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ESC STRATEGIC SMALL CAP FUND
a portfolio of
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 Small Cap
Fund, a portfolio of ESC Strategic Funds, Inc., are authorized to waive the
minimum initial and subsequent investment requirements of the Fund.
This information is added to the paragraph set forth under the heading
"Minimum Purchase Requirements" on page 16 of the Fund's prospectus dated July
28, 1995.
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ESC
[LOGO] STRATEGIC
FUNDS
ESC STRATEGIC SMALL CAP FUND
A PORTFOLIO OF
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 ESC Strategic Small Cap Fund (the "Fund"), the
objective of which is a high level of capital appreciation. The Fund is one of
five funds comprising ESC Strategic Funds, Inc. (the "Company"), an open-end
management registered investment company advised by Equitable Securities
Corporation (the "Adviser"). The Fund is a non-diversified separate portfolio of
the Company and offers two classes of shares. The Fund bears certain expenses
related to the distribution of its shares.
SHARES OF THE FUND 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 THE FUND AND SHOULD BE READ AND RETAINED FOR
INFORMATION ABOUT THE FUND.
A Statement of Additional Information (the "SAI"), dated July 28, 1995,
containing additional and more detailed information about the Fund, 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
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PAGE
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Highlights....................................................................... 2
Fund Expenses.................................................................... 4
Fee Table........................................................................ 4
Financial Highlights............................................................. 5
The Fund......................................................................... 6
Risks of Investing in the Fund................................................... 7
Management of the Fund........................................................... 10
Fund Share Valuation............................................................. 13
Pricing of Fund Shares........................................................... 14
Minimum Purchase Requirements.................................................... 16
Purchase of Fund Shares.......................................................... 16
Retirement Plan Accounts......................................................... 17
Exchange of Fund Shares.......................................................... 18
Redemption of Fund Shares........................................................ 18
Dividends, Distributions, and Federal Income Taxation............................ 21
Description of Securities and Investment Practices............................... 22
Investment Restrictions.......................................................... 25
Other Information................................................................ 26
Appendix......................................................................... 28
</TABLE>
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HIGHLIGHTS
THE FUND
This Prospectus describes ESC Strategic Small Cap Fund (the "Fund"), one of five
Funds comprising ESC Strategic Funds, Inc. (the "Company"). The 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.
SPECIAL RISKS
THE FUND MAY ENGAGE IN TRANSACTIONS IN OPTIONS AND FUTURES CONTRACTS FOR HEDGING
PURPOSES, PROVIDED THAT NO MORE THAN 5% OF THE FUND'S ASSETS MAY BE PLACED AT
RISK BY SUCH TRANSACTIONS. THESE AND OTHER INVESTMENT PRACTICES OF THE FUND,
INCLUDING ITS NON-DIVERSIFIED STATUS, INVOLVE SPECIAL RISKS. FOR MORE
INFORMATION ON THESE PRACTICES AND OTHER INVESTMENTS AND INVESTMENT RESTRICTIONS
AND RISKS, SEE "DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES" AND "RISKS
OF INVESTING IN THE FUND." THERE CAN, OF COURSE, BE NO ASSURANCE THAT THE FUND
WILL ACHIEVE ITS INVESTMENT OBJECTIVE. MOREOVER, INVESTORS SHOULD BE AWARE THAT
THE VALUE OF THE FUND'S SHARES WILL FLUCTUATE, WHICH MAY CAUSE A LOSS IN THE
PRINCIPAL VALUE OF THE INVESTMENT.
THE ADVISER AND THE MANAGER
Overall management of the Fund 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 predecessor of the Adviser 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, a
wholly-owned subsidiary of the Adviser formed in 1991, provides investment
management, trust, and other fiduciary services to individuals and other
clients. In 1986, the Adviser formed the
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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 its services, the Adviser receives a fee at an annual
rate of 1.0% based on the Fund's average daily net assets. This fee, which is
higher than those for most other investment companies, is used by the Adviser
to pay the Manager's fee, at no additional cost to the Fund.
Portfolio management for the Fund is provided by Equitable Asset Management,
Inc. ("EAM"), an affiliate of the Adviser. See "Management of the Fund."
THE DISTRIBUTOR AND ADMINISTRATOR
Equitable Securities Corporation distributes the Fund's shares and may be
reimbursed for certain of its distribution-related expenses. Furman Selz
Incorporated ("Furman Selz") acts as Administrator, transfer agent and fund
accounting agent to the Fund. For its services as Administrator, the 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 Fund."
CLASSES OF SHARES
The 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. See
"Management of the Fund -- The Distributor."
In selecting between the classes, a prospective investor 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 Fund may receive different levels of compensation
for sales of Class A and Class D shares.
GUIDE TO INVESTING IN ESC STRATEGIC SMALL CAP FUND
Purchase orders for shares of the Fund received by your broker or Service
Organization in proper order prior to 4:15 p.m., Eastern time, and transmitted
to the Fund prior to 5:00 p.m. Eastern time will become effective that day.
<TABLE>
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- - 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 of the Fund for shares of
the same class in another fund of ESC Strategic Funds, Inc. by telephone or
mail.
<TABLE>
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- - Minimum initial exchange.................................................... $ 2,000
(No minimum for subsequent exchanges.)
</TABLE>
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* Class D shares were formerly designated as Class B shares.
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Shareholders may redeem shares by telephone, mail or wire.
- - The Fund reserves the right to redeem upon not less than 30 days' notice all
shares in an account which has 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 Fund unless cash payment is
requested.
- - Distributions for 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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FUND EXPENSES
The following expense tables indicate costs and expenses that an investor should
anticipate incurring either directly or indirectly as a shareholder of the 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
SMALL CAP FUND
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CLASS A CLASS D
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)*............................. 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).............................. None None
Deferred Sales Charge (as a percentage of redemption proceeds)..... None None
Exchange Fees...................................................... None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net assets annualized)
Management Fees.................................................. 1.00% 1.00%
12b-1 Fees**..................................................... 0.25% 0.75%
Other Expenses................................................... 0.75% 0.75%
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TOTAL PORTFOLIO OPERATING EXPENSES................................. 2.00% 2.50%
====== ======
</TABLE>
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* An initial sales charge of 1.50% on Class D shares 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 the 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 Fund."
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Fund shareholder 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>
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ESC STRATEGIC
SMALL CAP FUND
-----------------
CLASS A CLASS D
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1 year......................................................... $ 64 $ 25
3 years........................................................ $ 105 $ 78
5 years........................................................ $ 148 $ 133
10 years....................................................... $ 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.
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FINANCIAL HIGHLIGHTS
The financial data shown below, which is audited, is to assist investors in
evaluating the performance of the Fund since its inception on June 8, 1994
through March 31, 1995. This data is based on information contained in audited
financial statements for the same period which are contained in the Statement of
Additional Information.
<TABLE>
<CAPTION>
ESC STRATEGIC
SMALL CAP FUND
FOR THE PERIOD
JUNE 8, 1994*
THROUGH
MARCH 31, 1995
------------------------
CLASS A CLASS D
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<S> <C> <C>
Net Asset Value, Beginning of Period:........................ $ 10.00 $ 10.00
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Income from Investment Operations:
Net investment (loss):..................................... (0.03) (0.05)
Net realized/unrealized gain on investments:............... 1.52 1.51
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Total from Investment Operations:.......................... 1.49 1.46
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Less Distributions:
Dividends from capital gains:.............................. (0.24) (0.24)
Dividends from net investment income:...................... 0 0
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Total Distributions:......................................... (0.24) (0.24)
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Net Asset Value, End of Period:.............................. $ 11.25 $ 11.22
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Total Return (not reflecting sales load):.................... 15.03% 14.72%
Net Assets End of period (in thousands):..................... $ 8,785 $ 3,367
Ratios to Average Net Assets of:
Net investment income:..................................... (0.43)%** (0.93)%**
Expenses net of waivers/reimbursements:.................... 2.00%** 2.50%**
Expenses before waivers/reimbursements:.................... 3.28%** 3.68%**
Portfolio Turnover Rate:..................................... 151% 151%
</TABLE>
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* Commencement of operations
** annualized
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THE 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 the Fund is a high level of capital appreciation.
Under normal circumstances, at least 65% of the value of the Funds' 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 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. There can be no assurance that the Fund will
achieve its investment objective.
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
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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. In addition to the investment policies and practices
described above, the Fund may engage in transactions in options and futures
contracts for hedging purposes, provided that no more than 5% of the Fund's
assets may be placed at risk by such transactions. (See "Risks of Investing in
the Fund."). For additional information on these and other investments and
investment restrictions, see "Description of Securities and Investment
Practices," "Investment Restrictions," and the SAI. The Fund's Manager is EAM.
For information regarding the Manager, see "Management of the Fund."
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RISKS OF INVESTING IN THE FUND
The price per share of the Fund will fluctuate with changes in the value of the
investments held by the Fund. Additionally, an investment in the 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 the 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 Manager monitor developments in
the economy, the securities markets, and with each particular issuer.
Foreign Securities. 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. The 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 the 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
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pace of business activity in certain other countries and the United States, and
other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Although 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 the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to sell that currency
to the dealer.
Through the Fund's flexible policies, the Manager endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the Fund's investments. See the SAI
for further information about foreign securities.
Short Sales. The 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 short sales differ from losses that could be
incurred from a purchase of a security, because losses from 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 the 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
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, the Fund may be
unable to close out a position. If the 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.
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 Fund invests 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 Fund's assets. The
Fund may, however, engage in foreign currency transactions to protect its
portfolio 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 curren-
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cies, and foreign exchange futures contracts. (See below.) The Fund 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 the 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. The 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 the 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 the Fund's use of futures contracts and related options for hedging may
protect the 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 the 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 the Fund's portfolio. An incorrect forecast or imperfect
correlation could result in a loss on both the hedged securities in the 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 the
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.
The 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. The Fund will
not enter into a futures contract if immediately thereafter the initial margin
deposits 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 Fund may trade futures contracts and options on futures contracts on U.S.
domestic markets and 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 princi-
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pal 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 the 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 the Fund.
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MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Directors are William Howard Cammack, Sr.;
William Howard Cammack, Jr.; J. Bransford Wallace; Brownlee O. Currey, 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 continuously monitors the
performance of the Fund and its Manager. Investments and investment management
decisions are made by the Fund's Manager based on the Fund's investment
objective and policies.
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 and has
operated under its present name since 1972. 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. The Fund's Manager, 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 Fund, the Adviser receives fees,
payable monthly based on average daily net assets, at an annual rate of 1.0% of
the Fund's average net assets. This fee is higher than that paid by most other
Funds. The Manager's fees, equal on an annual basis to 0.50% of the Fund's
average daily net assets, are paid by the Adviser from its fees from the Fund.
The Adviser has agreed to limit the Fund's expenses to the following percentages
of the net assets of each class: 2.00% (Class A) and 2.50%. (Class D) For the
period ended March 31, 1995, pursuant to an agreement to limit Fund expenses,
the Adviser waived the fee of $21,417 for the Small Cap Fund. Absent this waiver
agreement, the Advisory fee would have been $71,388.
W. Howard Cammack, Jr. has primary responsibility for the Adviser's advice to
the Fund. 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 and of its
wholly-owned subsidiary,
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10
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Equitable Trust Company. 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 MANAGER
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 $6.4 million in assets. Frank D. Inman has primary investment
responsibility for equity management at EAM, including EAM's services to the
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.
THE DISTRIBUTOR
The Adviser acts as Distributor for the Funds pursuant to a Distribution
Contract.
The Fund has adopted a service and distribution plan ("Plan") with respect to
each class of its shares. The Plan provides 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 $11,355 for the Small Cap Fund,
pursuant to the Class A Plan. The Plan provides 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 $9,355 for the Small Cap Fund pursuant to the Class D Plan.
Service Fees are paid to securities dealers and other financial institutions for
maintaining shareholder accounts and providing related services to shareholders.
Under the Plan, the 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 amounts, at the end of
each year, totalling up to 0.25% of the average daily net asset value of Class A
shares 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 Fund. The 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 the
Plan, including related legal and accounting fees. The Fund will not be liable
for distribution expenditures made by the Distributor in any given year in
excess of the maximum amount payable under the Plan in that year.
SERVICE ORGANIZATIONS
Payments may be made by the Fund or by the Adviser to various banks, trust
companies, broker-dealers or other financial organizations (collectively,
"Service Organizations") for providing administrative services for the Fund and
its shareholders, such as maintaining shareholder records, answering shareholder
inquiries and forwarding materials and information to shareholders. The Fund
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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 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 the Fund's
minimum initial or subsequent investment 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 Fund. 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 the
Fund's Administrator. 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 Fund's operations including: (a)
general supervision of the Fund's operation including coordination of the
services performed by the Adviser, Manager, 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; (c) general supervision relative to the compilation of data
required for the preparation of periodic reports distributed to the Fund's
officers and Board of Directors; and (d) furnishing office space and certain
facilities required for conducting the Fund's business. For these services,
Furman Selz receives from the Fund a fee, payable monthly, at the annual rate of
0.15% of the Fund's average daily net assets. For the period ended March 31,
1995, pursuant to an agreement to limit Fund expenses, the Administrator waived
the fee of $5,442 for the Small Cap Fund. Absent this waiver agreement, the
Administrative fee would have been $10,709. 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
with respect to the Fund of $15.00 per account per year subject to a required
minimum fee of $10,000, plus out-of-pocket expenses. For the period ended March
31, 1995, pursuant to an agreement to limit Fund expenses, the Transfer Agent
waived the fee of $2,102 for the Small Cap Fund. Absent this waiver agreement,
the transfer agent fee would have been $8,137. 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 the Fund described therein, for an annual fee of $30,000, plus out-of-pocket
expenses. For the period ended March 31, 1995, Furman Selz earned for Fund
accounting services including out of pocket expenses $25,666.
OTHER EXPENSES
The Fund bears all costs of its operations other than expenses specifically
assumed by the Administrator, the Adviser, the Manager or other service
providers. In addition to the fees to service providers described above, the
costs borne by the Fund, some of which may vary between the 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 Fund's portfolio securities; expenses
of registering and qualifying the Fund's shares for sale with the SEC and with
various state securities commissions; expenses of maintaining the Fund's legal
existence and of shareholders' meetings; and expenses of preparing and
distributing reports, proxy statements and prospectuses to existing
shareholders. The Fund bears its own expenses associated with its establishment
as a portfolio of the Com-
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pany; these expenses are amortized over a five-year period from the commencement
of the Fund's operations. Company expenses directly attributable to the Fund or
to a class are charged to the Fund or that class; other expenses are allocated
proportionately among all of the funds (including the Fund) 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
Agreement, the Manager places orders for the purchase and sale of portfolio
investments for the Fund's account with brokers or dealers it selects in its
discretion.
In effecting purchases and sales of portfolio securities for the account of the
Fund, the Manager will seek the best execution of the Fund's orders. Purchases
and sales of common stocks are generally placed by the Manager with
broker-dealers which, in the judgment of the 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 shares
and research provided to the Manager. Broker-dealers selected to execute
portfolio transactions for the Fund may include affiliates of the Company, the
Adviser, the Administrator, the Manager or a manager of another fund of the
Company, provided the charge for any such transaction does not exceed usual and
customary levels. The Manager may cause the 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 Fund 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. Purchases and sales of any portfolio debt securities
for the Fund are generally placed by the Manager with primary market makers for
these securities on a net basis, without any brokerage commission being paid by
the Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. The Fund 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
Fund 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).
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
Manager may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
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FUND SHARE VALUATION
The net asset value per share for each class of shares of the 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 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 Manager 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
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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 the 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 the 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 Fund, or by an authorized broker, investment adviser or
Service Organization and transmitted to the Fund by 5:00 p.m. Eastern Time. (See
"Purchase of Fund Shares"). The sales charge on purchases of each class of
shares of the Fund 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
CLASS A SHARES PRICE INVESTED PRICE
- --------------------------------------------------------------- -------- -------- ----------------
<S> <C> <C> <C>
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 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, the Manager or a manager of another fund of the Company pursuant to a
written agreement;
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(b) any person purchasing shares with the proceeds of a distribution from a
trust, investment management or other fiduciary account managed by the Adviser,
the Manager or a manager of another fund of the Company 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 Fund; (f) directors or officers of
Furman Selz, the Adviser, the Manager or a manager of another fund of the
Company, 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
The Fund permits sales charges on Class A shares to be reduced through rights of
accumulation. For Class A shares, the schedule 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 of Class A shares of the Fund is added to the net asset value of any
other Class A shares of 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 the Fund and other funds in the Company
valued at $100,000 and purchased an additional $20,000 of shares of the Fund or
of another fund in the Company (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 shares of the Fund or
another fund in the Company. 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 the Fund. Shares of the Fund previously
purchased during a 90-day period prior to the date of receipt by the Fund 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 Fund of such prior purchases.
A Letter of Intent permits an investor to establish a total investment goal for
the Fund 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
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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 the 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 Fund, 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 Fund.
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MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Fund 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 Fund reserves the right to reject purchase
orders.
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PURCHASE OF FUND SHARES
All funds received by the Fund are invested in full and fractional shares of the
indicated class of the 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
Fund reserves 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 Fund
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 Fund 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
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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 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: ESC Strategic Small Cap Fund
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 Fund. By using the Purchase Application, an investor may
specify other distribution options and may add any special features offered by
the 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 Fund
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 the Fund
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
The Fund 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 Fund at 1-800-261-FUND(3863).
EXCHANGE OF FUND SHARES
The Fund offers two convenient ways to exchange shares for shares of another
fund in the Company. Shares of a particular class of the Fund may be exchanged
only for shares
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of that same class in another fund, with no sales charge. Before engaging in an
exchange transaction, a shareholder should obtain and read carefully a
prospectus for the fund into which the exchange will occur. A shareholder may
not exchange Fund shares for shares 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 Company 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 Fund 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 Fund containing the information described below.
Exchange by Mail. To exchange Fund shares by mail, shareholders should simply
send a letter of instruction to the Fund. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the name of the Fund and of 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 Fund 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) the class
of shares to be exchanged; (c) the name of the Fund and of 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 Fund employs 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 the Fund does not follow such procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Company
reserves 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 Fund. 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, the shareholder will continue to be a record owner of shares for
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purposes of receiving any declared dividends and will be entitled to exercise
all other beneficial rights of ownership.
Once the shares are redeemed, the 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 Fund 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
Fund has no present intention to do so, the Fund reserves 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 Fund's services and their provisions may
be modified or terminated at any time by the Fund. If the Fund terminates any
particular service, it will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
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
Fund 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
Fund. To be accepted, a letter requesting redemption must include: (a) the name
of the Fund, class of shares 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 Fund 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 Fund and the class 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 Fund employs
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 the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The 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 Fund by mail or
telephone and instructing the Fund 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 Fund and the class
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.
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Systematic Withdrawal Plan. An owner of $12,000 or more of shares of the 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 class of the Fund, and the same account from which the shares were
redeemed. 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 the 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 Fund reserves the right to redeem, on not less
than 30 days' notice, a Fund account 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 Fund shares shall be made in cash,
except that the commitment to redeem shares in cash extends only to redemption
requests made by each shareholder 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 the 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 in the same manner as the securities of the 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
The Fund intends to qualify annually 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, the Fund must meet certain income,
distribution and diversification requirements. If the Fund qualifies as a
regulated investment company and timely distributes all of its taxable income,
the Fund generally will not pay any U.S. federal income or excise tax.
The Fund intends to distribute at least annually to its shareholders all of its
investment company taxable income (which includes, among other items, dividends
and interest, less expenses and the excess, if any, of net short-term capital
gains over net long-term capital losses). The Fund also 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 current year capital gains.
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.
Any dividend or other distribution paid by the Fund has the effect of reducing
the net asset value per share on the record date by the amount thereof.
Therefore, 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 the 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.
Distributions of net long-term capital gains designated by the 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 the 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 the Fund, or upon receipt of a distribution in complete liquidation of
the 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
the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies when Fund shares are exchanged
within 90 days after the date they were purchased for shares of another fund
without payment of 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
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this rule will be treated as a sales charge paid for the new shares.
The Fund 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 the Fund or a 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 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. 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 Fund shares in their
particular circumstances.
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DESCRIPTION OF SECURITIES AND
INVESTMENT PRACTICES
U.S. Government Securities. 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. These obligations include negotiable certificates of deposit
and bankers' acceptances. The Fund limits its 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. 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 govern-
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ment agencies and instrumentalities. The Fund has established standards of
creditworthiness for issuers of such investments.
Corporate Debt Securities. The 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 criteria established for the Fund under the direction of the
Board of Directors and the Fund's Manager or, if unrated, are in the Manager's
opinion comparable in quality to corporate debt securities in which the Fund may
invest. See "The Fund." 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. Securities held by the Fund 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 Fund 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, the 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. To increase current income the Fund may lend its
portfolio securities worth up to 5% of the 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. The Fund 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. The Fund's investments 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 the Fund's net assets.
The Fund may also buy variable rate master demand notes. The terms of these
obligations permit the 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 Fund has 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
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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, the 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 this Prospectus for
commercial paper obligations.
Foreign Securities. The Fund may purchase foreign securities traded in the
United States or in foreign markets. The Fund 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.
The Fund 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
the Fund concerning unsponsored securities, for which the paying agent is
located outside the United States. See "Risks of Investing in the Fund."
Forward Foreign Currency Transactions. The Fund 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. The Fund 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 the 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 Fund" for a discussion of risks related to investing in futures
and options.
Short Sales. The Fund may from time to time sell securities short. A short sale
is a transaction in which the 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 Fund."
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To complete a short sale, the Fund must arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by the 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.
The 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 further
limitations on the Fund's short sales, see "Risks of Investing in the Fund."
Short Sales Against the Box. The 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 the 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. The 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 the Fund.
(1) The Fund may not 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.
(2) The Fund may not borrow money, except that the Fund may borrow from banks up
to 10% of the current value of its total net assets for temporary or emergency
purposes. The Fund will make no purchases if its outstanding borrowings exceed
5% of its total assets.
(3) The Fund may not make loans, except that the Fund may (a) lend its portfolio
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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.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of the Fund which may be changed only when permitted by
law and approved by the holders of a majority of the Fund's outstanding voting
securities as described under "Other Information -- Voting."
Additionally, as a non-fundamental policy, the Fund may not 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, including
the Fund. (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
Fund are fully paid, non-assessable and freely transferable.
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 Fund's shareholders and does not intend to do so.
The Fund's shareholders vote separately on matters affecting only that Fund,
such as the Portfolio Management Agreement, and shareholders of each class vote
separately on matters affecting only that class, such as the service and
distribution plan for that class. The Company has applied for an order of
exemption from the Securities and Exchange Commission to permit it to retain new
Managers that are unaffiliated with the Adviser without obtaining shareholder
approval. There can, of course, be no assurance the exemptive relief will be
granted.
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 the 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 Fund may, from time to time, include the yield and total return for shares
(including each class) in advertisements or reports
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to shareholders or prospective investors. The methods used to calculate the
yield and total return of the Fund 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 on the last day of the period.
Quotations of yield reflect the 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 and each class'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 hypothetical investment in shares of the 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) on an annual
basis, and assume that all dividends and distributions are reinvested when paid.
Performance information for the Fund 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 the 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 Fund, see the SAI.
ACCOUNT SERVICES
All transactions in shares of the Fund 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 Fund has 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 Fund, 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 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 rated Not Prime do not fall within any of the
Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR
CORPORATE DEBT:
INVESTMENT GRADE RATINGS: AAA -- has 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
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is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories; BBB -- is regarded
as having an adequate capacity to pay interest and repay principal -- whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
SPECULATIVE GRADE RATINGS: BB, B, CCC, CC, C -- 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 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 on
issues with this designation 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 -- short-term debt obligations with 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 SMALL CAP FUND
A PORTFOLIO OF
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
237 Park Avenue
New York, New York 10017
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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