which would be a 26.4% decrease from
fiscal 1996.
1994 Fiscal Year. The budgeted operating funds of the Commonwealth ended
fiscal 1994 with a surplus of revenues and other sources over expenditures and
other uses of $26.8 million and aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $589.3 million. Budgeted
revenues and other sources for fiscal 1994 totalled approximately $15.550
billion, including tax revenues of $10.607 billion, $87 million below the
Department of Revenue's fiscal 1994 tax revenue estimate of $10.694 billion.
Total revenues and other sources increased by approximately 5.7% from fiscal
1993 to fiscal 1994 while tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994 totalled
$15.523 billion, which is $826.5 million or approximately 5.6% higher than
fiscal 1993 budgeted expenditures and other uses.
1995 Fiscal Year. 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
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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. Budgeted operating funds of the Commonwealth ended
fiscal 1996 with a surplus of revenues and other sources over expenditures and
other uses of $446.4 million, resulting in aggregate ending fund balances in the
budgeted operating funds of the Commonwealth of approximately $1.172 billion.
Budgeted revenues and other sources for fiscal 1996 totalled approximately
$17.328 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 revenues.) Budgeted expenditures and
other uses in fiscal 1996 totalled approximately $16.881 billion, an increase of
approximately $630.6 million, or 3.9%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $177.4 million, bringing the Stabilization Fund balance to
approximately $625.0 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 Audited Financial Report, is approximately $231.7 million.
Legislation approved by the Governor on July 30, 1996 appropriated $150 million
from the Tax Reduction Fund for personal income tax reductions in fiscal 1997,
to be implemented by a temporary increase in the amount of the personal
exemption allowable for the 1996 taxable year. On January 23, 1997, the Governor
filed legislation to appropriate the remaining balance of approximately $85
million (including interest earnings) in the Tax Reduction Fund for an
additional temporary personal exemption increase during the 1997 taxable year.
The Comptroller's report also demonstrates that tax revenues in fiscal
1996 were lower than the limit set by Chapter 29B of the General Laws
(approximately $13.215 billion). See "COMMONWEALTH REVENUES -- Limitations on
Tax Revenues."
1997 Fiscal Year. On October 31, 1997, the Comptroller released the
Commonwealth's statutory basis financial report for fiscal 1997. The report
indicates that fiscal 1997 tax collections totaled approximately $12.864
billion, an increase of approximately $815 million, or 6.8%, over fiscal 1996
and approximately $357 million higher than the most recent official estimates
released by the Secretary of Administration and Finance on May 20, 1997. Total
fiscal 1997 budgeted revenues amounted to approximately $18.170 billion. Total
fiscal 1997 budgeted expenditures were approximately $17.949 billion.
On August 29, 1997, Acting Governor Cellucci singed the final fiscal 1997
supplemental appropriation bill. The legislation provided for approximately
$195.0 million in additional fiscal 1997 appropriations, of which $63.7 million
were carried forward into fiscal 1998, and continued $44.6 million in prior
appropriations. The legislation also provided for several one-time transfers of
funds to be charged to fiscal 1997. The legislation established a Capital
Investment Trust Fund to be administered by the Secretary of Administration and
Finance and provided for the transfer of $229.8 million to such fund to finance
certain specified expenditures for equipment purchases, deferred maintenance and
repairs, technology upgrades and capital purchases and improvements. The
spending authorization will expire at
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the end of fiscal 1999, and any unexpended balances in the fund will be
transferred at that time to the Commonwealth Stabilization Fund. The legislation
directed the transfer of $100 million to the Stabilization Fund (in addition to
the transfer required by the general provisions of the state finance law) and
the transfer of $128 million to a Caseload Increase Mitigation Fund which had
been established in the fiscal 1998 budget. Moneys in the Caseload Increase
Mitigation Fund are available to fund expenditures under programs administered
by the Department of Transitional Assistance in the event caseloads increase
beyond the level contemplated by regular budgetary appropriations or the average
level of the prior fiscal year, or to accommodate changes in federal funding of
such programs. The amount transferred from fiscal 1997 revenues reflects the
unanticipated federal revenue increase received by the Commonwealth attributable
to federal welfare reform legislation. The legislation also provided for the
transfer of $20.2 million to the Massachusetts Water Pollution Abatement Trust
for state capitalization grants for the state revolving fund programs under the
federal Clean Water Act and Safe Drinking Water Act.
1998 Fiscal Year. The budget for fiscal 1998 was enacted by the
Legislature on June 30, 1997 and approved by Governor Weld on July 10, 1997.
(Appropriations covering the first two weeks of the fiscal year were enacted and
approved on June 30, 1997.) The budget was based on a consensus tax revenue
forecast of $12.85 billion, as agreed by both houses of the Legislature in
March. The Executive Office for Administration and Finance revised the fiscal
1998 tax forecast to $13.06 billion on July 30, 1997 and, after a review of
first quarter fiscal 1998 tax receipts, to $13.20 billion on October 15, 1997.
(The fiscal 1998 budget amended the state finance law to change the required
date for tax revenue estimates from September 25 to October 15.)
On July 30, 1997, Acting Governor Cellucci filed legislation that would
reduce the tax rate on certain income. The fiscal 1998 cost of this reduction is
estimated at $196 million by the Executive Office for Administration and
Finance.
Preliminary results indicate that year-to-date tax collections through
October, 1997 total approximately $4.033 billion, approximately $185 million, or
4.8% higher than collections in the corresponding period in fiscal 1997 and
approximately $43 million higher than the midpoint of the benchmark range
($3.897 billion to $4.082 billion) contemplated by the Department of Revenue's
estimate.
The fiscal 1998 budget provides for total appropriations of approximately
$18.4 billion, a 3.8% increase over estimated fiscal 1997 expenditures. Governor
Weld vetoed or reduced appropriations totaling $3.3 million. The budget
incorporates tax cuts valued by the Department of Revenue at $61 million and
provides for an accelerated pension funding schedule.
On July 10, 1997, Governor Weld filed a supplemental appropriation bill
for fiscal 1998 which would reduce existing fiscal 1998 appropriations to public
higher education institutions in the Commonwealth by $24 million and create a
$24 million reserve, to be administered by the Board of Higher Education, to
offset reductions in student fees during fiscal 1998 at the various campuses.
The bill would also prohibit increases in student fees after July 1, 1997
without the approval of the Board of Higher Education. The bill has been
referred to the House Ways and Means Committee.
On October 6, 1997, Acting Governor Cellucci filed a bill recommending
supplemental appropriations for fiscal 1998 totaling $51.6 million for the
construction and repair of local roads and bridges. On October 17, 1997, an
additional fiscal 1998 supplemental appropriations bill was filed by Acting
Governor Cellucci recommending spending of $37.5 million to provide for certain
unanticipated obligations of the Commonwealth. The bill also proposes the
transfer off-budget of the $128 million Caseload Increase Mitigation Fund to a
trust fund and of a $206 million Department of Medical Assistance reserve to
indemnify certain medical facilities against losses that might result from
providing uncompensated care. Both supplemental appropriation bills are being
considered by the House Committee on Ways and Means.
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Cash Flow. The Commonwealth ended fiscal 1997 with a cash balance of
approximately $902.0 million, not including the Stabilization Fund ending
balance of $575.0 million. The most recent cash flow projections for fiscal 1998
were released by the State Treasurer and the Secretary of Administration and
Finance on August 25, 1997. The forecast was based on the fiscal 1998 budget
signed by Governor Weld on July 10, 1997, revenue and spending estimates
prepared by the Executive Office for Administration and Finance and actual
results through July, 1997. Pending action by the Governor on the final fiscal
1997 supplemental appropriation bill enacted by the Legislature on August 21,
1997 (which was signed by Acting Governor Cellucci on August 29, 1997), such
estimates assumed additional fiscal 1997 appropriations of $212.0 million and
the continuation into fiscal 1998 of $118.0 million in unspent fiscal 1997
appropriations.
Fiscal 1998 is projected to end with a cash balance of $693.1 million,
without regard to any fiscal 1998 activity that may occur after June 30, 1998.
The cash flow statement notes that general obligation bonds were issued for
capital projects in August, 1997 in the amount of $250 million and forecasts
that an additional $800 million of general obligation bonds, as well as $105
million of special obligation bonds, will be issued for such purposes during the
remainder of the fiscal year. Neither the issuance of transit notes nor
commercial paper for operating purposes is forecast.
The cash flow statement notes that the Massachusetts Turnpike Authority
and the Massachusetts Port Authority are required to make payments to the
Commonwealth in connection with the Central Artery/Ted Williams Tunnel project
and forecasts that the Commonwealth will receive $400 million in the aggregate
during fiscal 1998 from such authorities or from the issuance of Commonwealth
notes in anticipation of payments from such authorities. (The statement also
notes that the Commonwealth has the statutory authority to issue bonds to pay
any such notes.) The statement further forecasts, in connection with the Central
Artery/Ted Williams Tunnel project, that the Commonwealth will issue $175
million of notes in anticipation of future federal highway grants, noting that
federal funding for such purposes has not yet been authorized beyond September
30, 1997.
The ending balances reported for fiscal 1997 and projected for fiscal 1998
are likely to differ from the ending balances for the Commonwealth's budgeted
operating funds for those years because of timing differences and the effect of
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.
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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.
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.
Tax revenues in fiscal 1991 through fiscal 1996 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
1997 will not reach the limit imposed by either of these statutes.
Commonwealth Programs and Services. 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 $17.949
billion, an increase of 4.9% 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
<PAGE>
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 20% 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.
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 $3.538 billion, an increase of approximately 9.0% 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 $1.289 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 ($232.9 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).
<PAGE>
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.
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.
In addition, it should be noted that additional state spending
authorization for the Central Artery/Ted Williams Tunnel project and other
transportation projects is contained in transportation bond legislation approved
by Governor Weld on May 16, 1997. The legislation authorizes $1.545 billion in
spending on federally assisted projects (approximately $1.040 billion for the
Central Artery/Ted Williams Tunnel project and $504.7 million for other
projects), to be funded by $345 million in state bonds and $1.2 billion in
federal grants. The legislation authorizes an additional $1.159 billion in
future spending for the Central Artery/Ted Williams Tunnel project, to be funded
in part by $358.8 million in state bonds.
Ratings. Standard & Poor's currently rates the Commonwealth's general
obligation debt and related guaranteed bonds as "AA-." Moody's currently rates
the Commonwealth's general obligation debt as "A1." Fitch Investors currently
rates the Commonwealth's general obligation debt as "A+." 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.
Foreign Securities. Foreign securities may be purchased and sold by the
Tax-Sensitive Funds on foreign stock exchanges or in over-the-counter markets
(but persons affiliated with the Fund will not act as principal in such
purchases and sales). 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 each Tax-Sensitive Fund will endeavor to achieve the most favorable net
results on its 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 Tax-Sensitive 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 Tax-Sensitive Funds' respective shareholders.
Investors should understand that the expense ratios of the Tax-Sensitive
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 Tax-Sensitive Funds may invest in foreign securities which take the
form of sponsored and unsponsored American Depository Receipts and Shares
("ADRs" and "ADSs"), Global Depository Receipts and Shares ("GDRs" and "GDSs")
and European Depository Receipts and Shares ("EDRs" and
<PAGE>
"EDSs") or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts" and "Depository Shares"). ADRs and ADSs
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. Prices of ADRs and ADSs 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 EDSs
and GDRs and GDSs are receipts evidencing an arrangement with a non-U.S. bank.
EDRs and EDSs and GDRs and GDSs are not necessarily quoted in the same currency
as the underlying security. To the extent that a Tax-Sensitive Fund acquires
unsponsored Depository Receipts or Shares (i.e., Depository Receipts or Shares
acquired from banks which do not have a contractual relationship with the
foreign issuer of the security underlying the Depository Receipts or Shares to
issue and service such Depository Receipts or Shares), 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 or Share may not
inure to the benefit of the holder of such Depository Receipt or Share. Further,
the lack of information may result in inefficiencies in the valuation of such
instruments. Investment in Depository Receipts or Shares does not eliminate all
the risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts or Shares is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipt or Share and the underlying securities are
quoted. However, by investing in Depository Receipts or Shares, such as ADRs or
ADSs, that are quoted in U.S. dollars, a Tax-Sensitive Fund will avoid currency
risks during the settlement period for purchases and sales.
Money Market Instruments and Repurchase Agreements. The money market
instruments include short-term U.S. Government securities, commercial paper
(promissory notes issued by corporations to finance their short-term credit
needs) of foreign (Tax-Sensitive 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.
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.
<PAGE>
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 investment strategies to seek to hedge market risks (such as
interest rates, currency exchange rates and broad or specific equity or fixed
income market movements), to manage the effective maturity or duration of fixed
income securities (Tax Exempt Funds only) 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 each Fund may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing their investment objectives, each Fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity indices (Tax-Sensitive Funds only), fixed income indices (Tax
Exempt Funds only), and other financial instruments; purchase and sell financial
futures contracts and options thereon; enter into various interest rate
transactions such as caps, swaps, floors and collars (Tax Exempt Funds only);
and, to the extent a Tax-Sensitive Fund invests in foreign securities, enter
into currency transactions such as forward foreign currency exchange contracts,
cross-currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to seek 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 or
currency exchange rate fluctuations, to seek to protect a Fund's unrealized
gains in the value of portfolio securities, to facilitate the sale of such
securities for investment purposes, to seek to manage the effective maturity or
duration of the Tax Exempt Funds' portfolios 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 a Fund to utilize Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market and currency and
interest rate movements, which cannot be assured. Each Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Funds' activities involving Strategic
Transactions may be limited in order to enable the Funds to satisfy the
requirements 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
<PAGE>
gain in many cases and the applicable tax rules may make it more difficult to
control the timing of gains or losses.
Risks of Strategic and Derivative Transactions. 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
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. 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 or sell a security
it might otherwise hold. The use of currency transactions by a Tax-Sensitive
Fund can result in the Fund 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 a
Fund in writing options 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. Futures markets
are highly volatile and the use of futures may increase the volatility of a
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
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
<PAGE>
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
(Tax-Sensitive 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.
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"
<PAGE>
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 (Tax- Sensitive 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.
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
(Tax-Sensitive Funds) and debt (Tax Exempt Funds) securities including U.S.
Treasury and agency securities, municipal notes and bonds (Tax Exempt Funds) 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
(Tax-Sensitive 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
(Tax-Sensitive Funds) and debt (Tax Exempt Funds) securities including U.S.
Treasury and agency securities, municipal notes and bonds (Tax Exempt Funds) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies (Tax-Sensitive 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.
<PAGE>
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 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 (or directly with the 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.
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 (Tax-Sensitive Funds), multiple currency transactions
(including forward currency contracts) (Tax-Sensitive 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.
<PAGE>
Currency Transactions. The Tax-Sensitive Funds may engage in currency
transactions with Counterparties to seek 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 Tax-Sensitive 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.
Each Tax-Sensitive Fund 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 seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the Tax-Sensitive
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.
<PAGE>
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 Tax- Sensitive 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.
Swaps, Caps, Floors, Spreads and Collars. Among the Strategic Transactions
into which each of the Funds may enter are interest rate, currency rate
(Tax-Sensitive 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 their
portfolios, protecting against currency fluctuations (Tax-Sensitive Funds only)
as a duration management technique (Tax Exempt Funds 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,
floors, spreads and collars are considered illiquid for purposes of each Fund's
policy regarding illiquid securities, unless
<PAGE>
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 (or marked
on the Funds' records as segregated) 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," "Delayed Delivery" and "Forward Commitment" Securities. The
Tax Exempt Funds may commit up to 40% of their net assets to purchase securities
on a "when-issued" and "delayed delivery" basis. Delivery and payment for the
securities purchased on a when-issued or delayed delivery basis will normally
take place 15 to 45 days after the date of the transaction. The payment
obligation and interest rate on the securities are fixed at the time the Funds
enter into such commitments, but interest will not accrue to the Funds until
delivery of and payment for the securities. Although the Funds will only make
commitments to purchase "when-issued" and "delayed delivery" securities with the
intention of actually acquiring the securities, the Funds may sell the
securities before the settlement date if deemed advisable by the Adviser.
Unless the Funds have 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 Funds'
commitment will be segregated with the Funds' 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 Funds' 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 a 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
<PAGE>
rise. The Funds 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 Funds.
Other Investment Companies. The Tax-Sensitive 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. 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.
2. 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.
3. 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.
4. 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).
5. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
6. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within 7 days.
7. 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.
<PAGE>
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 Massachusetts Intermediate Tax Exempt Bond Fund. As a matter
of fundamental policy, the Massachusetts Tax Exempt Fund may not:
1. 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.
2. 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.
3. 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.
4. 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).
5. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
6. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within seven days.
7. 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).
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.
<PAGE>
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.
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;
provided, however, that the Fund may invest all or part
<PAGE>
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
(this policy is fundamental with respect to the Tax Exempt Funds).
(d) Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets (this policy is fundamental with respect to the Tax Exempt
Funds).
As a matter of non-fundamental policy, the Tax Exempt Funds 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 Funds may
own so long as, as to 75% of their total assets, they do not invest more than 5%
of their total assets in the securities of the issuer. Consequently, the Tax
Exempt Funds 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 they are allowed to do so as a matter of fundamental policy, the
Tax Exempt Funds do 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 their 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 Funds do not expect that more
than 25% of their 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 Funds may invest more than
25% of their 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. 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 Funds is less than 10% of the value of
the total assets of the Funds. Securities backed only by the assets and revenues
of nongovernmental users will be deemed to be issued by such nongovernmental
users.
<PAGE>
The Tax-Sensitive 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 Tax-Sensitive 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 Funds 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 Funds is computed by dividing the net
investment income per share earned during a base period of 30 days, or one
month, 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 Funds, all recurring fees that are charged to all
shareholder accounts and any non-recurring charges for the period stated. In
particular, yield is determined according to the following formula:
Yield = 2[((A-B/CD) + 1)^6 - 1]
Where: A = dividends and interest earned during the period; B = net
expenses accrued for the period; C = average daily number of shares outstanding
during the period that were entitled to receive dividends; D = the maximum
offering price (net asset value) 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 Tax Exempt Funds is based upon each Fund's current
tax-exempt yield and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield /
100% - Marginal Tax Rate = Taxable Equivalent Yield
The Funds' average annual total return for the one-year and since
inception periods ended September 30, 1997, and the Tax Exempt Funds' average
annualized yield and tax-equivalent yield for the 30-day period ended September
30, 1996 were as follows:
<PAGE>
Average Annual Total Return
---------------------------
Tax-
Equivalent
Fund 1-Year Yield Yield
---- ------ ----- -----
Equity Fund 51.19% 39.86% n/a n/a
Small Cap Fund 38.50% 32.37% n/a n/a
Intermediate Tax Exempt Fund 8.27% 6.84% 4.36% 7.21%
Massachusetts Tax Exempt Fund 7.55% 6.07% 4.30% 8.09%
- ----------
(1) The Tax-Sensitive Funds commenced operations on January 2, 1996 and the Tax
Exempt Funds commenced operations on November 2, 1992.
(2) The Intermediate Tax Exempt Fund's tax-equivalent yield assumes a federal
income tax rate of 39.6% and the Massachusetts Tax Exempt Fund's tax-equivalent
yield assumes a combined federal and Massachusetts tax rate of 46.85%.
The Tax Exempt Funds 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.
The Tax-Sensitive Funds may also quote total return giving effect to the payment
of taxes.
In addition to average annual return and yield and tax equivalent yield
(Tax Exempt Funds 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
<PAGE>
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 13.3
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
1Q97 (0.01) 0.16
2Q97 2.97 3.13
3Q97 2.82 2.99
1997(1) 4.76 5.42
- ----------
(1) Information is presented for the first 9 months of the calendar year
Massachusetts Tax Exempt Fund
Quarter/Year Net Gross
---------------------------------
1992 2.27% 2.43%
1Q93 2.88 3.04
2Q93 2.72 2.88
3Q93 2.74 2.90
<PAGE>
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%
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
1Q97 (0.20) (0.03)
2Q97 2.76 2.92
3Q97 2.50 2.67
1997(1) 4.07 4.72
- ----------
(1) Information is presented for the first 9 months of the calendar year
Tax-Sensitive Equity
Quarter/Year Net Gross
---------------------------------
1Q96 6.60% 6.60%
2Q96 3.42 3.42
<PAGE>
3Q96 7.91 7.91
4Q96 9.78 9.78
1996 30.61 30.61
1Q97 2.88 2.88
2Q97 17.34 17.34
3Q97 14.08 14.21
1997(1) 30.61 30.61
- ----------
(1) Information is presented for the first 9 months of the calendar year
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
1Q97 (10.45) (10.45)
2Q97 24.41 24.41
3Q97 20.96 20.96
1997(1) 21.23 21.23
- ----------
(1) Information is presented for the first 9 months of the calendar year
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 limited other
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 Funds may each compare their respective 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 and the Lehman Intermediate Muni Index. The Tax-Sensitive
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 a 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>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*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
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 and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center Wood, Inc.; Director of
Boston, MA 02111 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.O. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President and
c/o Standish, Ayer & Wood, Inc. Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
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. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President and Secretary Senior Fund Administration Manager
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President and Vice President of Finance, Standish, Ayer & Wood,
c/o Standish, Ayer & Wood, Inc. Treasurer Inc. since October 1996; formerly Senior Vice
One Financial Center President, Treasurer and Chief Financial Officer
Boston, MA 02111 of Liberty Financial Bank Group (1993- 95); prior
to 1993, Corporate Controller, The Berkeley
Financial Group
Beverly E. Banfield, 7/6/56 Vice President Vice President and Associate Director
c/o Standish, Ayer & Wood, Inc. and Compliance Officer,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lavinia B. Chase, 6/4/46 Vice President Vice President, Associate Director
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Senior Operations Manager,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since December 1995 formerly
Vice President Scudder, Stevens and Clark
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
Sarah Walcott Abramson, 12/9/65 Vice President Compliance Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1993
Boston, MA 02111
Kathleen M. Broccoli, 4/13/65 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Manager, Portfolio Accounting,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Thomas J. Hanlon, 9/25/60 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Manager, Trade Settlement
One Financial Center and Pricing,
Boston, MA 02111 Standish, Ayer & Wood, Inc.
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1995;
Boston, MA 02111 Compliance Administrator,
New England Securities Corp.
Gigi K. Szekely, 5/8/67 Vice President Manager, Client
c/o Standish, Ayer & Wood, Inc. Communications,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
</TABLE>
- ----------
* Indicates that Trustee is an interested person of the Trust for
purposes of the 1940 Act.
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, 1997, except that certain Trustees and officers
who are directors and shareholders of the Adviser may, from time to time,
purchase additional shares of common stock of the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Funds' fiscal years ended September 30, 1997:
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Aggregate Compensation from the Funds Pension or Total
------------------------------------- Retirement Compensation
Benefits from Funds and
Accrued as Other Funds in
Part of Complex*
Fund's
Expenses
Name of Trustee Equity Small Cap Intermediate Massachusetts
Fund Fund Tax Exempt Tax Exempt Fund
Fund
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. Barr Clayson 0 0 0 0 $0 $0
Samuel C. Fleming $35 $ 95 $231 $175 0 $49,250
Benjamin M. Friedman $35 $ 95 $231 $175 0 $45,500
John H. Hewitt $47 $126 $281 $211 0 $45,500
Edward H. Ladd 0 0 0 0 0 $0
Caleb Loring, III $35 $ 95 $231 $175 0 $45,500
Richard S. Wood 0 0 0 0 0 $0
</TABLE>
- ----------
* As of the date of this Statement of Additional Information, there were
22 mutual funds in the fund complex. Total compensation is presented for
the calendar year ended December 31, 1996.
Certain Shareholders
At November 30, 1997, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each Fund. Also at that date, no person
beneficially owned 5% or more of the then outstanding shares of any Fund except:
Intermediate Tax Exempt Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
BDG & Co. 14%
Bingham Dana & Gould
Trust Development
150 Federal Street
Boston, MA 02110
YK Investment Partnership 6%
191 Waukegan Road
Suite 209
Northfield, IL 60093
Nedra Y. Oren Trust 6%
3526 Bayshore Villas Drive
Coconut Grove, FL 33133
Massachusetts Tax Exempt Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
BDG & Co. 30%
Trust Department
150 Federal Street
Boston, MA 02110
<PAGE>
Hyde Investment Corp. 11%
Bob & Co.
c/o BankBoston
PO Box 1809
Boston, MA 02105
Equity Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Charles Schwab & Co., Inc 20%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Malcolm Rees Jr. 1994 Trust 6%
5 Bridle Path Road
Andover, MA 01810
Small Cap Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 17%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Northern Trust Custodian 5%
Article 4B6
Trust U/W H. Martin
FBO Joyce Martin
P. O. Box 92956
Chicago, IL 60675
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, W. Charles Cook, Joseph M. Corrado, 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,
Ralph S. Tate, Michael W. Thompson 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
<PAGE>
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 set forth below. This fee is paid monthly.
Fund Contractual Advisory
---- Fee Annual Rate
---------------
Equity 0.50%
Small Cap 0.60%
Intermediate Tax Exempt 0.40%
Massachusetts Tax 0.40%
Exempt
During the last three fiscal years ended September 30, the Funds paid
advisory fees in the following amounts:
Fund 1995 1996 1997
---- ---- ---- ----
Equity N/A(1) $0(3) $0(5)
Small Cap N/A(1) $0(3) $0(5)
Intermediate Tax Exempt $ 77,056(2) $56,714(4) $132,842(5)
Massachusetts Tax Exempt $102,395(2) $78,103(4) $104,855(5)
- ------------------
(1) The Tax-Sensitive Funds commenced operations on January 2, 1996.
(2) Prior to September 30, 1996, the Tax Exempt Funds' fiscal years ended
on December 31. Data for 1995 is presented for the year ended December 31, 1995.
For the fiscal years ended December 31, 1995, the Adviser voluntarily agreed not
to impose a portion of its fees for the Intermediate Tax Exempt Fund and the
Massachusetts Tax Exempt Fund in the amount of $38,426 and $21,818,
respectively.
(3) For the period from January 2, 1996 (commencement of operations)
through September 30, 1996, the Adviser voluntarily agreed not to impose any of
its fees for the Equity and Small Cap Funds, which otherwise would have been
$6,161 and $13,510, respectively. In addition, during the same period, the
Adviser voluntarily bore other expenses related to the operations of the Equity
and Small Cap Funds in the amount of $57,444 and $64,052, respectively.
(4) Data for 1996 is presented for the nine months ended September 30,
1996 during which the Adviser voluntarily agreed not to impose a portion of its
fees for the Intermediate Tax Exempt Fund and the Massachusetts Tax Exempt Fund
in the amount of $41,685 and $20,375, respectively.
(5) For the fiscal year ended September 30, 1997, the Adviser voluntarily
agreed not to impose any of its fees for the Equity and Small Cap Funds which
otherwise would have been $32,635 and $100,630, respectively, and voluntarily
agreed not to impose a portion of its fees for the Intermediate Tax Exempt and
Massachusetts Tax Exempt Funds in the amount of $40,552 and $33,848,
respectively.
The Adviser has voluntarily and temporarily agreed to limit total expenses
(excluding brokerage commissions, taxes and extraordinary expenses) of the
Equity Fund, the Small Cap Fund, the Intermediate Tax Exempt Fund and the
Massachusetts Tax Exempt Fund to 0.50%, 0.75%, 0.65% and 0.65%, respectively, of
the applicable Fund's average daily net assets. The Tax-Sensitive Funds were
subject to different voluntary expense limitations at various times during the
September 30, 1997 fiscal year. Standish may revise or discontinue these
agreements at any time although it has no current intention to do so. If an
expense limitation is exceeded, the compensation due to the Adviser shall be
proportionately reduced by the amount of such excess by reduction or refund
thereof, subject to readjustment during the period during which such limit is in
place.
<PAGE>
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.
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, 1998 and for successive periods of one year thereafter, and the Tax
Exempt Fund's and Massachusetts Tax Exempt Fund's investment advisory agreements
continue 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, Standish Fund Distributors 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. ("Standish Fund Distributors"), 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, Standish Fund Distributors 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
Standish Fund Distributors. Pursuant to the Underwriting Agreement, Standish
Fund Distributors has agreed to use its best efforts to obtain orders for the
continuous offering of the Funds' shares. Standish Fund Distributors 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 each 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 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 Standish Fund Distributors are located at One
Financial Center, 26th Floor, Boston, Massachusetts 02111.
PURCHASE AND REDEMPTION OF SHARES
Detailed information on purchase and redemption of shares is included in
the Prospectus.
<PAGE>
In addition to Standish Fund Distributors and other agents of the Trust,
each Fund has authorized one or more brokers and dealers to accept on its behalf
orders for the purchase and redemption of Fund shares. Under certain conditions,
such authorized brokers and dealers may designate other intermediaries to accept
orders for the purchase and redemption of Fund shares. In accordance with a
position taken by the staff of the Securities and Exchange Commission, such
purchase and redemption orders are considered to have been received by a Fund
when accepted by the authorized broker or dealer or, if applicable, the
authorized broker's or dealer's designee. Also in accordance with the position
taken by the staff of the Securities and Exchange Commission, such purchase and
redemption orders will receive the appropriate Fund's net asset value per share
next computed after the purchase or redemption order is accepted by the
authorized broker or dealer or, if applicable, the authorized broker's or
dealer's designee.
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 seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends, portfolio strategy, access to research
analysts, corporate management personnel, industry experts and economists,
comparative performance evaluation and technical measurement services and
quotation services, and products and other services (such as third party
publications, reports and analysis, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist the Adviser in carrying out its responsibilities 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
<PAGE>
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. To the extent permitted
by law, securities to be sold or purchased for a Fund may be aggregated with
those to be sold or purchased for other investment clients of the Adviser and
the Adviser's personnel in order to obtain best execution.
Aggregate Brokerage Commissions
Paid by the Fund on Portfolio
Transactions for the Years ended September 30,
----------------------------------------------
Fund 1995(1) 1996(1) 1997
---- ---- ---- ----
Equity Fund N/A 2,858 10,193
Small Cap Fund N/A 20,738 32,992
- ----------
(1) The Tax-Sensitive Funds commenced operations on January 2, 1996.
At September 30, 1997, no Fund held any securities of their regular
brokers or dealers. The Tax Exempt Funds execute portfolio transactions on a
"net" basis without the payment of brokerage commissions but which include a
mark-up or "spread" by the securities broker-dealer.
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, Martin Luther King, Jr. 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.
Generally, trading in securities on foreign exchanges is substantially
completed each day at various times prior to the close of regular trading on the
New York Stock Exchange. If a security's primary exchange is outside the U.S.,
the value of such security used in computing the net asset value of a
Tax-Sensitive Fund's shares is determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of regular
trading on the New York Stock Exchange. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of regular trading on the New York Stock
Exchange and will therefore not be reflected in the computation of the
Tax-Sensitive Funds' net asset values. If events materially affecting the value
of such securities occur during such period, then these securities may be valued
at their fair value as determined in good faith by the Trustees of the Trust.
FEDERAL AND MASSACHUSETTS INCOME TAXES
Federal Income Taxation
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
taxable income, after reduction by deductible expenses, other than its "net
capital gain," which is the excess, if any, of its
<PAGE>
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 and other 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 seek to avoid
liability for such tax by satisfying such distribution requirements.
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 has $19,612 of capital loss carryforwards,
which expire on September 30, 2004, available to offset future net capital
gains. The Massachusetts Tax Exempt Fund has $227,004 and $178,890 of capital
loss carryforwards, which expire in 2002 and 2003, respectively, 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
(Tax-Sensitive 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 (Tax-Sensitive Funds
only), as ordinary income or loss) and timing of some capital gains and losses
realized by a Fund. Additionally, a Fund may be required to recognize gain if an
option, future, forward contract, short sale, swap or other Strategic
Transaction that is not subject to the mark to market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any net mark to market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though no corresponding cash amounts may
concurrently be received, possibly requiring the disposition of portfolio
securities or borrowing to obtain the necessary cash. Also, certain losses of a
Fund on its transactions involving options, futures or forward contracts and/or
offsetting or successor 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 applicable to options, futures, forward contracts and
constructive sales in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to dollar rolls, certain
structured or hybrid securities, interest rate swaps or currency swaps
(Tax-Sensitive Funds only), and interest rate caps, floors and collars are
unclear in certain respects, and the Funds will account for these instruments in
a manner that is intended to allow them to continue to qualify as regulated
investment companies.
If either Tax-Sensitive Fund acquires stock (including, under proposed
regulations, an option to acquire stock such as is inherent in a convertible
bond) in certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, certain rents
and royalties or capital gains) 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
<PAGE>
to its shareholders. The Tax-Sensitive Funds would not be able to pass through
to their shareholders any credit or deduction for such a tax. An election may
generally be available that would ameliorate these adverse tax consequences, but
any such election could require the electing Fund to recognize taxable income or
gain (subject to tax distribution requirements) without the concurrent receipt
of cash. These investments could also result in the treatment of associated
capital gains as ordinary income. The Tax-Sensitive 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.
Foreign exchange gains and losses realized by the Tax-Sensitive 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, 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 Tax-Sensitive 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 in some cases. Investors would be entitled to claim U.S.
foreign tax credits or deductions with respect to such taxes, subject to certain
holding period requirements and other 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 Tax-Sensitive
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
Tax-Sensitive Funds, and will generally not be entitled to any related tax
deductions or credits. Such taxes will reduce the amounts the Tax-Sensitive
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. As a result of the enactment of
the Taxpayer Relief Act of 1997 (the "1997 TRA") on August 5, 1997, gain
recognized after May 6, 1997 from the sale of a capital asset is taxable to
individual (noncorporate) investors at different maximum federal income tax
rates, depending generally upon the tax holding period for the asset, the
federal income tax bracket of the taxpayer, and the dates the asset was acquired
and/or sold. The Treasury Department has issued guidance under the 1997 TRA that
(subject to possible modification by future "technical corrections" legislation)
will enable each Fund to pass through to its shareholders the benefits of the
capital gains tax rates enacted in the 1997 TRA. Each Fund will provide
appropriate information to its shareholders about the tax rate(s) applicable to
its distributions from its long-term capital gains in accordance with this and
any future guidance. Shareholders should consult their own tax advisers on the
correct application of these new rules in their particular circumstances.
For purposes of the dividends received deduction available to
corporations, dividends, if any, received by the Tax-Sensitive Funds from U.S.
domestic corporations in respect of the stock of such
<PAGE>
corporations held by the Tax-Sensitive Funds, for U.S. Federal income tax
purposes, for at least a minimum holding period, generally 46 days, extending
before and after each dividend, and distributed and designated by the
Tax-Sensitive Funds may be treated as qualifying dividends. Distributions by the
Tax Exempt Funds 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 Tax-Sensitive Funds in order to
qualify for the deduction and, if they borrow to acquire or otherwise incur debt
attributable to 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 and, to the extent such basis would be reduced below zero, require the
current recognition of income.
Taxable distributions by the Tax Exempt Funds 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 Funds of tax-exempt interest
("exempt-interest dividends") timely designated as such by the Funds will be
treated as tax-exempt interest under the Code, provided that each 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 obligations the
interest on which is excluded from gross income under Section 103(a) of the
Code. Shareholders are required to report their receipt of tax-exempt interest,
including such distributions, on their federal income tax returns. The portion
of a 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 Funds 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 Funds may invest is treated as an
item of tax preference for purposes of the federal alternative minimum tax. To
the extent that a 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 tax purposes (both individual and corporate)
that part of the Fund's exempt- interest dividends which is derived from
interest on these tax-exempt obligations. All exempt-interest dividends, whether
or not attributable to private activity bonds, may also increase the alternative
minimum tax liability, if any, of corporate shareholders of the Tax Exempt
Funds.
If a Tax Exempt Fund invests in zero coupon securities, certain increasing
rate or deferred interest securities or, in general, other securities with
original issue discount, the Fund must accrue income on such investments prior
to the receipt of the corresponding cash payments. However, the 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, a 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
Tax-Sensitive Funds would be subject to the same tax rules but do not expect to
acquire such investments.
The Tax Exempt Funds purchase 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
<PAGE>
federal income tax purposes and, with respect to the obligations of
Massachusetts issuers acquired by the Massachusetts Tax Exempt Fund,
Massachusetts state income taxes. It is not economically feasible to, and the
Tax Exempt Funds therefore do not, make any 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
principally during the 1980s 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 or Massachusetts 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 Funds 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 Funds 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 Funds 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 Funds 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. Each 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 Funds, in relation to various regulated investment
company tax provisions is unclear. However the Adviser intends to manage each
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 a 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 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 Funds 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 may be attributable to undistributed net investment income
(except in the case of the Tax Exempt Funds) and/or realized or unrealized
appreciation in a Fund's portfolio. Consequently, subsequent distributions by
the Fund on such shares from such income and/or appreciation may be taxable to
such investor even if the
<PAGE>
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
economically 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
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 or other disposition of shares of the Funds in a
transaction that is treated as a sale for tax purposes, 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. Any loss realized on a redemption may be disallowed to
the extent the shares disposed of are replaced with other shares of the same
Fund 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 Funds, 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. Shareholders should consult their own tax advisers regarding their
particular circumstances to determine whether a disposition of Fund shares is
properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion. Also, future Treasury Department regulations, announcements or other
guidance issued to implement the 1997 TRA may contain rules for determining
different tax rates applicable to sales of Fund shares held for more than one
year, more than 18 months, and (for certain sales after the year 2000 or the
year 2005) more than five years. These regulations may also modify some of the
provisions described above.
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.
<PAGE>
Massachusetts Income Taxation
Distributions from the Massachusetts Tax Exempt Fund will be treated for
Massachusetts tax purposes as described in the Fund's prospectus, whether taken
in cash or reinvested in additional shares.
Long-term capital gains are 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 Massachusetts Department of Revenue is expected to issue guidance
regarding what Massachusetts tax rate is 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. Shareholders should consult their own tax advisers
regarding the state taxation of such distributions.
Each Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that each Fund qualifies as a regulated investment company under
the applicable provisions of federal law incorporated in Massachusetts law, it
will also not be required to pay any Massachusetts income tax.
THE FUNDS AND THEIR 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
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
<PAGE>
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.
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
Each Fund's financial statements contained in the 1997 Annual Reports of
the Funds have been audited by Coopers & Lybrand L.L.P., independent
accountants, and are incorporated by reference into and attached to this
Statement of Additional Information. Financial highlights of the Tax Exempt
Funds for the period from November 2, 1992 (commencement of operations) through
December 31, 1992 were audited by Deloitte & Touche LLP, independent auditors.
Coopers & Lybrand L.L.P., independent accountants, will audit each Fund's
financial statements for the current fiscal year ending September 30, 1998.
<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 Year Ended
September 30, 1997
[STANDISH LOGO]
<PAGE>
Standish, Ayer & Wood Investment Trust
Financial Statements
Table of Contents
Page
Chairman's Message..................................................1
Selected Financial Information......................................2
Performance Highlights..............................................3
Management Discussion Analysis:
Standish Massachusetts Intermediate Tax Exempt Bond Fund.........4
Standish Intermediate Tax Exempt Bond Fund.......................4
Standish Small Cap Tax-Sensitive Equity Fund.....................6
Standish Tax-Sensitive Equity Fund...............................8
Statements of Assets and Liabilities................................9
Statements of Operations...........................................10
Statements of Changes in Net Assets................................11
Financial Highlights:
Standish Massachusetts Intermediate Tax Exempt Bond Fund........15
Standish Intermediate Tax Exempt Bond Fund......................16
Standish Small Cap Tax-Sensitive Equity Fund....................17
Standish Tax-Sensitive Equity Fund..............................18
Portfolio of Investments:
Standish Massachusetts Intermediate Tax Exempt Bond Fund........19
Standish Intermediate Tax Exempt Bond Fund......................22
Standish Small Cap Tax-Sensitive Equity Fund....................26
Standish Tax-Sensitive Equity Fund..............................30
Notes of Financial Statements......................................33
Report of Independent Accountants..................................40
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
October 31, 1997
Dear Standish, Ayer & Wood Investment Trust Shareholder:
Enclosed you will find the annual 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-sensitive funds in one comprehensive document. As of September 30, 1997,
these funds had combined net assets of $136.7 million.
As of September 1997, Standish, Ayer & Wood managed assets for its clients of
approximately $36.7 billion, including the Standish mutual fund assets of $5.3
billion. The principal clients of the firm are corporate pension trusts, state
and local governmental units, 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.
During the last twelve months, the financial markets have generally registered
very positive rates of return. The tax exempt bond market as measured by a
combination of the Lehman Municipal 3, 5, 7 and 10 year indices, has recorded a
total rate of return of 7.48%. The U.S. equity markets as measured by the
Standard & Poor's 500 Index or the Russell 2000 Growth Index have recorded total
rates of return of 40.45% and 23.34%, respectively.
During the last year, we at Standish have continued to add resources to both
investment research and shareholder servicing. We have added expertise in
research and trading both for equities and for municipal bonds. Good flow of new
business at Standish has allowed us to expand our investment skills. We remain
confident that we have the resources and the organization to do a superior
investment management job, and we will be working hard to fulfill your
expectations in the years ahead. We appreciate the opportunity to serve you and
hope you will find the attached information helpful.
Sincerely yours,
/s/ Edward H. Ladd
Edward H. Ladd
Chairman
<PAGE>
Standish, Ayer & Wood Investment Trust
Selected Financial Information
For the Year Ended September 30, 1997
<TABLE>
<CAPTION>
Standish
Massachusetts Standish Standish
Intermediate Intermediate Small Cap Standish
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund Bond Fund Equity Fund Equity Fund
- ------------------------------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 20.63 $ 21.12 $ 23.57 $ 23.60
Income from investment operations
Net investment income * 0.97 1.01 0.02 0.39
Net realized and unrealized gain
(loss) 0.55 0.74 9.05 11.58
------- ------- ------- -------
Total from investment operations 1.52 1.75 9.07 11.97
------- ------- ------- -------
Less distributions declared to
shareholders
From net investment income (0.97) (1.01) (0.03) (0.33)
From net realized gains -- (0.08) -- --
------- ------- ------- -------
Net asset value - end of period $ 21.18 $ 21.78 $ 32.61 $ 35.24
======= ======= ======= =======
Total return 7.55% 8.27% 38.50% 51.19%
Ratios to average net assets
Expenses * 0.65% 0.65% 0.21% 0.20%
Net investment income * 4.67% 4.74% 0.08% 1.31%
Net assets, end of period
(000's omitted) $38,401 $52,729 $32,761 $12,819
Portfolio turnover 25% 23% 102% 25%
Average broker commission paid per
share -- -- $0.0429 $0.0497
</TABLE>
* The investment adviser voluntarily did not impose a portion of its fee and/or
reimbursed the Funds for their operating expenses. Please refer to the
Financial Highlights for additional disclosure regarding these ratios.
2
<PAGE>
Standish, Ayer & Wood Investment Trust
Performance Highlights
for the One-Year Period Ended September 30, 1997
Total Return
- --------------------------------------------------------- --------------
Tax Exempt Funds
Standish Mass. Intermediate Tax Exempt Fund 7.55%
Standish Intermediate Tax Exempt Bond Fund 8.27%
Lehman Muni 3-5-7-10 Index 7.48%
Tax-Sensitive Funds
Standish Tax-Sensitive Small Capitalization Equity Fund 38.50%
Russell 2000 Index 33.20%
Standish Tax-Sensitive Equity Fund 51.19%
S&P 500 Index 40.45%
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.
The 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.
3
<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 enjoyed an excellent environment during the twelve-month period
ending September 30, 1997. The performance of municipal bonds was no exception
to the general trend: investors earned a very satisfactory return over the
period and enjoyed the tax-exempt benefit of municipal bond income as well. The
Standish Intermediate Tax Exempt Bond Fund produced a total return of 8.27% for
the period, well ahead of the benchmark performance index (Lehman Muni 3, 5, 7,
and 10 Year Index) return of 7.48%. In addition, the return easily exceeded that
of the Lipper Intermediate Muni Bond Fund Index of 7.08%. The Standish
Massachusetts Intermediate Tax Exempt Fund returned 7.55%, which also compares
favorably to the indices (note that the Massachusetts Fund only invests in
double tax exempt Massachusetts bonds, whereas the benchmark indices are
"national" in scope).
The twelve-month period was characterized by very favorable circumstances for
financial assets: moderate economic growth with--importantly for bonds--a benign
inflation environment. A fourth quarter 1996 rally was stalled by Fed Chairman
Greenspan's remarks concerning the "irrational exuberance" of the equity
markets, followed by a preemptive tightening by the Federal Reserve in the first
quarter of 1997. However, the second and third quarters of 1997 saw a resumption
of the positive trend for bonds. Overall, bond investors were well rewarded. On
a price return basis, municipals underperformed taxable bonds by a very modest
amount. This is typical in bond market rallies and also reflects the fact that
municipals had become relatively expensive versus taxables in the relatively
weak market of calendar 1996.
Standish Intermediate Tax Exempt Bond Fund
The Fund's success for the period is attributable to its California and New York
exposures, an overweight in "BBB" rated paper, a duration posture modestly
longer than that of the index, and good overall security selection in a market
still characterized by occasional pricing inefficiencies. Credit quality of
states, municipalities, and public authorities definitely improved over the past
year, benefiting the Fund. We are proud to have produced such favorable returns
in a market currently characterized by tight sector and quality spreads, and a
relative lack of value opportunities when compared to years past.
Standish Massachusetts Intermediate Tax Exempt Bond Fund
The Massachusetts market for tax-exempt securities continues to lag the national
market and, although new issue supply has increased, continues to be plagued by
a lack of good value opportunities. Widespread use of bond insurance, tight
quality spreads, and a low level of issuance in the "yield" segment of the
market (i.e. hospitals and other credit sensitive issuers) have inhibited the
ability to add value through security selection. Nevertheless, the Fund
continues to perform well. We have maintained a low turnover posture, preserving
the higher yielding positions in the Fund and have actively used future
contracts to manage the Fund's duration (exposure to the movement of interest
rates). The Massachusetts market may become more interesting in the near term,
as a superb local economy and generally improving credit conditions are offset
by the financial consequences of the "Big Dig" and potential tax cut referendums
on the 1998 ballot.
Thank you for your continuing interest in the Tax Exempt Bond Funds.
Sincerely,
/s/ Raymond J. Kubiak /s/ Maria D. Furman
Raymond J. Kubiak Maria D. Furman
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Comparison of Change in Value of $100,000 Investment in
Standish Massachusetts Intermediate Tax Exempt Bond Fund,
the Lehman Muni 3,5,7, and 10 Index, and the Lipper Intermediate Muni Debt Index
[GRAPHIC OMITTED]
[The following table was represented as a line graph in the printed materials.]
Standish
Massachusetts Lehman Lipper
Intermediate Tax Muni Intermediate
Exempt 3-5-7-10 Muni
------ -------- ----
Inception 11/2/92 100000 100000 100000
11/30/92 101305 101290 101680
12/31/92 102271 102141 102575
1/31/93 103357 103448 103754
2/28/93 106612 106241 106867
3/31/93 105229 105147 105649
4/30/93 106229 105873 106504
5/31/93 106517 106201 106856
6/30/93 108089 107762 108309
7/31/93 108333 107870 108266
8/31/93 110126 109552 110193
9/30/93 111047 110517 111449
10/31/93 111453 110760 111628
11/30/93 110850 110106 110947
12/31/93 112755 111901 112766
1/31/94 114008 113020 113928
2/28/94 111819 110906 111512
3/31/94 108020 108189 108390
4/30/94 108815 109011 108845
5/31/94 109620 109633 109705
6/30/94 109114 109457 109387
7/30/94 110452 110848 110754
8/30/94 110814 111335 111175
9/30/94 109664 110433 110030
10/31/94 108348 109506 108820
11/30/94 106924 108290 107198
12/31/94 108420 109611 108796
1/31/95 110702 111398 110906
2/28/95 112714 113593 113213
3/31/95 113693 114819 114209
4/30/95 113792 115141 114461
5/31/95 116267 117870 117150
6/30/95 115984 117781 116787
7/31/95 117232 119260 117850
8/31/95 118537 120521 119005
9/30/95 119107 120988 119600
10/31/95 120378 121928 120736
11/30/95 121656 123148 122016
12/31/95 122127 123788 122797
1/31/96 122871 124952 123755
2/29/96 122408 124636 123371
3/31/96 121361 123655 122125
4/30/96 121021 123525 121905
5/31/96 121211 123407 121881
6/30/96 122293 124305 122624
7/31/96 123029 125259 123691
8/31/96 123036 125350 123703
9/30/96 124205 126403 124755
10/31/96 125492 127639 125915
11/30/96 127445 129528 127741
12/31/96 127093 129239 127345
1/31/97 127352 129734 127651
2/28/97 128291 130704 128582
3/31/97 126833 129318 127232
4/30/97 127649 130004 127868
5/31/97 129137 131538 129352
6/30/97 130328 132656 130516
7/31/97 133077 135335 133322
8/31/97 132137 134523 132242
9/30/97 133584 135855 133591
Standish Intermediate Tax Exempt Bond Fund
[GRAPHIC OMITTED]
[The following table was represented as a line graph in the printed materials.]
Comparison of Change in Value of $100,000 Investment in
Standish Intermediate Intermediate Tax Exempt Bond Fund,
the Lehman Muni 3,5,7, and 10 Index, and the Lipper Intermediate Muni Debt Index
Standish Lehman Lipper
Intermediate Tax Muni Intermediate
Exempt Fund 3-5-7-10 Muni
----------- -------- ----
Inception 11/2/92 100000 100000 100000
11/30/92 101801 101290 101680
12/31/92 102793 102141 102575
1/31/93 104194 103448 103754
2/28/93 107837 106241 106867
3/31/93 106346 105147 105649
4/30/93 107351 105873 106504
5/31/93 107657 106201 106856
6/30/93 109142 107762 108309
7/31/93 109502 107870 108266
8/31/93 111260 109552 110193
9/30/93 112344 110517 111449
10/31/93 112618 110760 111628
11/30/93 112004 110106 110947
12/31/93 113872 111901 112766
1/31/94 114967 113020 113928
2/28/94 112863 110906 111512
3/31/94 109373 108189 108390
4/30/94 110287 109011 108845
5/31/94 111348 109633 109705
6/30/94 111196 109457 109387
7/31/94 112496 110848 110754
8/30/94 112980 111335 111175
9/30/94 112274 110433 110030
10/31/94 111216 109506 108820
11/30/94 109615 108290 107198
12/31/94 110830 109611 108796
1/31/95 112944 111398 110906
2/28/95 114912 113593 113213
3/31/95 115946 114819 114209
4/30/95 116141 115141 114461
5/31/95 118555 117870 117150
6/30/95 118214 117781 116787
7/31/95 119290 119260 117850
8/31/95 120782 120521 119005
9/30/95 121480 120988 119600
10/31/95 122643 121928 120736
11/30/95 124158 123148 122016
12/31/95 124848 123788 122797
1/31/96 125763 124952 123755
2/29/96 125219 124636 123371
3/31/96 124321 123655 122125
4/30/96 124238 123525 121905
5/31/96 124341 123407 121881
6/30/96 125453 124305 122624
7/31/96 126454 125259 123691
8/31/96 126558 125350 123703
9/30/96 127879 126403 124755
10/31/96 129190 127639 125915
11/30/96 131226 129528 127741
12/31/96 130795 129239 127345
1/31/97 131197 129734 127651
2/28/97 132209 130704 128582
3/31/97 130777 129318 127232
4/30/97 131799 130004 127868
5/31/97 133387 131538 129352
6/30/97 134662 132656 130516
7/31/97 137839 135335 133322
8/31/97 136979 134523 132242
9/30/97 138456 135855 133591
5
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Management Discussion & Analysis
The strong performance in small cap stocks which began with a bang in May has
continued to date and we are pleased to report that 1997 is turning out to be an
excellent year for small cap stocks after all. For the year ended September 30,
1997, the Standish Small Cap Tax-Sensitive Fund gained 38.50%, compared to a
gain of 23.34% for the Russell 2000 Growth Index, and a gain of 33.20% for the
Russell 2000 Index. Since September 30, there has been considerably more
turbulence in the markets world wide and this may well not be over; we are,
however, optimistic that the year will produce reasonable returns.
Small caps had been performing poorly for the past four years, with some notable
sharp rallies as exceptions. Currently, there is some evidence that the tone of
the market is more favorable for these stocks. The key to this shift apparently
is in earnings and valuation: small caps have been improving in terms of
earnings growth and propensity to surprise positively analysts' estimates, and
their price/earnings multiples on average compare well to those of large cap
stocks. Large cap stock earnings are more in question now because of the age of
this business cycle and the challenge of repatriating foreign earnings that must
be translated into a very strong U.S. currency. Large cap valuations appear
extended, and it may be that investors are taking some profits and marginally
gravitating to small cap stocks. It would take very little increased attention
from institutional managers to have a noticeable impact on small cap stocks. In
a marketplace which has been very generous to shareholders, we believe that the
best of this cycle has been experienced but that prospects for small caps are
still good for the longer term.
The year ended September 30, 1997 has been again a volatile period for small cap
stocks. After a strong January the stocks languished badly through April, with a
very strong rally beginning in May and continuing to date. Our investments are
oriented toward rapidly growing high quality companies at the smaller end of the
small cap spectrum, and this has presented a performance challenge for the last
two years. In recent months smallness seems to have ceased as a negative. Also
this has been a better year for value investors compared to growth, and we are
decidedly in the higher growth camp; this past trend again has moderated in
recent months. Our most important value-addition this year has been from stock
selection, with our sector emphasis a neutral influence. While we were helped by
growth sector emphasis in particular in technology, it was offset by the strong
performance in financial stocks and more recently in the traditionally cyclical
industries, areas in which we typically have very few investments. As a
reminder, our high growth orientation leads us to heavier commitments in the
technology, medical, and business services sectors, with comparatively fewer
investments in the slower growth areas of the economy. We generally seek to
invest in the highest quality companies, and we select stocks based on earnings
and margin dynamics, business position analysis, and an evaluation of
management. We are committed to producing competitive after tax returns and
despite the bull market of the past two years, I believe we are effectively
balancing investment tactics and strategy with tax considerations.
6
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Management Discussion & Analysis
We are very pleased to announce the addition of Jonathan Stone to the Standish
Small Cap Team. Jonathan joins Drew Beja, Melissa Dane and me after several
years as an effective and distinguished analyst with a regional research and
brokerage firm where he covered technology stocks. He is an experienced,
seasoned analyst who has already had considerable impact in stock selection as
well as portfolio management; he is clearly an important addition to our
capabilities.
In closing, it is important to remind you of the volatility of small cap
investments and that we do not expect a diminution of this volatility in the
future. We remain, however, optimistic about the outlook for small cap stocks
and view the category as having important potential over the long term. We are
very appreciative of your support and thank you for your interest in the
Standish Small Capitalization Tax-Sensitive Equity Fund.
Sincerely,
/s/ Nicholas S. Battelle
Nicholas S. Battelle
Comparison of Change in Value of $100,000 Investment in
Standish Small Capitalization Tax-Sensitive Equity Fund, the S&P 500 Index,
the Russell 2000 Index, and the Russell 2000 Growth Index
[GRAPHIC OMITTED]
[The following table was represented as a line graph in the printed materials.]
Standish Small Russell
Capitalization Russell 2000
Tax Sensitive 2000 S&P 500 Growth
Equity Fund Index Index Index
----------- ----- ----- -----
100000 100000 100000 100000
1/31/96 99750 99892 103404 99172
2/29/96 102750 103006 104363 103694
3/31/96 107550 105135 105368 105744
4/30/96 120900 110756 106921 113862
5/31/96 128800 115121 109678 119701
6/30/96 120750 110394 110096 111923
7/31/96 104386 100753 105232 98259
8/31/96 113194 106602 107451 105534
9/30/96 117948 110768 113499 110969
10/31/96 111292 109061 116629 106181
11/30/96 112994 113555 125445 109134
12/31/96 121231 116531 122960 111262
1/31/97 126141 118859 130642 114042
2/28/97 117174 115977 131667 107155
3/31/97 108557 110504 126237 99593
4/30/97 108407 110812 133781 98438
5/31/97 125990 123146 141929 113233
6/30/97 135058 128429 148287 118090
7/31/97 142221 134400 160091 124137
8/31/97 146880 137478 151126 126757
9/30/97 163362 147542 159407 136873
7
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Tax-Sensitive Equity Fund
Management Discussion & Analysis
The returns from the stocks of U.S. companies were excellent over the last 12
months. The Tax-Sensitive Equity Fund returned 51.19%, beating the Standard &
Poor's 500 Index, which was up 40.45%.
These excellent returns arise from the supportive economic environment which the
U.S. is now experiencing. The economy is growing at a steady pace and corporate
profits continue to rise. Consumer confidence, buoyed by high rates of
employment and an enormous boost from the wealth effect growing out of strong
financial markets, is near an all-time high. Most important, inflation appears
largely under control with few signs of rising prices.
Returns for the Tax-Sensitive Equity Fund were driven by individual stock
selection, as we continued to rely on both our computer screens and further
fundamental analysis to find undervalued stocks with good long-term growth
prospects. Many of our best returns came from our technology sector, as
investors remain fascinated by the productivity gains which manufacturing and
service companies are realizing from their large investment in computers over
the past seven years. The best single stock return for the Fund came from Compaq
Computer, up 192% over the past 12 months. Intel and IBM also contributed to our
good results, appreciating 97% and 70%, respectively.
More recently, our group of smaller niche insurance companies--ACE Ltd., Allied
Group, American Bankers, Conseco and Reliastar--have benefited from both the
positive interest rate outlook and a growing investor appetite for smaller
companies.
We are happy to report that, as of September 30, our Fund had no capital gains
to distribute to our shareholders. There will be a dividend payment, but returns
will not be reduced by further capital gains taxes.
Sincerely,
/s/ Laurence A. Manchester
Laurence A. Manchester
Comparison of Change in Value of$100,000 Investment in
Standish Tax-Sensitive Equity Fund and the S&P 500 Index
[GRAPHIC OMITTED]
[The following table was represented as a line graph in the printed materials.]
Standish Tax
Sensitive S&P 500
Equity Fund Index
----------- -----
100000 100000
1/31/96 103400 103404
2/29/96 105950 104363
3/31/96 106600 105368
4/30/96 109050 106921
5/31/96 110950 109678
6/30/96 110250 110096
7/31/96 105763 105232
8/31/96 111813 107451
9/30/96 118971 113499
10/31/96 120836 116629
11/30/96 129608 125445
12/31/96 130612 122960
1/31/97 137675 130642
2/28/97 138227 131667
3/31/97 134369 126257
4/30/97 140511 133781
5/31/97 151425 141929
6/30/97 157671 148287
7/31/97 173188 160091
8/31/97 169870 151126
9/30/97 179875 159407
8
<PAGE>
Standish, Ayer & Wood Investment Trust
Statements of Assets and Liabilities
September 30, 1997
<TABLE>
<CAPTION>
Standish
Massachusetts Standish Standish
Intermediate Intermediate Small Cap Standish
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund Bond Fund Equity Fund Equity Fund
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments at value (Note 1A)* $ 39,524,101 $ 56,214,689 $ 32,277,528 $ 12,225,812
Cash -- -- 353,935 583,783
Receivable for investments sold -- -- 127,770 --
Receivable for Fund shares sold 180,000 -- 84,960 --
Interest and dividends receivable 538,647 787,064 5,555 11,633
Miscellaneous receivable 38,495 -- -- --
Prepaid expenses 2,251 2,648 1,501 939
Deferred organization costs (Note 1E) 234 309 12,299 12,308
------------ ------------ ------------- ------------
Total assets 40,283,728 57,004,710 32,863,548 12,834,475
Liabilities
Payable for investments purchased 933,941 -- 78,662 --
Payable for when-issued securities (Note 750,706 4,122,936 -- --
8)
Payable for Fund shares redeemed 80,500 -- -- --
Distribution payable 85,366 119,524 -- --
Payable for daily variation margin on open
financial futures contracts (Note 7) 1,875 -- -- --
Accrued accounting, custody and
transfer agent fees 19,248 21,790 12,263 9,275
Accrued expenses and other liabilities 11,464 17,168 12,106 6,260
------------ ------------ ------------- ------------
Total liabilities 1,883,100 4,281,418 103,031 15,535
------------ ------------ ------------- ------------
Net Assets $ 38,400,628 $ 52,723,292 $ 32,760,517 $ 12,818,940
============ ============ ============= ============
Net Assets consist of
Paid-in capital $ 37,779,238 $ 50,625,414 $ 24,102,658 $ 9,735,808
Undistributed net investment income -- 8,268 7,577 24,409
Accumulated net realized gain (loss) (414,831 142,748 165,588 (121,011)
Net unrealized appreciation 1,036,221 1,946,862 8,484,694 3,179,734
============ ============ ============= ============
Total Net Assets $ 38,400,628 $ 52,723,292 $ 32,760,517 $ 12,818,940
============ ============ ============= ============
Shares of beneficial interest outstanding 1,812,636 2,420,468 1,004,501 363,730
============ ============ ============= ============
Net asset value, offering price and
redemption price per share
(Net assets/Shares outstanding) $ 21.18 $ 21.78 $ 32.61 $ 35.24
============ ============ ============= ============
* Identified cost of investments $ 38,496,820 $ 54,267,827 $ 23,792,834 $ 9,046,078
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Standish, Ayer & Wood Investment Trust
Statements of Operations
For the Year Ended September 30, 1997
<TABLE>
<CAPTION>
Standish
Massachusetts Standish Standish
Intermediate Intermediate Small Cap Standish
Tax Exempt Tax Exempt Tax-Sensitive Tax-Sensitive
Bond Fund Bond Fund Equity Fund Equity Fund
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Investment Income
Dividend income $ -- $ -- $ 18,755 $ 85,447
Interest income 1,805,757 2,337,745 30,560 13,204
Miscellaneous income 38,495 -- -- --
----------- ----------- ----------- -----------
Total investment income 1,844,252 2,337,745 49,315 98,651
Expenses
Investment advisory fee (Note 3) 138,703 173,394 100,630 32,635
Accounting, custody and transfer 83,191 90,021 62,119 40,489
agent fees
Audit services 20,865 23,865 13,814 13,014
Legal fees 3,291 5,716 7,515 7,408
Insurance expense 3,257 3,759 1,804 1,122
Amortization of organization 2,858 3,854 3,774 3,774
expenses (Note 1E)
Registration fees 2,722 15,859 16,855 13,463
Administration fees 2,202 2,654 804 345
Trustees fees (Note 3) 739 976 414 154
Miscellaneous 1,652 2,441 1,052 633
----------- ----------- ----------- -----------
Total expenses 259,480 322,539 208,781 113,037
Deduct--
Waiver of investment advisory (33,848) (40,552) (100,63) (32,635)
fee (Note 3)
Reimbursement of Fund operating -- -- (72,897) (67,114)
expenses (Note 3)
----------- ----------- ----------- -----------
Total waiver of investment
advisory fee and reimbursement
of operating expenses (33,848) (40,552) (173,52) (99,749)
----------- ----------- ----------- -----------
Net expenses 225,632 281,987 35,254 13,288
----------- ----------- ----------- -----------
Net investment income 1,618,620 2,055,758 14,061 85,363
----------- ----------- ----------- -----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss)
Investment security 97,474 186,163 454,628 (99,250)
transactions
Financial futures contracts 75,451 8,767 -- --
----------- ----------- ----------- -----------
Net realized gain (loss) 172,925 194,930 454,628 (99,250)
Change in unrealized appreciation
(depreciation)
Investment securities 749,120 1,311,936 8,125,678 2,866,460
Financial futures contracts (24,834) (9,280) -- --
----------- ----------- ----------- -----------
Net change in unrealized
appreciation (depreciation) 724,286 1,302,656 8,125,678 2,866,460
----------- ----------- ----------- -----------
-----------
Net realized and unrealized gain 897,211 1,497,586 8,580,306 2,767,210
----------- ----------- ----------- -----------
Net increase in net assets from
operations $ 2,515,831 $ 3,553,344 $ 8,594,367 $ 2,852,573
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
September 30, 1997 September 30, 1996 December 31, 1995
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Increase (decrease) in Net Assets
From operations
Net investment income $ 1,618,620 $ 1,168,180 $ 1,451,879
Net realized gain (loss) 172,925 20,518 (144,169)
Change in net unrealized appreciation
(depreciation) 724,286 (631,115) 2,339,720
------------ ------------ ------------
Net increase in net assets from operations 2,515,831 557,583 3,647,430
------------ ------------ ------------
Distributions to Shareholders
From net investment income (1,618,620) (1,168,180) (1,451,879)
------------ ------------ ------------
Fund share (principal) Transactions (Note 5)
Net proceeds from sale of shares 13,888,372 7,839,919 10,781,062
Net asset value of shares issued to shareholders in
payment of distributions declared 636,463 354,227 371,483
Cost of shares redeemed (9,157,501) (8,012,503) (8,558,571)
------------ ------------ ------------
Increase in net assets from Fund share transactions 5,367,334 181,643 2,593,974
------------ ------------ ------------
Net increase (decrease) in net assets 6,264,545 (428,954) 4,789,525
Net Assets
At beginning of period 32,136,083 32,565,037 27,775,512
------------ ------------ ------------
At end of period $ 38,400,628 $ 32,136,083 $ 32,565,037
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Intermediate Tax Exempt Bond Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
September 30, 1997 September 30, 1996 December 31, 1995
------------------ ------------------- -----------------
<S> <C> <C> <C>
Increase (decrease) in Net Assets
From operations
Net investment income $ 2,055,758 $ 1,219,159 $ 1,363,479
Net realized gain 194,930 53,135 199,896
Change in net unrealized appreciation
(depreciation) 1,302,656 (459,413) 1,841,975
------------ ------------ ------------
Net increase in net assets from operations 3,553,344 812,881 3,405,350
------------ ------------ ------------
Distributions to Shareholders
From net investment income (2,055,758) (1,219,159) (1,363,479)
From net realized gain (61,613) -- --
------------ ------------ ------------
Total distributions to shareholders (2,117,371) (1,219,159) (1,363,479)
------------ ------------ ------------
Fund share (principal) Transactions (Note 5)
Net proceeds from sale of shares 23,342,391 11,111,750 16,771,357
Net asset value of shares issued to shareholders in
payment of distributions declared 828,068 428,110 316,498
Cost of shares redeemed (7,725,852) (9,156,263) (6,778,640)
------------ ------------ ------------
Increase in net assets from Fund share transactions 16,444,607 2,383,597 10,309,215
------------ ------------ ------------
Net increase in net assets 17,880,580 1,977,319 12,351,086
Net Assets
At beginning of period 34,842,712 32,865,393 20,514,307
------------ ------------ ------------
At end of period (including undistributed net
investment income of $8,268, $0 and $0,
respectively) $ 52,723,292 $ 34,842,712 $ 32,865,393
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended
September 30, 1997 September 30, 1996*
------------------ -------------------
<S> <C> <C>
Increase (decrease) in Net Assets
From operations
Net investment income $ 14,061 $ 9,219
Net realized gain (loss) 454,628 (289,040)
Change in unrealized appreciation (depreciation) 8,125,678 359,016
------------ -----------
Net increase in net assets from operations 8,594,367 79,195
------------ -----------
Distributions to Shareholders
From net investment income (11,664) (4,039)
------------ -----------
Fund Share (principal) Transactions+(Note 5)
Net proceeds from sale of shares 18,625,615 6,823,260
Net asset value of shares issued to shareholders in
payment of distributions declared 9,364 2,858
Cost of shares redeemed (1,353,032) (5,407)
------------ -----------
Net increase in net assets from Fund share transactions 17,281,947 6,820,711
------------ -----------
Net increase in net assets 25,864,650 6,895,867
Net Assets
At beginning of period 6,895,867 --
------------ -----------
At end of period (including undistributed net investment
income of $7,577 and $5,180, respectively) $ 32,760,517 $ 6,895,867
============ ===========
</TABLE>
* For the period January 2, 1996, commencement of operations, through September
30, 1996.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Tax-Sensitive Equity Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended
September 30, 1997 September 30, 1996*
------------------- -------------------
<S> <C> <C>
Increase (decrease) in Net Assets
From operations
Net investment income $ 85,363 $ 28,037
Net realized loss (99,250) (21,876)
Change in unrealized appreciation (depreciation) 2,866,460 313,274
------------ -----------
Net increase in net assets from operations 2,852,573 319,435
------------ -----------
Distributions to Shareholders
From net investment income (73,042) (15,453)
------------ -----------
Fund Share (principal) Transactions+(Note 5)
Net proceeds from sale of shares 7,241,231 2,539,035
Net asset value of shares issued to shareholders in payment
of distributions declared 61,187 14,425
Cost of shares redeemed (105,951) (14,500)
------------ -----------
Net increase in net assets from Fund share transactions 7,196,467 2,538,960
------------ -----------
Net increase in net assets 9,975,998 2,842,942
Net Assets
At beginning of period 2,842,942 --
------------ -----------
At end of period (including undistributed net investment income of $24,409 and
$12,585, respectively) $ 12,818,940 $ 2,842,942
============ ===========
</TABLE>
* For the period January 2, 1996, commencement of operations, through September
30, 1996.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Financial Highlights
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended Year ended December 31,
September 30, September 30, --------------------------------------------
1997 1996 1995 1994 1993 1992(a)(b)
------------- ------------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 20.63 $ 21.02 $ 19.55 $ 21.31 $ 20.32 $20.00
------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income * 0.97 0.74 0.94 0.94 0.92 0.13
Net realized and unrealized gain
(loss) on investments 0.55 (0.39) 1.47 (1.75) 1.13 0.32
------- ------- ------- ------- ------- ------
Total from investment operations 1.52 0.35 2.41 (0.81) 2.05 0.45
------- ------- ------- ------- ------- ------
Less distributions to shareholders
From net investment income (0.97) (0.74) (0.94) (0.94) (0.92) (0.13)
From net realized gains on
investments -- -- -- (0.01) (0.14) --
------- ------- ------- ------- ------- ------
Total distributions to
shareholders (0.97) (0.74) (0.94) (0.95) (1.06) (0.13)
------- ------- ------- ------- ------- ------
Net asset value, end of period $ 21.18 $ 20.63 $ 21.02 $ 19.55 $ 21.31 $20.32
======= ======= ======= ======= ======= ======
Total return 7.55% 1.70% 12.64% (3.84)% 10.24% 13.85%+
Ratios (to average daily net assets)/
Supplemental Data
Expenses * 0.65% 0.65%+ 0.65% 0.65% 0.65% 0.65%+
Net investment income * 4.67% 4.78%+ 4.71% 4.67% 4.35% 4.05%+
Portfolio Turnover 25%(1) 35%(1) 77% 84% 94% 31%
Net assets, end of period (000's
omitted) $38,401 $32,136 $32,565 $27,776 $29,627 $6,537
</TABLE>
* The investment adviser voluntarily agreed not to impose a portion of its
investment advisory fee and reimbursed the Fund for a portion of its
operating expenses. In the absence of this agreement, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income per share $ 0.95 $ 0.72 $ 0.95 $ 0.91 $ 0.86 $ 0.11
Ratios (to average net assets):
Expenses 0.75% 0.73%+ 0.72% 0.78% 0.95% 1.37%+
Net investment income 4.57% 4.70%+ 4.64% 4.54% 4.05% 3.33%+
</TABLE>
- ----------
(a)Audited by other auditors.
(b)For the period November 2, 1992 (commencement of operations) to December
31, 1992.
+ Computed on an annualized basis.
(1)Commencing in fiscal 1996, securities which are puttable daily have been
excluded from the portfolio turnover calculation.
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Intermediate Tax Exempt Bond Fund
Financial Highlights
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended Year ended December 31,
September 30, September 30, --------------------------------------------
1997 1996 1995 1994 1993 1992(a)(b)
------------- ------------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 21.12 $ 21.40 $ 19.91 $ 21.44 $ 20.42 $20.00
------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income * 1.01 0.79 0.98 0.95 0.93 0.14
Net realized and unrealized gain
(loss) on investments 0.74 (0.28) 1.49 (1.51) 1.24 0.42
------- ------- ------- ------- ------- ------
Total from investment operations 1.75 0.51 2.47 (0.56) 2.17 0.56
------- ------- ------- ------- ------- ------
Less distributions to shareholders
From net investment income (1.01) (0.79) (0.98) (0.95) (0.93) (0.14)
From net realized gains on
investments (0.08) -- -- (0.02) (0.22) --
------- ------- ------- ------- ------- ------
Total distributions to
shareholders (1.09) (0.79) (0.98) (0.97) (1.15) (0.14)
------- ------- ------- ------- ------- ------
Net asset value, end of period $ 21.78 $ 21.12 $ 21.40 $ 19.91 $ 21.44 $20.42
======= ======= ======= ======= ======= ======
Total return 8.27% 2.43% 12.65% (2.68)% 10.78% 17.02% +
Ratios (to average daily net assets)/
Supplemental Data
Expenses * 0.65% 0.65%+ 0.65% 0.65% 0.65% 0.65%+
Net investment income * 4.74% 4.99%+ 4.75% 4.62% 4.36% 4.16%+
Portfolio Turnover 23%(1) 43%(1) 140% 157% 126% 62%
Net assets, end of period (000's
omitted) $52,723 $34,843 $32,865 $20,514 $17,132 $5,577
</TABLE>
* The investment adviser voluntarily agreed not to impose a portion of its
investment advisory fee and reimbursed the Fund for a portion of its
operating expenses. In the absence of this agreement, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income per share $ 0.99 $ 0.76 $ 0.95 $ 0.90 $ 0.85 $ 0.12
Ratios (to average net assets):
Expenses 0.74% 0.82%+ 0.79% 0.89% 1.15% 1.47%+
Net investment income 4.65% 4.82%+ 4.61% 4.38% 3.86% 3.34%+
</TABLE>
- ----------
(a)Audited by other auditors.
(b)For the period November 2, 1992 (commencement of operations) to December
31, 1992.
+ Computed on an annualized basis.
(1)Commencing in fiscal 1996, securities which are puttable daily have been
excluded from the portfolio turnover calculation.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Financial Highlights
<TABLE>
<CAPTION>
For the Period
January 2, 1996
(commencement of
Year Ended operations) to
September 30, 1997 September 30, 1996
---------------------- -----------------------
<S> <C> <C>
Net asset value, beginning of period $ 23.57 $ 20.00
------- -------
Income from investment operations
Net investment income * 0.02 0.04
Net realized and unrealized gain on investments 9.05 3.55
------- -------
Total from investment operations 9.07 3.59
------- -------
Less distributions to shareholders
From net investment income (0.03) (0.02)
Net asset value, end of period $ 32.61 $ 23.57
======= =======
Total return 38.50% 17.95%
Ratios (to average daily net assets)/Supplemental Data
Expenses * 0.21% 0.00%+
Net investment income * 0.08% 0.41%+
Portfolio Turnover 102% 57%
Average broker commission per share (1) $0.0429 $0.1058
Net assets, end of period (000's omitted) $32,761 $ 6,896
</TABLE>
* The investment adviser voluntarily agreed not to impose a portion of its
investment advisory fee and reimbursed the Fund for a portion of its
operating expenses. In the absence of this agreement, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss per share $ (0.16) $ (0.28)
Ratios (to average daily net assets):
Expenses 1.24% 3.45%+
Net investment loss (0.95)% (3.04)%+
</TABLE>
- ----------
+ Computed on an annualized basis.
(1)Amount represents the average commission per share paid to brokers on the
purchase and sale of equity securities.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Tax-Sensitive Equity Fund
Financial Highlights
<TABLE>
<CAPTION>
For the Period
January 2, 1996
(commencement
Year Ended of operations) to
September 30, 1997 (2) September 30, 1996
----------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 23.60 $ 20.00
------- -------
Income from investment operations
Net investment income * 0.39 0.28
Net realized and unrealized gain on investments 11.58 3.50
------- -------
Total from investment operations 11.97 3.78
------- -------
Less distributions to shareholders
From net investment income (0.33) (0.18)
------- -------
Net asset value, end of period $ 35.24 $ 23.60
======= =======
Total return 51.19% 18.97%
Ratios (to average daily net assets)/Supplemental Data
Expenses * 0.20% 0.00%+
Net investment income * 1.31% 2.27%+
Portfolio Turnover 25% 17%
Average broker commission per share (1) $0.0497 $0.0419
Net assets, end of period (000's omitted) $12,819 $ 2,843
</TABLE>
* The investment adviser voluntarily agreed not to impose a portion of its
investment advisory fee and reimbursed the Fund for a portion of its
operating expenses. In the absence of this agreement, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income (loss) per share $ 0.04 $ (0.36)
Ratios (to average daily net assets):
Expenses 1.73% 5.15%+
Net investment loss (0.22)% (2.88)%+
</TABLE>
- ----------
+ Computed on an annualized basis.
(1)Amount represents the average commission per share paid to brokers on the
purchase and sale of equity securities.
(2)Calculated based on average shares outstanding.
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BOND -- 98.5%
General Obligations -- 32.2%
Amesbury MA State Qualified 5.30% 06/01/2003 $ 750,000 $ 766,875
Brockton MA State Qualified 5.55% 12/15/2003 270,000 274,725
Brockton MA State Qualified 5.65% 12/15/2004 300,000 306,000
Brockton MA State Qualified 5.70% 06/15/2002 160,000 166,800
Brockton MA State Qualified 6.13% 06/15/2018 250,000 258,750
Commonwealth of Massachusetts 7.50% 12/01/2000 400,000 438,500
Commonwealth of Massachusetts 7.50% 06/01/2004 700,000 808,500
Commonwealth of Massachusetts 5.40% 11/01/2006 600,000 632,250
Commonwealth of Massachusetts 5.00% 11/01/2009 1,000,000 1,007,499
Lawrence MA 5.00% 09/15/2002 250,000 255,000
Lawrence MA State Qualified+ 5.13% 09/15/2003 1,250,000 1,281,249
Lowell MA State Qualified 6.00% 08/15/1999 775,000 798,250
Mass St College Bldg Authority Project 7.50% 05/01/2006 500,000 601,250
Mass St College Bldg Authority Project 7.50% 05/01/2007 350,000 424,375
Massachusetts Bay Transportation Authority 6.25% 03/01/2004 475,000 518,938
Massachusetts Bay Transportation Authority 6.00% 03/01/2005 550,000 594,688
Massachusetts St Govt Ld Bk 5.25% 02/01/2007 1,000,000 1,039,999
Massachusetts St Obligation Rev 5.50% 06/01/2006 500,000 530,625
Peabody MA 5.00% 08/01/2008 500,000 514,375
University of Mass Building Authority State Guarantee 6.63% 05/01/2007 1,000,000 1,146,249
--------------
Total General Obligations (Cost $12,010,368) 12,364,897
--------------
Housing Revenue -- 8.8%
Mass HFA Residential Development FNMA 8.80% 08/01/2021 250,000 258,243
Mass HFA Residential Development FNMA 6.88% 11/15/2011 450,000 488,250
Mass HFA Residential Development FNMA+ 6.88% 11/15/2011 500,000 542,500
Mass HFA Residential Development FNMA 7.60% 12/01/2014 490,000 523,688
Mass HFA Residential Development FNMA 6.50% 12/01/2014 565,000 592,544
Massachusetts St Housing Finance Agency 6.30% 10/01/2013 500,000 526,250
Massachusetts St Housing Finance Authority 5.75% 12/01/2017 425,000 425,000
--------------
Total Housing Revenue (Cost $3,304,901) 3,356,475
--------------
Insured Bond -- 23.5%
Chelsea MA School District AMBAC 6.00% 06/15/2002 225,000 240,469
Chelsea MA School District AMBAC+ 6.00% 06/15/2004 750,000 813,750
Commonwealth of Massachusetts MBIA 6.90% 10/01/2000 200,000 214,000
Holyoke MA FSA 6.00% 06/15/2006 600,000 658,500
Holyoke MA FSA 6.00% 06/15/2007 800,000 882,000
Lynn MA MBIA 5.00% 06/01/2006 485,000 498,944
Massachusetts Bay Transportation Authority FSA 5.25% 03/01/2012 500,000 505,625
Massachusetts St Health & Educational FSA 5.50% 07/01/2007 635,000 669,131
Massachusetts St Industrial Finance Agency AMBAC 5.50% 07/01/2008 500,000 528,125
Massachusetts State Port Authority MBIA 5.75% 07/01/2007 500,000 533,750
Nantucket MA MBIA 6.00% 07/15/2007 400,000 441,000
New Bedford MA AMBAC 6.00% 10/15/2005 575,000 628,906
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insured Bond (continued)
Springfield MA AMBAC 6.25% 08/01/2006 $1,000,000 $ 1,117,499
Springfield MA AMBAC# 5.65% 09/01/2007 700,000 749,168
Worcester MA MBIA 6.00% 07/01/2005 500,000 545,625
--------------
Total Insured Bond (Cost $8,759,490) 9,026,492
--------------
Lease Revenue -- 2.6%
Puerto Rico Housing Bank Appropriation 5.13% 12/01/2004 250,000 253,438
Puerto Rico Housing Bank Appropriation 5.13% 12/01/2005 750,000 756,563
--------------
Total Lease Revenue (Cost $983,776) 1,010,001
--------------
LOC GIC -- 6.0%
Mass IFA Amesbury LOC: State Street 5.35% 09/01/2000+++ 410,000 420,763
Mass IFA Human Development Loc: Shawmut 6.25% 04/15/2009 765,000 800,381
Mass IFA Orchard Cove Project Loc: Fleet National Bank 5.00% 05/01/2002+++ 415,000 420,188
Northborough MA IFA LOC: Bank of Boston 5.75% 09/01/1999+++ 660,000 671,550
--------------
Total LOC GIC (Cost $2,250,000) 2,312,882
--------------
Revenue Bonds -- 25.4%
Mass Educational Loan Authority AMBAC+ 5.26% 07/01/1999 445,000 452,788
Mass HEFA Central New England Health Systems 5.75% 08/01/2003 500,000 497,500
Mass HEFA Charlton Hospital 7.10% 08/01/2003 300,000 325,875
Mass HEFA Charlton Hospital 7.00% 07/01/2000 300,000 317,625
Mass HEFA Melrose Wakefield Hospital 6.35% 07/01/2006 310,000 329,763
Mass HEFA New England Baptist Hospital 7.30% 07/01/2011 715,000 769,519
Mass HEFA Youville Hospital HFA Secured 6.13% 02/15/2015 800,000 848,000
Mass IFA Berkshire Retirement Development 5.13% 07/01/2018 530,000 535,300
Mass IFA Brooks School 5.60% 07/01/2005 245,000 260,313
Mass IFA Brooks School 5.90% 07/01/2013 410,000 424,350
Mass IFA Clark University 6.45% 07/01/2001 300,000 321,375
Mass IFA Loomis Project 6.50% 07/01/2002 350,000 365,750
Mass IFA Resource Recovery 6.15% 07/01/2002 1,000,000 1,053,749
Mass IFA Springfield College 4.90% 09/15/1999 715,000 717,681
Mass Water Resource Authority 7.25% 04/01/2001 200,000 218,250
Mass Water Resource Authority 5.25% 03/01/2013 500,000 501,250
Massachusetts St Industrial Agency Rev 4.75% 07/01/2007 400,000 404,500
Massachusetts Water Pollution 5.25% 02/01/2008 500,000 520,000
New England Loan Marketing MA Student Loan 5.80% 03/01/2002 850,000 891,438
--------------
Total Revenue Bonds (Cost $9,489,957) 9,755,026
--------------
Total Bond (Cost $36,798,492) 37,825,773
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 4.4%
SHORT TERM BONDS -- 4.2%
Mass St Updates 4.05% 12/01/1997(dag)(dag) 1,600,000 1,600,000
------------
Total Short Term Bonds (Cost $1,600,000) 1,600,000
------------
REPURCHASE AGREEMENTS -- 0.2%
Prudential-Bache Repurchase Agreement, dated 9/30/97,
due 10/1/97, with a maturity value of $98,343 and an
effective yield of 5.47%, collateralized by a U.S.
Government Agency Obligation with a rate of 9.00%,
with a maturity date of 4/1/10 and with an aggregate
market value of $100,294. 98,328 98,328
------------
Total Repurchase Agreements (Cost $98,328) 98,328
------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,698,328) 1,698,328
------------
TOTAL INVESTMENTS -- 102.9% (COST $38,496,820) $39,524,101
Other Assets, Less Liabilities -- (2.9)% (1,123,473)
============
NET ASSETS -- 100% $38,400,628
============
</TABLE>
Notes to the Schedule of Investments:
AMBAC - American Municipal Bond Assurance Corp.
FSA - Financial Security Association
HEFA - Health & Educational Facilities Authority
HFA - Housing Finance Authority
FNMA - Federal National Mortgage Association
IBEW - International Brotherhood of Electrical Workers
IFA - Industrial Finance Authority
LOC - Letter of Credit
MBIA - Municipal Bond Insurance Association
+ Denotes all or part of security pledged as collateral to cover margin
requirements on open financial futures contracts (Note 7).
# Delayed delivery contract (Note 8).
(dag) Date shown reflects next mandatory put date.
(dag)(dag) Date shown reflects actual maturity date. Security puttable on a
daily basis.
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BOND -- 96.8%
General Obligations -- 11.0%
California State 6.60% 02/01/2009 $1,000,000 $ 1,162,499
California State 5.25% 06/01/2012 500,000 508,125
Commonwealth of Massachusetts 7.50% 06/01/2004 500,000 577,500
Commonwealth of Massachussetts MBIA 6.00% 11/01/2008 500,000 555,625
Detroit MI 6.00% 04/01/2000 250,000 258,438
District of Columbia 5.80% 06/01/2004 500,000 523,125
Honolulu HI 5.40% 09/27/2007 500,000 526,875
Lawrence MA 5.38% 09/15/2005 500,000 516,875
Lowell MA State Qualified 7.20% 02/15/2000 500,000 531,250
Tuloso-Midway Texas Independent School District 5.75% 08/15/2006 580,000 627,125
--------------
Total General Obligations (Cost $5,579,256) 5,787,437
--------------
Housing Revenue -- 11.6%
California Housing Authority# 5.05% 02/01/2017 500,000 500,000
California Housing Authority MBIA 5.65% 08/01/2025 380,000 389,025
Colorado HFA 7.45% 11/01/2027 400,000 453,500
Colorado HFA Multi Family Insured Mortgage 7.90% 10/01/2000 225,000 243,563
Florida HFA 0.00% 07/15/2016 975,000 118,219
Houston TX Housing Finance Corp. 8.00% 06/01/2014 500,000 551,250
Mass HFA Residential Development FNMA 7.60% 12/01/2014 395,000 422,156
Michigan Housing Authority AMBAC 6.40% 04/01/2005 250,000 270,313
Michigan State Housing Development Authority 0.00% 04/01/2015 350,000 47,250
New Hampshire HFA 6.60% 01/01/2000 400,000 416,000
New Mexico Mortgage Finance Authority 5.75% 07/01/2014 455,000 468,081
North Carolina Hsg Fin Agy 7.60% 03/01/2021 960,000 1,033,200
Penn Housing Finance Agency 5.35% 10/01/2008 500,000 515,225
Rhode Island Housing & Mortgage 4.95% 10/01/2016 500,000 503,750
Texas Dept Housing & Community 0.00% 03/01/2015 290,000 90,625
Virginia Housing Development Authority 0.00% 11/01/2017 575,000 105,656
--------------
Total Housing Revenue (Cost $6,038,608) 6,127,813
--------------
Insured Bond -- 33.6%
Alabama St Docks MBIA# 5.50% 10/01/2004 1,000,000 1,037,500
Austin TX Utilities Systems FSA# 5.75% 11/15/2004 1,000,000 1,056,249
Bakersfield CA Convention Center MBIA 5.40% 04/01/2008 1,000,000 1,056,249
Benton County WA School District AMBAC 6.70% 12/01/2006 580,000 667,000
Bloomington MN Port Authority FSA 5.30% 02/01/2007 610,000 621,438
California Housing Authority Summit Medical Center FSA 5.50% 05/01/2005 615,000 653,438
Chicago IL Board of Education AMBAC 6.75% 12/01/2009 465,000 546,956
Chicago IL O'Hare Airport MBIA 6.75% 01/01/2006 500,000 569,375
Contra Costa CA Merrithew Hospital MBIA 6.00% 11/01/2006 750,000 828,750
Denver CO Airport MBIA 7.50% 11/15/2006 500,000 587,500
District of Columbia FSA 5.30% 06/01/2004 500,000 517,500
District of Columbia Medlantic Hospital MBIA 7.00% 08/15/2005 500,000 561,250
Grand Prairie TX Health AMBAC 6.00% 11/01/1999 360,000 368,550
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insured Bond (continued)
Greater Detroit Resource Recovery AMBAC 6.25% 12/13/2007 $ 400,000 $ 452,000
Hot Springs AK Sales & Use FSA 4.95% 12/01/2008 235,000 237,056
Jefferson County OH Asset Guaranty 6.63% 12/01/2005 345,000 370,444
Jefferson Parish LA FGIC 6.15% 09/01/2005 525,000 577,500
Kansas St Tpk Authority AMBAC# 5.50% 09/01/2006 500,000 525,625
Lubbock TX Health Facilities Development AMBAC 5.40% 12/01/2005 1,000,000 1,049,999
OK Industrial Authority Health System AMBAC 7.00% 08/15/2006 500,000 581,250
Orange County CA Recovery MBIA 5.80% 07/01/2016 400,000 417,000
Palm Beach County Solid Waste AMBAC 6.00% 10/01/2009 500,000 550,625
Pensacola FL Airport MBIA# 6.25% 10/01/2008 380,000 401,850
Rancho Mirage CA MBIA 5.25% 07/01/2010 750,000 768,750
San Bernardino Cnty CA MBIA 5.00% 08/01/2003 1,000,000 1,028,750
SD HEFA Mckennan Hosp MBIA 6.00% 07/01/2007 500,000 550,000
Tucson AZ COP Asset Guaranty 6.00% 07/01/2004 500,000 534,375
Walnut Valley CA School District MBIA 6.75% 08/01/2006 500,000 580,625
--------------
Total Insured Bond (Cost $16,964,983) 17,697,604
--------------
Lease Revenue -- 7.9%
Battery Park NY Authority Junior Lien 5.20% 11/01/2023 500,000 508,125
Los Angeles CA Building Authority 5.60% 05/01/2004 500,000 531,250
New York Dormitory Authority 6.00% 07/01/2006 500,000 532,500
New York Urban Development Corp. 6.25% 04/01/2002 500,000 532,500
New York Urban Development Corp. 6.00% 01/01/2004 500,000 532,500
New York Dormitory Authority 5.50% 07/01/2003 500,000 520,625
NY Metropolitan Tran Authority Ser P 5.75% 07/01/2015 500,000 505,625
San Bernadino CA Certificates of Participation 5.25% 08/01/2004 500,000 510,625
--------------
Total Lease Revenue (Cost $4,054,460) 4,173,750
--------------
LOC GIC -- 2.1%
Emphoria VA IDB LOC: Bank of Boston 5.80% 04/01/1999+ 60,000 60,214
Emphoria VA IDB LOC: Bank of Boston 5.80% 04/01/1999+ 200,000 200,712
Michigan Housing Authority AMBAC 5.50% 06/01/2000+ 485,000 488,031
Northborough MA IFA LOC: Bank of Boston 5.75% 09/01/1999+ 380,000 386,650
--------------
Total LOC GIC (Cost $1,122,287) 1,135,607
--------------
Prerefunded/Escrowed to Maturity -- 2.3%
Cincinnati Public Schools OH 6.15% 06/15/2002 600,000 642,750
Texas State Tpk Authority Creek 12.63% 01/01/2020 400,000 545,500
--------------
Total Prerefunded/Escrowed to Maturity (Cost $1,111,857) 1,188,250
--------------
Revenue Bonds -- 28.3%
Alaska Industrial Development and Export Authority 6.20% 04/01/2003 150,000 161,063
Alaska Industrial Development and Export Authority 5.25% 04/01/1998 215,000 216,195
Alaska Industrial Development and Export Authority 5.50% 04/01/2001 500,000 516,250
Camden County NJ Health Care Redevelopment 5.60% 02/15/2007 600,000 618,750
Castle Rock, CO Import Authority 5.75% 12/01/2001 500,000 519,375
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue Bonds (continued)
Colorado HEFA Rocky Mountain Adventist Hospital 6.00% 02/01/1998 $ 120,000 $ 120,578
Dayton Ohio Special Facilities 6.05% 10/01/2009 500,000 533,125
Denison Texas Hospital Authority 5.90% 08/15/2007 500,000 523,125
District of Columbia Medlantic Hospital 7.00% 08/15/2005 500,000 542,500
District of Columbia Redevelopment Agency 5.63% 11/01/2010 470,000 475,875
Eddyville Iowa Pollution Control Revenue 5.40% 10/01/2006 500,000 528,125
Foothills CA Transportation Agency 0.00% 01/01/2007 500,000 346,875
Gateway OH Special Tax 7.50% 09/01/2005 500,000 543,750
Hendersonville Tennessee Industrial Development 5.95% 12/15/2008 365,000 379,144
Long Beach CA Aquarium 5.75% 07/01/2005 200,000 209,500
Mashantucket CT W Pequot 6.25% 09/01/2003 300,000 321,750
Mass IFA Berkshire Retirement Development 5.13% 07/01/2018 500,000 505,000
Mass IFA Loomis Project 6.50% 07/01/2002 250,000 261,250
Mass IFA Resource Recovery 6.15% 07/01/2002 150,000 158,063
Met Govt Nashville & Davidson Revenue# 6.00% 05/01/2008 610,000 660,325
Met Peioria IL 6.25% 07/01/2017 300,000 315,750
MT Higher Education 5.95% 12/01/2012 410,000 424,863
New York Med Center Long Island FHA 6.40% 08/15/2014 480,000 522,600
New York Med Center Mercy FHA 5.40% 08/15/2005 275,000 286,344
New York Med Center Mt. Sinai FHA 5.95% 08/15/2009 190,000 199,263
New York Med Center St. Luke's FHA 5.60% 08/15/2013 460,000 471,500
New York Med Center St. Vincent FHA 6.13% 02/15/2014 470,000 498,788
NH Education Authority Brewster Acadamy 5.40% 06/01/2001 405,000 413,606
NH HEFA Allegheny Health MBIA 6.25% 10/01/2008 300,000 316,500
OH Development Commission 5.45% 06/01/1999 135,000 137,025
Orange County CA Transportation Sales Tax 6.00% 02/15/2007 500,000 551,875
Scranton PA 7.13% 07/15/2005 500,000 545,625
Stanislaus CA 7.63% 01/01/2010 400,000 429,000
Utah Student Loan AMBAC 7.45% 11/01/2008 500,000 530,625
Volusia FL HEFA - Embry Project 5.50% 10/15/2004 400,000 409,900
WA Public Power Supply Project 5.30% 07/01/2002 500,000 517,500
Weld County Colorado IDA Conagra 6.75% 12/15/2001 200,000 214,750
--------------
Total Revenue Bonds (Cost $14,219,002) 14,926,132
--------------
Total Bond (Cost $49,090,453) 51,036,593
--------------
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 9.8%
SHORT TERM BONDS -- 9.7%
Illinois St Sales Tax 4.90% 06/15/1998++ 1,400,000 1,410,738
Lone Star Airport Improvement Authority TX 4.00% 12/01/2014++ 100,000 100,000
Lone Star Airport Improvement Authority TX 4.00% 12/01/2014++ 100,000 100,000
Los Angeles County CA 4.50% 06/30/1998++ 1,000,000 1,005,090
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Intermediate Tax Exempt Bond Fund
Schedule of Investments - September 30, 1997
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term Bonds (continued)
Mass St Updates 4.05% 12/01/1997++ 1,800,000 1,800,000
New York State Dormitory Authority 4.00% 07/01/2023++ 500,000 500,000
Orange County CA Water Dist 3.05% 08/15/2015++ 200,000 200,000
--------------
Total Short Term Bonds (Cost $5,115,106) 5,115,828
--------------
REPURCHASE AGREEMENTS -- 0.1%
Prudential-Bache Repurchase Agreement, dated 9/30/97, due 10/1/97, with a
maturity value of $62,278 and an effective yield of 5.47%, collateralized by a
U.S. Government Agency Obligation with a rate of 9.00%, with
a maturity date of 4/1/10 and with an aggregate market
value of $63,514. 62,268 62,268
--------------
Total Repurchase Agreements (Cost $62,268) 62,268
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $5,177,374) 5,178,096
--------------
TOTAL INVESTMENTS -- 106.6% (COST $54,267,827) $ 56,214,689
Other Assets, Less Liabilities -- (6.6)% (3,491,397)
==============
NET ASSETS -- 100% $ 52,723,292
==============
</TABLE>
Notes to the Schedule of Investments:
AMBAC - American Municipal Bond Assurance Corp.
COP - Certification of Participation
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority
FSA - Financial Security Association
HEFA - Health & Educational Facilities Authority
FNMA - Federal National Mortgage Association
HFA - Housing Finance Authority
IDA - Industrial Development Authority
IDB - Industrial Development Bond
IFA - Industrial Finance Authority
LOC - Letter of Credit
MBIA - Municipal Bond Insurance Association
GIC - Guaranteed Investment Contact
# Delayed delivery contract (Note 8).
+ Date shown reflects next mandatory put date.
++ Date shown reflects actual maturity date. Security puttable on a daily basis.
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
EQUITIES -- 98.5%
Basic Industry -- 1.1%
Chirex, Inc.* 14,200 $ 362,100
----------
Capital Goods -- 7.3%
Ballantyne Of Omaha, Inc.* 13,100 252,175
Comfort Systems USA, Inc.* 12,600 240,975
Hagler Bailly* 8,600 218,225
Kellstrom Industries, Inc.* 15,000 309,375
SBS Technologies, Inc.* 14,300 341,413
Service Experts, Inc.* 8,600 232,738
Tetra Technologies, Inc.* 11,300 261,313
Trailer Bridge, Inc.* 14,500 192,125
Triumph Group, Inc.* 10,500 351,094
----------
2,399,433
----------
Consumer Stable -- 6.6%
800-Jr Cigar, Inc.* 11,100 388,499
Aviation Sales Co.* 10,300 311,575
Barnett Inc.* 9,300 197,625
General Cigar Holdings, Inc.* 8,800 254,100
Hughes Supply, Inc. 8,550 258,103
Robert Mondavi Corp., Class A* 6,600 361,350
Suiza Foods Corp.* 7,500 386,249
----------
2,157,501
----------
Early Cyclical -- 3.0%
Aftermarket Technology, Inc.* 13,900 330,125
Atlantic Coast Airlines, Inc.* 7,300 156,950
Excelsior-Henderson Motorcycle* 25,200 162,225
Hospitality Worldwide Services* 14,700 192,938
Midwest Express Holdings* 4,650 149,091
----------
991,329
----------
Energy -- 6.6%
Cal Dive International, Inc.* 16,200 603,449
Friede Goldman Intl, Inc.* 5,600 336,000
Halter Marine Group, Inc.* 9,200 445,049
Hvide Marine, Inc.* 13,200 422,399
Newpark Resources, Inc.* 4,200 165,113
Veritas DGC, Inc.* 4,400 187,275
----------
2,159,285
----------
Financial -- 3.0%
American Capital Strategies* 1,200 24,000
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
Financial (continued)
E Trade Group, Inc.* 9,900 $ 465,299
Greater Bay Bancorp 6,100 261,538
Rental Service Corp.* 10,000 224,375
----------
975,212
----------
Growth Cyclical -- 11.2%
Apple South, Inc. 22,800 438,899
Ashworth, Inc.* 17,300 177,325
Atria Communities, Inc.* 10,600 190,800
Central Garden & Pet Co.* 10,900 335,175
Coach USA, Inc.* 9,400 282,588
Coldwater Creek, Inc.* 4,900 142,100
Gadzooks, Inc.* 13,300 279,300
Logan's Roadhouse Inc.* 9,700 252,200
North Face, Inc.* 5,400 145,125
Sonic Corp.* 10,700 299,600
Steiner Leisure Ltd.* 8,500 312,375
Suburban Lodges of America* 10,400 274,300
Sunrise Assisted Living, Inc.* 4,500 162,563
Travel Services, Inc.* 7,600 157,700
Vans, Inc.* 14,500 232,000
----------
3,682,050
----------
Health Care -- 15.2%
Affymetrix, Inc.* 7,100 326,600
Arbor Health Care Company* 6,500 286,000
Arris Pharmaceutical Corp.* 19,700 256,100
CN Bioscience, Inc.* 14,500 340,750
Cohr, Inc.* 12,700 206,375
Daou Systems, Inc.* 5,900 184,375
Guilford Pharmaceuticals, Inc.* 11,300 333,350
Horizon Health Corp.* 7,750 193,750
Imnet Systems, Inc.* 9,000 241,875
Impath, Inc.* 9,000 263,250
Inhale Therapeutic Systems* 7,700 241,588
Medimmune, Inc.* 6,400 235,200
Medquist, Inc.* 11,250 262,969
National Surgery Centers, Inc.* 8,550 185,963
Neurogen Corp.* 8,400 226,800
Pharmaceutical Product Development* 10,000 203,750
Sepracor, Inc.* 10,300 338,613
Specialty Care Network, Inc.* 17,600 217,800
Urologix, Inc.* 10,600 251,750
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
Health Care (continued)
Vertex Pharmaceuticals, Inc.* 4,800 $ 181,200
----------
4,978,058
----------
Services -- 21.3%
Abacus Direct Corp.* 6,600 212,025
Analysts International Corp. 5,000 193,750
Barrett Business Services, Inc.* 9,700 162,475
BET Holdings, Inc.* 6,800 359,550
Central Parking Corp. 6,850 321,950
Computer Task Group, Inc. 8,000 335,500
Data Processing Resources Corp.* 4,000 100,000
Devry, Inc.* 9,000 268,875
Emmis Broadcasting Corp., Class A* 6,200 296,050
F.Y.I., Inc. 11,700 304,200
Gray Communications Systems, Class B 13,600 340,000
Harbinger Corp.* 6,000 218,250
Healthplan Services Corp. 9,500 200,688
Heftel Broadcasting Corp.* 5,500 416,624
Inspire Insurance Solutions* 12,500 226,563
Learning Tree International* 6,500 186,063
Metzler Group, Inc.* 5,300 212,663
On Assignment, Inc.* 7,000 318,500
Personnel Group of America, Inc.* 9,400 321,950
Physician Support Systems* 13,600 229,500
Remedy Temp, Inc.* 12,400 291,400
Rural Metro Corp.* 7,000 213,500
Scandinavian Broadcast Systems Corp.* 16,400 393,599
Scholastic Corp.* 8,400 331,800
Wackenhut Corrections Corp.* 7,700 238,700
Walsh International, Inc.* 22,800 285,000
----------
6,979,175
----------
Technology -- 23.2%
Advanced Technology Material* 10,000 367,500
Advantage Learning Systems Inc.* 5,000 126,250
Aehr Test Systems* 21,800 385,588
Asyst Technologies, Inc.* 2,500 111,016
Benchmark Electronics, Inc.* 7,800 219,863
Brooks Automation, Inc.* 6,000 230,250
C. P. Clare Corp.* 13,300 262,675
CFM Technologies, Inc.* 3,900 152,831
Dallas Semiconductor Corp. 6,000 268,500
Exar Corp.* 5,900 156,350
FSI International, Inc.* 7,300 152,388
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Cap Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
Technology (continued)
Galileo Technology* 3,200 $ 105,600
Hadco Corp.* 4,400 238,287
Helix Technology Corp. 3,800 235,244
Hyperion Software Corp.* 9,300 290,044
Intelligroup, Inc.* 12,900 277,350
Kulicke & Soffa Industries* 8,900 412,180
Lecroy Corp.* 6,000 265,500
Level One Communications, Inc.* 7,650 307,913
P-Com, Inc.* 13,600 325,550
PCD, Inc.* 11,300 279,675
Photronics, Inc.* 3,900 236,194
PRI Automation, Inc.* 6,700 391,949
Radiant Systems, Inc.* 14,800 310,800
Sanmina Corp.* 2,800 242,375
Semtech Corp.* 4,800 331,800
Star Telecommunications, Inc.* 14,100 324,300
Ultrak, Inc.* 25,400 311,150
Unitrode Corp.* 3,700 274,263
-----------
7,593,385
-----------
TOTAL EQUITIES (COST $23,792,834) 32,277,528
-----------
TOTAL INVESTMENTS -- 98.5% (COST $23,792,834) $32,277,528
Other Assets, Less Liabilities -- 1.5% 482,989
-----------
NET ASSETS -- 100% $32,760,517
===========
Notes to the Schedule of Investments:
* Non-income producing security
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
EQUITIES -- 95.4%
Basic Industry -- 5.8%
Crane Company 8,125 $ 334,140
Hanna (M. A.) Co. 10,000 265,625
Morton International Inc. 2,200 78,100
Praxair, Inc. 1,400 71,663
----------
749,528
----------
Capital Goods -- 7.1%
Deere & Co. 4,100 220,375
Dover Corp. 2,500 169,688
Textron Inc. 2,800 182,000
United Technologies Corp. 4,200 340,199
----------
912,262
----------
Consumer Stable -- 5.0%
General Nutrition Companies* 4,700 136,888
Kroger Co.* 4,000 120,750
Philip Morris Companies Inc. 2,950 122,609
Richfood Holdings Inc. 10,100 261,969
----------
642,216
----------
Early Cyclical -- 3.4%
Lancaster Colony Corp. 4,500 239,063
Leggett & Platt Inc. 4,500 200,531
----------
439,594
----------
Energy -- 8.9%
Amoco Corp. 2,200 212,025
British Petroleum Co. PLC 3,568 324,019
Mobil Corp. 3,800 281,200
Texaco Inc. 5,200 319,475
----------
1,136,719
----------
Financial -- 18.2%
Ace Limited 2,800 263,200
Allied Group 3,500 177,844
AMBAC Inc. 6,900 280,744
American Bankers Insurance Group 5,200 189,800
BankAmerica Corp. 2,000 146,625
BankBoston Corporation 1,200 106,125
Chase Manhattan Corp. 2,500 295,000
Conseco, Inc. 5,770 281,648
Morgan Stanley Dean Witter 3,800 205,438
Northern Trust 1,400 82,775
Reliastar Financial Corp. 7,500 298,594
----------
2,327,793
----------
Growth Cyclical -- 9.9%
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
Growth Cyclical (continued)
BJ's Wholesale Club Inc* 4,400 $ 128,425
Claire's Stores Inc. 9,000 201,375
Costco Companies Inc.* 4,000 150,500
Jones Apparel Group Inc.* 1,600 86,400
Pier 1 Imports Inc. 10,425 186,998
Ross Stores Inc. 4,500 153,563
Tommy Hilfiger Corp.* 5,000 249,688
Wallace Computer Services 3,000 110,625
----------
1,267,574
----------
Health Care -- 8.0%
Abbott Laboratories 1,100 70,331
Bristol-Myers Squibb Co. 2,300 190,325
Schering-Plough Corp. 3,800 195,700
Sofamor Danek Group, Inc.* 3,000 171,375
Steris Corp.* 3,000 123,375
Watson Pharmaceutical Inc.* 4,500 268,875
----------
1,019,981
----------
Real Estate -- 3.3%
Beacon Properties Corp., REIT 2,400 109,950
Macerich Company (The), REIT 1,900 54,863
Patriot Amer Hospitality Inc., REIT 2,399 76,468
Prentiss Properties Trust, REIT 2,200 63,525
Starwood Lodging Trust, REIT 2,100 120,619
----------
425,425
----------
Services -- 5.5%
Carnival Corp. 5,500 254,375
Ceridian Corp.* 5,300 196,100
Oakwood Homes Corp. 8,800 249,700
----------
700,175
----------
Technology -- 20.3%
Adaptec Inc.* 6,400 299,200
Belden Inc. 5,650 212,934
Compaq Computer* 5,250 392,437
Computer Associates International, Inc. 2,500 179,531
Harris Corp., Inc. 7,500 343,124
Intel Corp. 3,000 276,938
International Business Machine 1,000 105,938
Raychem Corp. 3,900 329,549
Shared Medical 4,100 216,788
Sun Microsystems Inc.* 5,300 248,106
----------
2,604,545
----------
TOTAL EQUITIES (COST $9,046,078) 12,225,812
----------
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Tax-Sensitive Equity Fund
Schedule of Investments - September 30, 1997
Security Shares Value
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 95.4% (COST $9,046,078) $ 12,225,812
Other Assets, Less Liabilities -- 4.6% 593,128
-------------
NET ASSETS -- 100% $ 12,818,940
=============
Notes to the Schedule of Investments:
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "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 Fund in the preparation of its 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
price 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 the Fund are valued at amortized cost. If the 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 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.
33
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
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. At September 30,
1997, 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 $227,004 $178,890 -- $405,894
Tax-Sensitive Equity Fund -- -- $ 19,612 $ 19,612
</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. Fiscal year end--
The Board of Trustees voted on February 9, 1996 to change the fiscal year
end of the Bond Funds from December 31 to September 30, effective
September 30, 1996.
(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 by 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.
34
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
(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: 0.40% for the Massachusetts Intermediate Tax
Exempt Bond Fund and the Intermediate Tax Exempt Bond Fund, 0.60% for the
Small Cap Tax-Sensitive Equity Fund and 0.50% for the Tax-Sensitive Equity
Fund. For the year ended September 30, 1997, SA&W voluntarily agreed to
limit the total fund operating expenses (excluding litigation,
indemnification and other extraordinary expenses) to the following
percentages of average daily net assets: 0.65% for the Massachusetts
Intermediate Tax Exempt Bond Fund and the Intermediate Tax Exempt Bond
Fund. For the Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive
Equity Fund, total operating expenses (excluding litigation and
extraordinary expenses) were voluntarily limited by SA&W to 0.00% of
average daily net assets through June 30, 1997; Commencing July 1, 1997
total operating expenses (excluding litigation and extraordinary expenses)
were limited to 0.50% of average daily net assets. For the year ended
September 30, 1997, SA&W voluntarily waived $33,848, $40,552, $100,630 and
$32,635 of its advisory fee to the Massachusetts Tax Exempt Bond Fund,
Intermediate Tax Exempt Bond Fund, Small Cap Tax-Sensitive Equity Fund and
Tax-Sensitive Equity Fund, respectively, and reimbursed operating expenses
of $72,897 and $67,114 for the Small Cap Tax-Sensitive Equity Fund and
Tax-Sensitive Equity Fund, respectively, which are reflected as reductions
of expenses in the respective Statements of Operations. 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 or 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.
(4) Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations,
were as follows:
<TABLE>
<CAPTION>
Year Ended For the Period Ended(a)
September 30, 1997 September 30, 1996
------------------------ ------------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Massachusetts Intermediate Tax Exempt Bond Fund $14,344,251 $8,536,805 $11,013,527 $11,159,395
=========== =========== =========== ===========
Intermediate Tax Exempt Bond Fund $44,667,863 $24,936,103 $16,279,361 $14,065,880
=========== =========== =========== ===========
Small Cap Tax-Sensitive Equity Fund $33,633,673 $16,657,415 $8,506,998 $1,856,009
=========== =========== =========== ===========
Tax-Sensitive Equity Fund $8,248,008 $1,571,491 $2,783,277 $293,127
=========== =========== =========== ===========
</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.
35
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
(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 Fund's shares were as follows:
<TABLE>
<CAPTION>
Massachusetts Intermediate Tax Exempt Year Ended Period Ended (a) Year Ended
Bond Fund September 30, 1997 September 30, 1996 December 31, 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Shares sold 664,860 379,843 534,346
Shares issued to shareholders in
payment of distributions declared 30,459 17,163 18,097
Shares redeemed (440,478) (388,723) (423,607)
================== ================== =================
Net increase 254,841 8,283 128,836
================== ================== =================
Intermediate Tax Exempt Bond Fund
Shares sold 1,093,993 524,041 821,564
Shares issued to shareholders in
payment of distributions declared 38,642 20,313 15,149
Shares redeemed (361,805) (430,546) (331,012)
================== ================== =================
Net increase 770,830 113,808 505,701
================== ================== =================
<CAPTION>
Year Ended Period Ended(a)
Small Cap Tax-Sensitive Equity Fund September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Shares Sold 763,163 292,713
Shares issued to shareholders in
payment of distributions declared 387 119
Shares redeemed (51,613) (268)
================== ==================
Net increase 711,937 292,564
================== ==================
Tax-Sensitive Equity Fund
Shares Sold 244,525 120,464
Shares issued to shareholders in
payment of distributions declared 2,135 660
Shares redeemed (3,376) (678)
================== ==================
Net increase 243,284 120,446
================== ==================
</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, 1997, the Massachusetts Intermediate Tax Exempt Bond Fund
had two shareholders of record owning approximately 31% and 11% of the
Fund's outstanding voting shares. The Intermediate Tax Exempt Bond Fund,
the Small Cap Tax-Sensitive Equity Fund and the Tax-Sensitive Equity Fund
each had a shareholder of record owning approximately 14%, 17% and 21% of
the respective Fund's outstanding voting shares.
36
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
(6) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at September 30, 1997, as computed on a
federal income tax basis, were as follows:
<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Aggregate Unrealized Unrealized Appreciation
Cost Appreciation Depreciation (Depreciation)
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Massachusetts Intermediate
Tax Exempt Bond Fund $38,496,820 $1,037,865 $10,584 $1,027,281
Intermediate Tax Exempt Bond
Fund $54,267 ,827 $1,950,867 $4,005 $1,946,862
Small Cap Tax-Sensitive
Equity Fund $23,846,486 $8,600,276 $169,254 $8,431,022
Tax-Sensitive Equity Fund $9,049,975 $3,175,837 $0 $3,175,837
</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 seek 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 Fund's Prospectus and Statement 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 in 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 or index, 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. Buying futures tends to
increase a Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund 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. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contracts terms. The Funds enter into financial futures transactions
primarily to manage their exposure to certain markets and to changes in
securities prices and, with respect to the Small Cap Tax-Sensitive Equity
Fund and the Tax-Sensitive Equity Fund, to changes in foreign currencies.
Gains and losses are realized upon the expiration or closing of the
futures contracts.
37
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
At September 30, 1997 the Massachusetts Intermediate Tax Exempt Bond Fund
held the following futures contracts:
<TABLE>
<CAPTION>
Underlying
Contract Position Expiration Date Face/amount Unrealized
at value Gain/(Loss)
--------------------------------------- ---------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Municipal Bond (6 contracts) Long 12/19/97 $721,125 $ 8,940
-------------
$ 8,940
=============
</TABLE>
At September 30, 1997, the Massachusetts Intermediate Tax Exempt Bond Fund
had segregated sufficient cash and/or securities to cover margin
requirements on open future contracts.
At September 30, 1997, the Intermediate Tax Exempt Bond Fund, 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, 1997, the Massachusetts Intermediate Tax Exempt Bond Fund
had entered into the following delayed delivery transactions:
<TABLE>
<CAPTION>
Type Security Settlement Date Trade Amount
------------ ----------------------------------------- ---------------- --------------
<S> <C> <C> <C>
Buy Springfield MA 10/15/97 $750,706
===========
</TABLE>
At September 30, 1997, the Intermediate Tax Exempt Bond Fund had entered
into the following delayed delivery transactions:
<TABLE>
<CAPTION>
Type Security Settlement Date Trade Amount
------------ ----------------------------------------- ---------------- ---------------
<S> <C> <C> <C>
Buy Alabama St. Docks 07/08/98 $1,026,400
Buy Austin TX Utilities Systems 08/17/98 1,043,706
Buy CA Housing Authority 05/06/98 500,000
Buy Kansas St. Tpk Authority 06/04/98 520,440
Buy Pensacola FL Airport 07/07/98 391,494
Buy Met Govt. Nashville & Davidson Revenue 02/03/98 640,896
-----------
$4,122,936
===========
</TABLE>
At September 30, 1997, the Small Cap Tax Sensitive Equity Fund and the Tax
Sensitive Equity Fund were not party to any delayed delivery transactions.
38
<PAGE>
Standish, Ayer & Wood Investment Trust
Notes to Financial Statements
(9) Tax Information - Unaudited
Pursuant to section 852 of the Internal Revenue Code, the Standish Small
Cap Tax-Sensitive Equity Fund designates $110,691 as capital gain
dividends for the year ended September 30, 1997. All of this amount
represents a 28% tax rate gain distribution.
Of the distributions paid by the Bond funds from net investment income for
the year ended September 30, 1997, amounts that were tax exempt for
federal income tax purposes are as follows:
Massachusetts Intermediate Tax Exempt Bond $ 2,023,273
Fund
Intermediate Tax Exempt Bond Fund $ 1,568,947
39
<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, 1997 and the related
statements of operations, changes in net assets and the financial highlights for
each of the periods indicated therein. 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
(commencement of operations) to December 31, 1992, presented therein 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, 1997 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, 1997; the results of operations, the changes in its net assets and
the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 11, 1997
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A of Standish Small Cap Tax-Sensitive Fund, Standish
Tax-Sensitive Equity Fund, Standish Intermediate Tax-Exempt Bond Fund and
Standish Massachusetts Intermediate Tax-Exempt Bond Fund:
Financial Highlights
Included in Part B of Standish Small Cap Tax-Sensitive Fund, Standish
Tax-Sensitive Equity Fund, Standish Intermediate Tax-Exempt Bond Fund and
Standish Massachusetts Intermediate Tax-Exempt Bond Fund:
Schedule of Portfolio Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Independent Auditors' Report
(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*
<PAGE>
(1F) Certificate of Amendment dated November 21, 1989*
(1G) Certificate of Amendment dated November 29, 1989*
(1H) Certificate of Amendment dated April 24, 1990*
(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**
(1R) Certificate of Designation of Standish Small Capitalization
Equity Asset Fund II, Standish Diversified Income Fund, Standish
Diversified Income Asset Fund**
(2) Bylaws of the Registrant*
(3) Not applicable
(4) Not applicable
<PAGE>
(5A) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Securitized
Fund**
(5B) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish International
Fixed Income Fund**
(5C) Assignment of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating to Standish
International Fixed Income Fund**
(5D) Form of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating to Standish
Intermediate Tax Exempt Bond Fund**
(5E) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Massachusetts
Intermediate Tax Exempt Bond Fund**
(5F) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Controlled
Maturity Fund**
(5G) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Fixed Income
Fund II**
(5H) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Small Cap
Tax-Sensitive Equity Fund**
(5I) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Tax-Sensitive
Equity Fund**
(5J) Form of Investment Advisory Agreement between the
Registrant and Standish, Ayer and Wood, Inc. relating to Standish
International Fund*
(5K) Form of Assignment of Investment Advisory Agreement*
(6A) Underwriting Agreement between the Registrant and Standish
Fund Distributors, L.P.**
<PAGE>
(6B) Most recently dated/filed revised Appendix A to
Underwriting Agreement between the Registrant and Standish Fund
Distributors, L.P.**
(7) Not applicable
(8A) Master Custody Agreement between the Registrant and
Investors Bank & Trust Company**
(8B) Most recently dated/filed revised Appendix A to Master Custody
Agreement between the Registrant and Investors Bank & Trust
Company**
(8C) Master Custody Agreement between the Registrant and Morgan
Stanley Trust Company*
(9A) Transfer Agency and Service Agreement between the
Registrant and Investors Bank & Trust Company**
(9B) Most recently dated/filed revised Exhibit A to Transfer Agency
and Service Agreement between the Registrant and Investors Bank &
Trust Company**
(9C) Master Administration Agreement between the Registrant and
Investors Bank & Trust Company**
(9D) Most recently dated/filed revised Exhibit A to Master
Administration Agreement between the Registrant and Investors
Bank & Trust Company**
(9E) Form of Administrative Services Agreement between Standish,
Ayer & Wood, Inc. and the Registrant**
(9F) Most recently dated/filed revised Exhibit A to
Administrative Services Agreement between Standish, Ayer & Wood,
Inc. and the Registrant**
(10A) Opinion and Consent of Counsel for the Registrant**
(11A) Consent of Independent Public Accountants***
(11B) Consent of Independent Public Accountants***
(12) Not applicable
<PAGE>
(13) Not applicable
(14) Not applicable
(15) Not applicable
(16) Performance Calculations**
(17A) Financial Data Schedule (Standish Tax-Sensitive Equity
Fund)***
(17B) Financial Data Schedule (Standish Small Cap Tax-Sensitive
Equity Fund)***
(17C) Financial Data Schedule (Standish Intermediate Tax Exempt
Bond Fund)***
(17D) Financial Data Schedule (Standish Massachusetts
Intermediate Tax Exempt Bond 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 Registrant (Paul G. Martins)**
(19J) Power of Attorney for Portfolio Trust (Richard S. Wood)*
<PAGE>
(19K) Power of Attorney for Portfolio Trust (Samuel C. Fleming,
Benjamin M. Friedman, John H. Hewitt, Edward H. Ladd, Caleb
Loring III, Richard S. Wood and D. Barr Clayson)**
(19L) Power of Attorney for Portfolio Trust (Paul G. Martins)**
----------
* Filed as an exhibit to Registration 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 September 30, 1997,
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 484
Standish Securitized Fund 9
Standish Short-Term Asset
Reserve Fund 88
Standish International Fixed
Income Fund 211
Standish Global Fixed Income Fund 53
Standish Equity Fund 155
Standish Small Capitalization
Equity Fund 324
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 94
<PAGE>
Standish Intermediate Tax Exempt
Bond Fund 136
Standish International Equity Fund 184
Standish Controlled Maturity Fund 16
Standish Fixed Income Fund II 10
Standish Small Cap Tax-Sensitive
Equity Fund 198
Standish Tax-Sensitive Equity Fund 103
Standish Equity Asset Fund 1
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 44
Standish Diversified Income Fund 14
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
<PAGE>
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
certain series of the Registrant, 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. ("SIMCO"), the investment
adviser to certain other series of the Registrant, are listed on the Form ADV of
SIMCO 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
<PAGE>
The General Partner of Standish Fund Distributors, L.P. is Standish, Ayer
& Wood, Inc.
(c) Not applicable.
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 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
the later of (i) four to six months from the effective date of
the applicable Post-Effective Amendment to its Registration
Statement registering shares of each such Fund or (ii) the
commencement of operations of each such Fund.
(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.
<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 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 19th day of December, 1997.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ Paul G. Martins
---------------
Paul G. Martins, 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.
<PAGE>
Signature Title Date
Richard S. Wood* Trustee and President December 19, 1997
- ------------------------ (principal executive officer)
Richard S. Wood
Paul G. Martins* Treasurer (principal December 19, 1997
- ------------------------ financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee December 19, 1997
- ------------------------
D. Barr Clayson
Samuel C. Fleming* Trustee December 19, 1997
- ------------------------
Samuel C. Fleming
Benjamin M. Friedman* Trustee December 19, 1997
- ------------------------
Benjamin M. Friedman
John H. Hewitt* Trustee December 19, 1997
- ------------------------
John H. Hewitt
Edward H. Ladd* Trustee December 19, 1997
- ------------------------
Edward H. Ladd
Caleb Loring III* Trustee December 19, 1997
- ------------------------
Caleb Loring III
*By: /s/ James E. Hollis, III
------------------------
James E. Hollis, III
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
(11A) Consent of Independent Public Accountants
(11B) Consent of Independent Public Accountants
(17A) Financial Data Schedule (Standish Tax-Sensitive Equity Fund)
(17B) Financial Data Schedule (Standish Small Cap Tax-Sensitive
Equity Fund)
(17C) Financial Data Schedule (Standish Intermediate Tax Exempt Bond
Fund)
(17D) Financial Data Schedule (Standish Massachusetts Intermediate
Tax Exempt Bond Fund)
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent in this Post-Effective Amendment No. 86 to Registration Statement
No. 33-8214 of Standish Intermediate Tax Exempt Bond Fund Series of Standish,
Ayer & Wood Investment Trust 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.
Deloitte & Touche LLP
Boston, Massachusetts
December 23, 1997
<PAGE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent in the Post-Effective Amendment No. 86 to Registration Statement
No. 33-8214 of Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series of Standish, Ayer & Wood Investment Trust 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.
Deloitte & Touche LLP
Boston, Massachusetts
December 23, 1997
Consent of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust:
We consent to the inclusion in Post-Effective Amendment No. 90 to the
Registration Statement on Form N-1A (1933 Act File Number 33-8214) 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 (the "Funds")
of our report dated November 11, 1997, 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 year ended September 30, 1997, which is also
included in this Registration Statement.
We also consent to the references to our Firm under the caption "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
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from Standish, Ayer & Wood Investment Trust
form N-SAR for the period ended September 30, 1997
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> Standish Mass. Int. Tax Exempt Bond Fund Series
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 38,496,820
<INVESTMENTS-AT-VALUE> 39,524,101
<RECEIVABLES> 757,142
<ASSETS-OTHER> 2,485
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,283,728
<PAYABLE-FOR-SECURITIES> 1,684,647
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,453
<TOTAL-LIABILITIES> 1,883,100
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,779,238
<SHARES-COMMON-STOCK> 1,812,636
<SHARES-COMMON-PRIOR> 1,557,795
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (414,831)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,036,221
<NET-ASSETS> 38,400,628
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,805,757
<OTHER-INCOME> 38,495
<EXPENSES-NET> 225,632
<NET-INVESTMENT-INCOME> 1,618,620
<REALIZED-GAINS-CURRENT> 172,925
<APPREC-INCREASE-CURRENT> 724,286
<NET-CHANGE-FROM-OPS> 2,515,831
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,618,620
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 664,860
<NUMBER-OF-SHARES-REDEEMED> 440,478
<SHARES-REINVESTED> 30,459
<NET-CHANGE-IN-ASSETS> 6,264,545
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (587,756)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 138,703
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 259,480
<AVERAGE-NET-ASSETS> 34,713,780
<PER-SHARE-NAV-BEGIN> 20.63
<PER-SHARE-NII> 0.97
<PER-SHARE-GAIN-APPREC> 0.55
<PER-SHARE-DIVIDEND> (0.97)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.18
<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, Ayer & Wood Investment Trust
form N-SAR for the period ended September 30, 1997
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> Standish Intermediate Tax Exempt Bond Fund Series
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 54,267,827
<INVESTMENTS-AT-VALUE> 56,214,689
<RECEIVABLES> 787,064
<ASSETS-OTHER> 2,957
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,004,710
<PAYABLE-FOR-SECURITIES> 4,122,936
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 158,482
<TOTAL-LIABILITIES> 4,281,418
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50,625,414
<SHARES-COMMON-STOCK> 2,420,468
<SHARES-COMMON-PRIOR> 1,649,638
<ACCUMULATED-NII-CURRENT> 8,268
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 142,748
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,946,862
<NET-ASSETS> 52,723,292
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,337,745
<OTHER-INCOME> 0
<EXPENSES-NET> 281,987
<NET-INVESTMENT-INCOME> 2,055,758
<REALIZED-GAINS-CURRENT> 194,930
<APPREC-INCREASE-CURRENT> 1,302,656
<NET-CHANGE-FROM-OPS> 3,553,344
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,055,758
<DISTRIBUTIONS-OF-GAINS> 61,613
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,093,993
<NUMBER-OF-SHARES-REDEEMED> 361,805
<SHARES-REINVESTED> 38,642
<NET-CHANGE-IN-ASSETS> 17,880,580
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 18,747
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 173,394
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 322,539
<AVERAGE-NET-ASSETS> 43,383,490
<PER-SHARE-NAV-BEGIN> 21.12
<PER-SHARE-NII> 1.01
<PER-SHARE-GAIN-APPREC> 0.74
<PER-SHARE-DIVIDEND> (1.01)
<PER-SHARE-DISTRIBUTIONS> (0.08)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.78
<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, Ayer & Wood Investment Trust
form N-SAR for the period ended September 30, 1997
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 14
<NAME> StandishSmall Cap Tax-Sensitive Equity Fund
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 23,792,834
<INVESTMENTS-AT-VALUE> 32,277,528
<RECEIVABLES> 218,285
<ASSETS-OTHER> 367,735
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,863,548
<PAYABLE-FOR-SECURITIES> 78,662
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,369
<TOTAL-LIABILITIES> 103,031
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,102,658
<SHARES-COMMON-STOCK> 1,004,501
<SHARES-COMMON-PRIOR> 292,564
<ACCUMULATED-NII-CURRENT> 7,577
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 165,588
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,484,694
<NET-ASSETS> 32,760,517
<DIVIDEND-INCOME> 18,755
<INTEREST-INCOME> 30,560
<OTHER-INCOME> 0
<EXPENSES-NET> 35,254
<NET-INVESTMENT-INCOME> 14,061
<REALIZED-GAINS-CURRENT> 454,628
<APPREC-INCREASE-CURRENT> 8,125,678
<NET-CHANGE-FROM-OPS> 8,594,367
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,664
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 763,163
<NUMBER-OF-SHARES-REDEEMED> 51,613
<SHARES-REINVESTED> 387
<NET-CHANGE-IN-ASSETS> 25,864,650
<ACCUMULATED-NII-PRIOR> 5,180
<ACCUMULATED-GAINS-PRIOR> (289,040)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 100,630
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 208,781
<AVERAGE-NET-ASSETS> 6,527,068
<PER-SHARE-NAV-BEGIN> 23.57
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 9.05
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 32.61
<EXPENSE-RATIO> 0.21
<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, Ayer & Wood Investment Trust
form N-SAR for the period ended September 30, 1997
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 15
<NAME> Standish Tax-Sensitive Equity Fund Series
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 9,046,078
<INVESTMENTS-AT-VALUE> 12,225,812
<RECEIVABLES> 11,633
<ASSETS-OTHER> 597,030
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,834,475
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,535
<TOTAL-LIABILITIES> 15,535
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,735,808
<SHARES-COMMON-STOCK> 363,730
<SHARES-COMMON-PRIOR> 120,446
<ACCUMULATED-NII-CURRENT> 24,409
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (121,011)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,179,734
<NET-ASSETS> 12,818,940
<DIVIDEND-INCOME> 85,447
<INTEREST-INCOME> 13,204
<OTHER-INCOME> 0
<EXPENSES-NET> 13,288
<NET-INVESTMENT-INCOME> 85,363
<REALIZED-GAINS-CURRENT> (99,250)
<APPREC-INCREASE-CURRENT> 2,866,460
<NET-CHANGE-FROM-OPS> 2,852,573
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 73,042
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 244,525
<NUMBER-OF-SHARES-REDEEMED> 3,376
<SHARES-REINVESTED> 2,135
<NET-CHANGE-IN-ASSETS> 9,975,998
<ACCUMULATED-NII-PRIOR> 12,585
<ACCUMULATED-GAINS-PRIOR> (21,876)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32,635
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 113,037
<AVERAGE-NET-ASSETS> 12,523,411
<PER-SHARE-NAV-BEGIN> 23.60
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> 11.58
<PER-SHARE-DIVIDEND> (0.33)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 35.24
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
