[LOGO] STANDISH FUNDS(SM)
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The Standish Group of
Tax-Sensitive Equity and
Tax Exempt
Bond Funds
Prospectus
..........
Standish Tax-Sensitive
Equity Fund
Standish Small
Capitalization Tax-
Sensitive Equity Fund
Standish Intermediate Tax
Exempt Bond Fund
Standish Massachusetts
Intermediate Tax Exempt
Bond Fund
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January 28, 1998
<PAGE>
Standish Group of Tax-Sensitive Equity and Tax Exempt Bond Funds
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The Standish Group of Tax-Sensitive and Tax Exempt Funds includes the Standish
Tax-Sensitive Equity Fund ("Equity Fund"), 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 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" or the "Adviser") is the investment adviser to each Fund.
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-three 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
for the Tax-Sensitive Funds and $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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds January 28, 1998
<PAGE>
Table of Contents
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Fund Comparison Highlights ................................................. 2
Expense Information ........................................................ 4
Financial Highlights ....................................................... 5
Investment Objectives and Policies ......................................... 9
The Tax-Sensitive Funds .................................................. 9
The Tax Exempt Funds ..................................................... 10
The Tax-Sensitive Equity Fund ............................................ 10
The Small Cap Tax-Sensitive Equity Fund .................................. 11
The Intermediate Tax Exempt Bond Fund .................................... 11
The Massachusetts Intermediate Tax Exempt Bond Fund ...................... 12
Description of Securities and Related Risks ................................ 12
Investment Techniques and Related Risks .................................... 16
Calculation of Performance Data ............................................ 19
Dividends and Distributions ................................................ 21
Purchase of Shares ......................................................... 21
Net Asset Value ............................................................ 22
Exchange of Shares ......................................................... 22
Redemption of Shares ....................................................... 22
Management ................................................................. 23
Federal Income Taxes ....................................................... 24
The Funds and Their Shares ................................................. 26
Custodian, Transfer Agent and Dividend-Disbursing Agent .................... 26
Independent Accountants .................................................... 26
Legal Counsel .............................................................. 27
Tax Certification Instructions ............................................. 27
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds January 28, 1998
<PAGE>
Fund Comparison Highlights
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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.
<TABLE>
<CAPTION>
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Tax-Sensitive Equity Fund Small Cap Tax-Sensitive Equity Fund
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<S> <C> <C>
Investment Maximize after-tax total Maximize after-tax total return,
Objective return, consisting of consisting of long-term growth of
long-term growth of capital capital with nominal current
with nominal current income, income, through investment
through investment primarily primarily in a diversified
in a diversified portfolio of portfolio of equity securities of
equity securities of companies small capitalization companies
that appear to be undervalued that appear to be undervalued
Key Strategy Employ various techniques to Employ various techniques to seek
seek the highest long-term the highest long-term total return
total return after considering after considering the impact of
the impact of Federal and Federal and state income taxes
state income taxes paid by paid by shareholders on the Fund's
shareholders on the Fund's distributions
distributions
Primary Types of Emphasize stocks believed to Emphasize rapidly growing, high
Obligations offer above average potential quality companies with market
for capital growth through the capitalization's less than $1
use of statistical modeling billion that are involved with
techniques and fundamental value added products or services
analysis
Market No limit; general range is $1 billion or less at time of
Capitalization of medium to large capitalization purchase
Companies Focused
on by the Fund
Foreign Securities Yes; no limit for securities Yes; limited to 15% of total assets
listed on a U.S. exchange or
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
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</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 2 January 28, 1998
<PAGE>
Fund Comparison Highlights
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<TABLE>
<CAPTION>
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Intermediate Tax Exempt Bond Massachusetts Intermediate Tax
Fund Exempt Bond Fund
<S> <C> <C>
Investment High level of interest income High level of interest income
Objective exempt from federal income exempt from Massachusetts and
taxes, while seeking Federal income taxes, while
preservation of capital seeking preservation of capital
through investment in through investment in investment
investment grade grade intermediate-term municipal
intermediate-term municipal securities
securities
Primary Types of Municipal securities of Municipal securities of issuers
Obligations states, territories and located in Massachusetts and other
possessions of the United qualifying issuers (including
States, and the District of Puerto Rico, the U.S. Virgin
Columbia and their political Islands and Guam) the interest on
subdivisions, agencies, which is excluded from gross
authorities and income for Federal income tax
instrumentalities the interest purposes and exempt from
on which is excluded from Massachusetts personal income tax
gross income for Federal
income tax purposes
Credit Quality Exclusively investment grade Exclusively investment grade with
with an emphasis on high an emphasis on high quality
quality
Below Investment No No
Grade
Average Effective 3-10 years 3-10 years
Portfolio Maturity
(Dollar-Weighted)
Foreign Securities No No
Selected
Benchmark Lehman Brothers State General Lehman Brothers State General
Obligation Bond 3, 5, 7 and 10 Obligation Bond 3, 5, 7 and 10
Year Indices Year Indices
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</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 3 January 28, 1998
<PAGE>
Expense Information
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<TABLE>
<CAPTION>
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Tax-Sensitive
Tax-Sensitive Small Cap Intermediate Tax Massachusetts
Equity Fund Equity Fund Exempt Fund Tax Exempt Fund
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<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
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
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after applicable limitation)* 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%
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Total Operating Expenses (after expense limitation) * 0.50% 0.75% 0.65% 0.65%
============ ============ ================ ==================
</TABLE>
Total operating expenses are based on expenses for the fiscal year ended
September 30, 1997.
* Standish has voluntarily agreed to limit each Fund's Total Operating Expenses
(excluding brokerage commissions, taxes and extraordinary expenses) to the
following percentages of average daily net assets: Equity Fund -- 0.50%; Small
Cap Fund -- 0.75%; Intermediate Tax Exempt Fund -- 0.65%; and Massachusetts Tax
Exempt Fund -- 0.65%. In the absence of such agreements, 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%. 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 fees.
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Tax-Sensitive
Tax-Sensitive Small Cap Intermediate Tax Massachusetts
Equity Fund Equity Fund Exempt Fund Tax Exempt Fund
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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 investors in understanding the
various costs and expenses that an investor in each Fund will bear directly or
indirectly. The example is included solely for illustrative purpose and should
not be considered a representation of future performance of expenses. Actual
expenses may be more or less than those shown. See "Management" for additional
information about each Fund's expenses.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 4 January 28, 1998
<PAGE>
Financial Highlights
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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.
<TABLE>
<CAPTION>
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Tax-Sensitive Equity Fund
For the Period
January 2, 1996
Fiscal Year (commencement of
Ended operations) to
September 30, September 30,
1997** 1996
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<S> <C> <C>
Net asset value - beginning of period $23.60 $20.00
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Income from investment operations
Net investment income* $0.39 $0.28
Net realized and unrealized gain (loss) 11.58 3.50
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Total from investment operations $11.97 $3.78
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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(1) 51.19% 18.97%
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $12,819 $2,843
Expenses* 0.20% 0.00%
Net investment income* 1.31% 2.27%
Portfolio turnover 25% 17%
Average broker commission paid per share $0.0497 $0.0419
</TABLE>
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** Calculated based on average shares outstanding.
* 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:
<TABLE>
<S> <C> <C>
Net Investment Income 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
</TABLE>
t Computed on an annualized basis.
(1) The Fund's performance benchmark is the S&P 500 Index. See "Calculation of
Performance Data" for a description of this index. The average annual total
return of this index for each year since the Fund's inception was as follows
(this total return information is not audited):
<TABLE>
<CAPTION>
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Total Return: 1997 1996
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<S> <C> <C>
S&P 500 33.36% 22.96%
</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 5 January 28, 1998
<PAGE>
Financial Highlights
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<TABLE>
<CAPTION>
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Small Cap Tax-Sensitive Equity Fund
For the Period
January 2, 1996
Fiscal Year (commencement of
Ended operations) to
September 30, September 30,
1997 1996
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<S> <C> <C>
Net asset value - beginning of period $23.57 $20.00
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Income from investment operations
Net investment income* $0.02 $0.04
Net realized and unrealized gain (loss) 9.05 3.55
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Total from investment operations $9.07 $3.59
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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(1) 38.50% 17.95%
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $32,761 $6,896
Expenses* 0.21% 0.00%
Net investment income* 0.08% 0.41%
Portfolio turnover 102% 57%
Average broker commission paid per share $0.0429 $0.1058
</TABLE>
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* 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:
<TABLE>
<S> <C> <C>
Net Investment Income 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
</TABLE>
t Computed on an annualized basis.
(1) The Fund's performance benchmark is the Russell 2000 Growth Index. See
"Calculation of Performance Data" for a description of this index. The
average annual total return of this index for each year since the Fund's
inception was as follows (this total return information is not audited):
<TABLE>
<CAPTION>
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Total Return: 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Russell 2000 Growth Index 12.94% 11.26%
</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 6 January 28, 1998
<PAGE>
Financial Highlights
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<TABLE>
<CAPTION>
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Intermediate Tax Exempt Bond Fund
For the Period
November 2, 1992
Fiscal Year Nine Months Fiscal Year (start of
Ended Ended Ended business) to
September 30, September 30, December 31, December 31,
1997 1996 1995 1994 1993 1992*
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<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) 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 gain on investments (0.08) ----- ----- (0.02) (0.22) -----
------------ --------------- --------- -------------- ------- -----------------
Total distributions declared 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(1) 8.27% 2.43% 12.65% ($2.68) 10.78% 17.02%t
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period (000 omitted) $52,723 $34,843 $32,865 $20,514 $17,132 $5,577
Expenses** 0.65% 0.65%t 0.65% -0.65% 0.65% .65%t
Net investment income** 4.74% 4.99%t 4.75% 4.62% 4.36% 4.16%t
Portfolio turnover 0.23%x 0.43%x 140% 157% 126% 62%
</TABLE>
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** 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% .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.
t Computed on an annualized basis.
x Commencing in fiscal 1996, securities which are puttable daily have been
excluded from the portfolio turnover calculations.
(1) The Fund's performance benchmark is the Lehman Muni 3-5-7-10 Index. See
"Calculation of Performance Data" for a description of this index. The
average annual total return of this index for each year since the Fund's
inception was as follows (this total return information is not audited):
<TABLE>
<CAPTION>
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Total Return: 1997 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C> <C>
Lehman Muni 3-5-7-10 Index 7.19% 4.40% 12.93% (2.05%) 9.56% 2.14%
</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 7 January 28, 1998
<PAGE>
Financial Highlights
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<TABLE>
<CAPTION>
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Massachusetts Intermediate Tax Exempt Bond Fund
For the Period
November 2,
Fiscal Year Nine Months Fiscal Year 1992 (start of
Ended Ended Ended business) to
September 30, September 30, December 31, December 31,
1997 1996 1995 1994 1993 1992*
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<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) 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 gain on investments ----- ----- ----- (0.01) (0.14) -----
-------------- -------------- -------- ------------- -------- ----------------
Total distributions declared 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 return1 7.55% 1.70% 12.64% ($3.84) 10.24% 13.85%t
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period (000 omitted) $38,401 $32,136 $32,565 $27,776 $29,627 $6,537
Expenses** 0.65% .65%t 0.65% 0.65% 0.65% .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>
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** 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% .73%t 0.72% 0.78% 0.95% 1.37%t
Net Investment Income 4.57% 4.07%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 calculations.
(1) The Fund's performance benchmark is the Lehman Muni 3-5-7-10 Index. See
"Calculation of Performance Data" for a description of this index. The
average annual total return of this index for each year since the Fund's
inception was as follows (this total return information is not audited):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return: 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lehman Muni 3-5-7-10 Index 7.19% 4.40% 12.93% (2.05%) 9.56% 2.14%
</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 8 January 28, 1998
<PAGE>
Investment Objectives and Policies
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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. The purpose of this strategy is 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.
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
(i.e., where warranted by actual or anticipated economic, market or
issuer-specific developments). The Tax-Sensitive Funds may also 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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 9 January 28, 1998
<PAGE>
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 and real estate investment trusts ("REITs"), 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 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 shorter-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 Investors 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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 10 January 28, 1998
<PAGE>
that are convertible into, or exchangeable for, common stocks. Generally, such
securities will be rated, at the time of investment, Aaa, Aa or A by Moody's or
AAA, AA or A by Standard & Poor's, 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 Standish 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
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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 11 January 28, 1998
<PAGE>
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 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
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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 12 January 28, 1998
<PAGE>
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. 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.
Investing in Emerging Markets. Although the Tax-Sensitive Funds invest
primarily in securities of established issuers based in the U.S., the
Tax-Sensitive Funds may also invest in securities of issuers in emerging
markets, including issuers in Asia (including Russia), Eastern Europe, Latin and
South America, the Mediterranean and Africa. The Tax-Sensitive Funds may 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. The Tax-Sensitive Funds may also invest in currencies of such
countries and may engage in strategic transactions in the markets of such
countries. Investing in securities of issuers in emerging markets involves
exposure to significantly higher risk than investing in foreign countries with
developed markets and may be considered speculative. These heightened risks
include:
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 13 January 28, 1998
<PAGE>
(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 and frequent artificial limits on daily price
movements, resulting in lack of liquidity and in price uncertainty; (iii)
certain national policies which may restrict a 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 which may adversely effect the
Fund's ability to retain ownership of its securities during periods of economic,
social or political turmoil; and (v) high rates of 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..
The economies of emerging market countries may be predominantly based on only
a small number of industries or dependent on revenues from the sale of
particular commodities or on international aid or development assistance. As a
result, these economies may be significantly more vulnerable to changes in local
or global trade conditions, and may suffer from volatile or extreme fluctuations
in currency exchange rates, inflation and deflation rates as well as debt
burdens. Many emerging market countries have experienced and will continue to
experience periods of rapid inflation, resulting in significant market
uncertainty and sharp drops in the U.S. dollar value of the country's assets.
The currencies of emerging market countries may also be devalued as a result of
governmental action in addition to market factors. Recently, the economies of
certain emerging market countries have experienced deflation which has
diminished the demand for goods and services resulting in excess capacity in
factories that were built upon the forecast of continuing strong demand for such
goods and services. All of these risks may adversely affect the Tax-Sensitive
Funds' investments in emerging market countries. See "Investing in Foreign
Securities" and "Currency Risks" above and the Statement of Additional
Information for a further description of the risks associated with investing in
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.
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 depositary receipts and depositary 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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 14 January 28, 1998
<PAGE>
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 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 inflation-indexed 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 include demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 15 January 28, 1998
<PAGE>
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 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 October 1997 was approximately 13.6%.
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
may
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 16 January 28, 1998
<PAGE>
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 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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 17 January 28, 1998
<PAGE>
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 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, as a temporary measure pending the
investment of rapid inflows of new money by investors into a Fund or for
defensive purposes to preserve capital or to meet redemption requests, hold part
or all of its assets in cash and investment grade money market instruments
(i.e., securities with maturities of less than one year) and short-term debt
securities (i.e., securities with maturities of one to three years). Each Fund
may also invest uncommitted cash and cash needed to maintain liquidity for
redemptions in investment grade money market instruments and short-term debt
securities. Investments in such securities will be limited to 20% of a Fund's
total assets unless the Fund is in a temporary defensive position.
The money market instruments and short-term debt securities in which the Funds
may invest consist of obligations issued or guaranteed by the U.S. Government,
its agencies, instrumentalities or authorities; instruments (including
negotiable certificates of deposit, non-negotiable fixed time deposits and
bankers' acceptances) of U.S. banks and foreign banks (the Tax-Sensitive Funds
only); repurchase agreements; and prime commercial paper of U.S. companies and
foreign companies (the Tax-Sensitive Funds only).
The Funds' investments in money market securities will be rated, at the time
of investment, P-1 by Moody's or A-1 by Standard & Poor's. At least 95% of each
Tax-Sensitive Fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the Adviser. Up to 5% of each Tax-Sensitive Fund's total assets
invested in short-term debt securities may be invested in securities which are
rated Baa by Moody's or BBB by Standard & Poor's or, if not rated, determined to
be of comparable credit quality by the Adviser.
The Tax Exempt 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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 18 January 28, 1998
<PAGE>
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 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 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 because 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).
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%
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 19 January 28, 1998
<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 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 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.
Standish, Ayer & Wood Tax-Sensitive Equity Composite Performance
- --------------------------------------------------------------------------------
Average Annual Total Return For
The Periods Ended September 30, 1997
3 Years 5 Years 7 Years
The Composite
- --------------------------------------------------------------------------------
Equal Weighted Gross 33.93% 24.04% 23.29%
Equal Weighted Net 33.43% 23.54% 22.79%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997
The Composite
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equal weighted gross total return 30.40% 13.09% 24.22% -1.62% 28.93% 26.83% 46.93%
Equal weighted net total return 29.90% 12.59% 23.72% -2.12% 28.43% 26.33% 46.43%
Size weighted gross total return 30.65% 12.79% 23.34% -1.28% 28.92% 26.48% 48.52%
Size weighted net total return 30.15% 12.29% 22.84% -1.78% 28.42% 25.98% 48.02%
</TABLE>
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 20 January 28, 1998
<PAGE>
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 Cumulative Total Return
For the Periods Ended For the Period January 2, 1996
September 30, 1997(1) to September 30, 19971
1 Years Since Inception
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Fund 38.50% 32.37% 63.36%
</TABLE>
- ----------
(1) The Equity Fund commenced operations on January 2, 1996.
Dividends and Distributions
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 for 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 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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 21 January 28, 1998
<PAGE>
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
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.
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
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 22 January 28, 1998
<PAGE>
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.
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 advisory agreements. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 23 January 28, 1998
<PAGE>
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 $39 billion in assets.
The Equity Fund's co-portfolio managers are Laurence A. Manchester, Richard
R. Davis and Susan B. Coan. During the past five years, Mr. Manchester has
served as a Vice President and Director of the Adviser and Ms. Coan has served
as a Vice President of the adviser. Mr. Davis has, since September 1994, served
as a Vice President of the Adviser. Prior to that, Mr. Davis served as President
and a Director of The Danforth Associates, an investment management firm.
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, since January 1996, Managing Director of the Adviser 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 Fiscal
Contractual Advisory 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 Exempt
Bond Fund 0.40% 0.30%*
- ----------
*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."
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.
Year 2000 Issue. The Funds' operations depend on the seamless functioning of
computer systems in the financial service industry, including those of the
Adviser, the Custodian and the Transfer Agent. Many computer software systems in
use today cannot properly process date-related information after December 31,
1999 because of the method by which dates are encoded and calculated. This
failure, commonly referred to as the "Year 2000 Issue," could adversely affect
the handling of securities trades, pricing and account servicing for the Funds.
The Adviser has made compliance with the Year 2000 Issue a high priority and is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to its computer systems. The Adviser has also been informed
that comparable steps are being taken by the Funds' other major service
providers. The Adviser does not currently anticipate that the Year 2000 Issue
will have a material impact on its ability to continue to fulfill its duties as
investment adviser.
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 "regu-
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 24 January 28, 1998
<PAGE>
lated 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 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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 25 January 28, 1998
<PAGE>
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
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.
As of January 1, 1998, BDG &Co., 150 Federal Street, Boston, MA 02110, owned
more than 25% of the then outstanding shares of the Massachusetts Tax Exempt
Fund, and, as a result, is deemed to control the Massachusetts Tax Exempt Fund.
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.
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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 26 January 28, 1998
<PAGE>
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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 27 January 28, 1998
<PAGE>
Standish Group of Tax-Sensitive Equity and Tax Exempt Bond Funds
- --------------------------------------------------------------------------------
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants Legal Counsel
Coopers & Lybrand L.L.P. Hale and Dorr LLP
One Post Office Square 60 State Street
Boston, Massachusetts 02109 Boston, Massachusetts 02109
Principal Underwriter Custodian
Standish Fund Distributors, L.P. Investors Bank & Trust Company
One Financial Center 200 Clarendon Street
Boston, Massachusetts 02111 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.
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 28 January 28, 1998
<PAGE>
(This page intentionally left blank.)
Standish Group of Tax-Sensitive
Equity and Tax Exempt Bond Funds 29 January 28, 1998
<PAGE>
[STANDISH LOGO] STANDISH FUNDS(SM)
One Financial Center
Boston, MA 02111-2662
(800) 729-0066
<PAGE>
January 28, 1998
[STANDISH LOGO]
STANDISH GROUP OF TAX-SENSITIVE EQUITY FUNDS
P.O. Box 1407
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
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, of Standish Tax-Sensitive Equity Fund ("Equity Fund"), 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
Investment Objectives and Policies ...... 2
Investment Restrictions ................ 16
Calculation of Performance Data ........ 19
Management ............................. 21
Purchase and Redemption of Shares ...... 25
Portfolio Transactions ................. 25
Determination of Net Asset Value ....... 26
Federal and Massachusetts Income Taxes.. 26
The Funds and Their Shares ............. 30
Additional Information ................. 31
Experts and Financial Statements ....... 31
<PAGE>
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 only)
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 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 also 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.
2
<PAGE>
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.
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 considered to be a public offering. 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.
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
3
<PAGE>
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 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.
4
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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, $543.3 million, that
can remain in the Stabilization Fund by law. 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 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
5
<PAGE>
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.
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.
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
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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 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,
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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).
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 ("OTC") 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 ("NYSE"), 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 "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 OTC 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
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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.
Investing in Securities of Emerging Market Countries
The Tax-Sensitive Funds may also invest, to a limited degree, in securities
of issuers of emerging market countries. Investing in the securities of emerging
market countries involves considerations and potential risks not typically
associated with investing in the securities of U.S. issuers whose securities are
principally traded in the United States. These risks may be related to (i)
restrictions on foreign investment and repatriation of capital; (ii) differences
in size, liquidity and volatility of, and the degree and manner of regulation
of, the securities markets of the Asian countries compared to the U.S.
securities markets; (iii) economic, political and social factors; and (iv)
foreign exchange matters such as fluctuations in exchange rates between the U.S.
dollar and the currencies in which a Fund's portfolio securities are quoted or
denominated, exchange control regulations and costs associated with currency
exchange. A Fund's purchase and sale of portfolio securities in certain emerging
market countries may be constrained by limitations as to daily changes in the
prices of listed securities, periodic trading or settlement volume and/or
limitations on aggregate holdings of foreign investors. In certain cases, such
limitations may be computed based upon the aggregate trading by or holdings of
the Funds, the Adviser and its affiliates and their respective clients and other
service providers. The Funds may not be able to sell securities in circumstances
where price, trading or settlement volume limitations have been reached. These
limitations may have a negative impact on each Fund's performance and may
adversely affect the liquidity of each Fund's investments to the extent that it
invests in emerging market countries.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a Fund's investment
in certain emerging market countries, require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of such company available for purchase by nationals. In certain
countries, the Funds may be limited by government regulation or a company's
charter to a maximum percentage of equity ownership in any one company. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by the Funds. From time to time, the Adviser may determine
that investment and repatriation restrictions in certain emerging market
countries negate the advantages of investing in such countries and no Fund is
required to invest in any emerging market country.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The Adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted. Due to restrictions on
direct investment in equity securities in certain emerging market countries,
such as Taiwan, the Funds may invest only through investment funds in such
emerging market countries.
The repatriation of both investment income and capital from several emerging
market countries is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Funds to the extent that they invest in emerging
market countries.
Market Characteristics. All of the securities markets of emerging market
countries have substantially less volume than the NYSE. Equity securities of
most emerging market Companies are generally less liquid and subject to greater
price volatility than equity securities of U.S. companies of comparable size.
Some of the stock exchanges in the emerging market countries are in the earliest
stages of their development.
Certain of the securities markets of emerging market countries are marked by
high concentrations of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
Even the market for relatively widely traded securities in the emerging markets
may not be able to absorb, without price disruptions, a significant increase in
trading volume or trades of a size customarily undertaken by institutional
investors in volume or trades of a size customarily undertaken by institutional
investors in the United States. Additionally, market making and arbitrage
activities are generally less extensive in such markets, which may contribute to
increased volatility and reduced liquidity of such markets. Accordingly, each of
these markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. The less liquid the market, the
more difficult it may be for a Fund to accurately price its portfolio securities
or to dispose of such securities at the times determined by the Adviser to be
appropriate. The risks associated with the liquidity of a market may be
particularly acute in situations in which a Fund's operations require cash, such
as the need to meet redemption requests for its shares, to pay dividends and
other distributions and to pay its expenses. To the extent that any emerging
market country experiences rapid increases in its money supply and investment in
equity securities is made for speculative purposes, the equity securities traded
in any such country may trade at price-earnings ratios higher than those of
comparable companies trading on securities markets in the United States. Such
price-earnings ratios may not be sustainable.
Settlement procedures in emerging market countries are less developed and
reliable than those in the United States and in other developed markets, and a
Fund may experience settlement delays or other material difficulties. In
addition, significant delays are common in registering transfers of securities,
and a
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Fund may be unable to sell such securities until the registration process is
completed and may experience delays in receipt of dividends and other
entitlements.
Brokerage commissions and other transactions costs on securities exchanges in
emerging market countries are generally higher than in the United States. There
is also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies in emerging market countries than exists
in the United States. Brokers in emerging market countries may not be as well
capitalized as those in the United States, so that they are more susceptible to
financial failure in times of market, political or economic stress. In addition,
existing laws and regulations are often inconsistently applied. As legal systems
in emerging market countries develop, foreign investors may be adversely
affected by new or amended laws and regulations. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
Financial Information and Standards. Issuers in emerging market countries
generally are subject to accounting, auditing and financial standards and
requirements that differ, in some cases significantly, from those applicable to
U.S. issuers. In particular, the assets and profits appearing on the financial
statements of an emerging market company may not reflect its financial position
or results of operations in the same manner as financial statements for U.S.
companies. Substantially less information may be publicly available about
issuers in emerging market countries than is available about issuers in the
United States.
Economic, Political and Social Factors. Many emerging market countries may be
subject to a greater degree of economic, political and social instability than
is the case in the United States and Western European countries. Such
instability may result from, among other things: (i) authoritarian governments
or military involvement in political and economic decision-making, including
changes or attempted changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved economic, political and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection and
conflict. Such economic, political and social instability could significantly
disrupt financial markets of emerging market countries and adversely affect the
value of a Fund's assets so invested.
Few emerging market countries have fully democratic governments. Some
governments in the region are authoritarian in nature or are influenced by armed
forces which have been used to control civil unrest. During the course of the
last 25 years, governments of certain emerging market countries have been
installed or removed as a result of military coups, while governments in other
emerging market countries have periodically used force to suppress civil
dissent. Disparities of wealth, the pace and success of democratization, and
ethnic, religions and racial disaffection, among other factors, have also led to
social unrest, violence and/or labor unrest in some emerging market countries.
Several emerging market countries have or in the past have had hostile
relationships with neighboring nations or have experienced internal
insurrections.
The economies of most emerging market countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the emerging securities markets. In addition, the economies of some
emerging market countries are vulnerable to weakness in world prices for their
commodity exports.
There may be the possibility of expropriations, confiscatory taxation,
political, economic or social instability or diplomatic developments which would
adversely affect assets of a Fund held in emerging market or other foreign
countries. Governments in certain emerging market countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Actions by these governments could have a significant
adverse effect on market prices of securities and payment of dividends.
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 a Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
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custodian bank for the Fund until they are repurchased. The Trustees will
monitor the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Funds.
The use of repurchase agreements involves certain risks. For example, if the
seller defaults on its obligation to repurchase the instruments acquired by a
Fund at a time when their market value has declined, the Fund may incur a loss.
If the seller becomes insolvent or subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the instruments
acquired by a Fund are collateral for a loan by the Fund and therefore are
subject to sale by the trustee in bankruptcy. Finally, it is possible that a
Fund may not be able to substantiate its interest in the instruments it
acquires. While the Trustees acknowledge these risks, it is expected that they
can be controlled through careful documentation and monitoring.
Strategic and Derivative Transactions
Each Fund may, but is not required to, utilize various 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 (Tax-Sensitive Funds only) 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 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
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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 OTC 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 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 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,
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term, exercise price, premium, guarantees and security, are set by negotiation
of the parties. The Funds will generally sell (write) OTC options (other than
OTC currency options) that are subject to a buy-back provision permitting a Fund
to require the Counterparty to sell the option back to the Fund at a formula
price within seven days. OTC options purchased by the Funds and portfolio
securities "covering" the amount of the Funds' obligation pursuant to an OTC
option sold by them (the cost of the sell-back plus the in-the- money amount, if
any) are subject to the Funds' restriction on illiquid securities, unless
determined to be liquid in accordance with procedures adopted by the Board of
Trustees. For OTC options written with "primary dealers" pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price. The Funds expect generally to enter into OTC options that have
cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency (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 only) and debt (Tax Exempt Funds only) securities including U.S. Treasury
and agency securities, municipal notes and bonds (Tax Exempt Funds only) and
Eurodollar instruments that are traded on U.S. and foreign securities exchanges
and in the OTC markets, and on securities indices, currencies (Tax-Sensitive
Funds only) 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 only) and debt (Tax Exempt Funds only) securities including U.S. Treasury
and agency securities, municipal notes and bonds (Tax Exempt Funds only) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies (Tax-Sensitive Funds only) and
futures contracts. A Fund will not sell put options if, as a result, more than
50% of the Fund's total assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a Fund
may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Funds may cover
call options on a securities index by owning securities whose price changes are
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
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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 only), multiple currency transactions (including forward
currency contracts) (Tax-Sensitive Funds only) and interest rate transactions
("component" transactions), instead of a single Strategic Transaction, as part
of a single or combined strategy when, in the opinion of the Adviser it is in
the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Currency Transactions
The 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 OTC 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
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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 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 marks and
buy dollars. Proxy hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to the Funds if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Funds are engaging in proxy hedging.
If a Fund enters into a currency hedging transaction, the Fund will comply with
the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a 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 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.
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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 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.
16
<PAGE>
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.
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.
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
17
<PAGE>
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 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.
18
<PAGE>
The Tax-Sensitive 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 = Taxable Equivalent Yield
--------------------------
100% - Marginal Tax Rate
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, 1997
were as follows:
Average Annual Total Return
Tax-
Since Equivalent
Fund 1-Year Inception(1) 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%(2)
Massachusetts Tax
Exempt Fund 7.55% 6.07% 4.30% 8.09%(2)
- ----------
(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 only), quotations, each Fund may quote quarterly and annual
performance on a net (with management fees and other operating expenses
deducted) and gross basis. The Funds' net and gross performance is as follows:
Tax Exempt Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1992 2.79% 2.95%
1Q93 3.46 3.62
2Q93 2.63 2.79
3Q93 2.94 3.10
4Q93 1.35 1.51
1993 10.78 11.47
1Q94 -3.95 -3.79
2Q94 1.67 1.83
3Q94 0.98 1.15
4Q94 -1.29 -1.13
1994 -2.68 -2.02
19
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
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
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
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.
20
<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
Growth Index. The Russell 2000 Growth Index is generally considered to be
representative of small capitalization companies in the United States 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.
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 Funds' investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
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.; Chairman
One Financial Center and Director, Standish International
Boston, MA 02111 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 Standish
Boston, MA 02111 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
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Treasurer Vice President of Finance,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1996; formerly
Boston, MA 02111 Senior Vice President, Treasurer and Chief
Financial Officer 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
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 Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President, Scudder, Stevens and Clark
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 Communications
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
- ----------
* Indicates that Trustee is an interested person of the Trust for purposes of
the 1940 Act.
22
<PAGE>
Compensation of Trustees and Officers
The Funds pay no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of a Fund's shares) with the Trust or the Adviser during the Funds'
fiscal years ended September 30, 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:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Funds
Intermediate Massachusetts Accrued as and Other
Equity Small Cap Tax Exempt Tax Exempt Part of Fund's Funds in
Name of Trustee Fund Fund Fund Fund Expenses Complex*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. Barr Clayson 0 0 0 0 $0 $0
Samuel C. Fleming $774 $816 $943 $911 0 $49,375
Benjamin M. Friedman $774 $813 $931 $901 0 $49,375
John H. Hewitt $778 $826 $966 $929 0 54,375
Edward H. Ladd 0 0 0 0 0 $0
Caleb Loring, III $774 $813 $931 $901 0 $49,375
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, 1997.
Certain Shareholders
At January 2, 1998, 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 or held of record 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. 13.5%
Trust Department
150 Federal Street
Boston, MA 02110
YK Investment Partnership 7%
191 Waukegan Road
Suite 209
Northfield, IL 60093
Nedra Y. Oren Trust 5%
3526 Bayshore Villas Drive
Coconut Grove, FL 33133
Massachusetts Tax Exempt Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
BDG & Co. 29.5%*
Trust Department
150 Federal Street
Boston, MA 02110
* Because the shareholder beneficially owned more than 25% of the then
outstanding shares of the indicated Fund, the shareholder was considered to
control such Fund. As a controlling person, the shareholder may be able to
determine whether a proposal submitted to the shareholders of such Fund will
be approved or disapproved.
Bob & Co. 10.4%
c/o BankBoston
PO Box 1809
Boston, MA 02105
Equity Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Charles Schwab & Co., Inc 21%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Malcolm Rees Jr. 1994 Trust 5%
5 Bridle Path Road
Andover, MA 01810
Cebantco 5%
P.O. Box 1360
Lexington, KY 40590
Small Cap Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 16%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Northern Trust Custodian 4.5%
Article 4B6
Trust U/W H. Martin
FBO Joyce Martin, P. O. Box 92956
Chicago, IL 60675
23
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
each Fund pursuant to separate written investment advisory agreements with the
Trust. The Adviser is a Massachusetts corporation organized in 1933 and is
registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the shareholders
of the Adviser, are the Adviser's controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, 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 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.
Contractual Advisory
Fund Fee Annual Rate
- --------------------------------------------------------------------------------
Equity 0.50%
Small Cap 0.60%
Intermediate Tax Exempt 0.40%
Massachusetts Tax Exempt 0.40%
- ----------
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
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. 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.
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
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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.
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 NYSE 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
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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 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 NYSE (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
NYSE. 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 NYSE.
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 NYSE 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 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.
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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 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
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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 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 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
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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 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.
29
<PAGE>
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.
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 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.
30
<PAGE>
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.
31
<PAGE>
[STANDISH LOGO]
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 729-0066
32
<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
40
<PAGE>
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41
<PAGE>
[STANDISH LOGO]
STANDISH, AYER & WOOD, INC.
One Financial Center
Boston, Massachusetts 02111-2662
(617) 350-6100
