<PAGE> 1
ESC STRATEGIC FUNDS, INC.
SUPPLEMENT DATED DECEMBER 7, 1995
TO
PROSPECTUS DATED JULY 28, 1995
Effective December 7, 1996, the Officers of the ESC Strategic Funds are
authorized to waive the minimum initial and subsequent investment requirements
of the Funds.
This information is added to the paragraph set forth under the heading
"Minimum Purchase Requirements" on page 29 of the Funds' prospectus dated July
28, 1995.
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ESC STRATEGIC FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
EQUITABLE SECURITIES CORPORATION -- INVESTMENT ADVISER AND DISTRIBUTOR
FURMAN SELZ INCORPORATED -- ADMINISTRATOR, TRANSFER AGENT
AND FUND ACCOUNTING AGENT
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This Prospectus describes the five funds (the "Funds") comprising ESC
Strategic Funds, Inc. (the "Company"), an open-end management registered
investment company advised by Equitable Securities Corporation (the "Adviser").
Certain of the Funds follow a "Multiple Manager Strategy" whereby the Adviser
seeks to enhance performance and reduce market risk by allocating the respective
Fund's assets among multiple "specialist" Managers. See "Management Strategies."
The Funds described in this prospectus are:
ESC Strategic APPRECIATION Fund
ESC ESC Strategic GLOBAL EQUITY Fund
[LOGO] STRATEGIC ESC Strategic SMALL CAP Fund
FUNDS ESC Strategic INCOME Fund
ESC Strategic ASSET PRESERVATION Fund
Each of the Funds offers two classes of shares, except ESC Strategic Asset
Preservation Fund, which offers only one class of shares. The Funds bear certain
expenses related to the distribution of their shares.
ESC STRATEGIC INCOME FUND MAY INVEST UP TO 40% OF ITS ASSETS IN DEBT
SECURITIES OF U.S. AND FOREIGN ISSUERS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS OF UNTIMELY PAYMENT OF
PRINCIPAL AND INTEREST, AS WELL AS DEFAULT AND OTHER RISKS, THAN HIGHER RATED
SECURITIES. INVESTORS SHOULD CONSIDER THESE RISKS CAREFULLY BEFORE INVESTING IN
THIS FUND. SEE "RISKS OF INVESTING IN THE FUNDS," PAGE 13.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND FUND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN MUTUAL FUNDS, SUCH AS THE FUNDS, INVOLVE RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING IN ANY OF THE FUNDS AND SHOULD BE READ AND RETAINED
FOR INFORMATION ABOUT EACH FUND.
A Statement of Additional Information (the "SAI"), dated July 28, 1995,
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or telephoning the Company at the address and
information numbers printed above.
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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.
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The Date of this Prospectus is July 28, 1995
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights....................................................................... 2
Fund Expenses.................................................................... 6
Fee Table........................................................................ 6
Financial Highlights............................................................. 8
The Funds........................................................................ 9
Risks of Investing in the Funds.................................................. 13
Management Strategies............................................................ 19
Management of the Funds.......................................................... 21
Fund Share Valuation............................................................. 26
Pricing of Fund Shares........................................................... 27
Minimum Purchase Requirements.................................................... 29
Purchase of Fund Shares.......................................................... 29
Retirement Plan Accounts......................................................... 30
Exchange of Fund Shares.......................................................... 30
Redemption of Fund Shares........................................................ 31
Dividends, Distributions, and Federal Income Taxation............................ 33
Description of Securities and Investment Practices............................... 35
Investment Restrictions.......................................................... 41
Other Information................................................................ 41
Appendix......................................................................... 44
</TABLE>
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HIGHLIGHTS
THE FUNDS, THEIR ADVISER AND MANAGERS
This Prospectus describes the five Funds comprising ESC Strategic Funds, Inc.
(the "Company"). Each Fund has a distinct investment objective and policies.
Overall management of the Funds is provided by Equitable Securities Corporation
(the "Adviser"). The Adviser, headquartered in Nashville, Tennessee, is a New
York Stock Exchange member investment banking and securities brokerage firm.
Founded in 1930, the Adviser's predecessor developed a national clientele as an
investment banking firm dealing in both corporate and municipal securities. In
1968, the American Express Company acquired the Adviser's predecessor and in
1972 the firm was reestablished as an independent company when a group of its
employees purchased the firm. Equitable Trust Company, the Adviser's
wholly-owned subsidiary formed in 1991, provides investment management, trust,
and other fiduciary services to individuals and other clients. Equitable Asset
Management, Inc., an investment adviser, is a wholly-owned subsidiary of
Equitable Trust Company. In 1986, the Adviser formed the IMES Consulting Group
to provide consulting services to institutional and individual investors
employing outside investment management expertise. The primary services of the
IMES Consulting Group are strategic investment planning, asset allocation
analysis, investment manager evaluation and performance measurement. The IMES
Consulting Group provides primary information within Equitable Securities
Corporation in the latter's role as Adviser of the ESC Strategic Funds.
For several of the Funds, the Adviser seeks to enhance performance and reduce
market risk by allocating the respective Fund's assets among multiple
"specialist" Managers (the "Multiple Manager Strategy"). For its services as
Adviser, Equitable Securities
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Corporation receives from each Fund a fee at an annual rate based on the Fund's
average daily net assets. This fee is at an annual rate of 0.50% for ESC
Strategic Asset Preservation Fund, and 1.0% for each of the other Funds. These
fees (except those for ESC Strategic Asset Preservation Fund) are higher than
those for most other investment companies and are used by the Adviser to pay
Managers' fees, at no additional cost to the Funds. See "Management of the
Funds." The Funds and their Managers are as follows:
- - ESC STRATEGIC APPRECIATION FUND -- This Fund's objective is long-term capital
appreciation. It invests in a diversified portfolio comprised mainly of
publicly traded common stocks and securities convertible into or exchangeable
for common stock, primarily of U.S.-based companies. The Fund uses the
Multiple Manager Strategy. Its Managers currently are GlobeFlex Capital,
L.P., Brandes Investment Partners, Inc. and Equitable Asset Management, Inc.
("EAM").
- - ESC STRATEGIC GLOBAL EQUITY FUND -- This Fund's objective is long-term capital
appreciation. It invests primarily in a diversified portfolio of publicly
traded common stocks and securities convertible into or exchangeable for
common stock. In addition to the use of the Multiple Manager Strategy, the
Fund diversifies its investments across domestic and international markets.
The Fund's Managers currently are GlobeFlex Capital, L.P., Murray Johnstone
International Limited and Blairlogie Capital Management.
- - ESC STRATEGIC SMALL CAP FUND -- This Fund's objective is a high level of
capital appreciation. The Fund invests primarily in equity securities of
domestic and foreign issuers with market capitalization of generally no more
than $800 million at the time of purchase. THE FUND MAY INVEST SUBSTANTIAL
PORTIONS OF ITS PORTFOLIO IN INDIVIDUAL ISSUERS AND THEREFORE DOES NOT INTEND
TO BE DIVERSIFIED. The Fund's Manager is EAM.
- - ESC STRATEGIC INCOME FUND -- This Fund's primary objective is a high level of
current income, with a secondary objective of total return. It invests
primarily in a diversified portfolio of corporate, government and other debt
instruments of U.S. issuers, although up to 35% of its assets may be invested
in such securities of non-U.S. issuers. THIS FUND HAS NO REQUIREMENTS AS TO
MINIMUM RATING, AND UP TO 40% OF ITS ASSETS MAY BE INVESTED IN "JUNK BONDS".
The Fund uses the Multiple Manager Strategy. Its Managers currently are Llama
Asset Management Company, L.P., Cincinnati Asset Management, Inc. and Murray
Johnstone International Limited.
- - ESC STRATEGIC ASSET PRESERVATION FUND -- This Fund's objective is as high a
level of current income as is consistent with limiting the risk of potential
loss. It invests in domestic investment grade debt securities with a maximum
maturity of five years and a maximum dollar-weighted average portfolio
maturity of three years. The Fund's Manager is EAM.
SPECIAL RISKS
IN ADDITION TO THE RISKS HIGHLIGHTED ABOVE, INVESTMENTS BY THE FUNDS IN FOREIGN
EQUITY AND DEBT (INCLUDING SOVEREIGN DEBT AND SECURITIES OF ISSUERS IN EMERGING
MARKETS) INVOLVE CURRENCY AND OTHER RISKS THAT ARE DIFFERENT FROM DOMESTIC
INVESTMENTS. EACH OF THE FUNDS MAY ENGAGE IN OPTIONS AND FUTURES TRANSACTIONS
FOR HEDGING PURPOSES, PROVIDED THAT NO MORE THAN 5% OF A FUND'S ASSETS MAY BE
PLACED AT RISK BY SUCH TRANSACTIONS. THESE AND OTHER INVESTMENT PRACTICES OF THE
FUNDS, INCLUDING SHORT SALES, INVOLVE SPECIAL RISKS. FOR MORE INFORMATION, SEE
"DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES" AND "RISKS OF INVESTING IN
THE FUNDS." THERE CAN, OF COURSE, BE NO ASSURANCE THAT A FUND WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. MOREOVER, INVESTORS SHOULD BE AWARE THAT THE VALUE OF EACH
FUND'S SHARES WILL FLUCTUATE, WHICH MAY CAUSE A LOSS IN THE PRINCIPAL VALUE OF
THE INVESTMENT.
THE DISTRIBUTOR AND ADMINISTRATOR
Equitable Securities distributes the Funds' shares and may be reimbursed for
certain of its distribution-related expenses. Furman Selz Incorporated ("Furman
Selz") acts as
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3
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Administrator, transfer agent and fund accounting agent to the Funds. For its
services as Administrator, each Fund pays Furman Selz a fee at the annual rate
of 0.15% of its average daily net assets. Furman Selz receives separate fees for
its services as transfer agent and fund accounting agent. See "Management of the
Funds."
CLASSES OF SHARES
Each Fund, except ESC Strategic Asset Preservation Fund, offers investors a
choice of two classes of shares which differ principally with respect to sales
charges and the rate of expenses to which they are subject. Investors may select
the class which better suits their investment needs. Class A shares are offered
with a maximum front-end sales charge of 4.50%, which may be reduced or waived
in certain cases. See "Purchase of Fund Shares." Class A shares are also subject
to a Service and Distribution Fee calculated at an annual rate of up to 0.25% of
the average daily net asset value of Class A shares. Class D* shares are offered
with no front-end sales charge through October 31, 1995 (pursuant to a waiver by
the Distributor of the 1.50% front-end sales charge, which waiver may be
extended for additional one-year periods) and are subject to a Service and
Distribution Fee at an annual rate of up to 0.75% based on the average daily net
asset value of Class D shares. ESC Strategic Asset Preservation Fund offers only
one class of shares with no front-end sales charge and a Service and
Distribution Fee calculated at an annual rate of up to 0.25% of the average
daily value of its net assets. See "Management of the Funds -- The Distributor."
For Funds offering two classes of shares, a prospective investor, in selecting
between the classes, should consider the impact of the sales charge together
with the cumulative effect of the Service and Distribution Fees for each class
over the anticipated period of investment, as well as the effect of any sales
charge waivers to which the investor may be entitled. Investors should be aware
that other expenses attributable to each class may differ slightly due to the
allocation to each class of certain "class specific" expenses, including
distribution and marketing expenses and federal and state securities
registration fees. Finally, investors should be aware that persons selling
shares of the Funds may receive different levels of compensation for sales of
Class A and Class D shares.
- ---------------
* Class D shares were formerly designated as Class B shares.
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4
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GUIDE TO INVESTING IN THE ESC STRATEGIC FUNDS, INC.
Purchase orders for the Funds received by your broker or Service Organization in
proper order prior to 4:15 p.m., Eastern time, and transmitted to the Funds
prior to 5:00 p.m. Eastern time will become effective that day.
<TABLE>
<S> <C>
- - Minimum initial investment.................................................. $10,000
- - Minimum initial investment for IRAs and other qualified retirement plans.... $ 2,000
- - Minimum subsequent investment............................................... $ 50
</TABLE>
Shareholders may exchange shares of a particular class in one Fund for shares of
the same class in another Fund (or for shares of ESC Strategic Asset
Preservation Fund) by telephone or mail.
<TABLE>
<S> <C>
- - Minimum initial exchange.................................................... $ 2,000
(No minimum for subsequent exchanges.)
</TABLE>
Shareholders may redeem shares by telephone, mail or wire.
- - The Funds reserve the right to redeem upon not less than 30 days' notice all
shares in a Fund's account which have an aggregate value of $500 or less.
All dividends and distributions will be automatically reinvested at net asset
value in additional shares of the same class of the applicable Fund unless cash
payment is requested.
- - Dividends for ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund are paid monthly.
- - Distributions for ESC Strategic Appreciation Fund, ESC Strategic Global Equity
Fund and ESC Strategic Small Cap Fund are paid at least annually.
See "Purchase of Fund Shares" and "Redemption of Fund Shares" for more
information.
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5
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FUND EXPENSES
The following expense tables indicate costs and expenses that an investor should
anticipate incurring either directly or indirectly as a shareholder of a Fund
during its fiscal year ending March 31, 1996. The numbers reflect estimated
levels of operating expenses based on general industry experience.
FEE TABLE
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC ESC STRATEGIC
APPRECIATION FUND GLOBAL EQUITY FUND SMALL CAP FUND
------------------- ------------------- -------------------
CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)*.................. 4.50% None 4.50% None 4.50% None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price)..... None None None None None None
Deferred Sales Charge (as a
percentage of redemption
proceeds)......................... None None None None None None
Exchange Fees....................... None None None None None None
ANNUAL FUND OPERATING EXPENSE(as a
percentage of average net assets
annualized)
Management Fees***................ 1.00% 1.00% 0.70% 0.70% 1.00% 1.00%
12b-1 Fees**...................... 0.25% 0.75% 0.25% 0.75% 0.25% 0.75%
Other Expenses***................. 0.75% 0.75% 1.55% 1.55% 0.75% 0.75%
------- ------- ------- ------- ------- -------
TOTAL PORTFOLIO OPERATING
EXPENSES.......................... 2.00% 2.50% 2.50% 3.00% 2.00% 2.50%
====== ====== ====== ====== ====== ======
</TABLE>
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* An initial sales charge of 1.50% on Class D shares of each Fund is being
waived by the Distributor through October 31, 1995. This waiver may be
extended by the Distributor for additional one-year periods.
** Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of a Fund, long-term shareholders may pay more initial sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD. See "Management of the Funds."
*** Amounts shown for "Management Fees for ESC Strategic Global Equity Fund"
reflect reductions of fees payable to the Adviser. Amounts shown for "Other
Expenses" reflect voluntary reductions of fees payable for administrative
and transfer agent services by ESC Strategic Global Equity Fund. Without
these reductions, the estimated Management Fees would be 1.00% for ESC
Strategic Global Equity Fund; "Other Expenses" and "Total Portfolio
Operating Expenses," respectively, would be: ESC Strategic Global Equity
Fund -- 1.60% and 3.35% (Class D), 1.60% and 2.85% (Class A). Out of its
management fees, the Adviser pays the fees of the Managers. See "Management
of the Funds."
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a shareholder in the Funds will bear.
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6
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EXAMPLE:*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
APPRECIATION GLOBAL EQUITY ESC STRATEGIC
FUND FUND SMALL CAP FUND
------------------- ------------------- -----------------
CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1 year................................. $ 64 $ 25 $ 69 $ 30 $ 64 $ 25
3 years................................ $ 105 $ 78 $ 119 $ 93 $ 105 $ 78
5 years................................ $ 148 $ 133 $ 172 $ 158 $ 148 $ 133
10 years............................... $ 267 $ 284 $ 316 $ 332 $ 267 $ 284
</TABLE>
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* THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES
WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or future
annual return. ACTUAL RETURN MAY BE GREATER OR LESS THAN THE ASSUMED AMOUNT.
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
INCOME FUND ASSET
--------------------- PRESERVATION
CLASS A CLASS D FUND
------- ------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)*.................... 4.50% None None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)........................... None None None
Deferred Sales Charge (as a percentage of
redemption proceeds).................................... None None None
Exchange Fees............................................. None None None
ANNUAL FUND OPERATING EXPENSE (as a percentage of average
net assets annualized)
Management Fees***...................................... 1.00% 1.00% 0.00%
12b-1 Fees**............................................ 0.25% 0.75% 0.25%
Other Expenses***....................................... 0.45% 0.45% 0.75%
------- ------- -------
TOTAL PORTFOLIO OPERATING EXPENSES........................ 1.70% 2.20% 1.00%
===== ===== ===========
</TABLE>
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* An initial sales charge of 1.50% on Class D shares of each Fund is being
waived by the Distributor through October 31, 1995. This waiver may be
extended by the Distributor for additional one-year periods.
** Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of a Fund, long-term shareholders may pay more initial sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD. See "Management of the Funds."
*** Amounts shown for "Management Fees" reflect waivers of a portion of the fees
payable to the Adviser for the ESC Strategic Asset Preservation Fund.
Amounts shown for "Other Expenses" reflect a waiver of the full amount of
fees payable for administrative and transfer agent services by ESC Strategic
Asset Preservation Fund. Without these waivers, the Funds' estimated
Management Fees would be 0.50% for ESC Strategic Asset Preservation Fund;
"Other Expenses" and "Total Portfolio Operating Expenses," respectively,
would be: 0.90% and 1.65%. Out of its Management Fees, the Adviser pays the
fees of the Managers.
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a shareholder in the Funds will bear.
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EXAMPLE:*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC ASSET
INCOME FUND PRESERVATION FUND
------------------ -------------------
CLASS A CLASS D
------- --------
<S> <C> <C> <C>
1 year......................................................... $ 62 $ 22 $ 10
3 years........................................................ $ 96 $ 69 $ 32
5 years........................................................ $ 133 $118 $ 55
10 years....................................................... $ 237 $253 $ 122
</TABLE>
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* THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES
WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or future
annual return. ACTUAL RETURN MAY BE GREATER OR LESS THAN THE ASSUMED AMOUNT.
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FINANCIAL HIGHLIGHTS
The financial data shown below, which is audited, is to assist investors in
evaluating the performance of the Funds since their commencement of operations
through March 31, 1995. This data is based on information contained in audited
financial statements for the same periods which are contained in the Statement
of Additional Information.
<TABLE>
<CAPTION>
ASSET
PRESERVATION
APRIL 25, INCOME GLOBAL EQUITY SMALL CAP APPRECIATION
1994 MAY 4, 1994 MAY 12, 1994 JUNE 8, 1994 JULY 6, 1994
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF OF OF OF OF
OPERATIONS) OPERATIONS) OPERATIONS) OPERATIONS) OPERATIONS)
THROUGH THROUGH THROUGH THROUGH THROUGH
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1995 1995 1995 1995 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CLASS A***
- -------
Net Asset Value, Beginning
of Period:................. $10.00 $10.00 $ 10.00 $ 10.00 $ 10.00
------------- ------------- ------------- ------------- -------------
Income from Investment
Operations:
Net Investment
income/(loss):........... 0.47 0.55 (0.05) (0.03) 0
Net realized/unrealized
gain/(loss) on
investments:............. (0.11) (0.05) 0.03 1.52 0.75
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations: ............. 0.36 0.50 (0.08) 1.49 0.73
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from capital
gains: .................. 0 (0.01) 0 (0.24) (0.06)
Dividends from net
investment income: ...... (0.47) (0.55) (0.02)** 0 0
------------- ------------- ------------- ------------- -------------
Total Distributions: ........ (0.47) (0.56) (0.02) (0.24) (0.06)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period: ................... $9.89 $9.94 $9.90 $11.25 $10.67
=============== =============== =============== =============== ===============
Total Return (not reflecting
sales load): .............. 3.75% 5.30% (0.84)% 15.03% 7.32%
Net Assets End of Period
(in thousands): ........... $11,924 $32,373 $9,213 $8,785 $15,126
Ratios to Average Net
Assets of:
Net investment income: .... 5.15%* 6.29%* (0.65)%* (0.43)%* (0.04)%*
Expenses net of waivers/
reimbursements: ......... 1.00%* 1.85%* 2.50%* 2.00%* 2.00%*
Expenses before waivers/
reimbursements: ......... 2.12%* 1.86%* 3.22%* 3.28%* 2.88%*
Portfolio Turnover Rate.... 30% 92% 76% 151% 58%
</TABLE>
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* Annualized.
** Represents distribution in excess of net investment income.
*** Data shown are for the sole class of shares of Asset Preservation Fund and
for Class A shares of each the other Funds.
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<TABLE>
<CAPTION>
INCOME GLOBAL EQUITY SMALL CAP APPRECIATION
MAY 4, 1994 MAY 12, 1994 JUNE 8, 1994 JULY 6, 1994
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) OF OPERATIONS) OF OPERATIONS) OF OPERATIONS)
THROUGH THROUGH THROUGH THROUGH
MARCH 31, 1995 MARCH 31, 1995 MARCH 31, 1995 MARCH 31, 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS D
- --------
Net Asset Value, Beginning
of Period:.......................... $10.00 $10.00 $ 10.00 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net Investment income/(loss):....... 0.50 (0.07) (0.05) (0.03)
Net realized/unrealized gain/(loss)
on investments:................... (0.05) (0.10) 1.51 0.72
------- ------- ------- -------
Total from Investment Operations:... 0.45 (0.17) 1.46 0.69
------- ------- ------- -------
Less Distributions:
Dividends from capital gains:....... (0.01) 0 (0.24) (0.06)
Dividends from net investment
income:........................... (0.50) (0.01)** 0 0
------- ------- ------- -------
Total Distributions:.................. (0.51) (0.01) (0.24) (0.06)
------- ------- ------- -------
Net Asset Value, End of Period:....... $9.94 $9.82 $11.22 $10.63
=============== =============== =============== ===============
Total Return:......................... 4.74% (1.72)% 14.72% 6.92%
Net Assets End of Period (in
thousands):......................... $ 1,241 $ 3,322 $ 3,367 $ 1,693
Ratios to Average Net Assets of:
Net investment income:.............. 5.73%* (1.51)%* (0.93)%* (0.56)%*
Expenses net of
waivers/reimbursements:........... 2.29%* 2.98%* 2.50%* 2.50%*
Expenses before
waivers/reimbursements:........... 2.31%* 3.69%* 3.68%* 3.40%*
Portfolio Turnover Rate:............ 92% 76% 151% 58%
</TABLE>
- ------------
* Annualized.
** Represents distribution in excess of net investment income.
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THE FUNDS
Each Fund is a separate investment fund or portfolio, commonly known as a mutual
fund. The Funds are portfolios of the Company, which was organized under the
laws of the State of Maryland on November 24, 1993 as an open-end management
investment company. The Company's Board of Directors oversees the overall
management of the Funds and elects the Funds' officers. The Adviser continuously
monitors the performance of each Fund and its Managers and determines proper
allocations of assets in each Fund's portfolio and among Managers for Funds
using the Multiple Manager Strategy. See "Management Strategies." Investments
and investment management decisions are made by the respective Manager(s) for
each Fund based on the investment objective and policies of that Fund. For
information regarding the Managers, see "Management of the Funds." There can be
no assurance that a Fund will achieve its investment objective.
ESC STRATEGIC APPRECIATION FUND. Investors seeking long-term growth of capital
and for whom current income is not an objective should consider investing in ESC
Strategic Appreciation Fund.
The investment objective of ESC Strategic Appreciation Fund is long-term capital
appreciation. The Fund invests in publicly traded common stocks and securities
convertible into or exchangeable for common stock, primarily of U.S.-based
companies. The Fund's investment policies reflect the Adviser's analysis
indicating that (a) an equity orientation is attractive because, as measured by
broad market indices, equities have historically out-performed fixed income
securities and inflation over longer periods but with greater short-term risk of
volatility, and (b) the short-term market risk of price volatility associated
with equity investments may be reduced by using the Multiple Manager Strategy.
See "Management Strategies." Al-
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though the Fund's portfolio consists primarily of equity securities, the Fund
may invest in debt instruments to the extent consistent with its investment
objective and for temporary defensive purposes. These debt obligations may
include U.S. Government securities, certificates of deposit, bankers'
acceptances, commercial paper, repurchase agreements and debt obligations of
corporations (corporate bonds, debentures, notes and other similar corporate
debt instruments) which are rated investment grade or better by Standard &
Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"), or
deemed of comparable quality by the Managers. The Fund's Managers are GlobeFlex
Capital, L.P., Brandes Investment Partners, Inc. and EAM.
ESC STRATEGIC GLOBAL EQUITY FUND. Investors seeking long-term growth of capital
and who wish to diversify their investments internationally should consider
investing in ESC Strategic Global Equity Fund.
The investment objective of ESC Strategic Global Equity Fund is long-term
capital appreciation. The Fund invests in publicly traded common stocks and
securities convertible into or exchangeable for common stock. Like ESC Strategic
Appreciation Fund, the Fund seeks to increase prospects for appreciation and to
reduce market risk by using an equity orientation and by employing the Multiple
Manager Strategy. The Fund also uses the Emerging Market Strategy (see
"Management Strategies" and "Risks of Investing in the Funds"). The Fund
diversifies its investments across markets (domestic and international) that
have exhibited divergent return characteristics. Particular emphasis is placed
on investing in (a) smaller companies believed by the Fund's Managers to have
potential for above-average growth rates when investing in "mature" securities
markets and (b) equity securities of companies in countries having "emerging"
securities markets. The weighting of U.S. equity securities relative to
securities of other equity asset categories in the Fund's portfolio will be
determined through use of the Adviser's Domestic/International Equity Allocation
Model. See "Management Strategies." Based on this Model, the Fund's portfolio is
initially anticipated to have about 33% of its investments in U.S. securities.
Its non-U.S. investments may include up to 35% in emerging market securities.
Under normal market conditions, a fundamental policy of the Fund is to have at
least 65% of its assets invested in issuers of at least three different
countries, as determined by the location of their headquarters or principal
business operations. Under appropriate market conditions, the Fund may invest in
debt instruments and other asset classes that appear to offer opportunities for
capital appreciation and that are rated investment grade or better by S&P or
Moody's or, if unrated, are deemed of comparable quality by the Fund's Manager.
In such event, the Fund may retain one or more Managers specializing in such
other asset classes. The Fund may also invest in debt securities for defensive
and cash management purposes. Permitted debt investments are comparable to those
for ESC Strategic Appreciation Fund. The Fund's Managers currently are GlobeFlex
Capital, L.P., Murray Johnstone International Limited and Blairlogie Capital
Management Limited.
ESC STRATEGIC SMALL CAP FUND. Investors seeking long-term capital appreciation
and who believe that smaller companies may offer special opportunities for
growth over the long term should consider investing in ESC Strategic Small Cap
Fund.
The investment objective of ESC Strategic Small Cap Fund is a high level of
capital appreciation. Under normal circumstances, at least 65% of the value of
the Fund's total assets will be invested in equity securities of issuers with
market capitalization of $1 billion or less, and as a matter of operating
policy, the Fund will invest primarily in companies with market capitalization
of $800 million or less at the time of investment. The Fund's portfolio will
include equity securities of companies believed by the Manager to show superior
prospects for growth due, for example, to promising new products, new
distribution strategies, new manufacturing technologies or new management teams
or management philosophy. In the Manager's view, such companies tend to be
responsible for technological breakthroughs and/or unique solutions to market
needs. By focusing on internal rather than
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external factors, the Fund attempts to minimize the risk associated with macro-
economic forces such as changes in commodity prices, currency exchange rates and
interest rates.
In selecting portfolio companies, the Manager considers the growth rate in
earnings, financial performance, management strengths and weaknesses, and
current market valuation relative to earnings growth as well as historic and
comparable company valuations. The Manager also analyzes the level and nature of
the company's debt, cash flow, working capital and the quality of the company's
assets. Typically, companies included in the Fund's portfolio will show earnings
growth exceeding 20% compared to the previous year's comparable period.
Companies with excessive levels of debt will generally be avoided.
By developing and maintaining contacts with management, customers, competitors
and suppliers of current and potential portfolio companies, the Manager attempts
to invest in those companies that are not well followed generally by securities
analysts and the financial press. Because such securities tend not to be
efficiently priced, the Manager believes they offer potentially superior
investment opportunities. The Manager favors portfolio companies whose price
when purchased is between five and fifteen times projected earnings for the
coming year.
Although the Fund's portfolio securities are generally acquired for the long
term, they may be sold under any of the following circumstances: (a) the
anticipated price appreciation has been achieved or is no longer probable; (b)
the Manager's analysis indicates that the company's fundamentals may be
deteriorating; (c) general market expectations regarding the company's future
performance exceed those of the Manager; or (d) alternative investments, in the
Manager's view, offer superior potential for appreciation.
The Fund's portfolio will consist primarily of common stocks, but may also
include convertible preferred, participating preferred and preferred stocks. Its
equity investments will be traded on domestic or foreign securities exchanges or
in over-the-counter markets. For temporary defensive and liquidity purposes,
however, it may invest in U.S. Government securities, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements and debt
obligations of corporations (corporate bonds, debentures, notes and other
similar corporate debt instruments) rated high grade or better or, if unrated,
determined to be of comparable quality by the Fund's Manager.
Investing in companies that are undergoing internal change may involve special
risks due to the unknown effects of change. Additionally, the Fund will not be a
"diversified" investment company and may therefore invest substantial portions
of its assets in securities of individual issuers. Thus, the Fund will not have
the same diversification of investment risk as a diversified fund. (A
"diversified" investment company must, with respect to at least 75% of its
assets, invest no more than 5% of its total assets in the securities of a single
issuer, and own no more than 10% of the outstanding voting securities of a
single issuer, except for cash, cash items, U.S. Government securities, and
securities of other investment companies.) The Fund intends, however, to meet
the diversification requirements under the Internal Revenue Code of 1986 to
qualify for tax treatment as a regulated investment company. The Fund's Manager
is EAM.
ESC STRATEGIC INCOME FUND. Investors seeking a high level of current income
together with total return should consider investing in ESC Strategic Income
Fund. The longer-term securities in which the Fund normally invests generally
have higher yields, but higher risks and greater price fluctuation, than
shorter-term securities. See "Risks of Investing in the Funds -- Interest Rate
Risk".
The primary investment objective of ESC Strategic Income Fund is a high level of
current income, with a secondary objective of total return. The Fund invests
primarily in corporate, government and other debt instruments of U.S. and
non-U.S. issuers and, under normal circumstances, will have at least 65% of the
value of its total assets invested in income producing securities. In selecting
debt securities for ESC Strategic Income Fund, the Managers seek those
instruments that appear best calculated to
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achieve the Fund's investment objective. To provide the Managers with maximum
flexibility and to accommodate their differing management styles, the Fund has
not adopted quality restrictions with respect to obligations in which its assets
may be invested. THUS, THE FUND'S INVESTMENTS GENERALLY WILL INCLUDE SECURITIES
THAT ARE UNRATED, AND UP TO 40% OF THE FUND'S ASSETS MAY BE INVESTED IN
SECURITIES THAT ARE RATED BELOW INVESTMENT GRADE AND UNRATED SECURITIES DEEMED
BY A MANAGER TO BE OF COMPARABLE QUALITY (COMMONLY KNOWN AS "JUNK BONDS"), WHICH
ENTAIL SPECIAL RISKS. SEE "RISKS OF LOWER RATED SECURITIES."
The Fund follows the Multiple Manager Strategy and the Emerging Market Strategy
(see "Management Strategies" and "Risks of Investing in the Funds"). The Fund
may invest in securities issued by the U.S. Government and its agencies and
instrumentalities. It may also invest in securities issued by foreign
governments or their agencies or instrumentalities ("sovereign debt"), by
international agencies and by U.S. and foreign corporate issuers, including
notes, bonds, convertible and preferred securities, mortgage-backed securities,
commercial paper, bankers' acceptances, certificates of deposit, Yankee bonds
and Eurobonds. INVESTMENTS IN FOREIGN SECURITIES (INCLUDING SOVEREIGN DEBT) WILL
BE LIMITED TO 35% OF ITS ASSETS. FOR MORE INFORMATION ON SPECIAL RISKS OF
INVESTING IN FOREIGN SECURITIES AND SOVEREIGN DEBT, SEE "RISKS OF INVESTING IN
THE FUNDS."
The Fund's Managers currently are Llama Asset Management Company, L.P.,
Cincinnati Asset Management, Inc. and Murray Johnstone International Limited.
ESC STRATEGIC ASSET PRESERVATION FUND. Investors seeking higher returns than are
generally available from money market instruments and certificates of deposit,
with low risk of significant share price volatility, should consider investing
in ESC Strategic Asset Preservation Fund. The Fund is not insured by the Federal
Deposit Insurance Corporation.
The investment objective of ESC Strategic Asset Preservation Fund is as high a
level of current income as is consistent with limiting the risk of potential
loss. The Fund invests primarily in domestic investment grade debt obligations
with a maximum maturity of five years, with a maximum dollar-weighted average
portfolio maturity of three years. Securities held by the Fund will include U.S.
Government securities, corporate debt securities, mortgage- and other
asset-backed securities, certificates of deposit, bankers' acceptances and other
debt instruments that meet the Fund's quality criteria. The Fund's yield will
tend to vary with changes in short-term interest rates. See "Risks of Investing
in the Funds."
The Manager selects investments for the Fund that appear best suited to
achieving the Fund's investment objective within the credit and risk tolerances
established for the Fund. In accordance with these policies, the Fund may
purchase corporate debt securities rated Baa or better by Moody's or BBB or
better by S&P (securities with these ratings have speculative characteristics),
mortgage-and asset-backed securities rated A or better by Moody's or S&P,
commercial paper rated Prime-2 or better by Moody's or A-2 or better by S&P and
other debt instruments that are either given equivalent ratings by at least two
other nationally-recognized rating agencies ("NRSROs") or deemed by the Manager
to be of comparable quality. Securities downgraded below these ratings will
normally be sold unless the Manager believes the sale would be disadvantageous
to the Fund. In no event will over 15% of the Fund's total assets consist of
such downgraded securities. Assumptions generally accepted by the financial
industry concerning the probability of early payment may be used in the
calculation of maturities for debt securities that contain put or call
provisions or that are subject to pre-refunding, sometimes resulting in a
calculated maturity different from the stated maturity of the security. The
Fund's Manager is EAM.
OTHER INVESTMENT POLICIES OF THE FUNDS
In addition to the investment policies and practices described above, the Funds
may engage in transactions in options and futures contracts for hedging
purposes, provided that no more than 5% of a Fund's assets may be
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placed at risk by such transactions. (See "Risks of Investing in the Funds").
For additional information on these and other investments and investment
restrictions, see "Description of Securities and Investment Practices,"
"Investment Restrictions," and the SAI.
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RISKS OF INVESTING IN THE FUNDS
Shareholders of a Fund should expect the value of their shares to fluctuate with
changes in the value of the securities owned by that Fund. Additionally, an
investment in ESC Strategic Small Cap Fund may entail special risks because (a)
the Fund is not required to be diversified and (b) investments in small
companies may involve greater risks than investments in large companies due to
such factors as limited product lines, markets and financial or managerial
resources, and less frequently traded securities that may be subject to more
abrupt price movements than securities of larger companies.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products. In order to
attempt to minimize that risk, the Adviser and Managers monitor developments in
the economy, the securities markets, and with each particular issuer. Also, as
noted earlier, each diversified Fund is managed within certain limitations that
restrict the amount of that respective Fund's investment in any single issuer.
Foreign Securities (All Funds except ESC Strategic Asset Preservation
Fund). Investing in the securities of issuers in any foreign country, including
ADRs and EDRs, involves special risks and considerations not typically
associated with investing in U.S. companies. These include differences in
accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility and less
liquidity. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial arrangements
and transaction costs of foreign currency conversions. Changes in foreign
exchange rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. A Fund's objectives may be affected
either unfavorably or favorably by fluctuations in the relative rates of
exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments. A decline in
the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of a Fund's holdings of securities denominated
in such currency and, therefore, will cause an overall decline in the Fund's net
asset value and any net investment income and capital gains to be distributed in
U.S. dollars to shareholders of the Fund. The rate of exchange between the U.S.
dollar and other currencies is determined by several factors including the
supply and demand for particular currencies, central bank efforts to support
particular currencies, the movement of interest rates, the pace of business
activity in certain other countries and the United States, and other economic
and financial conditions affecting the world economy.
Although the Funds value their assets daily in terms of U.S. dollars, the Funds
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis, and a Fund may from time to time have foreign currency
holdings pending investment. When a Fund converts its foreign currency holdings,
it will incur costs. Although
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foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to sell that currency to the dealer.
Through a Fund's flexible policies, Managers endeavor to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places a Fund's investments. See the SAI
for further information about foreign securities.
Special Considerations Concerning Emerging Markets: Investment in emerging
market countries presents risk in greater degree than, and in addition to, those
presented by investment in foreign issuers in general. A number of emerging
market countries restrict, to varying degrees, foreign investment in stocks.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some emerging
market countries. A number of the currencies of developing countries have
experienced significant declines against the U.S. dollar in recent years, and
devaluation may occur subsequent to investments in these currencies by the Fund.
Inflation and rapid fluctuations in inflation rates have had and may continue to
have negative effects on the economies and securities markets of certain
emerging market countries. Many of the emerging securities markets are
relatively small, have low trading volumes, suffer periods of relative
illiquidity, and are characterized by significant price volatility. There is a
risk in emerging market countries that a future economic or political crisis
could lead to price controls, forced mergers of companies, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies, any of which may have a detrimental effect on the Funds'
investments.
Interest Rate Risk. Changes in interest rates affect the value of securities in
a variety of ways, not all of which are predictable. The most direct effect of
interest rate changes, however, is on fixed income securities. Generally, the
current market value of fixed income securities falls as interest rates rise and
rises as interest rates fall. The effect of interest rate changes on the market
value of a security is typically greater the longer the remaining term of the
security. Changes in interest rates on short and/or longer term securities also
affect the yield on fixed income securities of particular maturities which can
be purchased by a Fund. Each of the Funds may invest in fixed income securities,
and ESC Strategic Income Fund and ESC Strategic Asset Preservation Fund will
generally be substantially invested in such securities. ESC Strategic Income
Fund, because of the longer-term securities in which it generally invests, will
typically be more vulnerable to the effects of interest rate risk on the market
value of its portfolio securities than ESC Strategic Asset Preservation Fund,
which invests in shorter term instruments. The yield to maturity on particular
securities will vary depending on prevailing interest rates for such securities
at the time of the investment. Because of its shorter term investments, the
yield from ESC Strategic Asset Preservation Fund will tend to be more quickly
affected by interest rate changes than will that of ESC Strategic Income Fund.
Risks of Lower Rated and Non-Investment Grade Securities and Sovereign Debt
Obligations. ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund may invest in securities rated Baa by Moody's and/or BBB by S&P if, in the
opinion of the Manager(s), the yield is commensurate with the risk involved.
These securities (and securities deemed of comparable quality by a Manager) have
speculative characteristics. A description of the characteristics of ratings of
securities in which a Fund may invest is attached as an Appendix.
ESC Strategic Income Fund may invest in securities rated below Baa by Moody's or
BBB by S&P. Securities rated below investment grade and comparable unrated
securities (commonly known as "junk bonds") offer yields that fluctuate over
time, but generally are superior to the yields offered by higher rated
securities. However, securities rated below investment grade also involve
greater risks than higher rated securities.
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Under rating agency guidelines, medium-and lower-rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Certain of the debt securities in which ESC Strategic Income Fund
may invest may have, or be considered comparable to securities having, the
lowest ratings for non-subordinated debt instruments assigned by Moody's, S&P or
other NRSROs (i.e., rated C by Moody's or CCC or lower by S&P). These securities
are considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default, to
be unlikely to have the capacity to pay interest and repay principal when due in
the event of adverse business, financial or economic conditions, and/or to be in
default or not current in the payment of interest or principal. Such securities
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
Accordingly, it is possible that these types of factors could, in certain
instances, reduce the value of securities held by a Fund with a commensurate
effect on the value of its respective shares. Therefore, an investment in a Fund
that invests in securities of this type should not be considered as a complete
investment program for all investors.
The secondary markets for high yield corporate and sovereign debt securities are
not as liquid as the secondary markets for higher rated securities. The
secondary markets for high yield debt securities are concentrated in relatively
few market makers and participants in the market are mostly institutional
investors, including insurance companies, banks, other financial institutions
and mutual funds. In addition, the trading volume for high yield debt securities
is generally lower than that for higher-rated securities and the secondary
markets could contract under adverse market or economic conditions independent
of any specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on a Fund's ability to dispose of particular
portfolio investments and may limit its ability to obtain accurate market
quotations for purposes of valuing securities and calculating net asset value.
If a Fund is not able to obtain precise or accurate market quotations for a
particular security, it will become more difficult for the Company's Board of
Directors to value its portfolio securities and the Company's Directors may have
to use a greater degree of judgment in making such valuations. Less liquid
secondary markets may also affect a Fund's ability to sell securities at their
fair value. In addition, a Fund may invest up to 15% of its net assets, measured
at the time of investment, in illiquid securities, which may be more difficult
to value and to sell at fair value. If the secondary markets for high yield debt
securities are affected by adverse economic conditions, the proportion of the
Fund's assets invested in illiquid securities may increase.
In the case of corporate debt securities, while the market values of securities
rated below investment grade and comparable unrated securities tend to react
less to fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. Price volatility in these securities
will be reflected in a Fund's share value. In addition, such securities
generally present a higher degree of credit risk. Issuers of these securities
are often highly leveraged and may not have more traditional methods of
financing available to them, so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The recent economic recession has resulted in
default levels in excess of historic averages.
Investing in sovereign debt securities will expose a Fund to the direct or
indirect consequences of political, social or economic changes in the developing
and emerging countries that issue the securities. The ability and willingness of
sovereign obligors in
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developing and emerging countries or the governmental authorities that control
repayment of their external debt to pay principal and interest on such debt when
due may depend on general economic and political conditions within the relevant
country. Countries such as those in which several of the Funds may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate and trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to default on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds (see below), and obtaining new credit to finance
interest payments. Holders of certain foreign sovereign debt securities may be
requested to participate in
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the restructuring of such obligations and to extend further loans to their
issuers. There can be no assurance that the Brady Bonds and other foreign
sovereign debt securities in which a Fund may invest will not be subject to
similar restructuring arrangements or to requests for new credit which may
adversely affect the Fund's holdings. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
In addition to high yield foreign sovereign debt securities, the Funds may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities," above.
Zero coupon bonds (which do not pay interest until maturity) and pay-in-kind
securities (which pay interest in the form of additional securities) may be more
speculative than securities which pay income periodically and in cash. In
addition, although a Fund receives no periodic cash payments from such
investments, applicable tax rules require the Fund to accrue on an effective
yield basis for original issue discount and pay out its income from such
securities annually as income dividends and require stockholders to pay tax on
such dividends.
Municipal Lease Obligations. Municipal lease obligations have special risks not
normally associated with municipal bonds. These obligations frequently contain
"non-appropriation" clauses that provide that the governmental issuer of the
obligation has no obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the legislative body on a
yearly or other periodic basis. For more information on risks of municipal lease
investments, see the SAI.
Short Sales. A Fund will incur a loss as a result of a short sale (other than a
short sale against the box) if the price of the security increases between the
date of the short sale and the date on which the Fund replaces the borrowed
security. Possible losses from such short sales differ from losses that could be
incurred from a purchase of a security, because losses from such short sales may
be unlimited, whereas losses from purchases of a security can equal only the
total amount invested. To limit these risks, a Fund's short sales (other than
short sales against the box) will be only with respect to securities fully
listed on a national securities exchange and will not at any time exceed a
dollar amount equal to 25% of the Fund's net equity. Further, a Fund's short
sales of securities of a single issuer will not exceed the lesser of 2% of the
value of the Fund's net assets or 2% of the securities of any class of the
issuer.
Risks of Options Transactions. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying securities at the exercise price. If
a put or call option purchased by a Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price, or in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, a Fund may be
unable to close out a position. If a Fund cannot effect a closing transaction,
it will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
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Options transactions involve, additionally, risks similar to those described
below in "Risks of Futures and Related Options Transactions."
Currency Risk. Most of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Funds' assets. The
Funds may, however, engage in foreign currency transactions to protect their
portfolios against fluctuations in currency exchange rates in relation to the
U.S. dollar. Such foreign currency transactions may include forward foreign
currency contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts. (See below.) The Funds cannot assure that these techniques will
always be successful.
Foreign Currency Options. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of a Fund to
reduce foreign currency risk using such options. Over-the-counter options differ
from traded options in that they are two-party contracts with price and other
terms negotiated between buyer and seller and generally do not have as much
market liquidity as exchange-traded options. Employing hedging strategies with
options on currencies does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline.
Furthermore, such hedging transactions reduce or preclude the opportunity for
gain if the value of the hedged currency should change relative to the U.S.
dollar. A Fund will not speculate in options on foreign currencies.
There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If a Fund cannot close out an option which
it holds, it would have to exercise its option in order to realize any profit
and would incur transactional costs on the sale of the underlying assets.
Risks of Futures and Related Options Transactions. There are several risks
associated with the use of futures contracts and options on futures contracts.
While a Fund's use of futures contracts and related options for hedging may
protect a Fund against adverse movements in the general level of interest rates
or securities prices, such transactions could also preclude the opportunity to
benefit from favorable movements in the level of interest rates or securities
prices. There can be no guarantee that a Manager's forecasts about market
values, interest rates and other applicable factors will be correct or that
there will be a correlation between price movements in the hedging vehicle and
in the securities being hedged. The skills required to invest successfully in
futures and options may differ from skills required to manage other assets in a
Fund's portfolio. An incorrect forecast or imperfect correlation could result in
a loss on both the hedged securities in a Fund and the hedging vehicle so that
the Fund's return might have been better had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
A Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or are quoted on an automated quotation system. A Fund will not
enter into a futures contract if immediately thereafter the initial margin de-
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posits for futures contracts held by the Fund plus premiums paid by it for open
futures options positions, less the amount by which any such positions are
"in-the-money," would exceed 5% of the Fund's total assets.
The Funds may trade futures contracts and options on futures contracts on U.S.
domestic markets and, except for ESC Strategic Asset Preservation Fund, also on
exchanges located outside of the United States. Foreign markets may offer
advantages such as trading in indices that are not currently traded in the
United States. Foreign markets, however, may have greater risk potential than
domestic markets. Unlike trading on domestic commodity exchanges, trading on
foreign commodity exchanges is not regulated by the CFTC and may be subject to
greater risk than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and a
trader may look only to the broker for performance of the contract. In addition,
any profits that a Fund might realize in trading could be eliminated by adverse
changes in the exchange rate of the currency in which the transaction is
denominated, or the Fund could incur losses as a result of changes in the
exchange rate. Transactions on foreign exchanges may include both commodities
that are traded on domestic exchanges or boards of trade and those that are not.
Risks of Forward Foreign Currency Contracts. The precise matching of forward
contracts and the value of the securities involved will not generally be
possible since the future value of the securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
Projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
There can be no assurance that new forward contracts or offsets will always be
available to a Fund.
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MANAGEMENT STRATEGIES
The Adviser uses various strategies intended to increase the return of the Funds
and to lower their volatility, to the extent consistent with the objectives of
each Fund, by (a) strategically allocating assets to specific categories,
markets and Managers, (b) identifying and retaining Managers who have achieved
superior records and have appropriately divergent management styles, and (c)
monitoring Managers' performance and adherence to stated styles.
MULTIPLE MANAGER STRATEGY. The Adviser expects to use the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance of both the total Fund portfolio and of each
Manager and will reallocate Fund assets among individual Managers, or recommend
to the Company that it employ or terminate particular Managers, to the extent
the Adviser deems appropriate to achieve the overall objectives of the
particular Fund. The Adviser intends to recommend reallocations if, under the
Adviser's strategic analysis, a Manager's allocation becomes over-weighted as a
result of extended appreciation and in order that undervalued securities and
management styles receive additional allocations. Under certain circumstances,
when deemed in the best interests of a Fund and its shareholders, the Adviser
may recommend that a Manager's allocation be set temporarily at zero.
The Multiple Manager Strategy is based on analysis of performance of investment
managers which indicates that even highly successful investment managers
experience variations in performance which may be caused by factors or
conditions that affect the particular universe of securities emphasized by that
investment manager or otherwise impact his particular investment style. By
recognizing the effect of these factors on particular Managers, the Adviser can
reallocate or rebalance the assets of a Fund among Managers from time to time to
provide a
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more favorable risk/reward relationship. As a result of this strategy, the
Adviser hopes both to increase the prospects for investment return and to reduce
market risk.
To the extent the Adviser is successful in (a) identifying and retaining
Managers who have achieved superior investment records and have appropriately
divergent investment styles, (b) monitoring Managers' performance and adherence
to stated styles, and (c) strategically allocating Fund assets among multiple
Managers, over time the Adviser believes the Funds with multiple Managers may
achieve a better rate of return with lower volatility than would typically be
expected of any one management style.
The Adviser selects Managers based on the continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to specific investment styles. While superior performance is regarded
as the ultimate goal, short-term performance by itself is not a significant
factor in selecting or terminating Managers, and the Adviser does not anticipate
frequent changes in Managers. Criteria for employment of Managers include, but
are not limited to, the following:
(1) Managers must display discipline and thoroughness in pursuit of stated
investment objectives.
(2) Managers must maintain over time consistently above-average performance.
Most importantly, Managers must display an ability to conserve values in
down markets.
(3) Managers must demonstrate a high level of service and responsibility to
clients. The Adviser monitors continually the performance of Managers as
well as management firm staffs and organizations to assess overall
competence.
The Company has applied to the Securities and Exchange Commission for an
exemptive order to permit the Company to retain new Managers without obtaining
shareholder approval. There is no assurance that the order will be granted. See
"Other Information -- Voting Rights" in the SAI for more information.
From time to time, the Adviser may recommend that the services of a Manager be
terminated. The criteria for termination include, but are not limited to, the
following:
(1) Departure of key personnel from the Manager's firm.
(2) Acquisition of the Manager by a third party.
(3) Change in or departure from investment style.
(4) Inadequate investment process which could result in inconsistent security
selection.
MULTIPLE ASSET STRATEGY. In the Adviser's view, approximately 94% of return
variability among investment portfolios is attributable to asset allocation.
Therefore, short-term risk of price volatility associated with equity
investments should be reduced by broad representation in asset groups that
historically have lower market risk than equities -- principally fixed income
securities.
MULTIPLE MARKET STRATEGY. For certain Funds, the Adviser will seek to reduce
market risk through exposure to international markets which, as a group, have
exhibited counter-cyclical characteristics compared to U.S. markets. The U.S.
equity market capitalization currently represents approximately 43% of global
equity market capitalization. Additional return benefits may be achieved by the
broader security selection available in international markets.
EMERGING COMPANY/MATURE MARKET STRATEGY. When a Fund invests in mature markets,
the Adviser will seek above-average return by allocating assets to Managers that
invest in companies (a) with earnings growth that exceeds that of the economy,
(b) that have a market capitalization less than the average for that market, and
(c) that are under-recognized by investors. The Adviser's analysis indicates
that, over time, such stocks tend to outperform larger capitalization indices
and are less subject to macro-economic, cyclical forces.
EMERGING MARKET STRATEGY. The Adviser will seek to enhance investment return
for ESC Strategic Global Equity Fund and ESC
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Strategic Income Fund through investing in emerging markets that are exhibiting
or are in the early stages of exhibiting very high economic growth rates
relative to countries in the Organization for European Community Development
("OECD"). An emerging market may be defined as any country considered to be
emerging or developing by the World Bank or the United Nations. Currently, the
Adviser anticipates emphasis, for Funds using this strategy, in Latin America
(Argentina, Brazil, Chile, Columbia, Costa Rica, Jamaica, Mexico, Peru, Trinidad
and Tobago, Uruguay and Venezuela) and Asia (China, India, Indonesia, Korea,
Malaysia, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, and Thailand). It
is anticipated that countries in Southern and Eastern Europe, the Mid-East and
Africa will be added to this list. For special risks of investing in emerging
markets, see "Risks of Investing in the Funds."
DOMESTIC/INTERNATIONAL EQUITY ALLOCATION MODEL (DIEA MODEL). For the ESC
Strategic Global Equity Fund, the Adviser will determine the weighting in the
Fund's portfolio between U.S. and international markets by using the DIEA Model.
This model considers (a) U.S. Gross National Product ("GNP") as a percentage of
the world economy, based on calculations by the World Bank, and (b) the trend of
U.S. Gross Domestic Product ("GDP") growth relative to other international
developed market and emerging market categories of equity assets represented in
the Fund's portfolio. The World Bank currently estimates that the GNP of the
United States comprises 34% of the world economy. This percentage has declined
from 47% in 1970 and is expected to decline further given 2% expected growth in
developed OECD markets as compared to 6.5% expected growth in emerging markets.
Accordingly, the initial allocation to U.S. equities is expected to be no
greater than 33%. Emerging markets will generally comprise between 40% to 60% of
the international component or about 35% of the total investment assets. From
time to time, the Adviser may allocate Fund assets to fixed income or other
securities when these allocations are expected to provide returns comparable to
those normally associated with equity securities.
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MANAGEMENT OF THE FUNDS
The business and affairs of each Fund are managed under the direction of the
Board of Directors. The Directors are William Howard Cammack, Sr.; William
Howard Cammack, Jr.; J. Bransford Wallace; Brownlee O. Curry, Jr.; and E. Townes
Duncan. Additional information about the Directors, as well as the Company's
executive officers, may be found in the SAI under the heading
"Management -- Directors and Officers."
THE ADVISER: EQUITABLE SECURITIES CORPORATION
Equitable Securities Corporation, 800 Nashville City Center, 511 Union Street,
Nashville, Tennessee 37219-1743, is a registered investment adviser, a
registered broker-dealer, and a member of the New York Stock Exchange, Inc.
Together with predecessors, the Adviser has been in business since 1930. Through
its IMES Consulting Group, the Adviser provides consulting services to clients
regarding the strategic allocation of assets and the selection and monitoring of
investment management firms. The Adviser serves as General Partner of several
private, unregistered limited partnerships. The Company is the Adviser's first
registered investment company client. One of the Managers, EAM, is a subsidiary
of the Adviser's subsidiary, Equitable Trust Company, and is, therefore, an
affiliate of the Adviser. The Adviser and its affiliates had approximately $485
million under management at March 31, 1995.
For the advisory services it provides the Funds, the Adviser receives from each
Fund fees, payable monthly based on average daily net assets, at an annual rate
based on the Fund's average net assets. Fees are 0.50% for ESC Strategic Asset
Preservation Fund. Fees are 1.0% for each of the other Funds, which are higher
rates than advisory fees paid by
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most other funds. Out of its fees, the Adviser pays fees to the Managers at the
following annual rates based on the percentage of each Fund's assets managed by
the particular Manager: GlobeFlex Capital, L.P., 0.50%; Equitable Asset
Management, 0.50%; Brandes Investment Partners, Inc., 1.00%; Murray Johnstone
International Limited, 0.50% for ESC Strategic Global Equity Fund and 0.25% for
ESC Strategic Income Fund; Blairlogie Capital Management Limited, 0.50%; Llama
Asset Management Company, L.P., 0.25%; Cincinnati Asset Management, Inc., 0.25%;
and Equitable Trust Company, 0.25%. The Adviser has agreed to limit the expenses
of the Funds to the following percentages of each Fund's net asset value: ESC
Strategic Appreciation Fund -- 2.00% (Class A) and 2.50% (Class D); ESC
Strategic Global Equity Fund -- 2.50% (Class A) and 3.00% (Class D); ESC
Strategic Small Cap Fund -- 2.00% (Class A) and 2.50% (Class D); ESC Strategic
Income Fund -- 2.00% (Class A) and 2.50% (Class D); and ESC Strategic Asset
Preservation Fund -- 1.00%. For the period ended March 31, 1995, pursuant to an
agreement to limit Fund expenses, the Adviser waived fees of $48,047, $0,
$49,973, $21,417 and $32,786 for the Asset Preservation, Income, Global Equity,
Small Cap and Appreciation Funds, respectively. Absent this waiver agreement,
Advisory fees would have been $48,047, $277,567, $87,665, $71,388 and $82,592
for the Asset Preservation, Income, Global Equity, Small Cap and Appreciation
Funds, respectively.
W. Howard Cammack, Jr. has primary responsibility for the Adviser's advice to
the Funds. Mr. Cammack joined the Adviser in 1979. He is presently a Managing
Director, is head of the Adviser's Investment Management and Fiduciary Services
Group, and is a member of the Board of Directors of the Adviser, Equitable Trust
Company, and EAM. In 1986, Mr. Cammack organized the Adviser's IMES Consulting
Group, which he oversees. Mr. Cammack received a Bachelor's degree in history
from Tulane University in 1979.
THE MANAGERS
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 740, San Diego, California
92121, was newly formed in 1994 by a group of seven individuals previously
associated with other investment advisory firms and collectively having
approximately 60 years' investment management experience. The firm specializes
in management of domestic and international equity securities.
Blairlogie Capital Management, 125 Princes Street, Edinburgh, Scotland EH2 4AD,
is an international equity investment firm founded in 1992. Blairlogie manages
assets of $500 million for mutual funds, pension plans, foundations and
endowments as of March 31, 1995. Blairlogie is a U.K. limited partnership
principally owned by PIMCO Advisors, L.P., an affiliate of Pacific Mutual Life
Insurance Company. PIMCO Advisors, L.P. manages over $70 billion of assets.
Llama Asset Management Company, L.P., One McIlroy Plaza, Suite 302,
Fayetteville, Arkansas 72701 organized in 1988, is an investment advisory firm
that specializes in fixed income investments. The firm provides investment
management to pension plans, insurance companies, hospitals, and other
institutional investors and individuals. As of March 31, 1995, the firm had
approximately $215 million of assets under management.
Cincinnati Asset Management, Inc., 11300 Cornell Park Drive, Cincinnati, Ohio
45242 is an investment advisory firm specializing in high-yield debt securities,
also known as junk bonds. The firm, organized in 1989 and majority owned by its
chief executive officer, William S. Sloneker and family members, provides
services to insurance companies, pension plans, other institutional investors
and individuals. As of March 31, 1995, the firm had approximately $145 million
of assets under management.
Murray Johnstone International Limited, 11 West Nile Street, Glasgow, Scotland
G1 2PX, was organized in 1989 and manages $1.1 billion in assets for clients in
North America, including other mutual funds. The firm is a wholly-owned
subsidiary of the Murray Johnstone Group, whose origin goes back to 1907. The
Group had approximately
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$6 billion of assets under management as of March 31, 1995. Murray Johnstone
Group, in turn, is owned by United Asset Management Corporation, a New York
Stock Exchange-traded company based in Boston.
Brandes Investment Partners, Inc., 12750 High Bluff Drive, San Diego, California
92130, has been providing investment advisory services since 1974 (including
predecessors). Brandes Investment Partners, Inc. manages approximately $4.1
billion for individual, corporate, pension plan and other clients as of March
31, 1995.
Equitable Asset Management, Inc. ("EAM"), 800 Nashville City Center, 511 Union
Street, Nashville, Tennessee 37219-1743, is a subsidiary of Equitable Trust
Company, a single-purpose financial institution chartered under Tennessee
banking statutes and a wholly-owned subsidiary of the Adviser. EAM began
business as an investment adviser in 1988 and at March 31, 1995 managed
approximately $64 million in assets. Frank D. Inman has primary investment
responsibility for equity management at EAM, including EAM's services to ESC
Strategic Appreciation Fund and ESC Strategic Small Cap Fund. Mr. Inman joined
Equitable Securities Corporation in May of 1988 where he is a Managing Director.
Prior to that date, Mr. Inman was Director of Institutional Equity Sales at
Interstate Securities in Charlotte, North Carolina. Mr. Inman received a
Bachelors degree in English from the University of Georgia in 1973 and a Masters
degree in Business Administration from Georgia State University in 1979.
Primary investment responsibility for fixed income investments at EAM, including
EAM's services to ESC Strategic Asset Preservation Fund, resides with Gary F.
Poling, First Vice President and Investment Officer of Equitable Trust Company
and First Vice President of EAM. Prior to joining Equitable Trust Company, Mr.
Poling was First Vice President and Senior Portfolio Manager of Sovran
Bank/Tennessee's Trust Division. Previously, he was an investment representative
with Merrill Lynch, Pierce, Fenner and Smith, Inc. Mr. Poling received a
Bachelor of Science degree in Finance from East Tennessee State University in
1972. He is also a Certified Financial Planner, a Registered Financial Planner,
a Certified Trust and Financial Adviser, and a Certified Financial Relationship
Counselor.
THE DISTRIBUTOR
The Adviser acts as Distributor for the Funds pursuant to a Distribution
Contract.
Each of the Funds offering two classes of shares has adopted a service and
distribution plan ("Plan") with respect to each class of its shares. The Plans
provide that Class A shares will pay the Distributor a fee up to an annual rate
of 0.25% (which may include a 0.25% Service Fee) of the value of average daily
net assets of Class A shares as reimbursement for its costs incurred for
financing certain distribution and shareholder service activities related to
Class A shares. For the period ended March 31, 1995, the Distributor received
$27,828; $10,299; $11,355 and $13,314 for the Income, Global Equity, Small Cap
and Appreciation Funds, respectively pursuant to Class A Plans. The Plans
provide that Class D shares will pay the Distributor amounts up to an annual
rate of 0.75% (which may include a 0.25% Service Fee) of the average daily net
assets of Class D shares as reimbursement for its costs incurred to finance
certain distribution and shareholder service activities related to Class D
Shares. For the period ended March 31, 1995, the Distributor received $2,185;
$6,800; $9,355 and $4,068 for the Income, Global Equity, Small Cap and
Appreciation Funds, respectively pursuant to Class D Plans. ESC Strategic Asset
Preservation Fund, which has only one class of shares, has adopted a Plan
substantially the same as that for Class A shares of the other Funds. For the
period ended March 31, 1995 the Distributor received $13,765 pursuant to the
Plan for ESC Strategic Asset Preservation Fund. Service Fees are paid to
securities dealers and other financial institutions for maintaining shareholder
accounts and providing related services to shareholders.
Under each of the Plans, each Fund pays the Distributor and other securities
dealers and other financial institutions and organizations for certain
shareholder service or distribution activities. Selling dealers may be paid
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amounts, at the end of each year, totalling up to 0.25% of the average daily net
asset value of Class A shares and for the sole class of shares of Asset
Preservation Fund, and 0.75% of the average daily net asset value of Class D
shares in their clients' accounts. Amounts received by the Distributor may,
additionally, subject to the Plan maximums, be used to cover certain other costs
and expenses related to the distribution of Fund shares and provision of service
to Fund shareholders, including: (a) advertising by radio, television,
newspapers, magazines, brochures, sales literature, direct mail or any other
form of advertising; (b) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses; (c)
costs of printing prospectuses and other materials to be given or sent to
prospective investors; and (d) such other similar services as the Directors
determine to be reasonably calculated to result in the sale of shares of the
Funds. Each Fund will pay all costs and expenses in connection with the
preparation, printing and distribution of the Prospectus to current shareholders
and the operation of its Plan(s), including related legal and accounting fees. A
Fund will not be liable for distribution expenditures made by the Distributor in
any given year in excess of the maximum amount payable under a Plan for that
Fund in that year.
SERVICE ORGANIZATIONS
Payments may be made by the Funds or by the Adviser to various banks,
trust companies, broker-dealers or other financial organizations (collectively,
"Service Organizations") for providing administrative services for the Funds
and their shareholders, such as maintaining shareholder records, answering
shareholder inquiries and forwarding materials and information to shareholders.
The Funds may pay fees to Service Organizations (which vary depending upon the
services provided) in amounts up to an annual rate of 0.25% of the daily net
asset value of the shares of either class (and of the sole class of Asset
Preservation Fund) owned by shareholders with whom the Service Organization has
a servicing relationship.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than a Fund's
minimum initial or subsequent investments or charging a direct fee for
servicing. If imposed, these fees would be in addition to any amounts which
might be paid to the Service Organization by the Funds. Each Service
Organization has agreed to transmit to its clients a schedule of any such fees.
Shareholders using Service Organizations are urged to consult with them
regarding any such fees or conditions.
ADMINISTRATIVE SERVICES
Furman Selz Incorporated, 237 Park Avenue, New York, New York 10017,
acts as Administrator of the Funds. Furman Selz is primarily an institutional
brokerage firm with membership on the New York, American, Boston, Midwest,
Pacific and Philadelphia Stock Exchanges. Furman Selz also serves as
administrator and distributor of other mutual funds. Pursuant to an
Administrative Services Contract with the Company, Furman Selz provides certain
management and administrative services necessary for the Funds' operations
including: (a) general supervision of the operation of the Funds including
coordination of the services performed by the Funds' Adviser, Managers,
custodian, independent accountants and legal counsel; (b) regulatory
compliance, including the compilation of information for documents such as
reports to, and filings with, the SEC and state securities commissions, and
preparation of proxy statements and shareholder reports for the Funds; (c)
general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Funds' officers and Board of
Directors; and (d) furnishing office space and certain facilities required for
conducting the business of the Funds. For these services, Furman Selz receives
from each Fund a fee, payable monthly, at the annual rate of 0.15% of each
Fund's average daily net assets. For the period ended March 31, 1995, pursuant
to an agreement to limit Fund expenses, the Administrator waived fees of
$14,414, $0, $9,525, $5,442 and $6,884 for the Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds, respectively. Absent this
waiver agreement, administrative fees would have been $14,414, $43,736,
$13,150, $10,709
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and $12,389 for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. Pursuant to a Services Agreement between the
Company and Furman Selz, Furman Selz provides the Company with transfer and
dividend disbursing agent services, for which it receives a fee of $15.00 per
account per year subject to a required minimum fee of $10,000 for each Fund,
plus out-of-pocket expenses. For the period ended March 31, 1995, pursuant to an
agreement to limit Fund expenses, the Transfer Agent waived fees of $7,842,
$4,464, $3,310, $2,102 and $2,946 for the Asset Preservation, Income, Global
Equity, Small Cap and Appreciation Funds, respectively. Absent this waiver
agreement, transfer agent fees would have been $9,342, $9,096, $8,877, $8,137
and $7,370 for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. Pursuant to a Fund Accounting Agreement
between the Company and Furman Selz, Furman Selz assists the Company in
calculating net asset values and provides certain other accounting services for
each Fund described therein, for an annual fee of $30,000 per Fund plus
out-of-pocket expenses. For the period ended March 31, 1995, Furman Selz earned
for fund accounting services including out of pocket expenses $32,273; $36,180;
$35,020; $25,666 and $22,016 for the Asset Preservation, Income, Global Equity,
Small Cap and Appreciation Funds, respectively.
OTHER EXPENSES
Each Fund bears all costs of its operations other than expenses specifically
assumed by the Administrator, the Adviser, the Managers or other service
providers. In addition to the fees to service providers, described above, the
costs borne by the Funds, some of which may vary between the classes for Funds
with two classes, as noted above, include: legal and accounting expenses;
Directors' fees and expenses; insurance premiums; custodian and transfer agent
fees and expenses; expenses incurred in acquiring or disposing of the Funds'
portfolio securities; expenses of registering and qualifying the Funds' shares
for sale with the SEC and with various state securities commissions; expenses of
maintaining the Funds' legal existence and of shareholders' meetings; and
expenses of preparing and distributing reports, proxy statements and
prospectuses to existing shareholders. Each Fund bears its own expenses
associated with its establishment as a portfolio of the Company; these expenses
are amortized over a five-year period from the commencement of a Fund's
operations. Company expenses directly attributable to a Fund or class are
charged to that Fund or class; other expenses are allocated proportionately
among all of the Funds and classes in the Company in relation to the net assets
of each Fund and class.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement and Portfolio Management
Agreements, each Manager places orders for the purchase and sale of portfolio
investments for the Funds' accounts with brokers or dealers it selects in its
discretion.
In effecting purchases and sales of portfolio securities for the account of a
Fund, each Manager will seek the best execution of the Fund's orders. Purchases
and sales of portfolio debt securities for the Funds are generally placed by
Managers with primary market makers for these securities on a net basis, without
any brokerage commission being paid by the Funds. Trading does, however, involve
transaction costs. Transactions with dealers serving as primary market makers
reflect the spread between the bid and asked prices. The Funds may purchase
securities during an underwriting, which will include an underwriting fee paid
to the underwriter. To the extent permitted by, and subject to conditions of,
applicable law and regulations, the Funds may purchase securities from an
underwriting syndicate of which an affiliate of the Company, the Adviser, the
Administrator or a Manager is a member (but not directly from such affiliate).
Purchases and sales of common stocks are generally placed by a Manager with
broker-dealers which, in the judgment of the particular Manager, provide prompt
and reliable execution at favorable security prices and reasonable commission
rates. Broker-dealers are selected on the basis of a variety of factors such as
reputation, capital strength, size and difficulty of order, sale of Fund
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shares and research provided to the Managers. Broker-dealers selected to execute
portfolio transactions for the Funds may include affiliates of the Company, the
Adviser, Administrator or a Manager, provided the charge for any such
transaction does not exceed usual and customary levels. A Manager may cause a
Fund to pay commissions higher than another broker-dealer would have charged if
the Manager believes the commission paid is reasonable in relation to the value
of the brokerage and research services received by the Manager. The Funds will
not pay higher securities prices or higher mark-ups or mark-downs, in
recognition of the value of research services provided by a securities dealer,
on transactions with a securities dealer where the dealer sells securities to
the Fund or purchases them from the Fund, on a principal basis.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Managers may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds.
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FUND SHARE VALUATION
The net asset value per share for each class of shares of each Fund is
calculated at 4:15 p.m. (Eastern time), Monday through Friday, on each day the
New York Stock Exchange is open for trading, which excludes the following
business holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of each class of shares of the Funds is computed by dividing the
value of net assets of each class (i.e., the value of the assets less the
liabilities) by the total number of such class's outstanding shares. All
expenses, including fees paid to the Adviser, the Managers and Furman Selz, are
accrued daily and taken into account for the purpose of determining the net
asset value.
Securities listed on an exchange are valued on the basis of the last sale prior
to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken for the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each business day. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Directors.
Notwithstanding the above, bonds and other fixed-income securities are valued by
using market quotations and may be valued on the basis of prices provided by a
pricing service approved by the Board of Directors. All assets and liabilities
initially expressed in foreign currencies will be expressed for valuation
purposes in U.S. dollars at the mean between the bid and asked prices of such
currencies against U.S. dollars as last quoted by any major bank.
With respect to options contracts sold by a Fund, the Fund records the premium
received as an asset and equivalent liability, and thereafter adjusts the
liability to the market value of the option determined in accordance with the
preceding paragraph. The premium paid for an option purchased by a Fund is
recorded as an asset and subsequently adjusted to market value. Open futures
contracts are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case such positions will be
valued by or under the direction of the Directors.
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PRICING OF FUND SHARES
Orders for the purchase of shares of each class will be executed at the net
asset value per share of that class plus any applicable sales charge (the
"public offering price") next determined after an order has been received in
proper order by the Funds, or by an authorized broker, investment adviser or
Service Organization and transmitted to the Funds by 5:00 p.m. Eastern Time.
(See "Purchase of Fund Shares.") The sales charge on purchases of each class of
shares of the Funds (except ESC Strategic Asset Preservation Fund, which has no
sales charge) is as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A AMOUNT OF SALES
PERCENTAGE OF CHARGE REALLOWED
--------------------- TO DEALERS AS A
PUBLIC NET PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
PRICE INVESTED PRICE
-------- -------- ----------------
<S> <C> <C> <C>
CLASS A SHARES
AMOUNT OF INVESTMENT
Less than $100,000................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000...................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000...................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000.................... 2.00% 2.04% 1.75%
$1,000,000 and over.................................. None None None
CLASS D SHARES*........................................ None None None
</TABLE>
- ------------
* An initial sales charge of 1.50% on Class D shares of each Fund is being
waived by the Distributor through October 31, 1995. This waiver may be
extended by the Distributor for additional one-year periods.
The sales charge will not apply to shares of either class purchased by: (a)
trust, investment management and other fiduciary accounts managed by the Adviser
or a Manager pursuant to a written agreement; (b) any person purchasing shares
with the proceeds of a distribution from a trust, investment management or other
fiduciary account managed by the Adviser or a Manager pursuant to a written
agreement; (c) any person purchasing shares with the proceeds of a redemption of
shares of a mutual fund, other than ESC Strategic Funds, Inc., that were
originally purchased with a sales load; (d) Furman Selz or any of its
affiliates; (e) Directors or officers of the Funds; (f) directors or officers of
Furman Selz, the Adviser or a Manager, or affiliates or bona fide full-time
employees of any of the foregoing who have acted as such for not less than 90
days (including members of their immediate families and their retirement plans
or accounts); or (g) retirement accounts or plans (or monies from retirement
accounts or plans) for which there is a written service agreement between the
Company and the Plan Sponsor, so long as such shares are purchased through the
Distributor; or (h) any person purchasing shares within an asset allocation or
fee based program sponsored by a financial services organization. The sales
charge also does not apply to shares sold to representatives of selling brokers
and members of their immediate families. In addition, the sales charge does not
apply to sales to bank trust departments, acting on behalf of one or more
clients, of shares having an aggregate value equal to or exceeding $200,000.
See "Dividends, Distributions and Federal Income Tax," for an explanation of
circumstances in which a sales charge paid to acquire shares of a mutual fund
may not be taken into account in determining gain or loss on the disposition of
those shares.
QUANTITY DISCOUNTS IN THE SALES CHARGES
Right of Accumulation
Each Fund (except ESC Strategic Asset Preservation Fund, which imposes no sales
charge) permits sales charges on Class A shares to be reduced through rights of
accumulation. For Class A shares, the schedule
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of reduced sales charges will be applicable once the accumulated value of the
account has reached $100,000. For this purpose, the dollar amount of the
qualifying concurrent or subsequent purchase is added to the net asset value of
any other Class A shares of those Funds in the Company owned at the time by the
investor. The sales charge imposed on the Class A shares being purchased will
then be at the rate applicable to the aggregate of Class A shares purchased. For
example, if the investor held Class A shares of these Funds valued at $100,000
and purchased an additional $20,000 of Class A shares of the Funds (totalling an
investment of $120,000), the sales charge for the $20,000 purchase would be at
the next lower sales charge on the schedule (i.e., the sales charge for
purchases over $100,000 but less than $250,000). There can be no assurance that
investors will receive the cumulative discounts to which they may be entitled
unless, at the time of placing their purchase order, the investors or their
dealers make a written request for the discount. The cumulative discount program
may be amended or terminated at any time. This particular privilege does not
entitle the investor to any adjustment in the sales charge paid previously on
purchases of Class A shares of the Funds. If the investor knows that he will be
making additional purchases of shares in the future, he may wish to consider
executing a Letter of Intent.
Letter of Intent
The schedule of reduced sales charges is also available to Class A investors who
enter into a written Letter of Intent providing for the purchase, within a
13-month period, of Class A shares of a particular Fund. Shares of such Fund
previously purchased during a 90-day period prior to the date of receipt by the
Funds of the Letter of Intent which are still owned by the shareholder may also
be included in determining the applicable reduction, provided the shareholder or
the dealer notifies the Funds of such prior purchases.
A Letter of Intent (which is not applicable to investments in ESC Strategic
Asset Preservation Fund or in Class D shares of the other Funds) permits an
investor to establish a total investment goal to be achieved by any number of
investments over a 13-month period. Each investment made during the period will
receive the reduced sales commission applicable to the amount represented by the
goal as if it were a single investment. A number of shares totalling 5% of the
dollar amount of the Letter of Intent will be held in escrow by the Distributor
in the name of the shareholder. The initial purchase under a Letter of Intent
must be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, or a Fund to
sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the Letter of Intent provides that a
sufficient number of escrowed shares will be liquidated to reimburse the
Distributor to the extent of the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges actually
paid. If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth under "Right of Accumulation," but there
will be no retroactive reduction of sales charges on previous purchases. At any
time while a Letter of Intent is in effect, a shareholder may, by written notice
to the Funds, increase the amount of the stated goal. In that event, shares
purchased during the previous 90-day period and still owned by the shareholder
will be included in determining the applicable sales charge reduction. The 5%
escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase Fund shares pursuant to a Letter of Intent
should carefully read the application for Letter of Intent which is available
from the Funds.
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MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Funds is $10,000, except that the minimum
is $2,000 for an IRA or other qualified retirement plan. Any subsequent
investments must be at least $50, including an IRA or qualified retirement plan
investment. All initial investments should be accompanied by a completed
Purchase Application. A Purchase Application accompanies this Prospectus.
However, a separate application is required for IRA and other qualified
retirement plan investments. The Distributor reserves the right to reject
purchase orders.
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PURCHASE OF FUND SHARES
All funds received by the Funds are invested in full and fractional shares of
the indicated class of the appropriate Fund. Certificates for shares are not
issued. Furman Selz maintains records of each shareholder's holdings of Fund
shares, and each shareholder receives a statement of transactions, holdings and
dividends. The Funds reserve the right to reject any purchase.
An investment may be made using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service
Organization. Shares are available to new and existing shareholders through
authorized brokers, investment advisers and Service Organizations. To make an
investment using this method, a Purchase Application must have been completed
and the customer must notify the broker, investment adviser or Service
Organization of the amount to be invested. The broker will then contact the
Funds to place the order.
Orders received by the broker or Service Organization in proper order prior to
the determination of net asset value and transmitted to the Funds prior to the
close of its business day (which is currently 5:00 p.m., Eastern time), will
become effective that day. Brokers who receive orders are obligated to transmit
them promptly. Written confirmation of an order should be received a few days
after the broker has placed the order.
From the Distributor. Shares may be purchased directly from the Distributor by
sending a completed Purchase Application together with a money order, check or
other negotiable bank draft to ESC Strategic Funds, Inc., P.O. Box 4490, Grand
Central Station, New York, New York 10163-4490.
By Wire. Investments may be made directly through the use of wire transfers of
Federal funds. An investor's bank may wire Federal funds to the applicable Fund.
In most cases, the bank will either be a member of the Federal Reserve Banking
System or have a relationship with a bank that is. The bank will normally charge
a fee for handling the transaction. To purchase shares by a Federal funds wire,
investors should first contact Furman Selz Mutual Funds Client Services Wire
Desk which will establish a record of information for the wire to insure the
correct processing of funds. The Wire Desk may be called at
1-800-261-FUND(3863).
The investor's bank should wire funds using the following instructions:
Investors Fiduciary Trust Company
Kansas City, MO 64105
ABA #1010-0362-1
Account #751-2996
Further Credit to: Fund Name
Investors who have read the Prospectus may establish a new regular account
through the Wire Desk; IRAs and other qualified retirement plan accounts may not
be opened in this way. When new accounts are established by wire, the
distribution options will be set to reinvest all dividends and the social
security or tax identification number ("TIN") will not be certified until a
signed application is received. Completed applications should be forwarded
immediately to the Funds. By using the Purchase Application, an investor may
specify other distribution options and may add any special features offered by a
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Fund. Should any dividend distributions or redemptions be paid before the TIN is
certified, they will be subject to 31% Federal tax withholding.
Institutional Accounts. Bank trust departments and other institutional
accounts, not subject to sales charges, may place orders directly with the Funds
by telephone at 1-800-261-FUND(3863).
Automatic Investment Program. An eligible shareholder may also participate in
the ESC Strategic Investment Program, an investment plan that automatically
debits money from the shareholder's bank account and invests it in one or more
of the Funds through the use of electronic funds transfers or automatic bank
drafts. Shareholders may commence their participation in this program with a
minimum initial investment of $10,000 and may elect to make subsequent
investments by transfers of a minimum of $50 on either the fifth or twentieth
day of each month or calendar quarter into their established Fund account.
Contact the Fund for more information about the ESC Strategic Automatic
Investment Program.
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RETIREMENT PLAN ACCOUNTS
All Funds may be used as a funding medium for IRAs and other qualified
retirement plans ("Plans"). The minimum initial investment for an IRA or a Plan
is $2,000. An IRA may be established through a custodial account with Investors
Fiduciary Trust Company. Completion of a special application is required in
order to create such an account. A $5.00 establishment fee and an annual $12.00
maintenance and custody fee is payable with respect to each IRA; in addition
there will be charged a $10.00 termination fee when the account is closed. Fund
shares may also be purchased for IRAs and Plans established with other
authorized custodians. Contributions to IRAs are subject to prevailing amount
limits set by the Internal Revenue Service. For more information about IRAs and
other Plan accounts, call the Funds at 1-800-261-FUND(3863).
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EXCHANGE OF FUND SHARES
The Funds offer two convenient ways to exchange shares in one Fund for shares of
another Fund in the Company. Shares of a particular class of a Fund may be
exchanged only for shares of that same class in another Fund, with no sales
charge. Shares of ESC Strategic Asset Preservation Fund may be exchanged for
shares of another Fund with payment of the applicable sales charges. Before
engaging in an exchange transaction, a shareholder should read carefully the
information in the Prospectus describing the Fund into which the exchange will
occur. A shareholder may not exchange shares of a class of one Fund for shares
of the same class of another Fund that is not qualified for sale in the state of
the shareholder's residence. The minimum amount for an initial exchange is
$2,000. There is no minimum for subsequent exchanges, and no service fee is
imposed for an exchange. The Funds may terminate or amend the terms of the
exchange privilege at any time upon 60 days' notice to shareholders.
An exchange is taxable as a sale of a security on which a gain or loss may be
recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction. See "Dividends,
Distributions and Federal Income Tax" for an explanation of circumstances in
which a sales charge paid to acquire shares of the Funds may not be taken into
account in determining gain or loss on the disposition of those shares.
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the respective net asset values next determined following
receipt of the request by the Funds containing the information indicated below.
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Exchange by Mail. To exchange Fund shares by mail, shareholders should simply
send a letter of instruction to the Funds. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the Fund from and the Fund into which the exchange is to be made;
(d) the dollar or share amount to be exchanged; and (e) the signatures of all
registered owners or authorized parties. All signatures must be guaranteed by an
eligible guarantor institution including members of national securities
exchanges, commercial banks or trust companies, broker-dealers, credit unions
and savings associations.
Exchange by Telephone. To exchange Fund shares by telephone or to ask any
questions, shareholders may call the Funds at 1-800-261-FUND(3863). Please be
prepared to give the telephone representative the following information: (a) the
account number, social security number and account registration; (b) if
applicable, the class of shares to be exchanged; (c) the name of the Fund from
which and the Fund into which the exchange is to be made; and (d) the dollar or
share amount to be exchanged. Telephone exchanges are available only if the
shareholder so indicates by checking the "yes" box on the Purchase Application.
The Funds employ procedures, including recording telephone calls, testing a
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Funds reserve the right to suspend or terminate the privilege of
exchanging by mail or by telephone at any time.
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REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business day.
Shares will be redeemed at the net asset value next determined after a
redemption request in good order has been received by the Funds. See
"Determination of Net Asset Value." A redemption may be a taxable transaction on
which gain or loss may be recognized.
Where the shares to be redeemed have been purchased by check, the redemption
request will be held until the purchasing check has cleared, which may take up
to 15 days. Shareholders may avoid this delay by investing through wire
transfers of Federal funds. During the period prior to the time the shares are
redeemed, dividends on the shares will continue to accrue and be payable and the
shareholder will be entitled to exercise all other beneficial rights of
ownership.
Once the shares are redeemed, a Fund will ordinarily send the proceeds by check
to the shareholder at the address of record on the next business day. The Fund
may, however, take up to three days to make payment, although this will not be
the customary practice. Also, if the New York Stock Exchange is closed (or when
trading is restricted) for any reason other than the customary weekend or
holiday closing or if an emergency condition as determined by the SEC merits
such action, the Funds may suspend redemptions or postpone payment dates.
Redemption Methods. To ensure acceptance of a redemption request, it is
important that shareholders follow the procedures described below. Although the
Funds have no present intention to do so, the Funds reserve the right to refuse
or to limit the frequency of any telephone or wire redemptions. Of course, it
may be difficult to place orders by telephone during periods of severe market or
economic change, and a shareholder should consider alternative methods of
communications, such as couriers. The Funds' services and their provisions may
be modified or terminated at any time by the Funds. If the Funds terminate any
particular service, they will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
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A shareholder may redeem shares using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service Organization. The
shareholder should contact his or her broker, investment adviser or Service
Organization and provide instructions to redeem shares. These organizations are
responsible for the prompt transmission of orders. The broker will contact the
Funds and place a redemption trade. The broker may charge a fee for this
service.
By Mail. Shareholders may redeem shares by sending a letter directly to the
Funds. To be accepted, a letter requesting redemption must include: (a) the Fund
name, class of shares (if applicable) and account registration from which shares
are being redeemed; (b) the account number; (c) the amount to be redeemed; (d)
the signatures of all registered owners; and (e) a signature guarantee by any
eligible guarantor institution including members of national securities
exchanges, commercial banks or trust companies, broker-dealers, credit unions
and savings associations. Corporations, partnerships, trusts or other legal
entities will be required to submit additional documentation.
By Telephone. Shareholders may redeem shares by calling the Funds toll free at
1-800-261-FUND(3863). Be prepared to give the telephone representative the
following information: (a) the account number, social security number and
account registration; (b) the name of the class (if applicable) and the Fund
from which shares are being redeemed; and (c) the amount to be redeemed.
Telephone redemptions are available only if the shareholder so indicates by
checking the "yes" box on the Purchase Application or on the Optional Services
Form. The Funds employ procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
By Wire. Shareholders may redeem shares by contacting the Funds by mail or
telephone and instructing the Funds to send a wire transmission to the
shareholder's bank.
The shareholder's instructions should include: (a) the account number, social
security number and account registration; (b) the name of the class (if
applicable) and the Fund from which shares are being redeemed; and (c) the
amount to be redeemed. Wire redemptions can be made only if the "yes" box has
been checked on the shareholder's Purchase Application, and a copy is attached
of a void check on an account where proceeds are to be wired. The bank may
charge a fee for receiving a wire payment on behalf of its customer.
Systematic Withdrawal Plan. An owner of $12,000 or more of shares of a Fund may
elect to have periodic redemptions made from his account to be paid on a
monthly, quarterly, semiannual or annual basis. The maximum payment per year is
12% of the account value at the time of the election. A sufficient number of
shares to make the scheduled redemption will normally be redeemed on the date
selected by the shareholder. Depending on the size of the payment requested and
fluctuation in the net asset value, if any, of the shares redeemed, redemptions
for the purpose of making such payments may reduce or even exhaust the account.
A shareholder may request that these payments be sent to a predesignated bank or
other designated party. Capital gains and dividend distributions paid to the
account will automatically be reinvested at net asset value on the distribution
payment date.
Reinstatement Privilege. A shareholder who has redeemed shares on which a sales
charge was paid may reinvest, without a sales charge, up to the full amount of
such redemption at the net asset value determined at the time of the
reinvestment within 30 days of the original redemption. This privilege must be
effected within 30 days of the redemption. The shareholder must reinvest in the
same Fund, same class, and the same account from which the shares were re-
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deemed. A redemption is a taxable transaction and gain may be recognized for
Federal income tax purposes even if the reinstatement privilege is exercised.
Any loss realized upon the redemption will not be recognized as to the number of
shares acquired by reinstatement, except through an adjustment in the tax basis
of the shares so acquired. See "Dividends, Distributions and Federal Income Tax"
for an explanation of circumstances in which a sales charge paid to acquire
shares of a Fund may not be taken into account in determining gain or loss on
the disposition of those shares.
Redemption of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Funds reserve the right to redeem, on not less
than 30 days' notice, an account in a Fund that has been reduced by a
shareholder (not by market action) to $500 or less. However, if during the
30-day notice period the shareholder purchases sufficient shares to bring the
value of the account above $500, the account will not be redeemed.
Redemption in Kind. All redemptions of shares of the Funds shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This commitment is irrevocable without the prior
approval of the SEC. In the case of redemption requests by shareholders in
excess of such amounts, the Board of Directors reserves the right to have a Fund
make payment, in whole or in part, in readily marketable securities or other
assets, in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued generally in the same manner as the
securities of that Fund are valued generally. If the recipient were to sell such
securities, he or she would incur brokerage charges.
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DIVIDENDS, DISTRIBUTIONS, AND
FEDERAL INCOME TAXATION
Each Fund intends to qualify annually to elect to be treated as a regulated
investment company pursuant to the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, each Fund must meet
certain income, distribution and diversification requirements. In any year in
which a Fund qualifies as a regulated investment company and timely distributes
all of its taxable income and substantially all of its net tax-exempt interest
income, if any, the Fund generally will not pay any U.S. federal income or
excise tax.
Each Fund intends to distribute to its shareholders substantially all of its
investment company taxable income (which includes, among other items, dividends
and interest and the excess, if any, of net short-term capital gains over net
long-term capital losses). ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund will declare distributions of such income daily and pay those
dividends monthly. ESC Strategic Appreciation Fund, ESC Strategic Global Equity
Fund and ESC Strategic Small Cap Fund will make distributions of such income at
least annually. Each Fund intends to distribute, at least annually,
substantially all net capital gain (the excess of net long-term capital gains
over net short-term capital losses). In determining amounts of capital gains to
be distributed, any capital loss carryovers from prior years will be applied
against capital gains.
In the case of ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund, the amount declared each day as a dividend may be based on projections of
estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account for
any difference between the projected and actual monthly investment income.
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Distributions will be paid in additional Fund shares of the relevant class based
on the net asset value of that class at the close of business of the payment
date of the distribution, unless the shareholder elects in writing, not less
than five full business days prior to the record date, to receive such
distributions in cash. Dividends declared in, and attributable to, the preceding
month will be paid within five business days after the end of such month. In the
case of the Funds that declare daily dividends, shares purchased will begin
earning dividends on the day after the purchase order is executed, and shares
redeemed will earn dividends through the day the redemption is executed.
Investors who redeem all or a portion of their Fund shares prior to a dividend
payment date will be entitled on the next payment date to all dividends declared
but unpaid on those shares at the time of their redemption.
Any dividend or other distribution paid by a Fund has the effect of reducing the
net asset value per share on the record date by the amount thereof. Therefore,
in the case of Funds which do not declare dividends daily, a dividend or other
distribution paid shortly after a purchase of shares would represent, in
substance, a return of capital to the shareholder (to the extent it is paid on
the shares so purchased), even though subject to income taxes, as discussed
below.
Distributions of investment company taxable income (regardless of whether
derived from dividends, interest or short-term capital gains) will be taxable to
shareholders as ordinary income. If a portion of a Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may qualify for the deduction for dividends received by corporations. No portion
of the dividends paid by ESC Strategic Income Fund or ESC Strategic Asset
Preservation Fund is expected to so qualify. Distributions of net long-term
capital gains designated by a Fund as capital gain dividends will be taxable as
long-term capital gains, regardless of how long a shareholder has held his Fund
shares. Distributions are taxable in the same manner whether received in
additional shares or in cash.
A distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Fund during October, November, or December of that year to
shareholders of record in such a month and paid by the Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
Any gain or loss realized by a shareholder upon the sale or other disposition of
shares of a Fund, or upon receipt of a distribution in complete liquidation of a
Fund, generally will be a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.
Under certain circumstances, the sales charge incurred in acquiring shares of a
Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies when shares of a Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Fund are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred a sales charge
initially. The portion of the sales charge affected by this rule will be treated
as a sales charge paid for the new shares.
The Funds may be required to withhold Federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where a Fund or shareholder has been notified
by the Internal Revenue Service that the shareholder is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld
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may be credited against the shareholder's U.S. federal income tax liability.
Further information relating to tax consequences is contained in the SAI.
Shareholders will be notified annually by the Company as to the federal tax
status of distributions made by the Fund(s) in which they invest. Depending on
the residence of the shareholder for tax purposes, distributions also may be
subject to state and local taxes, including withholding taxes. Foreign
shareholders may, for example, be subject to special withholding requirements.
Special tax treatment, including a penalty on certain pre-retirement
distributions, is accorded to accounts maintained as IRAs. Shareholders should
consult their own tax advisers as to the federal, state and local tax
consequences of ownership of shares of the Funds in their particular
circumstances.
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DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES
U.S. Government Securities (All Funds). U.S. Government securities are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Treasury bills, which have a maturity of up to one year,
are direct obligations of the United States and are the most frequently issued
marketable U.S. Government security. The U.S. Treasury also issues securities
with longer maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt securities
issued by U.S. Government-sponsored enterprises and federal agencies. Some
obligations of agencies are supported by the full faith and credit of the United
States or by U.S. Treasury guarantees, such as mortgage-backed certificates
issued by the Government National Mortgage Association; others, such as
obligations of the Federal Home Loan Banks, Federal Farm Credit Bank, Bank for
Cooperatives, Federal Intermediate Credit Banks and the Federal Land Bank, are
guaranteed by the right of the issuer to borrow from the U.S. Treasury; others,
such as obligations of the Federal National Mortgage Association, are supported
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as obligations of
the Student Loan Marketing Association and the Tennessee Valley Authority, are
backed only by the credit of the agency or instrumentality issuing the
obligation. In the case of obligations not backed by the full faith and credit
of the United States, the investor must look principally to the agency issuing
or guaranteeing the obligation for ultimate repayment.
Bank Obligations (All Funds). These obligations include negotiable certificates
of deposit and bankers' acceptances. The Funds limit their bank investments to
dollar-denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper (All Funds). Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions, as well as similar instruments issued by government
agencies and instrumentalities. Each Fund establishes its own standards of
creditworthiness for issuers of such investments.
Corporate Debt Securities (All Funds). A Fund's investments in U.S. dollar- or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments) which meet the previously
disclosed minimum ratings and maturity criteria established for the Fund under
the direction of the Board of Directors and the Fund's Manager or, if unrated,
are in
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the Manager's opinion comparable in quality to corporate debt securities in
which the Fund may invest. See "The Funds." The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Repurchase Agreements (All Funds). Securities held by the Funds may be subject
to repurchase agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed-upon time and price. These
agreements may be considered to be loans by the purchaser collateralized by the
underlying securities. These agreements will be fully collateralized and the
collateral plus accrued interest will be marked-to-market daily. The Funds will
enter into repurchase agreements only with dealers, domestic banks or recognized
financial institutions which, in the opinion of the Manager, present minimal
credit risks in accordance with guidelines adopted by the Board of Directors. In
the event of default by the seller under the repurchase agreement, a Fund may
have problems in exercising its rights to the underlying securities and may
experience time delays in connection with the disposition of such securities.
Loans of Portfolio Securities (All Funds). To increase current income each Fund
may lend its portfolio securities worth up to 5% of that Fund's total assets to
brokers, dealers and financial institutions, provided certain conditions are
met, including the condition that each loan is secured continuously by
collateral maintained on a daily mark-to-market basis in an amount at least
equal to the current market value of the securities loaned. For further
information, see the SAI.
Variable and Floating Rate Demand and Master Demand Notes (All Funds). The
Funds may, from time to time, buy variable or floating rate demand notes issued
by corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on specified notice. The obligation of the
issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The repurchase
price is ordinarily par plus accrued and unpaid interest. Generally, the
remarketing agent will adjust the interest rate every seven days (or at other
specified intervals) in order to maintain the interest rate at the prevailing
rate for securities with a seven-day or other designated maturity. A Fund's
investment in demand instruments which provide that the Fund will not receive
the principal note amount within seven days' notice, in combination with the
Fund's other investments in illiquid instruments, will be limited to an
aggregate total of 15% of that Fund's net assets.
The Funds may also buy variable rate master demand notes. The terms of these
obligations permit a Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Funds have the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Manager will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, a Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment,
the issuer meets the criteria set forth in
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this Prospectus for commercial paper obligations.
Forward Commitments and When-Issued Securities (ESC Strategic Income Fund and
ESC Strategic Asset Preservation Fund). A Fund may purchase when-issued
securities and make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time if the Fund holds, and maintains
until the settlement date in a segregated account cash, U.S. Government
securities or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Fund enters into offsetting contracts for the forward
sale of other securities it owns. Purchasing securities on a when-issued basis
and forward commitments involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of a Fund's other assets. No income accrues on
securities purchased on a when-issued basis prior to the time delivery of the
securities is made, although a Fund may earn interest on securities it has
deposited in the segregated account because it does not pay for the when-issued
securities until they are delivered. Investing in when-issued securities has the
effect of (but is not the same as) leveraging the Fund's assets. Although a Fund
would generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of actually acquiring securities, that Fund may
dispose of a when-issued security or forward commitment prior to settlement if
the Manager deems it appropriate to do so. A Fund may realize short-term profits
or losses upon such sales.
Mortgage-Related Securities (ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund). Mortgage pass-through securities are securities
representing interests in "pools" of mortgages in which payments of both
interest and principal on the securities are made monthly, in effect "passing
through" monthly payments made by the individual borrowers on the residential
mortgage loans which underlie the securities (net of fees paid to the issuer or
guarantor of the securities). Early repayment of principal on mortgage
pass-through securities (arising from prepayments of principal due to sale of
the underlying property, refinancing, or foreclosure, net of fees and costs
which may be incurred) may expose a Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with prepayment
features may not increase as much as other fixed-income securities. In
recognition of this prepayment risk to investors, the Public Securities
Association (the "PSA") has standardized the method of measuring the rate of
mortgage loan principal prepayments. The PSA formula, the Constant Prepayment
Rate (the "CPR"), or other similar models that are standard in the industry will
be used by a Fund in calculating maturity for purposes of its investment in
mortgage-related securities. Because the average life of mortgage-related
securities may lengthen with increases in interest rates, the portfolio-weighted
average life of the securities in which a Fund is invested may at times lengthen
due to this effect. Under these circumstances, a Manager may, but is not
required to, sell securities in order to maintain an appropriate
portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (such as securities guaranteed by the
Government National Mortgage Association ("GNMA"); or guaranteed by agencies or
instrumentalities of the U.S. Government (such as securities guaranteed by the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities created by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance compa-
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nies, mortgage bankers and other secondary market issuers) may be supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
A Fund may also invest in investment grade Collateralized Mortgage Obligations
("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding longer maturity classes receive principal only after
the first class has been retired. CMOs may be issued by government and
non-governmental entities. Some CMOs are debt obligations of FHLMC issued in
multiple classes with different maturity dates secured by the pledge of a pool
of conventional mortgages purchased by FHLMC. Other types of CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios. To the extent a
particular CMO is issued by an investment company, a Fund's ability to invest in
such CMOs will be limited. See "Investment Restrictions" in the SAI.
Assumptions generally accepted by the industry concerning the probability of
early payment may be used in the calculation of maturities for debt securities
that contain put or call provisions, sometimes resulting in a calculated
maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private entities may
create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-related securities are developed
and offered to investors, the Managers will, consistent with a Fund's investment
objectives, policies and quality standards, consider making investments in such
new types of mortgage-related securities.
Other Asset-Backed Securities (ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund). Other asset-backed securities (unrelated to mortgage loans)
have been offered to investors, such as Certificates for Automobile Receivables
("CARS"). CARS represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS are "passed through" monthly to
certificate holders and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. Underlying sales contracts are
subject to prepayment, which may reduce the overall return to certificate
holders. If the letter of credit is exhausted, certificate holders may also
experience delays in payment or losses on CARS if the full amounts due on
underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage or loss of the vehicles securing the contracts,
or other factors. For asset-backed securities, the industry standard uses a
principal prepayment model, the "ABS Model," which is similar to the PSA model
described previously under "Mortgage-Related Securities." Either the PSA model,
the ABS model or other similar models that are standard in the industry will be
used by a Fund in calculating maturity for purposes of its investment in
asset-backed securities.
A Fund may also invest in Stripped Mortgage-Backed Securities ("SMBS"), which
are derivative multi-class mortgage securities issued by U.S. Government
agencies or in-
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strumentalities or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and their special purpose subsidiaries.
SMBS generally have two classes: one (the "IO" class) entitles the holders to
receive distributions consisting solely or entirely of all or a portion of
interest payments from the underlying pool of mortgages or mortgage-backed
securities ("mortgage assets"); the other (the "PO") class entitles the holders
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying mortgage asset pool. The cash flows and yields
on IO and PO classes are considerably more sensitive to changes in the rate of
principal payments (including prepayments) on the underlying mortgage assets
than an investment in a traditional mortgage-backed security, thus exposing a
Fund to more risk.
Foreign Securities (All Funds except ESC Strategic Asset Preservation
Fund). These Funds may invest directly in both sponsored and unsponsored U.S.
dollar- or foreign currency-denominated corporate securities (including
preferred or preference stock), certificates of deposit and bankers' acceptances
issued by foreign banks, U.S. dollar-denominated bonds sold in the United States
("Yankee bonds"), other bonds denominated in U.S. dollars or other currencies
and sold to investors outside the United States ("Eurobonds"), and obligations
of foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. There may be less information
available to a Fund concerning unsponsored securities, for which the paying
agent is located outside the United States. See "Risks of Investing in the
Funds."
The Funds may purchase foreign securities traded in the United States or in
foreign markets. The Funds may invest directly in foreign equity securities and
in securities represented by European Depositary Receipts ("EDRs") or American
Depositary Receipts ("ADRs"). ADRs are dollar-denominated receipts generally
issued by domestic banks, which represent the deposit with the bank of a
security of a foreign issuer, and which are publicly traded on exchanges or
over-the-counter in the United States. EDRs are receipts similar to ADRs and are
issued and traded in Europe.
There are certain risks associated with investments in unsponsored ADR programs.
Because the non-U.S. company does not actively participate in the creation of
the ADR program, the underlying agreement for service and payment will be
between the depositary and the shareholders. The company issuing the stock
underlying the ADRs pays nothing to establish the unsponsored facility, as fees
for ADR issuance and cancellation are paid by brokers. Investors directly bear
the expenses associated with certificate transfer, custody and dividend payment.
In addition, in an unsponsored ADR program, there may be several depositaries
with no defined legal obligations to the non-U.S. company. The duplicate
depositaries may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports. For more information, see "Risks of
Investing in the Funds."
Forward Foreign Currency Transactions (All Funds except ESC Strategic Asset
Preservation Fund). The Funds may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates. See the SAI for further information concerning forward foreign
currency transactions.
Futures Contracts and Options (All Funds). The Funds may purchase and sell
futures contracts on securities, currencies, and indices of securities, and
write and sell put and call options on securities, currencies and indices of
securities as a hedge against changes in interest rates, stock prices, currency
fluctuations and other market developments, provided that not more than 5% of a
Fund's net assets are committed to margin deposits on futures contracts and
premiums for options. See the SAI for further information about futures and
options. See "Risks of Investing in the Funds" for a discussion of risks related
to investing in futures and options.
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Municipal Obligations (ESC Strategic Asset Preservation Fund). When consistent
with its investment objective and policies, including quality criteria, the Fund
may invest in securities issued by states, their political subdivisions and
agencies and instrumentalities of the foregoing ("Municipal Obligations"). Such
Municipal Obligations may include municipal bonds, floating rate and variable
rate Municipal Obligations, participation interests in municipal bonds, tax-
exempt asset-backed certificates, tax-exempt commercial paper, short-term
municipal notes, stand-by commitments, municipal lease obligations and third
party puts. For more information on Municipal Obligations, see "Risks of
Investing in the Funds" in this Prospectus and "Investment Policies" in the SAI.
Short Sales (ESC Strategic Appreciation Fund, ESC Strategic Global Equity Fund,
and ESC Strategic Small Cap Fund). A Fund may from time to time sell securities
short. A short sale is a transaction in which a Fund sells securities it does
not own (but has borrowed) in anticipation of a decline in the market price of
the securities. Risks associated with short sales of securities are described
below under "Risks of Investing in the Funds."
To complete a short sale, a Fund must arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by a Fund from
the short sale are retained by the broker until the Fund replaces the borrowed
securities. In borrowing the securities to be delivered to the buyer, the Fund
becomes obligated to replace the securities borrowed at their market price at
the time of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
A Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or obligations of the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"). In addition, the Fund will
place in a segregated account with its custodian an amount of cash or U.S.
Government Securities equal to the difference, if any, between (a) the market
value of the securities sold at the time they were sold short, and (b) any cash
or U.S. Government Securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the Fund will maintain the segregated
account daily at a level so that (a) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will equal the current market value of the securities sold short, and (b)
the amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short. For additional
limitations on short sales, see "Risks of Investing in the Funds."
Short Sales Against the Box (ESC Strategic Appreciation Fund, ESC Strategic
Global Equity Fund, and ESC Strategic Small Cap Fund). A Fund may, in addition
to engaging in short sales as described above, enter into a short sale of common
stock such that when the short position is open, the Fund owns an equal amount
of preferred stock or debt securities, convertible or exchangeable without
payment of further consideration, into an equal number of shares of the common
stock sold short. This kind of short sale, which is described as one "against
the box," will be entered into by a Fund for the purpose of receiving a portion
of the interest earned by the executing broker from the proceeds of the sale.
The proceeds of the sale will be held by the broker until the settlement date,
when the Fund delivers the convertible securities to close out its short
position. Although, prior to delivery, the Fund will have to pay an amount equal
to any dividends paid on the common stock sold short, the Fund will receive the
dividends from the preferred stock or interest from the debt securities
convertible into the stock sold short, plus a portion of the interest earned
from the proceeds of the short sale. A Fund will deposit, in a segregated
account with its custodian, convertible preferred stocks or convertible debt
securities in connection with short sales against the box.
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INVESTMENT RESTRICTIONS
The following restrictions are applicable to each of the Funds, except as
otherwise indicated.
(1) Except for ESC Strategic Small Cap Fund, no Fund may, with respect to 75% of
its total assets, purchase more than 10% of the voting securities of any one
issuer or invest more than 5% of the value of such assets in the securities or
instruments of any one issuer, except securities or instruments issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
(2) No Fund may purchase securities or instruments which would cause 25% or more
of the market value of its total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is no
limit with respect to investments in the U.S. Government, its agencies and
instrumentalities.
(3) No Fund may borrow money, except that a Fund may borrow from banks up to 10%
of the current value of its total net assets for temporary or emergency
purposes. A Fund will make no purchases if its outstanding borrowings exceed 5%
of its total assets.
(4) No Fund may make loans, except that a Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements with respect to its portfolio
securities, and (c) purchase the types of debt instruments described in this
Prospectus or the SAI.
For purposes of investment restriction number (1), ESC Strategic Asset
Preservation Fund considers a Municipal Obligation to be issued by the
governmental entity (or entities) whose assets and revenues back the Municipal
Obligation. For a Municipal Obligation backed only by the assets and revenues of
a non-governmental user, such user is deemed to be the issuer; such issuers, to
the extent their principal business activities are in the same industry, are
also subject to investment restriction (2). For purposes of investment
restriction (2), public utilities are not deemed to be a single industry but are
separated by industrial categories, such as telephone or gas utilities.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of each Fund which may be changed with respect to that
Fund only when permitted by law and approved by the holders of a majority of the
applicable Fund's outstanding voting securities as described under "Other
Information -- Voting."
Additionally, as a non-fundamental policy, no Fund may invest more than 15% of
the value of its net assets in investments which are illiquid, or not readily
marketable (including repurchase agreements having maturities of more than seven
calendar days and variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount within seven days' notice).
If a percentage restriction on investment policies or the investment or use of
assets set forth in this Prospectus are adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not be
considered a violation.
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OTHER INFORMATION
CAPITALIZATION
ESC Strategic Funds, Inc. was organized as a Maryland corporation on November
24, 1993 and currently consists of five separately managed portfolios. (The
Company has two additional portfolios that are currently inactive.) The Board of
Directors may establish additional portfolios in the future. The capitalization
of the Company consists solely of 650 million shares of common stock with a par
value of $0.001 per share. When issued, shares of the Funds are fully paid,
non-assessable and freely transferable.
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VOTING
Shareholders have the right to vote in the election of Directors and on any and
all matters on which, by law or under the provisions of the Articles of
Incorporation, they may be entitled to vote. The Company is not required to hold
regular annual meetings of the Funds' shareholders and does not intend to do so.
Each Fund's shareholders vote separately on matters affecting only that Fund,
such as agreements with its Portfolio Managers, and shareholders of each class
within a Fund vote separately on matters affecting only that class, such as its
service and distribution plan. For information concerning exemptive relief that
would permit the Company to retain new Managers without shareholder approval,
see "Management of the Fund" and "Other Information -- Voting Rights" in the
SAI.
The Articles of Incorporation provide that the holders of not less than a
majority of the outstanding shares of the Company may remove a person serving as
Director. The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Other Information -- Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate voting
for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of a Fund, a class or the Company, as
applicable, means the vote of the lesser of: (1) 67% of the shares of the Fund
(a class or the Company) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2) more than 50%
of the outstanding shares of the Fund (a class or the Company).
PERFORMANCE INFORMATION
The Funds may, from time to time, include the yield and total return for shares
(including each class, as applicable) in advertisements or reports to
shareholders or prospective investors. The methods used to calculate the yield
and total return of the Funds are mandated by the SEC.
Quotations of "yield" will be based on the investment income per share during a
particular 30-day (or one month) period (including dividends and interest), less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the maximum public offering price
per share (for each class, as applicable) on the last day of the period.
Quotations of yield reflect a Fund's (and its classes') performance only during
the particular period on which the calculations are based. Yields will vary
based on changes in market conditions, the level of interest rates and the level
of the Fund's expenses, including class-specific expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future. Quotations of average annual total return will be
expressed in terms of the average annual compounded rate of return of a 62
hypothetical investment in shares of a Fund (or class) over periods of 1, 5 and
10 years (up to the life of the Fund), reflect the deduction of a proportional
share of Fund (and class-specific expenses, as applicable) on an annual basis,
and assume that all dividends and distributions are reinvested when paid.
Performance information for the Funds may be compared to various unmanaged
indices, such as the Standard & Poor's 500 Stock Index, the Dow Jones Industrial
Average, indices prepared by Lipper Analytical Services, and other entities or
organizations which track the performance of investment companies. Any
performance information should be considered in light of each Fund's investment
objectives and policies, characteristics and quality of the Fund and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Funds, see the SAI.
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ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in a statement for
each shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Funds have been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
Furman Selz, the Company's Administrator, provides fund accounting functions for
the Funds, and provides personnel and facilities to perform shareholder
servicing and transfer agency-related services for the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to Furman Selz Mutual Funds
Department, 237 Park Avenue, New York, New York 10017.
General and Account Information:
(800) 261-FUND (3863).
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APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as follows:
AAA -- judged to be the best quality and they carry the smallest degree of
investment risk; AA -- judged to be of high quality by all standards -- together
with the Aaa group, they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly
secured -- interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; BA -- judged to
have speculative elements, their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; CAA -- are of
poor standing -- such issues may be in default or there may be present elements
of danger with respect to principal or interest; CA -- speculative in a high
degree, often in default; C -- lowest rated class of bonds, regarded as having
extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal; whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D -- interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 -- denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades;
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MIG 4/VMIG 4 -- denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk;
SQ -- denotes speculative quality, instruments in this category lack margins of
protection.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows: PRIME-1 --
issuers (or supporting institutions) have a superior ability for repayment of
senior short-term promissory obligations; PRIME-2 -- issuers (or supporting
institutions) have a strong ability for repayment of senior short-term
promissory obligations; PRIME-3 -- issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term promissory obligations;
NOT PRIME -- issuers do not fall within any of the Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
INVESTMENT GRADE RATINGS: AAA -- the highest rating assigned by S&P, capacity to
pay interest and repay principal is extremely strong; AA -- has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A -- has strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories; BBB -- regarded as having an adequate capacity to pay interest and
repay principal -- whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATINGS: BB, B, CCC, CC, C -- debt rated in these categories
is regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal -- while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI -- reserved for
income bonds on which no interest is being paid; D -- in default, and payment of
interest and/or repayment of principal is in arrears. PLUS (+) OR MINUS
(-) -- the ratings from "AA" to "CCC" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
DESCRIPTION OF S&P'S RATING FOR MUNICIPAL NOTES AND SHORT-TERM MUNICIPAL DEMAND
OBLIGATIONS:
Rating categories are as follows: SP-1 -- has a very strong or strong capacity
to pay principal and interest -- those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation; SP-2 -- has a
satisfactory capacity to pay principal and interest; SP-3 -- issues carrying
this designation have a speculative capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR SHORT-TERM CORPORATE DEMAND OBLIGATIONS AND
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 -- the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- capacity for timely payment is
satisfactory -- however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 -- has adequate capacity for timely
payment -- however, is more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations; B -- regarded
as having only speculative capacity for timely payment; C -- a doubtful capacity
for payment; D -- in payment default -- the "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
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ADDRESS FOR:
ESC
[LOGO] STRATEGIC
FUNDS
ESC STRATEGIC FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
INVESTMENT ADVISER AND DISTRIBUTOR
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219-1743
ADMINISTRATOR
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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