<PAGE> 1
Registration Nos. 33-72190
811-8640
As filed with the Securities and Exchange Commission on July 29, 1996
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 3
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4
ESC STRATEGIC FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
237 Park Avenue, New York, New York 10017
------------------------------------------
(Address of Principal Executive Offices)(ZipCode)
Registrant's Telephone Number, including area code: (212) 808-3901
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W. Howard Cammack, Jr.
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219-1743
(Name and Address of Agent for Service)
Copies to:
Jeffrey L. Steele, Esq. Joan V. Fiore, Esq.
Dechert Price & Rhoads Furman Selz LLC
1500 K Street, N.W. 230 Park Avenue
Washington, D.C. 20005 New York, New York 10169
DECLARATION PURSUANT TO RULE 24f-2
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective: (check appropriate box)
X immediately upon filing pursuant to paragraph (b)
---
on (date) pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(1)
---
on (date) pursuant to paragraph (a)(1)
---
75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of rule 485
---
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has previously filed a declaration of registration of an indefinite number of
shares of Common Stock, $.001 par value per share, of all series of the
Registrant, now existing or hereafter created. Registrant's 24f-2 Notice for
the fiscal year ended March 31, 1996 was filed on May 17, 1996.
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ESC STRATEGIC FUNDS, INC.
CROSS REFERENCE SHEET
(as required by Rule 404(c))
<TABLE>
<CAPTION>
PART A
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N-1A Item No. Location
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<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Highlights
Item 3. Condensed Financial Information Financial Information
Item 4. General Description of Registrant The Funds; Description of Securities and
Investment Practices; Investment
Restrictions
Item 5. Management of the Fund Management of the Funds
Item 5A. Not Applicable Not Applicable
Item 6. Capital Stock and Other Securities. Other Information, Dividends, Distributions
and Federal Income Taxation of the Fund
Item 7. Purchase of Securities Being Offered. Fund Share Valuation; Purchase of Fund Shares;
Management of the Fund
Item 8. Redemption or Repurchase Redemption of Fund Shares
Item 9. Pending Legal Proceedings Not Applicable
<CAPTION>
Part B
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N-1A Item No. Location
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<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Investment Policies
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal Holders Other Information
of Securities
Item 16. Investment Advisory and Other Services Management of the Fund
Item 17. Brokerage Allocation Portfolio Transaction
Item 18. Capital Stock and Other Securities Other Information
Item 19. Purchase, Redemption and Pricing of Purchase of Fund Shares; Redemption of
Securities Being Offered Fund Shares, Redemption of Fund Shares
(Part A)
Item 20. Tax Status Taxation
Item 21. Underwriters Management
Item 22. Calculations of Performance Data Other Information
Item 23. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of the Registration Statement.
<PAGE> 3
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 LLC -- ADMINISTRATOR, TRANSFER AGENT
AND FUND ACCOUNTING AGENT
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This Prospectus describes the five funds (the "Funds") comprising ESC
Strategic Funds, Inc. (the "Company"), an open-end management registered
investment company advised by Equitable Securities Corporation (the "Adviser").
Certain of the Funds follow a "Multiple Manager Strategy" whereby the Adviser
seeks to enhance performance and reduce market risk by allocating the respective
Fund's assets among multiple "specialist" Managers. See "Management Strategies."
The Funds described in this prospectus are:
ESC Strategic APPRECIATION Fund
ESC Strategic GLOBAL EQUITY Fund
[LOGO] ESC STRATEGIC FUNDS ESC Strategic SMALL CAP Fund
ESC Strategic INCOME Fund
ESC Strategic ASSET PRESERVATION Fund
Each of the Funds offers two classes of shares, except ESC Strategic Asset
Preservation Fund, which offers only one class of shares. The Funds bear certain
expenses related to the distribution of their shares.
ESC STRATEGIC INCOME FUND MAY INVEST UP TO 40% OF ITS ASSETS IN DEBT
SECURITIES OF U.S. AND FOREIGN ISSUERS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS OF UNTIMELY PAYMENT OF
PRINCIPAL AND INTEREST, AS WELL AS DEFAULT AND OTHER RISKS, THAN HIGHER RATED
SECURITIES. INVESTORS SHOULD CONSIDER THESE RISKS CAREFULLY BEFORE INVESTING IN
THIS FUND. SEE "RISKS OF INVESTING IN THE FUNDS," PAGE 13.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND FUND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN MUTUAL FUNDS, SUCH AS THE FUNDS, INVOLVE RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING IN ANY OF THE FUNDS AND SHOULD BE READ AND RETAINED
FOR INFORMATION ABOUT EACH FUND.
A Statement of Additional Information (the "SAI"), dated July 26, 1996,
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or telephoning the Company at the address and
information numbers printed above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The Date of this Prospectus is July 26, 1996
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Highlights....................................................................... 2
Fund Expenses.................................................................... 6
Fee Table........................................................................ 6
Financial Highlights............................................................. 8
The Funds........................................................................ 9
Risks of Investing in the Funds.................................................. 13
Management Strategies............................................................ 19
Management of the Funds.......................................................... 22
Fund Share Valuation............................................................. 27
Pricing of Fund Shares........................................................... 28
Minimum Purchase Requirements.................................................... 30
Purchase of Fund Shares.......................................................... 30
Retirement Plan Accounts......................................................... 31
Exchange of Fund Shares.......................................................... 31
Redemption of Fund Shares........................................................ 32
Dividends, Distributions, and Federal Income Taxation............................ 35
Description of Securities and Investment Practices............................... 36
Investment Restrictions.......................................................... 42
Other Information................................................................ 43
Appendix......................................................................... 45
</TABLE>
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HIGHLIGHTS
THE FUNDS, THEIR ADVISER AND MANAGERS
This Prospectus describes the five Funds comprising ESC Strategic Funds, Inc.
(the "Company"). Each Fund has a distinct investment objective and policies.
Overall management of the Funds is provided by Equitable Securities Corporation
(the "Adviser"). The Adviser, headquartered in Nashville, Tennessee, is a New
York Stock Exchange member investment banking and securities brokerage firm.
Founded in 1930, the Adviser's predecessor developed a national clientele as an
investment banking firm dealing in both corporate and municipal securities. In
1968, the American Express Company acquired the Adviser's predecessor and in
1972 the firm was reestablished as an independent company when a group of its
employees purchased the firm. Equitable Trust Company, the Adviser's
wholly-owned subsidiary formed in 1991, provides investment management, trust,
and other fiduciary services to individuals and other clients. Equitable Asset
Management, Inc., an investment adviser, is a wholly-owned subsidiary of
Equitable Trust Company. In 1986, the Adviser formed the IMES Consulting Group
to provide consulting services to institutional and individual investors
employing outside investment management expertise. The primary services of the
IMES Consulting Group are strategic investment planning, asset allocation
analysis, investment manager evaluation and performance measurement. The IMES
Consulting Group provides primary information within Equitable Securities
Corporation in the latter's role as Adviser of the ESC Strategic Funds.
For several of the Funds, the Adviser seeks to enhance performance and reduce
market risk by allocating the respective Fund's assets among multiple
"specialist" Managers (the "Multiple Manager Strategy"). For its services as
Adviser, Equitable Securities
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2
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Corporation receives from each Fund a fee at an annual rate based on the Fund's
average daily net assets. This fee is at an annual rate of 0.50% for ESC
Strategic Asset Preservation Fund, and 1.0% for each of the other Funds. These
fees (except those for ESC Strategic Asset Preservation Fund) are higher than
those for most other investment companies and are used by the Adviser to pay
Managers' fees, at no additional cost to the Funds. See "Management of the
Funds." The Funds and their Managers are as follows:
- - ESC STRATEGIC APPRECIATION FUND -- This Fund's objective is long-term capital
appreciation. It invests in a diversified portfolio comprised mainly of
publicly traded common stocks and securities convertible into or exchangeable
for common stock, primarily of U.S.-based companies. The Fund uses the
Multiple Manager Strategy. Its Managers currently are GlobeFlex Capital,
L.P., Brandes Investment Partners, Inc. and Equitable Asset Management, Inc.
("EAM").
- - ESC STRATEGIC GLOBAL EQUITY FUND -- This Fund's objective is long-term capital
appreciation. It invests primarily in a diversified portfolio of publicly
traded common stocks and securities convertible into or exchangeable for
common stock. In addition to the use of the Multiple Manager Strategy, the
Fund diversifies its investments across domestic and international markets.
The Fund's Managers currently are GlobeFlex Capital, L.P., and Murray
Johnstone International Limited.
- - ESC STRATEGIC SMALL CAP FUND -- This Fund's objective is a high level of
capital appreciation. The Fund invests primarily in equity securities of
domestic and foreign issuers with market capitalization of generally no more
than $800 million at the time of purchase. THE FUND MAY INVEST SUBSTANTIAL
PORTIONS OF ITS PORTFOLIO IN INDIVIDUAL ISSUERS AND THEREFORE DOES NOT INTEND
TO BE DIVERSIFIED. The Fund's Manager is EAM.
- - ESC STRATEGIC INCOME FUND -- This Fund's primary objective is a high level of
current income, with a secondary objective of total return. It invests
primarily in a diversified portfolio of corporate, government and other debt
instruments of U.S. issuers, although up to 35% of its assets may be invested
in such securities of non-U.S. issuers. THIS FUND HAS NO REQUIREMENTS AS TO
MINIMUM RATING, AND UP TO 40% OF ITS ASSETS MAY BE INVESTED IN "JUNK BONDS".
The Fund uses the Multiple Manager Strategy. Its Managers currently are Llama
Asset Management Company, L.P., Cincinnati Asset Management, Inc. and Murray
Johnstone International Limited.
- - ESC STRATEGIC ASSET PRESERVATION FUND -- This Fund's objective is as high a
level of current income as is consistent with limiting the risk of potential
loss. It invests in domestic investment grade debt securities with a maximum
maturity of five years and a maximum dollar-weighted average portfolio
maturity of three years. The Fund's Manager is EAM.
SPECIAL RISKS
IN ADDITION TO THE RISKS HIGHLIGHTED ABOVE, INVESTMENTS BY THE FUNDS IN FOREIGN
EQUITY AND DEBT (INCLUDING SOVEREIGN DEBT AND SECURITIES OF ISSUERS IN EMERGING
MARKETS) INVOLVE CURRENCY AND OTHER RISKS THAT ARE DIFFERENT FROM DOMESTIC
INVESTMENTS. EACH OF THE FUNDS MAY ENGAGE IN OPTIONS AND FUTURES TRANSACTIONS
FOR HEDGING PURPOSES, PROVIDED THAT NO MORE THAN 5% OF A FUND'S ASSETS MAY BE
PLACED AT RISK BY SUCH TRANSACTIONS. THESE AND OTHER INVESTMENT PRACTICES OF THE
FUNDS, INCLUDING SHORT SALES, INVOLVE SPECIAL RISKS. FOR MORE INFORMATION, SEE
"DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES" AND "RISKS OF INVESTING IN
THE FUNDS." THERE CAN, OF COURSE, BE NO ASSURANCE THAT A FUND WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. MOREOVER, INVESTORS SHOULD BE AWARE THAT THE VALUE OF EACH
FUND'S SHARES WILL FLUCTUATE, WHICH MAY CAUSE A LOSS IN THE PRINCIPAL VALUE OF
THE INVESTMENT.
THE DISTRIBUTOR AND ADMINISTRATOR
Equitable Securities distributes the Funds' shares and may be reimbursed for
certain of its distribution-related expenses. Furman Selz LLC ("Furman Selz")
acts as Administrator, transfer agent and fund accounting
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3
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agent to the Funds. For upcoming changes in the Administrator and other services
see "Management of the Funds." For its services as Administrator, each Fund pays
Furman Selz a fee at the annual rate of 0.15% of its average daily net assets.
Furman Selz receives separate fees for its services as transfer agent and fund
accounting agent. See "Management of the Funds."
CLASSES OF SHARES
Each Fund, except ESC Strategic Asset Preservation Fund, offers investors a
choice of two classes of shares which differ principally with respect to sales
charges and the rate of expenses to which they are subject. Investors may select
the class which better suits their investment needs. Class A shares are offered
with a maximum front-end sales charge of 4.50%, which may be reduced or waived
in certain cases. See "Purchase of Fund Shares." Class A shares are also subject
to a Service and Distribution Fee calculated at an annual rate of up to 0.25% of
the average daily net asset value of Class A shares. Class D* shares are offered
with a 1.50% front-end sales charge and are subject to a Service and
Distribution Fee at an annual rate of up to 0.75% based on the average daily net
asset value of Class D shares. ESC Strategic Asset Preservation Fund offers only
one class of shares with no front-end sales charge and a Service and
Distribution Fee calculated at an annual rate of up to 0.25% of the average
daily value of its net assets. See "Management of the Funds -- The Distributor."
For Funds offering two classes of shares, a prospective investor, in selecting
between the classes, should consider the impact of the sales charge together
with the cumulative effect of the Service and Distribution Fees for each class
over the anticipated period of investment, as well as the effect of any sales
charge waivers to which the investor may be entitled. Investors should be aware
that other expenses attributable to each class may differ slightly due to the
allocation to each class of certain "class specific" expenses, including
distribution and marketing expenses and federal and state securities
registration fees. Finally, investors should be aware that persons selling
shares of the Funds may receive different levels of compensation for sales of
Class A and Class D shares.
- ---------------
* Class D shares were formerly designated as Class B shares.
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4
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GUIDE TO INVESTING IN THE ESC STRATEGIC FUNDS, INC.
Purchase orders for the Funds received by your broker or Service Organization in
proper order prior to 4:15 p.m., Eastern time, and transmitted to the Funds
prior to 5:00 p.m. Eastern time will become effective that day.
<TABLE>
<S> <C>
- - Minimum initial investment.................................................. $10,000
- - Minimum initial investment for IRAs and other qualified retirement plans.... $ 2,000
- - Minimum subsequent investment............................................... $ 50
</TABLE>
Shareholders may exchange shares of a particular class in one Fund for shares of
the same class in another Fund (or for shares of ESC Strategic Asset
Preservation Fund) by telephone or mail.
<TABLE>
<S> <C>
- - Minimum initial exchange.................................................... $ 2,000
(No minimum for subsequent exchanges.)
</TABLE>
Shareholders may redeem shares by telephone, mail or wire.
- - The Funds reserve the right to redeem upon not less than 30 days' notice all
shares in a Fund's account which have an aggregate value of $500 or less.
All dividends and distributions will be automatically reinvested at net asset
value in additional shares of the same class of the applicable Fund unless cash
payment is requested.
- - Dividends for ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund are paid monthly.
- - Distributions for ESC Strategic Appreciation Fund, ESC Strategic Global Equity
Fund and ESC Strategic Small Cap Fund are paid at least annually.
See "Purchase of Fund Shares" and "Redemption of Fund Shares" for more
information.
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5
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FUND EXPENSES
The following expense tables indicate costs and expenses that an investor should
anticipate incurring either directly or indirectly as a shareholder of a Fund
during its fiscal year ending March 31, 1997. The numbers reflect estimated
levels of operating expenses based on general industry experience.
FEE TABLE
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC GLOBAL ESC STRATEGIC
APPRECIATION FUND EQUITY FUND SMALL CAP FUND
--------------------- --------------------- ---------------------
CLASS A CLASS D** CLASS A CLASS D** CLASS A CLASS D**
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge Imposed
on Purchases (as a
percentage of offering
price)...................... 4.50% 1.50% 4.50% 1.50% 4.50% 1.50%
Maximum Sales Charge Imposed
on Reinvested Dividends (as
a percentage of offering
price)...................... None None None None None None
Deferred Sales Charge (as a
percentage of redemption
proceeds)................... None None None None None None
Exchange Fees................. None None None None None None
ANNUAL FUND OPERATING
EXPENSE(as a percentage of
average net assets
annualized)
Management Fees............. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
12b-1 Fees*................. 0.25% 0.75% 0.25% 0.75% 0.25% 0.75%
Other Expenses.............. 0.76% 0.77% 1.12% 1.13% 0.79% 0.80%
------ ----- ----- ----- ----- -----
TOTAL PORTFOLIO OPERATING
EXPENSES.................... 2.01% 2.52% 2.37% 2.88% 2.04% 2.55%
===== ===== ===== ===== ===== =====
</TABLE>
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* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of a Fund, long-term shareholders may pay more initial sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD. See "Management of the Funds."
** Prior to November 1, 1995, the 1.50% sales load was being waived.
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a shareholder in the Funds will bear.
EXAMPLE:*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
APPRECIATION GLOBAL EQUITY ESC STRATEGIC
FUND FUND SMALL CAP FUND
------------------- ------------------- -----------------
CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
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<S> <C> <C> <C> <C> <C> <C>
1 year................................. $ 64 $ 40 $ 68 $ 44 $ 65 $ 40
3 years................................ $ 105 $ 92 $ 116 $ 103 $ 106 $ 93
5 years................................ $ 148 $ 147 $ 166 $ 165 $ 150 $ 149
10 years............................... $ 268 $ 296 $ 303 $ 331 $ 271 $ 299
</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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6
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<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
INCOME FUND ASSET
------------------------ PRESERVATION
CLASS A CLASS D*** FUND
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).................. 4.50% 1.50% None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................. None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)................................. None None None
Exchange Fees.......................................... None None None
ANNUAL FUND OPERATING EXPENSE (as a percentage of
average net assets annualized)
Management Fees**.................................... 1.00% 1.00% 0.02%
12b-1 Fees*.......................................... 0.25% 0.75% 0.25%
Other Expenses**..................................... 0.46% 0.47% 0.64%
------- ---------- -------
TOTAL PORTFOLIO OPERATING EXPENSES..................... 1.71% 2.22% 0.91%
===== ======== ===========
</TABLE>
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* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of a Fund, long-term shareholders may pay more initial sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD. See "Management of the Funds."
** Amounts shown for "Management Fees" reflect waivers of a portion of the fees
payable to the Adviser for the ESC Strategic Asset Preservation Fund.
Amounts shown for "Other Expenses" reflect a waiver of the full amount of
fees payable for administrative and transfer agent services by ESC Strategic
Asset Preservation Fund. Without these waivers, the Funds' estimated
Management Fees would be 0.50% for ESC Strategic Asset Preservation Fund;
"Other Expenses" and "Total Portfolio Operating Expenses," respectively,
would be: 0.83% and 1.58%. Out of its Management Fees, the Adviser pays the
fees of the Managers.
*** Prior to November 1, 1995, the 1.50% sales load was being waived.
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a shareholder in the Funds will bear.
EXAMPLE:*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC
INCOME FUND
------------------
CLASS A CLASS D ESC STRATEGIC ASSET
------- -------- PRESERVATION FUND
-------------------
<S> <C> <C> <C>
1 year......................................................... $ 62 $ 37 $ 9
3 years........................................................ $ 96 $ 83 $ 29
5 years........................................................ $ 134 $132 $ 50
10 years....................................................... $ 238 $267 $ 112
</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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7
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FINANCIAL HIGHLIGHTS
The financial data shown below, which is audited, is to assist investors in
evaluating the performance of the Funds for their fiscal periods ended March 31,
1996 and March 31, 1995. This data is based on information contained in, and
should be read in conjunction with, audited financial statements for the same
periods which are contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
ASSET
PRESERVATION(A) INCOME(B) GLOBAL EQUITY(C) SMALL CAP(D) APPRECIATION(E)
----------------- ----------------- ----------------- ----------------- -----------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
------- ------- ------- ------- ------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A***
- ------
Net Asset Value,
Beginning
of Period:.............. $9.89 $10.00 $9.94 $10.00 $ 9.90 $10.00 $11.25 $10.00 $10.67 $10.00
------- ------- ------- ------- ------- ------ ------- ------ ------- -------
Income from Investment
Operations:
Net Investment
income/(loss):........ 0.56 0.47 0.59 0.55 (0.04) (0.05) (0.08) (0.03) (0.05) 0
Net realized/unrealized
gain/(loss) on
investments:.......... 0.11 (0.11) 0.16 (0.05) 1.46 0.03 5.19 1.52 2.71 0.73
------- ------- ------- ------- ------- ------ ------- ------ ------- -------
Total from Investment
Operations: .......... 0.67 0.36 0.75 0.50 1.42 (0.08) 5.11 1.49 2.66 0.73
------- ------- ------- ------- ------- ------ ------- ------ ------- -------
Less Distributions:
Dividends from realized
gains: ............... 0 0 (0.21) (0.01) (0.24) 0 (0.48) (0.24) (0.31) (0.06)
Dividends from net
investment income: ... (0.56) (0.47) (0.59) (0.55) 0 (0.02)** 0 0 0 0
------- ------- ------- ------- ------- ------ ------- ------ ------- -------
Total Distributions: .... (0.56) (0.47) (0.80) (0.56) (0.24) (0.02) (0.48) (0.24) (0.31) (0.06)
------- ------- ------- ------- ------- ------ ------- ------ ------- -------
Net Asset Value, End of
Period: ................ $10.00 $9.89 $9.89 $9.94 $11.08 $9.90 $15.88 $11.25 $13.02 $10.67
========= ========= ========= ========= ========= ======= ========= ======= ========= =========
Total Return (not
reflecting sales
load): ................. 6.85% 3.75% 7.67% 5.30% 14.41% (0.84)% 45.88% 15.03% 25.07% 7.32%
Net Assets End of Period
(in thousands): ........ $13,241 $11,924 $36,891 $32,373 $14,597 $9,213 $28,840 $8,785 $25,561 $15,126
Ratios to Average Net
Assets of:
Net investment
income: .............. 5.53% 5.15%* 5.87% 6.29%* (0.36)% (0.65)%* (0.80)% (0.43)%* (0.39)% (0.04)%*
Expenses net of waivers/
reimbursements: ...... 0.90% 1.00%* 1.70% 1.85%* 2.37% 2.50%* 2.00% 2.00%* 2.00% 2.00%*
Expenses before waivers/
reimbursements: ...... 1.58% 2.12%* 1.75% 1.86%* 2.43% 3.22%* 2.18% 3.28%* 2.10% 2.88%*
Portfolio Turnover
Rate.................. 40% 30% 138% 92% 92% 76% 102% 151% 78% 58%
</TABLE>
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(a) Commencement of operation April 25, 1994
(b) Commencement of operation May 4, 1994
(c) Commencement of operation May 12, 1994
(d) Commencement of operation June 8, 1994
(e) Commencement of operation July 6, 1994
* Annualized.
** Represents distribution in excess of net investment income.
*** Data shown are for the sole class of shares of Asset Preservation Fund and
for Class A shares of each the other Funds.
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<TABLE>
<CAPTION>
INCOME(A) GLOBAL EQUITY(B) SMALL CAP(C) APPRECIATION(D)
----------------- ----------------- ----------------- -----------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS D
- -------
Net Asset Value, Beginning
of Period:.................................. $9.94 $10.00 $9.82 $10.00 $11.22 $10.00 $10.63 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment income/(loss):............... 0.54 0.50 (0.09) (0.07) (0.16) (0.05) (0.09) (0.03)
Net realized/unrealized gain/(loss) on
investments:.............................. 0.16 (0.05) 1.46 (0.10) 5.18 1.51 2.68 0.72
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations:........... 0.70 0.45 1.37 (0.17) 5.02 1.46 2.59 0.69
------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from realized gains:.............. (0.21) (0.01) (0.24) 0 (0.48) (0.24) (0.31) (0.06)
Dividends from net investment income:....... (0.54) (0.50) 0 (0.01)** 0 0 0 0
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions:......................... (0.75) (0.51) (0.24) (0.01) (0.48) (0.24) (0.31) (0.06)
------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Period:.............. $9.89 $9.94 $10.95 $9.82 $15.76 $11.22 $12.91 $10.63
======= ======= ======= ======= ======= ======= ======= =======
Total Return (not reflecting sales load):.... 7.11% 4.74% 14.01% (1.72)% 45.19% 14.72% 24.50% 6.92%
Net Assets End of Period (in thousands):..... $1,446 $1,241 $3,725 $3,322 $8,897 $3,367 $2,482 $1,693
Ratios to Average Net Assets of:
Net investment income:...................... 5.37% 5.73%* (0.83)% (1.51)%* (1.30)% (0.93)%* (0.86) (0.56)%*
Expenses net of waivers/reimbursements:..... 2.20% 2.29%* 2.87% 2.98%* 2.50% 2.50%* 2.50% 2.50%*
Expenses before waivers/reimbursements:..... 2.25% 2.31%* 2.96% 3.69%* 2.74% 3.68%* 2.64% 3.40%*
Portfolio Turnover Rate:.................... 138% 92% 92% 76% 102% 151% 78% 58%
</TABLE>
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(a) Commencement of operation May 4, 1994
(b) Commencement of operation May 12, 1994
(c) Commencement of operation June 8, 1994
(d) Commencement of operation July 6, 1994
* Annualized.
** Represents distribution in excess of net investment income.
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THE FUNDS
Each Fund is a separate investment fund or portfolio, commonly known as a mutual
fund. The Funds are portfolios of the Company, which was organized under the
laws of the State of Maryland on November 24, 1993 as an open-end management
investment company. The Company's Board of Directors oversees the overall
management of the Funds and elects the Funds' officers. The Adviser continuously
monitors the performance of each Fund and its Managers and determines proper
allocations of assets in each Fund's portfolio and among Managers for Funds
using the Multiple Manager Strategy. See "Management Strategies." Investments
and investment management decisions are made by the respective Manager(s) for
each Fund based on the investment objective and policies of that Fund. For
information regarding the Managers, see "Management of the Funds." There can be
no assurance that a Fund will achieve its investment objective.
ESC STRATEGIC APPRECIATION FUND. Investors seeking long-term growth of capital
and for whom current income is not an objective should consider investing in ESC
Strategic Appreciation Fund.
The investment objective of ESC Strategic Appreciation Fund is long-term capital
appreciation. The Fund invests in publicly traded common stocks and securities
convertible into or exchangeable for common stock, primarily of U.S.-based
companies. The Fund's investment policies reflect the Adviser's analysis
indicating that (a) an equity orientation is attractive because, as measured by
broad market indices, equities have historically out-performed fixed income
securities and inflation over longer periods but with greater short-term risk of
volatility, and (b) the short-term market risk of price volatility associated
with equity investments may be reduced by using the Multiple Manager Strategy.
See "Management Strategies." Although the Fund's portfolio consists primarily of
equity securities, the Fund may invest in debt instruments to the extent
consistent with its investment objective and for temporary defensive purposes.
These debt obligations may include U.S. Government securities, certificates of
deposit, bankers' acceptances, commercial paper, repurchase
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agreements and debt obligations of corporations (corporate bonds, debentures,
notes and other similar corporate debt instruments) which are rated investment
grade or better by Standard & Poor's Corporation ("S&P") or Moody's Investors
Service, Inc. ("Moody's"), or deemed of comparable quality by the Managers. The
Fund's Managers are GlobeFlex Capital, L.P., Brandes Investment Partners, Inc.
and EAM.
ESC STRATEGIC GLOBAL EQUITY FUND. Investors seeking long-term growth of capital
and who wish to diversify their investments internationally should consider
investing in ESC Strategic Global Equity Fund.
The investment objective of ESC Strategic Global Equity Fund is long-term
capital appreciation. The Fund invests in publicly traded common stocks and
securities convertible into or exchangeable for common stock. Like ESC Strategic
Appreciation Fund, the Fund seeks to increase prospects for appreciation and to
reduce market risk by using an equity orientation and by employing the Multiple
Manager Strategy. The Fund also uses the Emerging Market Strategy (see
"Management Strategies" and "Risks of Investing in the Funds"). The Fund
diversifies its investments across markets (domestic and international) that
have exhibited divergent return characteristics. Particular emphasis is placed
on investing in (a) smaller companies believed by the Fund's Managers to have
potential for above-average growth rates when investing in "mature" securities
markets and (b) equity securities of companies in countries having "emerging"
securities markets. The weighting of U.S. equity securities relative to
securities of other equity asset categories in the Fund's portfolio will be
determined through use of the Adviser's Domestic/International Equity Allocation
Model. See "Management Strategies." Based on this Model, the Fund's portfolio is
initially anticipated to have about 33% of its investments in U.S. securities.
Its non-U.S. investments may include up to 35% in emerging market securities.
Under normal market conditions, a fundamental policy of the Fund is to have at
least 65% of its assets invested in issuers of at least three different
countries, as determined by the location of their headquarters or principal
business operations. Under appropriate market conditions, the Fund may invest in
debt instruments and other asset classes that appear to offer opportunities for
capital appreciation and that are rated investment grade or better by S&P or
Moody's or, if unrated, are deemed of comparable quality by the Fund's Manager.
In such event, the Fund may retain one or more Managers specializing in such
other asset classes. The Fund may also invest in debt securities for defensive
and cash management purposes. Permitted debt investments are comparable to those
for ESC Strategic Appreciation Fund. The Fund's Managers currently are GlobeFlex
Capital, L.P., and Murray Johnstone International Limited.
ESC STRATEGIC SMALL CAP FUND. Investors seeking long-term capital appreciation
and who believe that smaller companies may offer special opportunities for
growth over the long term should consider investing in ESC Strategic Small Cap
Fund.
The investment objective of ESC Strategic Small Cap Fund is a high level of
capital appreciation. Under normal circumstances, at least 65% of the value of
the Fund's total assets will be invested in equity securities of issuers with
market capitalization of $1 billion or less, and as a matter of operating
policy, the Fund will invest primarily in companies with market capitalization
of $800 million or less at the time of investment. The Fund's portfolio will
include equity securities of companies believed by the Manager to show superior
prospects for growth due, for example, to promising new products, new
distribution strategies, new manufacturing technologies or new management teams
or management philosophy. In the Manager's view, such companies tend to be
responsible for technological breakthroughs and/or unique solutions to market
needs. By focusing on internal rather than external factors, the Fund attempts
to minimize the risk associated with macro-economic forces such as changes in
commodity prices, currency exchange rates and interest rates.
In selecting portfolio companies, the Manager considers the growth rate in
earnings, financial performance, management strengths and weaknesses, and
current
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market valuation relative to earnings growth as well as historic and comparable
company valuations. The Manager also analyzes the level and nature of the
company's debt, cash flow, working capital and the quality of the company's
assets. Typically, companies included in the Fund's portfolio will show earnings
growth exceeding 20% compared to the previous year's comparable period.
Companies with excessive levels of debt will generally be avoided.
By developing and maintaining contacts with management, customers, competitors
and suppliers of current and potential portfolio companies, the Manager attempts
to invest in those companies that are not well followed generally by securities
analysts and the financial press. Because such securities tend not to be
efficiently priced, the Manager believes they offer potentially superior
investment opportunities. The Manager favors portfolio companies whose price
when purchased is between five and fifteen times projected earnings for the
coming year.
Although the Fund's portfolio securities are generally acquired for the long
term, they may be sold under any of the following circumstances: (a) the
anticipated price appreciation has been achieved or is no longer probable; (b)
the Manager's analysis indicates that the company's fundamentals may be
deteriorating; (c) general market expectations regarding the company's future
performance exceed those of the Manager; or (d) alternative investments, in the
Manager's view, offer superior potential for appreciation.
The Fund's portfolio will consist primarily of common stocks, but may also
include convertible preferred, participating preferred and preferred stocks. Its
equity investments will be traded on domestic or foreign securities exchanges or
in over-the-counter markets. For temporary defensive and liquidity purposes,
however, it may invest in U.S. Government securities, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements and debt
obligations of corporations (corporate bonds, debentures, notes and other
similar corporate debt instruments) rated high grade or better or, if unrated,
determined to be of comparable quality by the Fund's Manager.
Investing in companies that are undergoing internal change may involve special
risks due to the unknown effects of change. Additionally, the Fund will not be a
"diversified" investment company and may therefore invest substantial portions
of its assets in securities of individual issuers. Thus, the Fund will not have
the same diversification of investment risk as a diversified fund. (A
"diversified" investment company must, with respect to at least 75% of its
assets, invest no more than 5% of its total assets in the securities of a single
issuer, and own no more than 10% of the outstanding voting securities of a
single issuer, except for cash, cash items, U.S. Government securities, and
securities of other investment companies.) The Fund intends, however, to meet
the diversification requirements under the Internal Revenue Code of 1986 to
qualify for tax treatment as a regulated investment company. The Fund's Manager
is EAM.
ESC STRATEGIC INCOME FUND. Investors seeking a high level of current income
together with total return should consider investing in ESC Strategic Income
Fund. The longer-term securities in which the Fund normally invests generally
have higher yields, but higher risks and greater price fluctuation, than
shorter-term securities. See "Risks of Investing in the Funds -- Interest Rate
Risk".
The primary investment objective of ESC Strategic Income Fund is a high level of
current income, with a secondary objective of total return. The Fund invests
primarily in corporate, government and other debt instruments of U.S. and
non-U.S. issuers and, under normal circumstances, will have at least 65% of the
value of its total assets invested in income producing securities. In selecting
debt securities for ESC Strategic Income Fund, the Managers seek those
instruments that appear best calculated to achieve the Fund's investment
objective. To provide the Managers with maximum flexibility and to accommodate
their differing management styles, the Fund has not adopted quality restrictions
with respect to obligations in which its assets may be invested. THUS, THE
FUND'S INVESTMENTS GENERALLY WILL INCLUDE SECURITIES THAT ARE UNRATED, AND UP TO
40% OF THE FUND'S ASSETS MAY BE INVESTED IN SECURITIES THAT
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11
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ARE RATED BELOW INVESTMENT GRADE AND UNRATED SECURITIES DEEMED BY A MANAGER TO
BE OF COMPARABLE QUALITY (COMMONLY KNOWN AS "JUNK BONDS"), WHICH ENTAIL SPECIAL
RISKS. SEE "RISKS OF LOWER RATED SECURITIES."
The Fund follows the Multiple Manager Strategy and the Emerging Market Strategy
(see "Management Strategies" and "Risks of Investing in the Funds"). The Fund
may invest in securities issued by the U.S. Government and its agencies and
instrumentalities. It may also invest in securities issued by foreign
governments or their agencies or instrumentalities ("sovereign debt"), by
international agencies and by U.S. and foreign corporate issuers, including
notes, bonds, convertible and preferred securities, mortgage-backed securities,
commercial paper, bankers' acceptances, certificates of deposit, Yankee bonds
and Eurobonds. INVESTMENTS IN FOREIGN SECURITIES (INCLUDING SOVEREIGN DEBT) WILL
BE LIMITED TO 35% OF ITS ASSETS. FOR MORE INFORMATION ON SPECIAL RISKS OF
INVESTING IN FOREIGN SECURITIES AND SOVEREIGN DEBT, SEE "RISKS OF INVESTING IN
THE FUNDS."
The Fund's Managers currently are Llama Asset Management Company, L.P.,
Cincinnati Asset Management, Inc. and Murray Johnstone International Limited.
ESC STRATEGIC ASSET PRESERVATION FUND. Investors seeking higher returns than are
generally available from money market instruments and certificates of deposit,
with low risk of significant share price volatility, should consider investing
in ESC Strategic Asset Preservation Fund. The Fund is not insured by the Federal
Deposit Insurance Corporation.
The investment objective of ESC Strategic Asset Preservation Fund is as high a
level of current income as is consistent with limiting the risk of potential
loss. The Fund invests primarily in domestic investment grade debt obligations
with a maximum maturity of five years, with a maximum dollar-weighted average
portfolio maturity of three years. Securities held by the Fund will include U.S.
Government securities, corporate debt securities, mortgage- and other
asset-backed securities, certificates of deposit, bankers' acceptances and other
debt instruments that meet the Fund's quality criteria. The Fund's yield will
tend to vary with changes in short-term interest rates. See "Risks of Investing
in the Funds."
The Manager selects investments for the Fund that appear best suited to
achieving the Fund's investment objective within the credit and risk tolerances
established for the Fund. In accordance with these policies, the Fund may
purchase corporate debt securities rated Baa or better by Moody's or BBB or
better by S&P (securities with these ratings have speculative characteristics),
mortgage-and asset-backed securities rated A or better by Moody's or S&P,
commercial paper rated Prime-2 or better by Moody's or A-2 or better by S&P and
other debt instruments that are either given equivalent ratings by at least two
other nationally-recognized rating agencies ("NRSROs") or deemed by the Manager
to be of comparable quality. Securities downgraded below these ratings will
normally be sold unless the Manager believes the sale would be disadvantageous
to the Fund. In no event will over 15% of the Fund's total assets consist of
such downgraded securities. Assumptions generally accepted by the financial
industry concerning the probability of early payment may be used in the
calculation of maturities for debt securities that contain put or call
provisions or that are subject to pre-refunding, sometimes resulting in a
calculated maturity different from the stated maturity of the security. The
Fund's Manager is EAM.
OTHER INVESTMENT POLICIES OF THE FUNDS
In addition to the investment policies and practices described above, the Funds
may engage in transactions in options and futures contracts for hedging
purposes, provided that no more than 5% of a Fund's assets may be placed at risk
by such transactions. (See "Risks of Investing in the Funds"). For additional
information on these and other investments and investment restrictions, see
"Description of Securities and Investment Practices," "Investment Restrictions,"
and the SAI.
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RISKS OF INVESTING IN THE FUNDS
Shareholders of a Fund should expect the value of their shares to fluctuate with
changes in the value of the securities owned by that Fund. Additionally, an
investment in ESC Strategic Small Cap Fund may entail special risks because (a)
the Fund is not required to be diversified and (b) investments in small
companies may involve greater risks than investments in large companies due to
such factors as limited product lines, markets and financial or managerial
resources, and less frequently traded securities that may be subject to more
abrupt price movements than securities of larger companies.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products. In order to
attempt to minimize that risk, the Adviser and Managers monitor developments in
the economy, the securities markets, and with each particular issuer. Also, as
noted earlier, each diversified Fund is managed within certain limitations that
restrict the amount of that respective Fund's investment in any single issuer.
Foreign Securities (All Funds except ESC Strategic Asset Preservation
Fund). Investing in the securities of issuers in any foreign country, including
ADRs and EDRs, involves special risks and considerations not typically
associated with investing in U.S. companies. These include differences in
accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility and less
liquidity. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial arrangements
and transaction costs of foreign currency conversions. Changes in foreign
exchange rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. A Fund's objectives may be affected
either unfavorably or favorably by fluctuations in the relative rates of
exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments. A decline in
the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of a Fund's holdings of securities denominated
in such currency and, therefore, will cause an overall decline in the Fund's net
asset value and any net investment income and capital gains to be distributed in
U.S. dollars to shareholders of the Fund. The rate of exchange between the U.S.
dollar and other currencies is determined by several factors including the
supply and demand for particular currencies, central bank efforts to support
particular currencies, the movement of interest rates, the pace of business
activity in certain other countries and the United States, and other economic
and financial conditions affecting the world economy.
Although the Funds value their assets daily in terms of U.S. dollars, the Funds
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis, and a Fund may from time to time have foreign currency
holdings pending investment. When a Fund converts its foreign currency holdings,
it will incur costs. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference ("spread") between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange
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should the Fund desire to sell that currency to the dealer.
Through a Fund's flexible policies, Managers endeavor to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places a Fund's investments. See the SAI
for further information about foreign securities.
Special Considerations Concerning Emerging Markets: Investment in emerging
market countries presents risk in greater degree than, and in addition to, those
presented by investment in foreign issuers in general. A number of emerging
market countries restrict, to varying degrees, foreign investment in stocks.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some emerging
market countries. A number of the currencies of developing countries have
experienced significant declines against the U.S. dollar in recent years, and
devaluation may occur subsequent to investments in these currencies by the Fund.
Inflation and rapid fluctuations in inflation rates have had and may continue to
have negative effects on the economies and securities markets of certain
emerging market countries. Many of the emerging securities markets are
relatively small, have low trading volumes, suffer periods of relative
illiquidity, and are characterized by significant price volatility. There is a
risk in emerging market countries that a future economic or political crisis
could lead to price controls, forced mergers of companies, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies, any of which may have a detrimental effect on the Funds'
investments.
Interest Rate Risk. Changes in interest rates affect the value of securities in
a variety of ways, not all of which are predictable. The most direct effect of
interest rate changes, however, is on fixed income securities. Generally, the
current market value of fixed income securities falls as interest rates rise and
rises as interest rates fall. The effect of interest rate changes on the market
value of a security is typically greater the longer the remaining term of the
security. Changes in interest rates on short and/or longer term securities also
affect the yield on fixed income securities of particular maturities which can
be purchased by a Fund. Each of the Funds may invest in fixed income securities,
and ESC Strategic Income Fund and ESC Strategic Asset Preservation Fund will
generally be substantially invested in such securities. ESC Strategic Income
Fund, because of the longer-term securities in which it generally invests, will
typically be more vulnerable to the effects of interest rate risk on the market
value of its portfolio securities than ESC Strategic Asset Preservation Fund,
which invests in shorter term instruments. The yield to maturity on particular
securities will vary depending on prevailing interest rates for such securities
at the time of the investment. Because of its shorter term investments, the
yield from ESC Strategic Asset Preservation Fund will tend to be more quickly
affected by interest rate changes than will that of ESC Strategic Income Fund.
Risks of Lower Rated and Non-Investment Grade Securities and Sovereign Debt
Obligations. ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund may invest in securities rated Baa by Moody's and/or BBB by S&P if, in the
opinion of the Manager(s), the yield is commensurate with the risk involved.
These securities (and securities deemed of comparable quality by a Manager) have
speculative characteristics. A description of the characteristics of ratings of
securities in which a Fund may invest is attached as an Appendix.
ESC Strategic Income Fund may invest in securities rated below Baa by Moody's or
BBB by S&P. Securities rated below investment grade and comparable unrated
securities (commonly known as "junk bonds") offer yields that fluctuate over
time, but generally are superior to the yields offered by higher rated
securities. However, securities rated below investment grade also involve
greater risks than higher rated securities. Under rating agency guidelines,
medium-and lower-rated securities and comparable unrated securities will likely
have some quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. Certain of the debt
securities in which ESC Strategic
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Income Fund may invest may have, or be considered comparable to securities
having, the lowest ratings for non-subordinated debt instruments assigned by
Moody's, S&P or other NRSROs (i.e., rated C by Moody's or CCC or lower by S&P).
These securities are considered to have extremely poor prospects of ever
attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal. Such securities are considered speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of its respective shares.
Therefore, an investment in a Fund that invests in securities of this type
should not be considered as a complete investment program for all investors.
The secondary markets for high yield corporate and sovereign debt securities are
not as liquid as the secondary markets for higher rated securities. The
secondary markets for high yield debt securities are concentrated in relatively
few market makers and participants in the market are mostly institutional
investors, including insurance companies, banks, other financial institutions
and mutual funds. In addition, the trading volume for high yield debt securities
is generally lower than that for higher-rated securities and the secondary
markets could contract under adverse market or economic conditions independent
of any specific adverse changes in the condition of a particular issuer. These
factors may have an adverse effect on a Fund's ability to dispose of particular
portfolio investments and may limit its ability to obtain accurate market
quotations for purposes of valuing securities and calculating net asset value.
If a Fund is not able to obtain precise or accurate market quotations for a
particular security, it will become more difficult for the Company's Board of
Directors to value its portfolio securities and the Company's Directors may have
to use a greater degree of judgment in making such valuations. Less liquid
secondary markets may also affect a Fund's ability to sell securities at their
fair value. In addition, a Fund may invest up to 15% of its net assets, measured
at the time of investment, in illiquid securities, which may be more difficult
to value and to sell at fair value. If the secondary markets for high yield debt
securities are affected by adverse economic conditions, the proportion of the
Fund's assets invested in illiquid securities may increase.
In the case of corporate debt securities, while the market values of securities
rated below investment grade and comparable unrated securities tend to react
less to fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. Price volatility in these securities
will be reflected in a Fund's share value. In addition, such securities
generally present a higher degree of credit risk. Issuers of these securities
are often highly leveraged and may not have more traditional methods of
financing available to them, so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The recent economic recession has resulted in
default levels in excess of historic averages.
Investing in sovereign debt securities will expose a Fund to the direct or
indirect consequences of political, social or economic changes in the developing
and emerging countries that issue the securities. The ability and willingness of
sovereign obligors in developing and emerging countries or the governmental
authorities that control repayment of their external debt to pay principal and
interest on such debt when due may depend on general economic and political
conditions within the relevant country. Countries such as those in which several
of
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the Funds may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate and
trade difficulties and extreme poverty and unemployment. Many of these countries
are also characterized by political uncertainty or instability. Additional
factors which may influence the ability or willingness to service debt include,
but are not limited to, a country's cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
its debt service burden to the economy as a whole, and its government's policy
towards the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to default on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds (see below), and obtaining new credit to finance
interest payments. Holders of certain foreign sovereign debt securities may be
requested to participate in the restructuring of such obligations and to extend
further loans to their issuers. There can be no assurance that the Brady Bonds
and other foreign sovereign debt securities in which a Fund may invest will not
be subject to similar restructuring arrangements or to requests for new credit
which may
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adversely affect the Fund's holdings. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
In addition to high yield foreign sovereign debt securities, the Funds may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities," above.
Zero coupon bonds (which do not pay interest until maturity) and pay-in-kind
securities (which pay interest in the form of additional securities) may be more
speculative than securities which pay income periodically and in cash. In
addition, although a Fund receives no periodic cash payments from such
investments, applicable tax rules require the Fund to accrue on an effective
yield basis for original issue discount and pay out its income from such
securities annually as income dividends and require stockholders to pay tax on
such dividends.
In an effort to reduce credit risk, the Strategic Income Fund diversifies its
holdings among many issuers. As of March 31, 1996, the Strategic Income Fund
held securities of 57 issuers.
The chart below shows, on a dollar-weighted basis, the credit quality
characteristics of the Strategic Income Fund. The chart reflects average
percentages of the Strategic Income Fund's assets invested in bonds having the
ratings shown below, based upon an average of the Strategic Income Fund's
portfolio holdings at the end of each month for the fiscal period ended March
31, 1996.
<TABLE>
<CAPTION>
PERCENT OF
RATINGS ASSETS
- ------------------------------- ----------
<S> <C>
Cash & Equivalents............. 2.0%
Aaa/AAA........................ 41.3
Aa/AA.......................... 1.8
A/A............................ 2.6
Baa/BBB........................ 0
Ba/BB.......................... 9.2
B/B............................ 27.9
Caa/CCC........................ 0
Ca/CC.......................... 0
Lower.......................... 0.6
<CAPTION>
PERCENT OF
UNRATED, BUT EQUIVALENT TO ASSETS
- ------------------------------- ----------
<S> <C>
AAA/AAA........................ 7.7%
Aa/AA.......................... 4.5
A/A............................ 0
Baa/BBB........................ 0
Ba/BB.......................... 1.2
B/B............................ 1.2
Caa/CCC........................ 0
Ca/CC.......................... 0
Lower.......................... 0
</TABLE>
The above chart is intended solely to provide disclosure about the Strategic
Income Fund's asset composition at March 31, 1996. The asset composition after
this time may or may not be approximately the same as shown above. The chart
reflects ratings by Moody's where they were available, and ratings assigned by
Moody's may not be consistent with ratings assigned by S&P or other credit
rating services, and the Investment Adviser may not necessarily agree with a
rating assigned by Moody's, S&P or another credit rating agency.
Municipal Lease Obligations. Municipal lease obligations have special risks not
normally associated with municipal bonds. These obligations frequently contain
"non-appropriation" clauses that provide that the governmental issuer of the
obligation has no obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the legislative body on a
yearly or other periodic basis. For more information on risks of municipal lease
investments, see the SAI.
Short Sales. A Fund will incur a loss as a result of a short sale (other than a
short sale against the box) if the price of the security increases between the
date of the short sale and the date on which the Fund replaces the borrowed
security. Possible losses from such short sales differ from losses that could be
incurred from a purchase of a security, because losses from such short sales may
be unlimited, whereas losses from purchases of a security can equal only the
total amount invested. To limit these risks, a Fund's short sales (other than
short sales against the box) will be only with respect to securities fully
listed on a national securities exchange and will not at any time exceed a
dollar amount equal to 25% of the Fund's net equity. Further, a Fund's short
sales of securities of a
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single issuer will not exceed the lesser of 2% of the value of the Fund's net
assets or 2% of the securities of any class of the issuer.
Risks of Options Transactions. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying securities at the exercise price. If
a put or call option purchased by a Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price, or in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, a Fund may be
unable to close out a position. If a Fund cannot effect a closing transaction,
it will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
Options transactions involve, additionally, risks similar to those described
below in "Risks of Futures and Related Options Transactions."
Currency Risk. Most of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Funds' assets. The
Funds may, however, engage in foreign currency transactions to protect their
portfolios against fluctuations in currency exchange rates in relation to the
U.S. dollar. Such foreign currency transactions may include forward foreign
currency contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts. (See below.) The Funds cannot assure that these techniques will
always be successful.
Foreign Currency Options. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of a Fund to
reduce foreign currency risk using such options. Over-the-counter options differ
from traded options in that they are two-party contracts with price and other
terms negotiated between buyer and seller and generally do not have as much
market liquidity as exchange-traded options. Employing hedging strategies with
options on currencies does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline.
Furthermore, such hedging transactions reduce or preclude the opportunity for
gain if the value of the hedged currency should change relative to the U.S
dollar. A Fund will not speculate in options on foreign currencies.
There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If a Fund cannot close out an option which
it holds, it would have to exercise its option in order to realize any profit
and would incur transactional costs on the sale of the underlying assets.
Risks of Futures and Related Options Transactions. There are several risks
associated with the use of futures contracts and options on futures contracts.
While a Fund's use of futures contracts and related options for hedging may
protect a Fund against adverse movements in the general level of interest
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<PAGE> 21
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rates or securities prices, such transactions could also preclude the
opportunity to benefit from favorable movements in the level of interest rates
or securities prices. There can be no guarantee that a Manager's forecasts about
market values, interest rates and other applicable factors will be correct or
that there will be a correlation between price movements in the hedging vehicle
and in the securities being hedged. The skills required to invest successfully
in futures and options may differ from skills required to manage other assets in
a Fund's portfolio. An incorrect forecast or imperfect correlation could result
in a loss on both the hedged securities in a Fund and the hedging vehicle so
that the Fund's return might have been better had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
A Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or are quoted on an automated quotation system. A Fund will not
enter into a futures contract if immediately thereafter the initial margin
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 Funds may trade futures contracts and options on futures contracts on U.S.
domestic markets and, except for ESC Strategic Asset Preservation Fund, also on
exchanges located outside of the United States. Foreign markets may offer
advantages such as trading in indices that are not currently traded in the
United States. Foreign markets, however, may have greater risk potential than
domestic markets. Unlike trading on domestic commodity exchanges, trading on
foreign commodity exchanges is not regulated by the CFTC and may be subject to
greater risk than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and a
trader may look only to the broker for performance of the contract. In addition,
any profits that a Fund might realize in trading could be eliminated by adverse
changes in the exchange rate of the currency in which the transaction is
denominated, or the Fund could incur losses as a result of changes in the
exchange rate. Transactions on foreign exchanges may include both commodities
that are traded on domestic exchanges or boards of trade and those that are not.
Risks of Forward Foreign Currency Contracts. The precise matching of forward
contracts and the value of the securities involved will not generally be
possible since the future value of the securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
Projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
There can be no assurance that new forward contracts or offsets will always be
available to a Fund.
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MANAGEMENT STRATEGIES
The Adviser uses various strategies intended to increase the return of the Funds
and to lower their volatility, to the extent consistent with the objectives of
each Fund, by (a) strategically allocating assets to specific categories,
markets and Managers,
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<PAGE> 22
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(b) identifying and retaining Managers who have achieved superior records and
have appropriately divergent management styles, and (c) monitoring Managers'
performance and adherence to stated styles.
MULTIPLE MANAGER STRATEGY. The Adviser expects to use the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance of both the total Fund portfolio and of each
Manager and will reallocate Fund assets among individual Managers, or recommend
to the Company that it employ or terminate particular Managers, to the extent
the Adviser deems appropriate to achieve the overall objectives of the
particular Fund. The Adviser intends to recommend reallocations if, under the
Adviser's strategic analysis, a Manager's allocation becomes over-weighted as a
result of extended appreciation and in order that undervalued securities and
management styles receive additional allocations. Under certain circumstances,
when deemed in the best interests of a Fund and its shareholders, the Adviser
may recommend that a Manager's allocation be set temporarily at zero.
The Multiple Manager Strategy is based on analysis of performance of investment
managers which indicates that even highly successful investment managers
experience variations in performance which may be caused by factors or
conditions that affect the particular universe of securities emphasized by that
investment manager or otherwise impact his particular investment style. By
recognizing the effect of these factors on particular Managers, the Adviser can
reallocate or rebalance the assets of a Fund among Managers from time to time to
provide a more favorable risk/reward relationship. As a result of this strategy,
the Adviser hopes both to increase the prospects for investment return and to
reduce market risk.
To the extent the Adviser is successful in (a) identifying and retaining
Managers who have achieved superior investment records
and have appropriately divergent investment styles, (b) monitoring Managers'
performance and adherence to stated styles, and (c) strategically allocating
Fund assets among multiple Managers, over time the Adviser believes the Funds
with multiple Managers may achieve a better rate of return with lower volatility
than would typically be expected of any one management style.
The Adviser selects Managers based on the continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to specific investment styles. While superior performance is regarded
as the ultimate goal, short-term performance by itself is not a significant
factor in selecting or terminating Managers, and the Adviser does not anticipate
frequent changes in Managers. Criteria for employment of Managers include, but
are not limited to, the following:
(1) Managers must display discipline and thoroughness in pursuit of stated
investment objectives.
(2) Managers must maintain over time consistently above-average performance.
Most importantly, Managers must display an ability to conserve values in
down markets.
(3) Managers must demonstrate a high level of service and responsibility to
clients. The Adviser monitors continually the performance of Managers as
well as management firm staffs and organizations to assess overall
competence.
The Company has received an exemptive order (the "Order") from the
Securities and Exchange Commission that will permit, subject to certain
conditions, the Adviser to retain new Managers (except a Manager affiliated
with the Adviser) without shareholder approval of the contracts with those
Managers. Within 60 days of such retention of a new Manager, shareholders
of any affected Fund will receive information similar to what would have
been provided in a proxy statement, except for fees to be paid to the
Manager. The Order relieves the Company from requirements to disclose fees
paid to individual Managers (except Managers affiliated with the Adviser,
such as EAM) in the prospectus and other doc-
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uments. Aggregate advisory fees paid by each Fund, aggregate fees paid to
Managers of each Fund, fees retained by the Adviser with respect to each
Fund and fees paid to Managers affiliated with the Adviser will be
disclosed.
From time to time, the Adviser may recommend that the services of a Manager be
terminated. The criteria for termination include, but are not limited to, the
following:
(1) Departure of key personnel from the Manager's firm.
(2) Acquisition of the Manager by a third party.
(3) Change in or departure from investment style.
(4) Inadequate investment process which could result in inconsistent security
selection.
MULTIPLE ASSET STRATEGY. In the Adviser's view, approximately 94% of return
variability among investment portfolios is attributable to asset allocation.
Therefore, short-term risk of price volatility associated with equity
investments should be reduced by broad representation in asset groups that
historically have lower market risk than equities -- principally fixed income
securities.
MULTIPLE MARKET STRATEGY. For certain Funds, the Adviser will seek to reduce
market risk through exposure to international markets which, as a group, have
exhibited counter-cyclical characteristics compared to U.S. markets. The U.S.
equity market capitalization currently represents approximately 43% of global
equity market capitalization. Additional return benefits may be achieved by the
broader security selection available in international markets.
EMERGING COMPANY/MATURE MARKET STRATEGY. When a Fund invests in mature markets,
the Adviser will seek above-average return by allocating assets to Managers that
invest in companies (a) with earnings growth that exceeds that of the economy,
(b) that have a market capitalization less than the average for that market, and
(c) that are under-recognized by investors. The Adviser's analysis indicates
that, over time, such stocks tend to outperform larger capitalization indices
and are less subject to macro-economic, cyclical forces.
EMERGING MARKET STRATEGY. The Adviser will seek to enhance investment return
for ESC Strategic Global Equity Fund and ESC Strategic Income Fund through
investing in emerging markets that are exhibiting or are in the early stages of
exhibiting very high economic growth rates relative to countries in the
Organization for European Community Development ("OECD"). An emerging market may
be defined as any country considered to be emerging or developing by the World
Bank or the United Nations. Currently, the Adviser anticipates emphasis, for
Funds using this strategy, in Latin America (Argentina, Brazil, Chile, Columbia,
Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela)
and Asia (China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines,
Singapore, Sri Lanka, Taiwan, and Thailand). It is anticipated that countries in
Southern and Eastern Europe, the Mid-East and Africa will be added to this list.
For special risks of investing in emerging markets, see "Risks of Investing in
the Funds."
DOMESTIC/INTERNATIONAL EQUITY ALLOCATION MODEL (DIEA MODEL). For the ESC
Strategic Global Equity Fund, the Adviser will determine the weighting in the
Fund's portfolio between U.S. and international markets by using the DIEA Model.
This model considers (a) U.S. Gross National Product ("GNP") as a percentage of
the world economy, based on calculations by the World Bank, and (b) the trend of
U.S. Gross Domestic Product ("GDP") growth relative to other international
developed market and emerging market categories of equity assets represented in
the Fund's portfolio. The World Bank currently estimates that the GNP of the
United States comprises 34% of the world economy. This percentage has declined
from 47% in 1970 and is expected to decline further given 2% expected growth in
developed OECD markets as compared to 6.5% expected growth in emerging markets.
Accordingly, the initial allocation to U.S. equities is expected to be no
greater than 33%. Emerging markets will generally comprise between 40% to 60% of
the interna-
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tional component or about 35% of the total investment assets. From time to time,
the Adviser may allocate Fund assets to fixed income or other securities when
these allocations are expected to provide returns comparable to those normally
associated with equity securities.
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MANAGEMENT OF THE FUNDS
The business and affairs of each Fund are managed under the direction of the
Board of Directors. The Directors are William Howard Cammack, Sr.; William
Howard Cammack, Jr.; J. Bransford Wallace; Brownlee O. Curry, Jr.; and E. Townes
Duncan. Additional information about the Directors, as well as the Company's
executive officers, may be found in the SAI under the heading
"Management -- Directors and Officers."
THE ADVISER: EQUITABLE SECURITIES CORPORATION
Equitable Securities Corporation, 800 Nashville City Center, 511 Union Street,
Nashville, Tennessee 37219-1743, is a registered investment adviser, a
registered broker-dealer, and a member of the New York Stock Exchange, Inc.
Together with predecessors, the Adviser has been in business since 1930. Through
its IMES Consulting Group, the Adviser provides consulting services to clients
regarding the strategic allocation of assets and the selection and monitoring of
investment management firms. The Adviser serves as General Partner of several
private, unregistered limited partnerships. The Company is the Adviser's first
registered investment company client. One of the Managers, EAM, is a subsidiary
of the Adviser's subsidiary, Equitable Trust Company, and is, therefore, an
affiliate of the Adviser. The Adviser and its affiliates had approximately $1.0
billion under management at March 31, 1996.
For the advisory services it provides the Funds, the Adviser receives from each
Fund fees, payable monthly based on average daily net assets, at an annual rate
based on the Fund's average net assets. Fees are 0.50% for ESC Strategic Asset
Preservation Fund. Fees are 1.0% for each of the other Funds, which are higher
rates than advisory fees paid by most other funds. Out of its fees, the Adviser
pays fees to the Managers. Fees paid to Equitable Asset Management for the
fiscal year ended March 31, 1996 were .17% with respect to ESC Strategic
Appreciation Fund and .73% with respect to ESC Strategic Small Cap Fund, as a
percentage of each Fund's assets. Fees paid to Equitable Trust Company for the
same period were 0% of the assets of ESC Strategic Asset Preservation Fund.
Aggregate fees paid by each Fund to the Adviser, aggregate fees paid by the
Adviser to the Managers of each Fund, and fees retained by the Adviser with
respect to each of the Funds for the fiscal year ended March 31, 1995, expressed
as a percentage of the assets of each Fund, were as follows: ESC Strategic
Appreciation Fund, .95%, .67% and .28%; ESC Strategic Global Equity Fund, 1.0%,
.49% and .51%; ESC Strategic Small Cap Fund, .88%, .73% and .15%; ESC Strategic
Income Fund, 1.0%, .25 % and .75%; and ESC Strategic Asset Preservation Fund,
.13%, 0 and .13%. Pursuant to an exemptive order received from the Securities
and Exchange Commission, the Funds are not required to disclose fee rates or
fees paid to individual Managers that are not affiliated with the Adviser. The
Adviser has agreed to limit the expenses of the Funds to the following
percentages of each Fund's net asset value: ESC Strategic Appreciation
Fund -- 2.00% (Class A) and 2.50% (Class D); ESC Strategic Global Equity
Fund -- 2.50% (Class A) and 3.00% (Class D); ESC Strategic Small Cap
Fund -- 2.00% (Class A) and 2.50% (Class D); ESC Strategic Income Fund -- 2.00%
(Class A) and 2.50% (Class D); and ESC Strategic Asset Preservation Fund --
1.00%. For the period ended March 31, 1996, pursuant to an agreement to limit
Fund expenses, the Adviser waived fees of $50,302, $25,762 and $11,800 for the
Asset Preservation, Small Cap and Appreciation Funds, respectively. Absent this
waiver agreement, Advisory fees would have been $63,894, $224,932 and $236,656
for the
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Asset Preservation, Small Cap and Appreciation Funds, respectively. The Adviser
received fees of $373,088 and $156,881 from the Income and Global Equity Funds,
respectively, for the period ended March 31, 1996.
W. Howard Cammack, Jr. has primary responsibility for the Adviser's advice to
the Funds. Mr. Cammack joined the Adviser in 1979. He is presently a Managing
Director, is head of the Adviser's Investment Management and Fiduciary Services
Group, and is a member of the Board of Directors of the Adviser, Equitable Trust
Company, and EAM. In 1986, Mr. Cammack organized the Adviser's IMES Consulting
Group, which he oversees. Mr. Cammack received a Bachelor's degree in history
from Tulane University in 1979.
THE MANAGERS
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 740, San Diego, California
92121, was newly formed in 1994 by a group of seven individuals previously
associated with other investment advisory firms and collectively having
approximately 60 years' investment management experience. The firm specializes
in management of domestic and international equity securities. As of March 31,
1996, the firm had approximately $478.9 million of assets under management.
Llama Asset Management Company, L.P., One McIlroy Plaza, Suite 302,
Fayetteville, Arkansas 72701 organized in 1988, is an investment advisory firm
that specializes in fixed income investments. The firm provides investment
management to pension plans, insurance companies, hospitals, and other
institutional investors and individuals. As of March 31, 1996, the firm had
approximately $212.6 million of assets under management.
Cincinnati Asset Management, Inc., 11300 Cornell Park Drive, Cincinnati, Ohio
45242 is an investment advisory firm specializing in high-yield debt securities,
also known as junk bonds. The firm, organized in 1989 and majority owned by its
chief executive officer, William S. Sloneker and family members, provides
services to insurance companies, pension plans, other institutional investors
and individuals. As of March 31, 1996, the firm had approximately $175 million
of assets under management.
Murray Johnstone International Limited, 11 West Nile Street, Glasgow, Scotland
G1 2PX, was organized in 1989 and manages $1.4 billion in assets for clients in
North America, including other mutual funds. The firm is a wholly-owned
subsidiary of the Murray Johnstone Group, whose origin goes back to 1907. The
Group had approximately $6.8 billion of assets under management as of March 31,
1996. Murray Johnstone Group, in turn, is owned by United Asset Management
Corporation, a New York Stock Exchange-traded company based in Boston.
Brandes Investment Partners, Inc., 12750 High Bluff Drive, San Diego, California
92130, has been providing investment advisory services since 1974 (including
predecessors). Brandes Investment Partners, Inc. manages approximately $7.0
billion for individual, corporate, pension plan and other clients as of March
31, 1996.
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, 1996 managed
approximately $127.8 million in assets. Frank D. Inman has primary investment
responsibility for equity management at EAM, including EAM's services to ESC
Strategic Appreciation Fund and ESC Strategic Small Cap Fund. Mr. Inman joined
Equitable Securities Corporation in May of 1988 where he is a Managing Director.
Prior to that date, Mr. Inman was Director of Institutional Equity Sales at
Interstate Securities in Charlotte, North Carolina. Mr. Inman received a
Bachelors degree in English from the University of Georgia in 1973 and a Masters
degree in Business Administration from Georgia State University in 1979.
Primary investment responsibility for fixed income investments at EAM, including
EAM's services to ESC Strategic Asset Preser-
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vation Fund, resides with Gary F. Poling, First Vice President and Investment
Officer of Equitable Trust Company and First Vice President of EAM. Prior to
joining Equitable Trust Company, Mr. Poling was First Vice President and Senior
Portfolio Manager of Sovran Bank/Tennessee's Trust Division. Previously, he was
an investment representative with Merrill Lynch, Pierce, Fenner and Smith, Inc.
Mr. Poling received a Bachelor of Science degree in Finance from East Tennessee
State University in 1972. He is also a Certified Financial Planner, a Registered
Financial Planner, a Certified Trust and Financial Adviser, and a Certified
Financial Relationship Counselor.
THE DISTRIBUTOR
The Adviser acts as Distributor for the Funds pursuant to a Distribution
Contract.
Each of the Funds offering two classes of shares has adopted a service and
distribution plan ("Plan") with respect to each class of its shares. The Plans
provide that Class A shares will pay the Distributor a fee up to an annual rate
of 0.25% (which may include a 0.25% Service Fee) of the value of average daily
net assets of Class A shares as reimbursement for its costs incurred for
financing certain distribution and shareholder service activities related to
Class A shares. For the period ended March 31, 1996, the Distributor received
$32,859, $16,888, $40,962 and $55,323 for the Income, Global Equity, Small Cap
and Appreciation Funds, respectively pursuant to Class A Plans. The Plans
provide that Class D shares will pay the Distributor amounts up to an annual
rate of 0.75% (which may include a 0.25% Service Fee) of the average daily net
assets of Class D shares as reimbursement for its costs incurred to finance
certain distribution and shareholder service activities related to Class D
Shares. For the period ended March 31, 1996, the Distributor received $10,400,
$27,060, $36,932 and $15,516 for the Income, Global Equity, Small Cap and
Appreciation Funds, respectively pursuant to Class D Plans. ESC Strategic Asset
Preservation Fund, which has only one class of shares, has adopted a Plan
substantially the same as that for Class A shares of the other Funds. For the
period ended March 31, 1996 the Distributor received $10,557 pursuant to the
Plan for ESC Strategic Asset Preservation Fund. Service Fees are paid to
securities dealers and other financial institutions for maintaining shareholder
accounts and providing related services to shareholders.
Under each of the Plans, each Fund pays the Distributor and other securities
dealers and other financial institutions and organizations for certain
shareholder service or distribution activities. Selling dealers may be paid
amounts, at the end of each year, totalling up to 0.25% of the average daily net
asset value of Class A shares and for the sole class of shares of Asset
Preservation Fund, and 0.75% of the average daily net asset value of Class D
shares in their clients' accounts. Amounts received by the Distributor may,
additionally, subject to the Plan maximums, be used to cover certain other costs
and expenses related to the distribution of Fund shares and provision of service
to Fund shareholders, including: (a) advertising by radio, television,
newspapers, magazines, brochures, sales literature, direct mail or any other
form of advertising; (b) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses; (c)
costs of printing prospectuses and other materials to be given or sent to
prospective investors; and (d) such other similar services as the Directors
determine to be reasonably calculated to result in the sale of shares of the
Funds. Each Fund will pay all costs and expenses in connection with the
preparation, printing and distribution of the Prospectus to current shareholders
and the operation of its Plan(s), including related legal and accounting fees. A
Fund will not be liable for distribution expenditures made by the Distributor in
any given year in excess of the maximum amount payable under a Plan for that
Fund in that year.
SERVICE ORGANIZATIONS
Payments may be made by the Funds or by the Adviser to various banks, trust
companies, broker-dealers or other financial
organizations (collectively, "Service Organizations") for providing
administrative services for the Funds and their shareholders, such as
maintaining shareholder records, answering shareholder inquiries and forward-
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ing materials and information to shareholders. The Funds may pay fees to Service
Organizations (which vary depending upon the services provided) in amounts up to
an annual rate of 0.25% of the daily net asset value of the shares of either
class (and of the sole class of Asset Preservation Fund) owned by shareholders
with whom the
Service Organization has a servicing relationship.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than a Fund's
minimum initial or subsequent investments or charging a direct fee for
servicing. If imposed, these fees would be in addition to any amounts which
might be paid to the Service Organization by the Funds. Each Service
Organization has agreed to transmit to its clients a schedule of any such fees.
Shareholders using Service Organizations are urged to consult with them
regarding any such fees or conditions.
ADMINISTRATIVE SERVICES
Furman Selz LLC, 230 Park Avenue, New York, New York 10169, acts as
Administrator of the Funds. On June 28, 1996 Furman Selz and BISYS Group, Inc.
("BISYS") announced a definitive agreement which provides for Furman Selz to
transfer its mutual fund clients to BISYS. This transaction is expected to close
within 90 days. The Board of Directors approved BISYS' Fund Administration
Agreement, Fund Transfer Agency Agreement and Fund Accounting Agreement on
behalf of the Company at their July 16, 1996 Board of Directors Meeting. BISYS,
headquartered in Little Falls, New Jersey, supports more than 5,000 financial
institutions and corporate clients through two strategic business units. BISYS
Information Services Group provides image and data processing outsourcing, and
pricing analysis to more than 600 banks nationwide. BISYS Investment Services
Group designs, administers and distributes over 30 families of proprietary
mutual funds consisting of more than 365 portfolios, and provides 401(k)
marketing support, administration, and recordkeeping services in partnership
with 18 of the nation's leading bank and investment management companies.
Furman Selz is primarily an institutional brokerage firm with membership on the
New York, American, Boston, Midwest, Pacific and Philadelphia Stock Exchanges.
Furman Selz also serves as administrator and distributor of other mutual funds.
Pursuant to an Administrative Services Contract with the Company, Furman Selz
provides certain management and administrative services necessary for the Funds'
operations including: (a) general supervision of the operation of the Funds
including coordination of the services performed by the Funds' Adviser,
Managers, custodian, independent accountants and legal counsel; (b) regulatory
compliance, including the compilation of information for documents such as
reports to, and filings with, the SEC and state securities commissions, and
preparation of proxy statements and shareholder reports for the Funds; (c)
general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Funds' officers and Board of
Directors; and (d) furnishing office space and certain facilities required for
conducting the business of the Funds. For these services, Furman Selz receives
from each Fund a fee, payable monthly, at the annual rate of 0.15% of each
Fund's average daily net assets. For the period ended March 31, 1996, the
Administrator was entitled to and received fees in the amount of $55,963,
$23,532, $33,740 and $35,498 from the Income, Global Equity, Small Cap and
Appreciation Funds, respectively. The Administrator was entitled to $19,168 in
fees from the Asset Preservation Fund, but voluntarily waived $14,250 for the
same period. Pursuant to a Services Agreement between the Company and Furman
Selz, Furman Selz provides the Company with transfer and dividend disbursing
agent services, for which it receives a fee of $15.00 per account per year
subject to a required minimum fee of $10,000 for each Fund, plus out-of-pocket
expenses. For the period ended March 31, 1996, pursuant to an agreement to limit
Fund expenses, the Transfer Agent waived fees of $10,000 for each of the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. Absent this waiver agreement, transfer agent fees would have been
$11,796, $14,942, $16,307, $23,536 and $16,395 for
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the Asset Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. Pursuant to a Fund Accounting Agreement between the Company and
Furman Selz, Furman Selz assists the Company in calculating net asset values and
provides certain other accounting services for each Fund described therein, for
an annual fee of $30,000 per Fund plus out-of-pocket expenses. For the period
ended March 31, 1996, Furman Selz earned for fund accounting services including
out of pocket expenses $34,056, $40,222, $39,554, $31,533 and $39,370 for the
Asset Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
OTHER EXPENSES
Each Fund bears all costs of its operations other than expenses specifically
assumed by the Administrator, the Adviser, the Managers or other service
providers. In addition to the fees to service providers, described above, the
costs borne by the Funds, some of which may vary between the classes for Funds
with two classes, as noted above, include: legal and accounting expenses;
Directors' fees and expenses; insurance premiums; custodian and transfer agent
fees and expenses; expenses incurred in acquiring or disposing of the Funds'
portfolio securities; expenses of registering and qualifying the Funds' shares
for sale with the SEC and with various state securities commissions; expenses of
maintaining the Funds' legal existence and of shareholders' meetings; and
expenses of preparing and distributing reports, proxy statements and
prospectuses to existing shareholders. Each Fund bears its own expenses
associated with its establishment as a portfolio of the Company; these expenses
are amortized over a five-year period from the commencement of a Fund's
operations. Company expenses directly attributable to a Fund or class are
charged to that Fund or class; other expenses are allocated proportionately
among all of the Funds and classes in the Company in relation to the net assets
of each Fund and class.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement and Portfolio Management
Agreements, each Manager places orders for the purchase and sale of portfolio
investments for the Funds' accounts with brokers or dealers it selects in its
discretion.
In effecting purchases and sales of portfolio securities for the account of a
Fund, each Manager will seek the best execution of the Fund's orders. Purchases
and sales of portfolio debt securities for the Funds are generally placed by
Managers with primary market makers for these securities on a net basis, without
any brokerage commission being paid by the Funds. Trading does, however, involve
transaction costs. Transactions with dealers serving as primary market makers
reflect the spread between the bid and asked prices. The Funds may purchase
securities during an underwriting, which will include an underwriting fee paid
to the underwriter. To the extent permitted by, and subject to conditions of,
applicable law and regulations, the Funds may purchase securities from an
underwriting syndicate of which an affiliate of the Company, the Adviser, the
Administrator or a Manager is a member (but not directly from such affiliate).
Purchases and sales of common stocks are generally placed by a Manager with
broker-dealers which, in the judgment of the particular Manager, provide prompt
and reliable execution at favorable security prices and reasonable commission
rates. Broker-dealers are selected on the basis of a variety of factors such as
reputation, capital strength, size and difficulty of order, sale of Fund shares
and research provided to the Managers. Broker-dealers selected to execute
portfolio transactions for the Funds may include affiliates of the Company, the
Adviser, Administrator or a Manager, provided the charge for any such
transaction does not exceed usual and customary levels. A Manager may cause a
Fund to pay commissions higher than another broker-dealer would have charged if
the Manager believes the commission paid is reasonable in relation to the value
of the brokerage and research services received by the Manager. The Funds will
not pay higher securities prices or higher mark-ups or mark-downs, in
recognition of the value of research services provided by a securities dealer,
on transactions with a securities dealer where the dealer
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sells securities to the Fund or purchases them from the Fund, on a principal
basis.
Consistent with the Rules of Fair Practice of the National Association of
Securities Deal- ers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Managers may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds.
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FUND SHARE VALUATION
The net asset value per share for each class of shares of each Fund is
calculated at 4:15 p.m. (Eastern time), Monday through Friday, on each day the
New York Stock Exchange is open for trading, which excludes the following
business holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of each class of shares of the Funds is computed by dividing the
value of net assets of each class (i.e., the value of the assets less the
liabilities) by the total number of such class's outstanding shares. All
expenses, including fees paid to the Adviser, the Managers and Furman Selz, are
accrued daily and taken into account for the purpose of determining the net
asset value.
Securities listed on an exchange are valued on the basis of the last sale prior
to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken for the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each business day. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Directors.
Notwithstanding the above, bonds and other fixed-income securities are valued by
using market quotations and may be valued on the basis of prices provided by a
pricing service approved by the Board of Directors. All assets and liabilities
initially expressed in foreign currencies will be expressed for valuation
purposes in U.S. dollars at the mean between the bid and asked prices of such
currencies against U.S. dollars as last quoted by any major bank.
With respect to options contracts sold by a Fund, the Fund records the premium
received as an asset and equivalent liability, and thereafter adjusts the
liability to the market value of the option determined in accordance with the
preceding paragraph. The premium paid for an option purchased by a Fund is
recorded as an asset and subsequently adjusted to market value. Open futures
contracts are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case such positions will be
valued by or under the direction of the Directors.
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PRICING OF FUND SHARES
Orders for the purchase of shares of each class will be executed at the net
asset value per share of that class plus any applicable sales charge (the
"public offering price") next determined after an order has been received in
proper order by the Funds, or by an authorized broker, investment adviser or
Service Organization and transmitted to the Funds by 5:00 p.m. Eastern Time.
(See "Purchase of Fund Shares.") The sales charge on purchases of each class of
shares of the Funds (except ESC Strategic Asset Preservation Fund, which has no
sales charge) is as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A AMOUNT OF SALES
PERCENTAGE OF CHARGE REALLOWED
--------------------- TO DEALERS AS A
PUBLIC NET PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
PRICE INVESTED PRICE
-------- -------- ----------------
<S> <C> <C> <C>
CLASS A SHARES
AMOUNT OF INVESTMENT
Less than $100,000................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000...................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000...................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000.................... 2.00% 2.04% 1.75%
$1,000,000 and over.................................. None None None
CLASS D SHARES
AMOUNT OF INVESTMENT
Less than $1,000,000................................. 1.50% 1.52% 1.25%
$1,000,000 and over.................................. None None None
</TABLE>
The sales charge will not apply to shares of either class purchased by: (a)
trust, investment management and other fiduciary accounts managed by the Adviser
or a Manager pursuant to a written agreement; (b) any person purchasing shares
with the proceeds of a distribution from a trust, investment management or other
fiduciary account managed by the Adviser or a Manager pursuant to a written
agreement; (c) any person purchasing shares with the proceeds of a redemption of
shares of a mutual fund, other than ESC Strategic Funds, Inc., that were
originally purchased with a sales load; (d) Furman Selz or any of its
affiliates; (e) Directors or officers of the Funds; (f) directors or officers of
Furman Selz, the Adviser or a Manager, or affiliates or bona fide full-time
employees of any of the foregoing who have acted as such for not less than 90
days (including members of their immediate families and their retirement plans
or accounts); or (g) retirement accounts or plans (or monies from retirement
accounts or plans) for which there is a written service agreement between the
Company and the Plan Sponsor, so long as such shares are purchased through the
Distributor; or (h) any person purchasing shares within an asset allocation or
fee based program sponsored by a financial services organization. The sales
charge also does not apply to shares sold to representatives of selling brokers
and members of their immediate families. In addition, the sales charge does not
apply to sales to bank trust departments, acting on behalf of one or more
clients, of shares having an aggregate value equal to or exceeding $200,000.
See "Dividends, Distributions and Federal Income Tax," for an explanation of
circumstances in which a sales charge paid to acquire shares of a mutual fund
may not be taken into account in determining gain or loss on the disposition of
those shares.
QUANTITY DISCOUNTS IN THE SALES CHARGES
The following quantity discounts shall be available to: (a) an individual, his
or her spouse, and their children under the age of 21, and any trust, pension,
IRA, spousal IRA, profit sharing or other benefit plan for such persons; (b) a
trustee or other fiduciary of a single trust estate or a single fiduciary
account; (c) a pension, profit-sharing or other employee benefit plan qualified
under Section 401 of the Internal Revenue Code of 1986, and (d) tax-exempt
organizations under Section 501(c)(3) of the Code.
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Right of Accumulation
Each Fund (except ESC Strategic Asset Preservation Fund, which imposes no sales
charge) permits sales charges on Class A shares to be reduced through rights of
accumulation. For Class A shares, the schedule of reduced sales charges will be
applicable once the accumulated value of the account has reached $100,000. For
this purpose, the dollar amount of the qualifying concurrent or subsequent
purchase is added to the net asset value of any other Class A shares of those
Funds in the Company owned at the time by the investor. The sales charge imposed
on the Class A shares being purchased will then be at the rate applicable to the
aggregate of Class A shares purchased. For example, if the investor held Class A
shares of these Funds valued at $100,000 and purchased an additional $20,000 of
Class A shares of the Funds (totalling an investment of $120,000), the sales
charge for the $20,000 purchase would be at the next lower sales charge on the
schedule (i.e., the sales charge for purchases over $100,000 but less than
$250,000). There can be no assurance that investors will receive the cumulative
discounts to which they may be entitled unless, at the time of placing their
purchase order, the investors or their dealers make a written request for the
discount. The cumulative discount program may be amended or terminated at any
time. This particular privilege does not entitle the investor to any adjustment
in the sales charge paid previously on purchases of Class A shares of the Funds.
If the investor knows that he will be making additional purchases of shares in
the future, he may wish to consider executing a Letter of Intent.
Letter of Intent
The schedule of reduced sales charges is also available to Class A investors who
enter into a written Letter of Intent providing for the purchase, within a
13-month period, of Class A shares of a particular Fund. Shares of such Fund
previously purchased during a 90-day period prior to the date of receipt by the
Funds of the Letter of Intent which are still owned by the shareholder may also
be included in determining the applicable reduction, provided the shareholder or
the dealer notifies the Funds of such prior purchases.
A Letter of Intent (which is not applicable to investments in ESC Strategic
Asset Preservation Fund or in Class D shares of the other Funds) permits an
investor to establish a total investment goal to be achieved by any number of
investments over a 13-month period. Each investment made during the period will
receive the reduced sales commission applicable to the amount represented by the
goal as if it were a single investment. A number of shares totalling 5% of the
dollar amount of the Letter of Intent will be held in escrow by the Distributor
in the name of the shareholder. The initial purchase under a Letter of Intent
must be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, or a Fund to
sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the Letter of Intent provides that a
sufficient number of escrowed shares will be liquidated to reimburse the
Distributor to the extent of the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges actually
paid. If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth under "Right of Accumulation," but there
will be no retroactive reduction of sales charges on previous purchases. At any
time while a Letter of Intent is in effect, a shareholder may, by written notice
to the Funds, increase the amount of the stated goal. In that event, shares
purchased during the previous 90-day period and still owned by the shareholder
will be included in determining the applicable sales charge reduction. The 5%
escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase Fund shares pursuant to a Letter of Intent
should carefully read the application for Letter of Intent which is available
from the Funds.
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MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Funds is $10,000, except that the minimum
is $2,000 for an IRA or other qualified retirement plan. Any subsequent
investments must be at least $50, including an IRA or qualified retirement plan
investment. All initial investments should be accompanied by a completed
Purchase Application. A Purchase Application accompanies this Prospectus.
However, a separate application is required for IRA and other qualified
retirement plan investments. The Distributor reserves the right to reject
purchase orders. The officers of the Company are authorized to waive the minimum
initial and subsequent investment requirements of the Funds.
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PURCHASE OF FUND SHARES
All funds received by the Funds are invested in full and fractional shares of
the indicated class of the appropriate Fund. Certificates for shares are not
issued. Furman Selz maintains records of each shareholder's holdings of Fund
shares, and each shareholder receives a statement of transactions, holdings and
dividends. The Funds reserve the right to reject any purchase.
Each Fund, except ESC Strategic Asset Preservation Fund, offers investors a
choice of two classes of shares which differ principally with respect to sales
charges and the rate of expenses to which they are subject. Investors may select
the class which better suits their investment needs.
For Funds offering two classes of shares, a prospective investor, in selecting
between the classes, should consider the impact of the sales charge together
with the cumulative effect of the Service and Distribution Fees for each class
over the anticipated period of investment, as well as the effect of any sales
charge waivers to which the investor may be entitled. Investors should be aware
that other expenses attributable to each class may differ slightly due to the
allocation to each class of certain "class specific" expenses, including
distribution and marketing expenses and federal and state securities
registration fees. Finally, investors should be aware that persons selling
shares of the Funds may receive different levels of compensation for sales of
Class A and Class D shares. See "Purchase of Fund Shares" and "Management of the
Funds -- The Distributor".
An investment may be made using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service
Organization. Shares are available to new and existing shareholders through
authorized brokers, investment advisers and Service Organizations. To make an
investment using this method, a Purchase Application must have been completed
and the customer must notify the broker, investment adviser or Service
Organization of the amount to be invested. The broker will then contact the
Funds to place the order.
Orders received by the broker or Service Organization in proper order prior to
the determination of net asset value and transmitted to the Funds prior to the
close of its business day (which is currently 5:00 p.m., Eastern time), will
become effective that day. Brokers who receive orders are obligated to transmit
them promptly. Written confirmation of an order should be received a few days
after the broker has placed the order.
From the Distributor. Shares may be purchased directly from the Distributor by
sending a completed Purchase Application together with a money order, check or
other negotiable bank draft to ESC Strategic Funds, Inc., P.O. Box 4490, Grand
Central Station, New York, New York 10163-4490.
By Wire. Investments may be made directly through the use of wire transfers of
Federal funds. An investor's bank may wire Federal funds to the applicable Fund.
In most cases, the bank will either be a member of the Federal Reserve Banking
System or have a
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relationship with a bank that is. The bank will normally charge a fee for
handling the transaction. To purchase shares by a Federal funds wire, investors
should first contact Furman Selz Mutual Funds Client Services Wire Desk which
will establish a record of information for the wire to insure the correct
processing of funds. The Wire Desk may be called at 1-800-261-FUND(3863).
The investor's bank should wire funds using the following instructions:
Investors Fiduciary Trust Company
Kansas City, MO 64105
ABA #1010-0362-1
Account #751-2996
Further Credit to: Fund Name
Investors who have read the Prospectus may establish a new regular account
through the Wire Desk; IRAs and other qualified retirement plan accounts may not
be opened in this way. When new accounts are established by wire, the
distribution options will be set to reinvest all dividends and the social
security or tax identification number ("TIN") will not be certified until a
signed application is received. Completed applications should be forwarded
immediately to the Funds. By using the Purchase Application, an investor may
specify other distribution options and may add any special features offered by a
Fund. Should any dividend distributions or redemptions be paid before the TIN is
certified, they will be subject to 31% Federal tax withholding.
Institutional Accounts. Bank trust departments and other institutional
accounts, not subject to sales charges, may place orders directly with the Funds
by telephone at 1-800-261-FUND(3863).
Automatic Investment Program. An eligible shareholder may also participate in
the ESC Strategic Investment Program, an investment plan that automatically
debits money from the shareholder's bank account and invests it in one or more
of the Funds through the use of electronic funds transfers or automatic bank
drafts. Shareholders may commence their participation in this program with a
minimum initial investment of $10,000 and may elect to make subsequent
investments by transfers of a minimum of $50 on either the fifth or twentieth
day of each month or calendar quarter into their established Fund account.
Contact the Fund for more information about the ESC Strategic Automatic
Investment Program.
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RETIREMENT PLAN ACCOUNTS
All Funds may be used as a funding medium for IRAs and other qualified
retirement plans ("Plans"). The minimum initial investment for an IRA or a Plan
is $2,000. An IRA may be established through a custodial account with Investors
Fiduciary Trust Company. Completion of a special application is required in
order to create such an account. A $5.00 establishment fee and an annual $12.00
maintenance and custody fee is payable with respect to each IRA; in addition
there will be charged a $10.00 termination fee when the account is closed. Fund
shares may also be purchased for IRAs and Plans established with other
authorized custodians. Contributions to IRAs are subject to prevailing amount
limits set by the Internal Revenue Service. For more information about IRAs and
other Plan accounts, call the Funds at 1-800-261-FUND(3863).
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EXCHANGE OF FUND SHARES
The Funds offer two convenient ways to exchange shares in one Fund for shares of
another Fund in the Company. Shares of a particular class of a Fund may be
exchanged only for shares of that same class in another Fund, with no sales
charge. Shares of ESC Strategic Asset Preservation Fund may be exchanged for
shares of another Fund with payment of the applicable sales charges. Before
engaging in an exchange transaction, a shareholder should read carefully the
information in the Prospectus describing the Fund into which the exchange will
occur. A shareholder may not exchange shares of a
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class of one Fund for shares of the same class of another Fund that is not
qualified for sale in the state of the shareholder's residence. The minimum
amount for an initial exchange is $2,000. There is no minimum for subsequent
exchanges, and no service fee is imposed for an exchange. The Funds may
terminate or amend the terms of the exchange privilege at any time upon 60 days'
notice to shareholders.
An exchange is taxable as a sale of a security on which a gain or loss may be
recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction. See "Dividends,
Distributions and Federal Income Tax" for an explanation of circumstances in
which a sales charge paid to acquire shares of the Funds may not be taken into
account in determining gain or loss on the disposition of those shares.
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the respective net asset values next determined following
receipt of the request by the Funds containing the information indicated below.
Exchange by Mail. To exchange Fund shares by mail, shareholders should simply
send a letter of instruction to the Funds. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the Fund from and the Fund into which the exchange is to be made;
(d) the dollar or share amount to be exchanged; and (e) the signatures of all
registered owners or authorized parties. All signatures must be guaranteed by an
eligible guarantor institution including members of national securities
exchanges, commercial banks or trust companies, broker-dealers, credit unions
and savings associations.
Exchange by Telephone. To exchange Fund shares by telephone or to ask any
questions, shareholders may call the Funds at 1-800-261-FUND(3863). Please be
prepared to give the telephone representative the following information: (a) the
account number, social security number and account registration; (b) if
applicable, the class of shares to be exchanged; (c) the name of the Fund from
which and the Fund into which the exchange is to be made; and (d) the dollar or
share amount to be exchanged. Telephone exchanges are available only if the
shareholder so indicates by checking the "yes" box on the Purchase Application.
The Funds employ procedures, including recording telephone calls, testing a
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Funds reserve the right to suspend or terminate the privilege of
exchanging by mail or by telephone at any time.
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REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business day.
Shares will be redeemed at the net asset value next determined after a
redemption request in good order has been received by the Funds. See
"Determination of Net Asset Value." A redemption may be a taxable transaction on
which gain or loss may be recognized.
Where the shares to be redeemed have been purchased by check, the redemption
request will be held until the purchasing check has cleared, which may take up
to 15 days. Shareholders may avoid this delay by investing through wire
transfers of Federal funds. During the period prior to the time the shares are
redeemed, dividends on the shares will continue to accrue and be payable and the
shareholder will be entitled to exercise all other beneficial rights of
ownership.
Once the shares are redeemed, a Fund will ordinarily send the proceeds by check
to the
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shareholder at the address of record on the next business day. The Fund may,
however, take up to three days to make payment, although this will not be the
customary practice. Also, if the New York Stock Exchange is closed (or when
trading is restricted) for any reason other than the customary weekend or
holiday closing or if an emergency condition as determined by the SEC merits
such action, the Funds may suspend redemptions or postpone payment dates.
Redemption Methods. To ensure acceptance of a redemption request, it is
important that shareholders follow the procedures described below. Although the
Funds have no present intention to do so, the Funds reserve the right to refuse
or to limit the frequency of any telephone or wire redemptions. Of course, it
may be difficult to place orders by telephone during periods of severe market or
economic change, and a shareholder should consider alternative methods of
communications, such as couriers. The Funds' services and their provisions may
be modified or terminated at any time by the Funds. If the Funds terminate any
particular service, they will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
A shareholder may redeem shares using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service Organization. The
shareholder should contact his or her broker, investment adviser or Service
Organization and provide instructions to redeem shares. These organizations are
responsible for the prompt transmission of orders. The broker will contact the
Funds and place a redemption trade. The broker may charge a fee for this
service.
By Mail. Shareholders may redeem shares by sending a letter directly to the
Funds. To be accepted, a letter requesting redemption must include: (a) the Fund
name, class of shares (if applicable) and account registration from which shares
are being redeemed; (b) the account number; (c) the amount to be redeemed; (d)
the signatures of all registered owners; and (e) a signature guarantee by any
eligible guarantor institution including members of national securities
exchanges, commercial banks or trust companies, broker-dealers, credit unions
and savings associations. Corporations, partnerships, trusts or other legal
entities will be required to submit additional documentation.
By Telephone. Shareholders may redeem shares by calling the Funds toll free at
1-800-261-FUND(3863). Be prepared to give the telephone representative the
following information: (a) the account number, social security number and
account registration; (b) the name of the class (if applicable) and the Fund
from which shares are being redeemed; and (c) the amount to be redeemed.
Telephone redemptions are available only if the shareholder so indicates by
checking the "yes" box on the Purchase Application or on the Optional Services
Form. The Funds employ procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
By Wire. Shareholders may redeem shares by contacting the Funds by mail or
telephone and instructing the Funds to send a wire transmission to the
shareholder's bank.
The shareholder's instructions should include: (a) the account number, social
security number and account registration; (b) the name of the class (if
applicable) and the Fund from which shares are being redeemed; and (c) the
amount to be redeemed. Wire redemptions can be made only if the "yes" box has
been checked on the shareholder's Purchase Application, and a copy is attached
of a void check on an account where proceeds are to be wired. The bank may
charge a fee for receiving a wire payment on behalf of its customer.
Systematic Withdrawal Plan. An owner of $12,000 or more of shares of a Fund may
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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.
Signature Guarantees. To protect shareholder accounts, the Funds and the
Administrator from fraud, signature guarantees are required to enable the Funds
to verify the identity of the person who has authorized a redemption from an
account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) and
the registered address, (2) a redemption of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Funds at 1-800-261-FUND (3863) for further details.
Reinstatement Privilege. A shareholder who has redeemed shares on which a sales
charge was paid may reinvest, without a sales charge, up to the full amount of
such redemption at the net asset value determined at the time of the
reinvestment within 30 days of the original redemption. This privilege must be
effected within 30 days of the redemption. The shareholder must reinvest in the
same Fund, same class, and the same account from which the shares were 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 a
Fund may not be taken into account in determining gain or loss on the
disposition of those shares.
Redemption of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Funds reserve the right to redeem, on not less
than 30 days' notice, an account in a Fund that has been reduced by a
shareholder (not by market action) to $500 or less. However, if during the
30-day notice period the shareholder purchases sufficient shares to bring the
value of the account above $500, the account will not be redeemed.
Redemption in Kind. All redemptions of shares of the Funds shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This commitment is irrevocable without the prior
approval of the SEC. In the case of redemption requests by shareholders in
excess of such amounts, the Board of Directors reserves the right to have a Fund
make payment, in whole or in part, in readily marketable securities or other
assets, in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued generally in the same manner as the
securities of that Fund are valued generally. If the recipient were to sell such
securities, he or she would incur brokerage charges.
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DIVIDENDS, DISTRIBUTIONS, AND
FEDERAL INCOME TAXATION
Each Fund intends to qualify annually to elect to be treated as a regulated
investment company pursuant to the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, each Fund must meet
certain income, distribution and diversification requirements. In any year in
which a Fund qualifies as a regulated investment company and timely distributes
all of its taxable income and substantially all of its net tax-exempt interest
income, if any, the Fund generally will not pay any U.S. federal income or
excise tax.
Each Fund intends to distribute to its shareholders substantially all of its
investment company taxable income (which includes, among other items, dividends
and interest and the excess, if any, of net short-term capital gains over net
long-term capital losses). ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund will declare distributions of such income daily and pay those
dividends monthly. ESC Strategic Appreciation Fund, ESC Strategic Global Equity
Fund and ESC Strategic Small Cap Fund will make distributions of such income at
least annually. Each Fund intends to distribute, at least annually,
substantially all net capital gain (the excess of net long-term capital gains
over net short-term capital losses). In determining amounts of capital gains to
be distributed, any capital loss carryovers from prior years will be applied
against capital gains.
In the case of ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund, the amount declared each day as a dividend may be based on projections of
estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account for
any difference between the projected and actual monthly investment income.
Distributions will be paid in additional Fund shares of the relevant class based
on the net asset value of that class at the close of business of the payment
date of the distribution, unless the shareholder elects in writing, not less
than five full business days prior to the record date, to receive such
distributions in cash. Dividends declared in, and attributable to, the preceding
month will be paid within five business days after the end of such month. In the
case of the Funds that declare daily dividends, shares purchased will begin
earning dividends on the day after the purchase order is executed, and shares
redeemed will earn dividends through the day the redemption is executed.
Investors who redeem all or a portion of their Fund shares prior to a dividend
payment date will be entitled on the next payment date to all dividends declared
but unpaid on those shares at the time of their redemption.
Any dividend or other distribution paid by a Fund has the effect of reducing the
net asset value per share on the record date by the amount thereof. Therefore,
in the case of Funds which do not declare dividends daily, a dividend or other
distribution paid shortly after a purchase of shares would represent, in
substance, a return of capital to the shareholder (to the extent it is paid on
the shares so purchased), even though subject to income taxes, as discussed
below.
Distributions of investment company taxable income (regardless of whether
derived from dividends, interest or short-term capital gains) will be taxable to
shareholders as ordinary income. If a portion of a Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may qualify for the deduction for dividends received by corporations. No portion
of the dividends paid by ESC Strategic Income Fund or ESC Strategic Asset
Preservation Fund is expected to so qualify. Distributions of net long-term
capital gains designated by a Fund as capital gain dividends will be taxable as
long-term capital gains, regardless of how long a shareholder has held his Fund
shares. Distributions are taxable in the same manner whether received in
additional shares or in cash.
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A distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Fund during October, November, or December of that year to
shareholders of record in such a month and paid by the Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
Any gain or loss realized by a shareholder upon the sale or other disposition of
shares of a Fund, or upon receipt of a distribution in complete liquidation of a
Fund, generally will be a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.
Under certain circumstances, the sales charge incurred in acquiring shares of a
Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies when shares of a Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Fund are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred a sales charge
initially. The portion of the sales charge affected by this rule will be treated
as a sales charge paid for the new shares.
The Funds may be required to withhold Federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where a Fund or shareholder has been notified
by the Internal Revenue Service that the shareholder is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.
Further information relating to tax consequences is contained in the SAI.
Shareholders will be notified annually by the Company as to the federal tax
status of distributions made by the Fund(s) in which they invest. Depending on
the residence of the shareholder for tax purposes, distributions also may be
subject to state and local taxes, including withholding taxes. Foreign
shareholders may, for example, be subject to special withholding requirements.
Special tax treatment, including a penalty on certain pre-retirement
distributions, is accorded to accounts maintained as IRAs. Shareholders should
consult their own tax advisers as to the federal, state and local tax
consequences of ownership of shares of the Funds in their particular
circumstances.
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DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES
U.S. Government Securities (All Funds). U.S. Government securities are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Treasury bills, which have a maturity of up to one year,
are direct obligations of the United States and are the most frequently issued
marketable U.S. Government security. The U.S. Treasury also issues securities
with longer maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt securities
issued by U.S. Government-sponsored enterprises and federal agencies. Some
obligations of agencies are supported by the full faith and credit of the United
States or by U.S. Treasury guarantees, such as mortgage-backed certificates
issued by the Government National Mortgage Association; others, such as
obligations of the Federal Home Loan Banks, Federal
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Farm Credit Bank, Bank for Cooperatives, Federal Intermediate Credit Banks and
the Federal Land Bank, are guaranteed by the right of the issuer to borrow from
the U.S. Treasury; others, such as obligations of the Federal National Mortgage
Association, are supported by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others, such
as obligations of the Student Loan Marketing Association and the Tennessee
Valley Authority, are backed only by the credit of the agency or instrumentality
issuing the obligation. In the case of obligations not backed by the full faith
and credit of the United States, the investor must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment.
Bank Obligations (All Funds). These obligations include negotiable certificates
of deposit and bankers' acceptances. The Funds limit their bank investments to
dollar-denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper (All Funds). Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions, as well as similar instruments issued by government
agencies and instrumentalities. Each Fund establishes its own standards of
creditworthiness for issuers of such investments.
Corporate Debt Securities (All Funds). A Fund's investments in U.S. dollar- or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments) which meet the previously
disclosed minimum ratings and maturity criteria established for the Fund under
the direction of the Board of Directors and the Fund's Manager or, if unrated,
are in the Manager's opinion comparable in quality to corporate debt securities
in which the Fund may invest. See "The Funds." The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Repurchase Agreements (All Funds). Securities held by the Funds may be subject
to repurchase agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed-upon time and price. These
agreements may be considered to be loans by the purchaser collateralized by the
underlying securities. These agreements will be fully collateralized and the
collateral plus accrued interest will be marked-to-market daily. The Funds will
enter into repurchase agreements only with dealers, domestic banks or recognized
financial institutions which, in the opinion of the Manager, present minimal
credit risks in accordance with guidelines adopted by the Board of Directors. In
the event of default by the seller under the repurchase agreement, a Fund may
have problems in exercising its rights to the underlying securities and may
experience time delays in connection with the disposition of such securities.
Loans of Portfolio Securities (All Funds). To increase current income each Fund
may lend its portfolio securities worth up to 5% of that Fund's total assets to
brokers, dealers and financial institutions, provided certain conditions are
met, including the condition that each loan is secured continuously by
collateral maintained on a daily mark-to-market basis in an amount at least
equal to the current market value of the securities loaned. For further
information, see the SAI.
Variable and Floating Rate Demand and Master Demand Notes (All Funds). The
Funds may, from time to time, buy variable or floating rate demand notes issued
by corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on
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specified notice. The obligation of the issuer of the put to repurchase the
securities may be backed by a letter of credit or other obligation issued by a
financial institution. The repurchase price is ordinarily par plus accrued and
unpaid interest. Generally, the remarketing agent will adjust the interest rate
every seven days (or at other specified intervals) in order to maintain the
interest rate at the prevailing rate for securities with a seven-day or other
designated maturity. A Fund's investment in demand instruments which provide
that the Fund will not receive the principal note amount within seven days'
notice, in combination with the Fund's other investments in illiquid
instruments, will be limited to an aggregate total of 15% of that Fund's net
assets.
The Funds may also buy variable rate master demand notes. The terms of these
obligations permit a Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Funds have the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Manager will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, a Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the criteria set
forth in this Prospectus for commercial paper obligations.
Forward Commitments and When-Issued Securities (ESC Strategic Income Fund and
ESC Strategic Asset Preservation Fund). A Fund may purchase when-issued
securities and make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time if the Fund holds, and maintains
until the settlement date in a segregated account cash, or liquid securities in
an amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns.
Purchasing securities on a when-issued basis and forward commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of a
Fund's other assets. No income accrues on securities purchased on a when-issued
basis prior to the time delivery of the securities is made, although a Fund may
earn interest on securities it has deposited in the segregated account because
it does not pay for the when-issued securities until they are delivered.
Investing in when-issued securities has the effect of (but is not the same as)
leveraging the Fund's assets. Although a Fund would generally purchase
securities on a when-issued basis or enter into forward commitments with the
intention of actually acquiring securities, that Fund may dispose of a
when-issued security or forward commitment prior to settlement if the Manager
deems it appropriate to do so. A Fund may realize short-term profits or losses
upon such sales.
Mortgage-Related Securities (ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund). Mortgage pass-through securities are securities
representing interests in "pools" of mortgages in which payments of both
interest and principal on the securities are made monthly, in effect "passing
through" monthly payments made by the individual borrowers on the residential
mortgage loans which underlie the securities (net of fees paid to the issuer or
guarantor of the securities). Early repayment of principal on mortgage
pass-through securities (arising from prepayments of principal due to sale of
the underlying property, refinancing, or foreclosure, net of fees and costs
which may be incurred) may expose a Fund
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to a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed-income securities. In recognition of this prepayment risk to
investors, the Public Securities Association (the "PSA") has standardized the
method of measuring the rate of mortgage loan principal prepayments. The PSA
formula, the Constant Prepayment Rate (the "CPR"), or other similar models that
are standard in the industry will be used by a Fund in calculating maturity for
purposes of its investment in mortgage-related securities. Because the average
life of mortgage-related securities may lengthen with increases in interest
rates, the portfolio-weighted average life of the securities in which a Fund is
invested may at times lengthen due to this effect. Under these circumstances, a
Manager may, but is not required to, sell securities in order to maintain an
appropriate portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (such as securities guaranteed by the
Government National Mortgage Association ("GNMA"); or guaranteed by agencies or
instrumentalities of the U.S. Government (such as securities guaranteed by the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities created by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
A Fund may also invest in investment grade Collateralized Mortgage Obligations
("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding longer maturity classes receive principal only after
the first class has been retired. CMOs may be issued by government and
non-governmental entities. Some CMOs are debt obligations of FHLMC issued in
multiple classes with different maturity dates secured by the pledge of a pool
of conventional mortgages purchased by FHLMC. Other types of CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios. To the extent a
particular CMO is issued by an investment company, a Fund's ability to invest in
such CMOs will be limited. See "Investment Restrictions" in the SAI.
Assumptions generally accepted by the industry concerning the probability of
early payment may be used in the calculation of maturities for debt securities
that contain put or call provisions, sometimes resulting in a calculated
maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private entities may
create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above.
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As new types of mortgage-related securities are developed and offered to
investors, the Managers will, consistent with a Fund's investment objectives,
policies and quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities (ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund). Other asset-backed securities (unrelated to mortgage loans)
have been offered to investors, such as Certificates for Automobile Receivables
("CARS"). CARS represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS are "passed through" monthly to
certificate holders and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. Underlying sales contracts are
subject to prepayment, which may reduce the overall return to certificate
holders. If the letter of credit is exhausted, certificate holders may also
experience delays in payment or losses on CARS if the full amounts due on
underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage or loss of the vehicles securing the contracts,
or other factors. For asset-backed securities, the industry standard uses a
principal prepayment model, the "ABS Model," which is similar to the PSA model
described previously under "Mortgage-Related Securities." Either the PSA model,
the ABS model or other similar models that are standard in the industry will be
used by a Fund in calculating maturity for purposes of its investment in
asset-backed securities.
A Fund may also invest in Stripped Mortgage-Backed Securities ("SMBS"), which
are derivative multi-class mortgage securities issued by U.S. Government
agencies or instrumentalities or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and their special purpose subsidiaries.
SMBS generally have two classes: one (the "IO" class) entitles the holders to
receive distributions consisting solely or entirely of all or a portion of
interest payments from the underlying pool of mortgages or mortgage-backed
securities ("mortgage assets"); the other (the "PO") class entitles the holders
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying mortgage asset pool. The cash flows and yields
on IO and PO classes are considerably more sensitive to changes in the rate of
principal payments (including prepayments) on the underlying mortgage assets
than an investment in a traditional mortgage-backed security, thus exposing a
Fund to more risk.
Foreign Securities (All Funds except ESC Strategic Asset Preservation
Fund). These Funds may invest directly in both sponsored and unsponsored U.S.
dollar- or foreign currency-denominated corporate securities (including
preferred or preference stock), certificates of deposit and bankers' acceptances
issued by foreign banks, U.S. dollar-denominated bonds sold in the United States
("Yankee bonds"), other bonds denominated in U.S. dollars or other currencies
and sold to investors outside the United States ("Eurobonds"), and obligations
of foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. There may be less information
available to a Fund concerning unsponsored securities, for which the paying
agent is located outside the United States. See "Risks of Investing in the
Funds."
The Funds may purchase foreign securities traded in the United States or in
foreign markets. The Funds may invest directly in foreign equity securities and
in securities represented by European Depositary Receipts ("EDRs") or American
Depositary Receipts ("ADRs"). ADRs are dollar-denominated receipts generally
issued by domestic banks, which represent the deposit with the bank of a
security of a foreign issuer, and which are publicly traded on exchanges or
over-the-counter in the United States. EDRs are receipts similar to ADRs and are
issued and traded in Europe.
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There are certain risks associated with investments in unsponsored ADR programs.
Because the non-U.S. company does not actively participate in the creation of
the ADR program, the underlying agreement for service and payment will be
between the depositary and the shareholders. The company issuing the stock
underlying the ADRs pays nothing to establish the unsponsored facility, as fees
for ADR issuance and cancellation are paid by brokers. Investors directly bear
the expenses associated with certificate transfer, custody and dividend payment.
In addition, in an unsponsored ADR program, there may be several depositaries
with no defined legal obligations to the non-U.S. company. The duplicate
depositaries may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports. For more information, see "Risks of
Investing in the Funds."
Forward Foreign Currency Transactions (All Funds except ESC Strategic Asset
Preservation Fund). The Funds may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates. See the SAI for further information concerning forward foreign
currency transactions.
Futures Contracts and Options (All Funds). The Funds may purchase and sell
futures contracts on securities, currencies, and indices of securities, and
write and sell put and call options on securities, currencies and indices of
securities as a hedge against changes in interest rates, stock prices, currency
fluctuations and other market developments, provided that not more than 5% of a
Fund's net assets are committed to margin deposits on futures contracts and
premiums for options. See the SAI for further information about futures and
options. See "Risks of Investing in the Funds" for a discussion of risks related
to investing in futures and options.
Municipal Obligations (ESC Strategic Asset Preservation Fund). When consistent
with its investment objective and policies, including quality criteria, the Fund
may invest in securities issued by states, their political subdivisions and
agencies and instrumentalities of the foregoing ("Municipal Obligations"). Such
Municipal Obligations may include municipal bonds, floating rate and variable
rate Municipal Obligations, participation interests in municipal bonds, tax-
exempt asset-backed certificates, tax-exempt commercial paper, short-term
municipal notes, stand-by commitments, municipal lease obligations and third
party puts. For more information on Municipal Obligations, see "Risks of
Investing in the Funds" in this Prospectus and "Investment Policies" in the SAI.
Short Sales (ESC Strategic Appreciation Fund, ESC Strategic Global Equity Fund,
and ESC Strategic Small Cap Fund). A Fund may from time to time sell securities
short. A short sale is a transaction in which a Fund sells securities it does
not own (but has borrowed) in anticipation of a decline in the market price of
the securities. Risks associated with short sales of securities are described
below under "Risks of Investing in the Funds."
To complete a short sale, a Fund must arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by a Fund from
the short sale are retained by the broker until the Fund replaces the borrowed
securities. In borrowing the securities to be delivered to the buyer, the Fund
becomes obligated to replace the securities borrowed at their market price at
the time of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
A Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or obligations of the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"). In addition, the Fund will
place in a segregated account with its custodian an amount of cash or U.S.
Government Securities equal to the difference, if any, between (a) the market
value of the securities sold at
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41
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the time they were sold short, and (b) any cash or U.S. Government Securities
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Fund will maintain the segregated account daily at a level so
that (a) the amount deposited in the account plus the amount deposited with the
broker (not including the proceeds from the short sale) will equal the current
market value of the securities sold short, and (b) the amount deposited in the
account plus the amount deposited with the broker (not including the proceeds
from the short sale) will not be less than the market value of the securities at
the time they were sold short. For additional limitations on short sales, see
"Risks of Investing in the Funds."
Short Sales Against the Box (ESC Strategic Appreciation Fund, ESC Strategic
Global Equity Fund, and ESC Strategic Small Cap Fund). A Fund may, in addition
to engaging in short sales as described above, enter into a short sale of common
stock such that when the short position is open, the Fund owns an equal amount
of preferred stock or debt securities, convertible or exchangeable without
payment of further consideration, into an equal number of shares of the common
stock sold short. This kind of short sale, which is described as one "against
the box," will be entered into by a Fund for the purpose of receiving a portion
of the interest earned by the executing broker from the proceeds of the sale.
The proceeds of the sale will be held by the broker until the settlement date,
when the Fund delivers the convertible securities to close out its short
position. Although, prior to delivery, the Fund will have to pay an amount equal
to any dividends paid on the common stock sold short, the Fund will receive the
dividends from the preferred stock or interest from the debt securities
convertible into the stock sold short, plus a portion of the interest earned
from the proceeds of the short sale. A Fund will deposit, in a segregated
account with its custodian, convertible preferred stocks or convertible debt
securities in connection with short sales against the box.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The following restrictions are applicable to each of the Funds, except as
otherwise indicated.
(1) Except for ESC Strategic Small Cap Fund, no Fund may, with respect to 75% of
its total assets, purchase more than 10% of the voting securities of any one
issuer or invest more than 5% of the value of such assets in the securities or
instruments of any one issuer, except securities or instruments issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
(2) No Fund may purchase securities or instruments which would cause 25% or more
of the market value of its total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is no
limit with respect to investments in the U.S. Government, its agencies and
instrumentalities.
(3) No Fund may borrow money, except that a Fund may borrow from banks up to 10%
of the current value of its total net assets for temporary or emergency
purposes. A Fund will make no purchases if its outstanding borrowings exceed 5%
of its total assets.
(4) No Fund may make loans, except that a Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements with respect to its portfolio
securities, and (c) purchase the types of debt instruments described in this
Prospectus or the SAI.
For purposes of investment restriction number (1), ESC Strategic Asset
Preservation Fund considers a Municipal Obligation to be issued by the
governmental entity (or entities) whose assets and revenues back the Municipal
Obligation. For a Municipal Obligation backed only by the assets and revenues of
a non-governmental user, such user is deemed to be the issuer; such issuers, to
the extent their principal business activities are in the same industry, are
also subject to
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investment restriction (2). For purposes of investment restriction (2), public
utilities are not deemed to be a single industry but are separated by industrial
categories, such as telephone or gas utilities.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of each Fund which may be changed with respect to that
Fund only when permitted by law and approved by the holders of a majority of the
applicable Fund's outstanding voting securities as described under "Other
Information -- Voting."
Additionally, as a non-fundamental policy, no Fund may invest more than 15% of
the value of its net assets in investments which are illiquid, or not readily
marketable (including repurchase agreements having maturities of more than seven
calendar days and variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount within seven days' notice).
If a percentage restriction on investment policies or the investment or use of
assets set forth in this Prospectus are adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not be
considered a violation.
- --------------------------------------------------------------------------------
OTHER INFORMATION
CAPITALIZATION
ESC Strategic Funds, Inc. was organized as a Maryland corporation on November
24, 1993 and currently consists of five separately managed portfolios. (The
Company has two additional portfolios that are currently inactive.) The Board of
Directors may establish additional portfolios in the future. The capitalization
of the Company consists solely of 650 million shares of common stock with a par
value of $0.001 per share. When issued, shares of the Funds are fully paid,
non-assessable and freely transferable.
VOTING
Shareholders have the right to vote in the election of Directors and on any and
all matters on which, by law or under the provisions of the Articles of
Incorporation, they may be entitled to vote. The Company is not required to hold
regular annual meetings of the Funds' shareholders and does not intend to do so.
Each Fund's shareholders vote separately on matters affecting only that Fund and
shareholders of each class within a Fund vote separately on matters affecting
only that class, such as its service and distribution plan. For information
concerning exemptive relief that permits the Company to retain new Managers
without shareholder approval, see "Management of the Fund" and "Other
Information -- Voting Rights" in the SAI.
The Articles of Incorporation provide that the holders of not less than a
majority of the outstanding shares of the Company may remove a person serving as
Director. The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Other Information -- Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate voting
for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of a Fund, a class or the Company, as
applicable, means the vote of the lesser of: (1) 67% of the shares of the Fund
(a class or the Company) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2) more than 50%
of the outstanding shares of the Fund (a class or the Company).
PERFORMANCE INFORMATION
The Funds may, from time to time, include the yield and total return for shares
(including each class, as applicable) in advertisements or reports to
shareholders or prospective investors. The methods used to
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43
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calculate the yield and total return of the Funds are mandated by the SEC.
Quotations of "yield" will be based on the investment income per share during a
particular 30-day (or one month) period (including dividends and interest), less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the maximum public offering price
per share (for each class, as applicable) on the last day of the period.
Quotations of yield reflect a Fund's (and its classes') performance only during
the particular period on which the calculations are based. Yields will vary
based on changes in market conditions, the level of interest rates and the level
of the Fund's expenses, including class-specific expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future. Quotations of average annual total return will be
expressed in terms of the average annual compounded rate of return of a 62
hypothetical investment in shares of a Fund (or class) over periods of 1, 5 and
10 years (up to the life of the Fund), reflect the deduction of a proportional
share of Fund (and class-specific expenses, as applicable) on an annual basis,
and assume that all dividends and distributions are reinvested when paid.
Performance information for the Funds may be compared to various unmanaged
indices, such as the Standard & Poor's 500 Stock Index, the Dow Jones Industrial
Average, indices prepared by Lipper Analytical Services, and other entities or
organizations which track the performance of investment companies. Any
performance information should be considered in light of each Fund's investment
objectives and policies, characteristics and quality of the Fund and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Funds, see the SAI.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in a statement for
each shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Funds have been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
Furman Selz, the Company's Administrator, provides fund accounting functions for
the Funds, and provides personnel and facilities to perform shareholder
servicing and transfer agency-related services for the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to Furman Selz Mutual Funds
Department, 237 Park Avenue, New York, New York 10017.
General and Account Information:
(800) 261-FUND (3863).
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APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as follows:
AAA -- judged to be the best quality and they carry the smallest degree of
investment risk; AA -- judged to be of high quality by all standards -- together
with the Aaa group, they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly
secured -- interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; BA -- judged to
have speculative elements, their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; CAA -- are of
poor standing -- such issues may be in default or there may be present elements
of danger with respect to principal or interest; CA -- speculative in a high
degree, often in default; C -- lowest rated class of bonds, regarded as having
extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal; whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D -- interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 -- denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades;
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MIG 4/VMIG 4 -- denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk;
SQ -- denotes speculative quality, instruments in this category lack margins of
protection.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows: PRIME-1 --
issuers (or supporting institutions) have a superior ability for repayment of
senior short-term promissory obligations; PRIME-2 -- issuers (or supporting
institutions) have a strong ability for repayment of senior short-term
promissory obligations; PRIME-3 -- issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term promissory obligations;
NOT PRIME -- issuers do not fall within any of the Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
INVESTMENT GRADE RATINGS: AAA -- the highest rating assigned by S&P, capacity to
pay interest and repay principal is extremely strong; AA -- has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A -- has strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories; BBB -- regarded as having an adequate capacity to pay interest and
repay principal -- whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATINGS: BB, B, CCC, CC, C -- debt rated in these categories
is regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal -- while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI -- reserved for
income bonds on which no interest is being paid; D -- in default, and payment of
interest and/or repayment of principal is in arrears. PLUS (+) OR MINUS
(-) -- the ratings from "AA" to "CCC" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
DESCRIPTION OF S&P'S RATING FOR MUNICIPAL NOTES AND SHORT-TERM MUNICIPAL DEMAND
OBLIGATIONS:
Rating categories are as follows: SP-1 -- has a very strong or strong capacity
to pay principal and interest -- those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation; SP-2 -- has a
satisfactory capacity to pay principal and interest; SP-3 -- issues carrying
this designation have a speculative capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR SHORT-TERM CORPORATE DEMAND OBLIGATIONS AND
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 -- the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- capacity for timely payment is
satisfactory -- however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 -- has adequate capacity for timely
payment -- however, is more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations; B -- regarded
as having only speculative capacity for timely payment; C -- a doubtful capacity
for payment; D -- in payment default -- the "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
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ADDRESS FOR:
[LOGO] ESC
STRATEGIC
FUNDS
ESC STRATEGIC FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
INVESTMENT ADVISER AND DISTRIBUTOR
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219-1743
ADMINISTRATOR
Furman Selz LLC
230 Park Avenue
New York, New York 10169
CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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<PAGE> 50
[LOGO] ESC 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 LLC -- ADMINISTRATOR, TRANSFER AGENT
AND FUND ACCOUNTING AGENT
- --------------------------------------------------------------------------------
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 26, 1996,
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
The Date of this Prospectus is July 26, 1996
<PAGE> 51
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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............................................................. 14
Pricing of Fund Shares........................................................... 14
Minimum Purchase Requirements.................................................... 17
Purchase of Fund Shares.......................................................... 17
Retirement Plan Accounts......................................................... 18
Exchange of Fund Shares.......................................................... 18
Redemption of Fund Shares........................................................ 19
Dividends, Distributions, and Federal Income Taxation............................ 22
Description of Securities and Investment Practices............................... 23
Investment Restrictions.......................................................... 26
Other Information................................................................ 27
Appendix......................................................................... 29
</TABLE>
- --------------------------------------------------------------------------------
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 LLC
("Furman Selz") acts as Administrator, transfer agent and fund accounting agent
to the Fund. For upcoming changes in the Administrator and other services, see
"Management of the Funds." 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 a 1.50% front-end sales
charge 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>
<S> <C>
- - Minimum initial investment.................................................. $10,000
- - Minimum initial investment for IRAs and other qualified retirement plans.... $ 2,000
- - Minimum subsequent investment............................................... $ 50
</TABLE>
Shareholders may exchange shares of a particular class of the Fund for shares of
the same class in another fund of ESC Strategic Funds, Inc. by telephone or
mail.
<TABLE>
<S> <C>
- - Minimum initial exchange.................................................... $ 2,000
(No minimum for subsequent exchanges.)
</TABLE>
- ---------------
* Class D shares were formerly designated as Class B shares.
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3
<PAGE> 53
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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.
- --------------------------------------------------------------------------------
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, 1997. The numbers reflect estimated
levels of operating expenses based on general industry experience.
FEE TABLE
<TABLE>
<CAPTION>
ESC STRATEGIC
SMALL CAP FUND
---------------------
CLASS
CLASS A D(**)
------- ---------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................ 4.50% 1.50%
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................................................. 0.79% 0.80%
------- ---------
TOTAL PORTFOLIO OPERATING EXPENSES............................... 2.04% 2.55%
====== ========
</TABLE>
- ---------------
* 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."
** Prior to November 1, 1995, the 1.50% sales load was being waived.
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Fund shareholder will bear.
EXAMPLE:*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC
SMALL CAP FUND
-----------------
CLASS A CLASS D
------- -------
<S> <C> <C>
1 year......................................................... $ 65 $ 40
3 years........................................................ $ 106 $ 93
5 years........................................................ $ 153 $ 149
10 years....................................................... $ 271 $ 299
</TABLE>
- ------------
* 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
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4
<PAGE> 54
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not be considered a representation of past or future annual return. Actual
return may be greater or less than the assumed amount.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The Financial Highlights below, which is audited, is to assist investors in
evaluating the performance of the Fund for the fiscal periods ended March 31,
1996 and March 31, 1995. This data is based on information contained in, and
should be read in conjunction with, audited financial statements for the same
period which are contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995*
---------------------- ----------------------
CLASS A CLASS D CLASS A CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period:............................ $ 11.25 $ 11.22 $ 10.00 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment (loss):............. (0.08) (0.16) (0.03) (0.05)
Net realized/unrealized gain on
investments:.................... 5.19 5.18 1.52 1.51
------- ------- ------- -------
Total from Investment
Operations:..................... 5.11 5.02 1.49 1.46
------- ------- ------- -------
Less Distributions:
Distributions from realized
gains........................... (0.48) 0 0 (0.24)
Dividends from net investment
income:......................... 0 (0.48) (0.24) 0
------- ------- ------- -------
Total Distributions:................. (0.48) (0.48) (0.24) (0.24)
------- ------- ------- -------
Net Asset Value, End of Period:...... $ 15.88 $ 15.76 $ 11.25 $ 11.22
======== ====== ====== ======
Total Return (not reflecting sales
load):............................. 45.88% 45.19% 15.03% 14.72%
Net Assets End of period (in
thousands):........................ $28,840 $ 8,897 $ 8,785 $ 3,367
Ratios to Average Net Assets of:
Net investment income:............. (0.80)% (1.30)% (0.43)%** (0.93)%**
Expenses net of
waivers/reimbursements:......... 2.00% 2.50% 2.00%** 2.50%**
Expenses before
waivers/reimbursements:......... 2.18% 2.74% 3.28%** 3.68%**
Portfolio Turnover Rate:............. 102% 102% 151% 151%
</TABLE>
- ---------------
* Commencement of operations June 8, 1994
** 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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<PAGE> 56
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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."
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
7
<PAGE> 57
- --------------------------------------------------------------------------------
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-
- --------------------------------------------------------------------------------
8
<PAGE> 58
- --------------------------------------------------------------------------------
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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9
<PAGE> 59
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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.
- --------------------------------------------------------------------------------
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 $1.0 billion under
management at March 31, 1996.
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
fiscal year ended March 31, 1996, pursuant to an agreement to limit Fund
expenses, the Adviser waived the fee of $25,762 for the Small Cap Fund. Absent
this waiver agreement, the Advisory fee would have been $224,932.
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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<PAGE> 60
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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, 1996 managed
approximately $127.8 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 fiscal year
ended March 31, 1996, the Distributor received $40,962 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 fiscal year ended March 31, 1996,
the Distributor received $36,932 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
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and information to shareholders. The Fund 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 LLC, 230 Park Avenue, New York, New York 10169, acts as the Fund's
Administrator. On June 28, 1996 Furman Selz and BISYS Group, Inc. ("BISYS")
announced a definitive agreement which provides for Furman Selz to transfer its
mutual fund clients to BISYS. This transaction is expected to close within 90
days. The Board of Directors approved BISYS' Fund Administration Agreement, Fund
Transfer Agency Agreement and Fund Accounting Agreement on behalf of the Company
at their July 16, 1996 Board of Directors Meeting. BISYS, headquartered in
Little Falls, New Jersey, supports more than 5,000 financial institutions and
corporate clients through two strategic business units. BISYS Information
Services Group provides image and data processing outsourcing, and pricing
analysis to more than 600 banks nationwide. BISYS Investment Services Group
designs, administers and distributes over 30 families of proprietary mutual
funds consisting of more than 365 portfolios, and provides 401(k) marketing
support, administration, and recordkeeping services in partnership with 18 of
the nation's leading bank and investment management companies. 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 fiscal year
ended March 31, 1996, the Administrator received $33,740 for the Small Cap Fund.
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 fiscal year ended March 31, 1996, pursuant to an agreement to limit Fund
expenses, the Transfer Agent waived $10,000 in fees for the Small Cap Fund.
Absent this waiver agreement, the transfer agent fee would have been $23,536.
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 fiscal year ended March 31,
1996, Furman Selz earned for Fund accounting services including out of pocket
expenses $31,533.
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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 Company; 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 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
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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
Amount of Investment
Less than $1,000,000........................................... 1.50% 1.52% 1.25%
$1,000,000 and over............................................ None None None
</TABLE>
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; (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
The following quantity discounts shall be available to: (a) an individual, his
or her spouse, and their children under the age of 21, and any trust, pension,
IRA, spousal IRA, profit sharing or other benefit plan for such persons; (b) a
trustee or other fiduciary of a single trust estate or a single fiduciary
account; (c) a pension, profit-sharing or other employee benefit plan qualified
under Section 401 of the Internal Revenue Code of 1986, and (d) tax-exempt
organizations under Section 501(c)(3) of the Code.
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
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<PAGE> 65
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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 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. The officers of the Fund are authorized to waive the minimum initial and
subsequent investment requirements of the Fund.
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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.
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.
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. See "Purchase of Fund Shares" and
"Management of the Fund -- The Distributor."
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 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
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<PAGE> 67
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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.
- --------------------------------------------------------------------------------
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).
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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 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 mini-
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<PAGE> 68
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mum 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
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 prac-
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tice. 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.
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
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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.
Signature Guarantees. To protect shareholder accounts, the Fund and the
Administrator from fraud, signature guarantees are required to enable the Fund
to verify the identity of the person who has authorized a redemption from an
account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) and
the registered address, (2) a redemption of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Fund at 1-800-261-FUND (3863) for further details.
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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 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
received an order of exemption from the Securities and Exchange Commission which
permits it to retain new Managers that are unaffiliated with the Adviser without
obtaining shareholder approval.
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 to shareholders or
prospective investors. The
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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, 230 Park Avenue, New York, New York 10169.
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:
[LOGO] ESC
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 LLC
230 Park Avenue
New York, New York 10169
CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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<PAGE> 81
ESC STRATEGIC FUNDS, INC.
(THE "COMPANY")
237 PARK AVENUE
NEW YORK, NEW YORK 10017
GENERAL AND ACCOUNT INFORMATION: (800) 662-8417
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EQUITABLE SECURITIES CORPORATION --
INVESTMENT ADVISER AND DISTRIBUTOR
FURMAN SELZ LLC -
ADMINISTRATOR, TRANSFER AGENT AND FUND ACCOUNTING AGENT
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the five
funds (the "Funds") advised by Equitable (the "Adviser"). The Funds are:
o ESC Strategic Appreciation Fund
o ESC Strategic Global Equity Fund
o ESC Strategic Small Cap Fund
o ESC Strategic Income Fund
o ESC Strategic Asset Preservation Fund
Each Fund has distinct investment objectives and policies and several
of the Funds have one or more Managers. See "Management." Shares of the Funds
are sold to the public by the Distributor as an investment vehicle for
individuals, institutions, corporations and fiduciaries, including customers of
the Adviser or its affiliates.
The Company is offering an indefinite number of shares of each class
of each Fund.
This SAI is not a prospectus and is authorized for distribution only
when preceded or accompanied by the prospectus for the Funds dated July 26,
1996 (the "Prospectus"). This SAI contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus. The Prospectus may be obtained without charge
by writing or calling the Funds at the address and information numbers printed
above.
July 26, 1996
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TABLE OF CONTENTS
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INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Bank Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Corporate Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Variable and Floating Rate Demand and Master Demand Notes . . . . . . . . . . . . . . . . . . . . . . . . . 2
Loans of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Forward Foreign Currency Exchange Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Interest Rate Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Stock Index Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Option Writing and Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Options on Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risks of Futures and Options Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Limitations on Futures Contracts and Options on Futures Contracts . . . . . . . . . . . . . . . . . . . . . 9
Municipal Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Municipal Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Brady Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
The Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Distribution of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Administrative Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Custodian, Transfer Agent and Dividend Disbursing Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Yield and Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and
the policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Funds may invest, the investment policies and
portfolio strategies that the Funds may utilize, and certain risks attendant to
such investments, policies and strategies.
Bank Obligations (All Funds). These obligations include negotiable
certificates of deposit and bankers' acceptances. A description of the banks
the obligations of which the Funds may purchase are set forth in the
Prospectus. A certificate of deposit is a short-term, interest-bearing
negotiable certificate issued by a commercial bank against funds deposited in
the bank. A bankers' acceptance is a short-term draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date.
Commercial Paper (All Funds). Commercial paper includes short-term
unsecured promissory notes, variable rate demand notes and variable rate master
demand notes issued by domestic and foreign bank holding companies,
corporations and financial institutions and similar taxable instruments issued
by government agencies and instrumentalities. All commercial paper purchased
by a Fund must meet the minimum rating criteria for that Fund.
Corporate Debt Securities (All Funds). Fund investments in these
securities are limited to corporate debt securities (corporate bonds,
debentures, notes and similar corporate debt instruments) which meet the rating
criteria established for each Fund.
After purchase by a Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, a
Fund's Manager will consider such event in its determination of whether the
Fund should continue to hold the security. To the extent the ratings given by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") or another rating agency may change as a result of changes in such
organizations or their rating systems, the Funds will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in the Prospectus and in this SAI.
Repurchase Agreements (All Funds). The Funds may invest in
securities subject to repurchase agreements with U.S. banks or broker-dealers.
Such agreements may be considered to be loans by the Funds for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"). A repurchase
agreement is a
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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. The repurchase price exceeds the sale price, reflecting an agreed-
upon interest rate effective for the period the buyer owns the security subject
to repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. A Manager will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to insure that the value of the security always equals or
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Funds may have problems in exercising their rights to
the underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities.
Variable and Floating Rate Demand and Master Demand Notes (All
Funds). The Funds may, from time to time, buy variable 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 in the 5 to 20 year range but carry
with them the right of the holder to put the securities to a remarketing agent
or other entity on short notice, typically seven days or less. The obligation
of the issuer of the put to repurchase the securities is backed up by a letter
of credit or other obligation issued by a financial institution. The purchase
price is ordinarily par plus accrued and unpaid interest. Ordinarily, the
remarketing agent will adjust the interest rate every seven days (or at other
intervals corresponding to the notice period for the put), in order to maintain
the interest rate at the prevailing rate for securities with a seven-day
maturity.
The Funds may also buy variable rate master demand notes. The terms
of these obligations permit the investment of fluctuating amounts by the Funds
at varying rates of interest pursuant to direct arrangements between a Fund, as
lender, and the borrower. They permit weekly, and in some instances, daily,
changes in the amounts borrowed. The Funds have the right to increase the
amount under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may prepay 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 lender and the borrower, it is not generally contemplated that they
will be traded, and there is no secondary market for them, although they are
redeemable (and thus, immediately repayable by the borrower) at principal
amount, plus accrued interest, at any time. The Funds have no
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limitations on the type of issuer from whom the notes will be purchased.
However, in connection with such purchase and on an ongoing basis, a 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, if not so rated, the Funds may, under their minimum rating standards,
invest in them only if at the time of an investment the issuer meets the
criteria set forth in the Prospectus for other comparable debt obligations.
Floating rate demand and master demand notes are similar to variable
rate instruments except that their interest rates vary with a designated market
index or market rate, such as the coupon equivalent of the U.S. Treasury bill
rate.
Loans of Portfolio Securities (All Funds). The Funds may lend their
portfolio securities to brokers, dealers and financial institutions, provided:
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Funds may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Funds will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 5% of the total
assets of a particular Fund.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Funds may pay
reasonable finders, administrative and custodial fees. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral.
Foreign Securities (All Funds except ESC Strategic Asset Preservation
Fund). As described in the Prospectus, changes in foreign exchange rates will
affect the value of securities denominated or quoted in currencies other than
the U.S. dollar.
Since certain Funds may invest in securities denominated in currencies
other than the U.S. dollar, and since those Funds may, for various periods
pending investment for non speculative purposes, hold funds in bank deposits or
other money market investments denominated in foreign currencies, a Fund may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the
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dollar. Changes in foreign currency exchange rates will influence values of
securities in the Fund's portfolio, from the perspective of U.S. investors.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by a Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
Forward Foreign Currency Exchange Contracts (All Funds except ESC
Strategic Asset Preservation Fund). Those Funds that purchase foreign
currency-denominated securities may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted between currency traders (usually large
commercial banks) and their customers. Forward foreign currency exchange
contracts may be bought or sold to protect a Fund against a possible loss
resulting from an adverse change in the relationship between foreign currencies
and the U.S. dollar, or between foreign currencies. Although such contracts are
intended to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase.
Interest Rate Futures Contracts (ESC Strategic Income Fund and ESC
Strategic Asset Preservation Fund). These Funds may purchase and sell interest
rate futures contracts ("futures contracts") as a hedge against changes in
interest rates. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. Futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there are
futures contracts based on securities such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury bills. For
municipal securities, there is the Bond Buyer Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering
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into a futures contract for the sale of securities has an effect similar to the
actual sale of securities, although sale of the futures contract might be
accomplished more easily and quickly. For example, if a Fund holds long-term
U.S. Government securities and its Manager anticipates a rise in long-term
interest rates, the Fund could, in lieu of disposing of its portfolio
securities, enter into futures contracts for the sale of similar long-term
securities. If rates increased and the value of the Fund's portfolio
securities declined, the value of the Fund's futures contracts would increase,
thereby protecting the Fund by preventing net asset value from declining as
much as it otherwise would have. Similarly, entering into futures contracts
for the purchase of securities has an effect similar to actual purchase of the
underlying securities, but permits the continued holding of securities other
than the underlying securities. For example, if a Manager expects long-term
interest rates to decline, the Fund might enter into futures contracts for the
purchase of long-term securities, so that it could gain rapid market exposure
that may offset anticipated increases in the cost of securities it intends to
purchase, while continuing to hold higher-yielding short- term securities or
waiting for the long-term market to stabilize.
Stock Index Futures Contracts (ESC Strategic Appreciation Fund, ESC
Strategic Global Equity Fund and ESC Strategic Small Cap Fund). These Funds may
enter into stock index futures contracts in order to protect the value of their
common stock investments. A stock index futures contract is an agreement in
which one party agrees to deliver to the other an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. As the aggregate market value of the stocks in
the index changes, the value of the index also will change. In the event that
the index level rises above the level at which the stock index futures contract
was sold, the seller of the stock index futures contract will realize a loss
determined by the difference between the two index levels at the time of
expiration of the stock index futures contract, and the purchaser will realize a
gain in that amount. In the event the index level falls below the level at
which the stock index futures contract was sold, the seller will recognize a
gain determined by the difference between the two index levels at the expiration
of the stock index futures contract, and the purchaser will realize a loss.
Stock index futures contracts expire on a fixed date, currently one to seven
months from the date of the contract, and are settled upon expiration of the
contract.
The Funds intend to utilize stock index futures contracts only for the
purpose of attempting to protect the value of their
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common stock portfolios in the event of a decline in stock prices and,
therefore, usually will be sellers of stock index futures contracts. This risk
management strategy is an alternative to selling securities in the portfolio
and investing in money market instruments. Also, stock index futures contracts
may be purchased to protect a Fund against an increase in prices of stocks
which the Fund intends to purchase. If the Fund is unable to invest its cash
(or cash equivalents) in stock in an orderly fashion, the Fund could purchase a
stock index futures contract which may be used to offset any increase in the
price of the stock. However, it is possible that the market may decline
instead, resulting in a loss on the stock index futures contract. If the Fund
then concludes not to invest in stock at that time, or if the price of the
securities to be purchased remains constant or increases, the Fund will realize
a loss on the stock index futures contract that is not offset by a reduction in
the price of securities purchased. The Fund also may buy or sell stock index
futures contracts to close out existing futures positions.
Option Writing and Purchasing (All Funds). A Fund may write (or sell)
put and call options on the securities that the Fund is authorized to buy or
already holds in its portfolio. These option contracts may be listed for trading
on a national securities exchange or traded over-the-counter. A Fund may also
purchase put and call options. A Fund will not write covered calls on more than
5% of its portfolio, and a Fund will not write covered calls with strike prices
lower than the underlying securities' cost basis on more than 5% of its total
portfolio. A Fund may not invest more than 5% of its total assets in option
purchases.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an
amount, known as a premium, to the option writer in exchange for the right
under the option contract.
A Fund may sell "covered" put and call options as a means of hedging
the price risk of securities in the Fund's portfolio. The sale of a call
option against an amount of cash equal to the put's potential liability
constitutes a "covered put." When a Fund sells an option, if the underlying
securities do not increase (in the case of a call option) or decrease (in the
case of a put option) to a price level that would make the exercise of the
option profitable to the holder of the option, the option will generally expire
without being exercised and the Fund will
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realize as profit the premium paid for such option. When a call option of
which a Fund is the writer is exercised, the option holder purchases the
underlying security at the strike price and the Fund does not participate in
any increase in the price of such securities above the strike price. When a
put option of which a Fund is the writer is exercised, the Fund will be
required to purchase the underlying securities at the strike price, which may
be in excess of the market value of such securities.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for
a wider range of expiration dates and exercise prices than exchange- traded
options. Because OTC options are not traded on an exchange, pricing is
normally done by reference to information from a market marker. This
information is carefully monitored by the Managers and verified in appropriate
cases. OTC options transactions will be made by a Fund only with recognized
U.S. Government securities dealers. OTC options are subject to the Funds' 15%
limit on investments in securities which are illiquid or not readily marketable
(see "Investment Restrictions"), provided that OTC option transactions by a
Fund with a primary U.S. Government securities dealer which has given the Fund
an absolute right to repurchase according to a "repurchase formula" will not be
subject to such 15% limit.
It may be a Fund's policy, in order to avoid the exercise of an option
sold by it, to cancel its obligation under the option by entering into a
closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of a Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of cancelling the Fund's
position as a seller. The premium which a Fund will pay in executing a closing
purchase transaction may be higher than the premium received when the option
was sold, depending in large part upon the relative price of the underlying
security at the time of each transaction. To the extent options sold by a Fund
are exercised and the Fund either delivers portfolio securities to the holder
of a call option or liquidates securities in its portfolio as a source of funds
to purchase securities put to the Fund, the Fund's portfolio turnover rate may
increase, resulting in a possible increase in short-term capital gains and a
possible decrease in long-term capital gains.
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Options on Futures Contracts (All Funds). A Fund may purchase and
write put and call options on futures contracts that are traded on a U.S.
exchange or board of trade and enter into related closing transactions to
attempt to gain additional protection against the effects of interest rate,
currency or equity market fluctuations. There can be no assurance that such
closing transactions will be available at all times. In return for the premium
paid, such an option gives the purchaser the right to assume a position in a
futures contract at any time during the option period for a specified exercise
price.
A Fund may purchase put options on futures contracts in lieu of, and
for the same purpose as, the sale of a futures contract. It also may purchase
such put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve
the same purpose as the actual purchase of the futures contracts. A Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
A Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, a
Fund would pay more than the market price for the underlying securities or
index units. The net cost to that Fund would be reduced, however, by the
premium received on the sale of the put, less any transactions costs.
Risks of Futures and Options Investments. A Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while a Fund may benefit from the
use of futures contracts and related options, unanticipated changes in interest
rates may result in a poorer overall performance for that Fund than if it had
not entered into any such contracts. Additionally, the skills required to
invest successfully in futures and options may differ from skills required for
managing other assets in the Fund's portfolio. Further, although a Manager may
engage in transactions with
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respect to index-based futures contracts if the Manager believes a correlation
exists between price movements in the index and in a Fund's portfolio
securities, such a correlation is not likely to be perfect because the Fund's
portfolio is not likely to duplicate the index, making the futures contract an
imperfect hedge.
Limitations on Futures Contracts and Options on Futures Contracts.
Each Fund will use financial futures contracts and related options only for
"bona fide hedging" purposes, as such term is defined in applicable regulations
of the CFTC, or, with respect to positions in financial futures and related
options that do not qualify as "bona fide hedging" positions, will enter such
non-hedging positions only to the extent that aggregate initial margin deposits
plus premiums paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5% of the Fund's
total assets.
Municipal Obligations. (ESC Strategic Asset Preservation Fund). When
consistent with its investment objectives and policies, including quality
criteria, a Fund may invest in securities issued by states, their political
subdivisions and agencies and instrumentalities of the foregoing ("Municipal
Obligations"). Such Municipal Obligations include municipal bonds, floating
rate and variable rate Municipal Obligations, participation interests in
municipal bonds, asset-backed certificates, commercial paper, short-term
municipal notes, stand-by commitments, municipal lease obligations and third
party puts. It may be anticipated that governmental, government-related or
private entities will create other investments in addition to those described
above. As new types of Municipal Obligations are developed, a Manager may,
consistent with a Fund's investment objectives, policies and quality standards,
consider making investments in such types of Municipal Obligations. Municipal
Obligations in which a Fund may invest include "general obligation" and
"revenue" securities. General obligation securities are backed by the issuer's
full faith, credit and taxing power for the payment of principal and interest.
The taxes that can be levied for the payment of debt service may be limited or
unlimited in terms of rate or amount or special assessments. Revenue
securities are secured primarily by net revenues generated by a particular
facility or group of facilities, or by the proceeds of a special excise or
other specific revenue source. Additional security may be provided by a debt
service reserve fund. Municipal bonds include industrial development bonds
("IDBs"), moral obligation bonds, put bonds and private activity bonds
("PABs"). PABs are generally related to the financing of a facility used by a
private entity or entities. The credit quality of such bonds is usually
directly related to that of the users of the facilities. The interest on most
PABs is subject to the Federal alternative minimum tax.
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A Fund may purchase from banks participation interests in all or part
of specific holdings of Municipal Obligations. Each participation is backed by
an irrevocable letter of credit or guarantee of the selling bank. The credit
of either or both the issuer of the Municipal Obligations or of the selling
bank must meet the Fund's credit quality standards. A Fund has the right to
sell the participation back to the bank after seven days' notice for the full
principal amount of the Fund's interest plus accrued interest, but only (a)
when necessary to provide liquidity to the Fund, (b) to maintain the Fund's
quality standards, or (c) in the event of a default under the terms of the
Municipal Obligation.
A Fund may acquire "stand-by commitments," which will enable it to
improve its portfolio liquidity by making available same-day settlements on
sales of its securities. A stand-by commitment gives a Fund, when it purchases
a Municipal Obligation from a broker, dealer or other financial institution
("seller") the right to sell up to the same principal amount of such securities
back to the seller, at the Fund's option, at a specified price. Stand-by
commitments are also known as "puts." A Fund may acquire stand-by commitments
solely to facilitate portfolio liquidity and not to protect against changes in
the market price of the Fund's portfolio securities. The exercise by a Fund of
a stand-by commitment is subject to the ability of the other party to fulfill
its contractual commitment.
It is expected that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Directors
will determine that stand-by commitments ordinarily have a "fair value" of
zero, regardless of whether any direct or indirect consideration was paid.
However, if the market price of the security, subject to the stand-by
commitment is less than the exercise price of the stand-by commitment, such
security will ordinarily be valued at such exercise price. Where a Fund has
paid for a stand-by commitment, its cost will be reflected as unrealized
depreciation for the period during which the commitment is held.
There is no assurance that stand-by commitments will be available to a
Fund nor does a Fund assume that such commitments would continue to be
available under all market conditions.
- 10 -
<PAGE> 93
A Fund may also purchase long-term fixed rate bonds that have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented
by custodial receipts or trust certificates and may be combined with other
features such as interest rate swaps. A Fund receives a short-term rate of
interest (which is periodically reset), and the interest rate differential
between that rate and the fixed rate on the bond is retained by the financial
institution. The financial institution granting the option does not provide
credit enhancement. In the event that there is a default in the payment of
principal or interest, or downgrading of a bond to below investment grade, or a
loss of the bond's tax-exempt status, the put option will terminate
automatically. The risk to a Fund in this case will be that of holding a long-
term bond which would tend to lengthen the weighted average maturity of the
Fund's portfolio.
Municipal Lease Obligations. (ESC Strategic Asset Preservation Fund).
Municipal lease obligations are municipal securities that may be supported by a
lease or an installment purchase contract issued by state and local government
authorities to acquire funds to obtain the use of a wide variety of equipment
and facilities such as fire and sanitation vehicles, computer equipment and
other capital assets. These obligations, which may be secured or unsecured,
are not general obligations and have evolved to make it possible for state and
local government authorities to obtain the use of property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt. Thus, municipal lease obligations have special risks not normally
associated with municipal bonds. These obligations frequently contain
"non-appropriation" clauses that provide that the governmental issuer of the
obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the legislative body
on a yearly or other periodic basis. In addition to the "non-appropriation"
risk, many municipal lease obligations have not yet developed the depth of
marketability associated with municipal bonds; moreover, although the
obligations may be secured by the leased equipment, the disposition of the
equipment in the event of foreclosure might prove difficult. In order to limit
certain of these risks, the Fund will limit its investments in municipal lease
obligations that are illiquid, together with all other illiquid securities in
its portfolio, to not more than 15% of its assets. The liquidity of municipal
lease obligations purchased by the Fund will be determined pursuant to
guidelines approved by the Board of Directors. Factors considered in making
such determinations may
- 11 -
<PAGE> 94
include; the frequency of trades and quotes for the obligation; the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; the willingness of dealers to undertake to make a market; the
obligation's rating; and, if the security is unrated, the factors generally
considered by a rating agency.
Brady Bonds. (ESC Strategic Income Fund). "Brady Bonds" are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructurings under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain
Brady Bonds are entitled to "value recovery payments" in certain circumstances,
which in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event
of a default with respect to collateralized Brady Bonds as a result of which
the payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial
- 12 -
<PAGE> 95
bank loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Brady Plan debt restructurings totalling more than $80 billion have
been implemented to date in Argentina, Bolivia, Costa Rica, Mexico, Nigeria,
the Philippines, Uruguay and Venezuela with the largest proportion of Brady
Bonds having been issued to date by Argentina, Mexico and Venezuela. Brazil
has announced plans to issue Brady Bonds in respect of approximately $44
billion of bank debt but there can be no assurance that the circumstances
regarding the issuance of Brady Bonds by Brazil will not change.
Most Argentine and Mexican Brady Bonds and a significant portion of
the Venezuela Brady Bonds issued to date are collateralized Brady Bonds with
interest coupon payments collateralized on a rolling-forward basis by funds or
securities held in escrow by an agent for the bondholders. Of the other
issuers of Brady Bonds, Bolivia, Nigeria, the Philippines and Uruguay have to
date issued collateralized Brady Bonds. While the Adviser anticipates that
collateralized Brady Bonds will be issued by Brazil, there can be no assurance
that any such obligations will be issued or, if so, when. A Fund may purchase
Brady Bonds with no or limited collateralization, and will be relying for
payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories. Many of the
Brady Bonds and other sovereign debt securities in which a Fund invests are
likely to be acquired at a discount.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of each Fund, and
except as otherwise indicated, may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of that
Fund which, as defined in the Investment Company Act of 1940 ("1940 Act"),
means the lesser of (1) 67% of the shares of such Fund present at a meeting if
the holders of more than 50% of the outstanding shares of such Fund are present
in person or by proxy, or (2) more than 50% of the outstanding voting shares of
such Fund.
- 13 -
<PAGE> 96
Each Fund, except as indicated, may not:
(1) Except for ESC Strategic Small Cap Fund, with respect
to 75% of its total assets, purchase more than 10% of the voting
securities of any one issuer or invest more than 5% of the value of
such assets in the securities or instruments of any one issuer, except
securities or instruments issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(2) Borrow money except that a Fund may borrow from banks
up to 10% of the current value of its total net assets for temporary
or emergency purposes, provided that a Fund may make no purchases if
its outstanding borrowings exceed 5% of its total assets;
(3) Invest in real estate, provided that a Fund may invest in
readily marketable securities (except limited partnership interests)
of issuers that deal in real estate and securities secured by real
estate or interests therein and a Fund may hold and sell real estate
(a) used principally for its own office space or (b) acquired as a
result of a Fund's ownership of securities;
(4) Engage in the business of underwriting securities of
other issuers, except to the extent that the purchase of securities
directly from the issuer (either alone or as one of a group of
bidders) or the disposal of an investment position may technically
cause it to be considered an underwriter as that term is defined under
the Securities Act of 1933;
(5) Make loans, except that a Fund may (a) lend its
portfolio securities, (b) enter into repurchase agreements and (c)
purchase the types of debt instruments described in the Prospectus or
the SAI;
(6) Purchase securities or instruments which would cause
25% or more of the market value of the Fund's 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;
(7) Issue any senior securities, except as appropriate to
evidence indebtedness which it is permitted to incur, and provided
that collateral arrangements with respect to forward contracts,
futures contracts or options, including deposits of initial and
variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction; or
- 14 -
<PAGE> 97
(8) Purchase or sell commodity contracts, except
that the Fund may invest in futures contracts and in options
related to such contracts (for purposes of this restriction,
forward foreign currency exchange contracts are not deemed to
be commodities).
For restriction number 1, above, securities backed only by the assets
of a non-governmental user will be deemed to be issued by that user. For
purposes of investment restriction number 6, public utilities are not deemed to
be a single industry but are separated by industrial categories, such as
telephone or gas utilities.
The following policies of the Funds are non-fundamental and may be
changed by the Board of Directors without shareholder approval. These policies
provide that a Fund, except as otherwise specified, may not:
(a) Invest in companies for the purpose of exercising control
or management;
(b) Knowingly purchase securities of other investment
companies, except (i) in connection with a merger, consolidation,
acquisition, or reorganization; and (ii) a Fund may invest up to 10%
of its total assets in shares of other investment companies;
(c) Purchase securities on margin, except that a Fund may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities;
(d) Mortgage, pledge, or hypothecate any of its assets,
except that a Fund may pledge not more than 15% of the current value
of the Fund's total net assets;
(e) Purchase or retain the securities of any issuer, if
those individual officers and Directors of the Company, the Adviser,
the Fund's Manager(s), the Administrator, or the Distributor, each
owning beneficially more than 1/2 of 1% of the securities of such
issuer, together own more than 5% of the securities of such issuer;
(f) Invest more than 5% of its net assets in warrants
which are unattached to securities; included within that amount, no
more than 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges;
- 15 -
<PAGE> 98
(g) Write, purchase or sell puts, calls or combinations
thereof, except as described in the Prospectus or SAI;
(h) Invest more than 5% of the current value of its total
assets in the securities of companies which, including predecessors,
have a record of less than three years' continuous operation;
(i) 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); or
(j) Invest in oil, gas or other mineral exploration or
development programs, although it may invest in issuers that own or
invest in such programs.
MANAGEMENT
Directors and Officers
The principal occupations of the Directors and executive officers of
the Company for the past five years are listed below. The address of each,
unless otherwise indicated, is 230 Park Avenue, New York, New York 10169.
Directors deemed to be "interested persons" of the Company for purposes of the
1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Name, Address Position with Company Principal Occupation and Age
- ------------- --------------------- ----------------------------
<S> <C> <C>
*William Howard Director and President Equitable Securities Corporation
Cammack, Sr. (1) - Chairman, Managing Director
800 Nashville City Center and Director.
511 Union Street
Nashville, TN 37219-1743
Age: 65
Director and Treasurer Equitable Securities Corporation
*William Howard - Managing Director.
Cammack, Jr. (1)
800 Nashville City Center
511 Union Street
Nashville, TN 37219-1743
Age: 39
</TABLE>
1 William Howard Cammack, Sr. and William Howard Cammack, Jr. are father
and son.
- 16 -
<PAGE> 99
<TABLE>
<CAPTION>
Name, Address Position with Company Principal Occupation
- ------------- --------------------- --------------------
and Age
- -------
<S> <C> <C>
J. Bransford Wallace Director Willis Coroon Corporations
26 Century Boulevard (insurance) - Vice Chairman
Nashville, TN 37214 (1994); Chairman (1992-93);
Age: 64 various positions since prior to
1989.
Brownlee O. Currey, Jr. Director Osborn Communications, Inc. -
1100 Broadway Chairman; Nashville Banner
Nashville, TN 37203 Publishing Company - President.
Age: 68
E. Townes Duncan Director Comptronix Corporation (contract
Three Maryland Farms manufacturing) - Chairman and
Suite 410 Chief Executive Officer (1993-
Brentwood, TN 37027 present); Massey Burch Investment
Age: 43 Group (venture capital) -
Principal (1985-1993).
John J. Pileggi Secretary Furman Selz LLC - Senior Managing
Age: 37 Director (1992-present); Managing
Director (1984-1992).
Joan Fiore Assistant Secretary Furman Selz LLC - Managing
Age: 40 Director and Counsel (1991-
present); Securities and Exchange
Commission - Staff Attorney
(1986-1991).
Sheryl Hirschfeld Assistant Secretary Furman Selz LLC - Director,
Age: 36 Corporate Secretary Services; The
Dreyfus Corporation - Assistant
to the Corporate Secretary and
General Counsel (1982-1994).
John L. McAllister
Assistant Secretary and Assistant Equitable Securities Corporation
Age: 33 Treasurer - Vice President (1990-present);
Copyright Management, Inc. -
Analyst (1988-1989).
Gordon M. Forrester
Assistant Treasurer Furman Selz LLC - Managing
Age: 35 Director, (1987-present).
</TABLE>
Directors of the Company not affiliated with the Adviser, any Manager
or the Administrator receive from the Company an annual retainer of $2,000 and
a fee of $250 for each Board of Directors and Board committee meeting of the
Company attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Adviser, a
Manager or the Administrator do not receive compensation from the Company.
- 17 -
<PAGE> 100
DIRECTOR COMPENSATION
(for fiscal year ended March 31, 1996)
<TABLE>
<CAPTION>
Pension or Estimated Total
Aggregate Retirement Annual Compensation
Name of Compensation Benefits Accrued Benefits From Registrant
Person, From As Part of Fund Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Directors
- -------- ---------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
J. Bransford $6,000 0 N/A $6,000
Wallace
Brownlee O. $7,000 0 N/A $7,000
Currey, Jr.
E. Townes $7,000 0 N/A $7,000
Duncan
</TABLE>
As of July 12, 1996, officers and Directors of the Company, as a
group, owned 10.42% of the outstanding shares of ESC Strategic Small Cap Fund
and .03% of the outstanding shares of ESC Global Equity Fund.
Investment Adviser
Equitable Securities Corporation (the "Adviser") 511 Union Street,
Nashville, Tennessee 37219-1743, serves as investment adviser to the Funds,
providing overall supervision of the Managers. For Funds with multiple
Managers, the Adviser determines what portion of each Fund's assets shall be
allocated to each Manager from time to time. For these services, the Adviser
receives from each Fund a fee at an annual rate of 1.0% (0.75% for ESC
Strategic Tennessee Tax- Exempt Fund and 0.50% for ESC Strategic Asset
Preservation Fund) of each Fund's average daily net assets. Out of these fees,
the Adviser pays fees of the Managers.
Under the terms of the Investment Advisory Agreement for the Funds
between the Company and the Adviser ("Agreement"), the investment advisory
services of the Adviser to the Funds are not exclusive. The Adviser is free to,
and does, render investment advisory services to others.
The Agreement will continue in effect with respect to each Fund for a
period more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of each Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Agreement or interested
persons of any such parties, at its meeting held on April 4, 1994, and by the
- 18 -
<PAGE> 101
sole shareholder of the Funds on April 4, 1994. The Agreement was recently
re-approved at the January 16, 1996 Board of Directors meeting. The Agreement
may be terminated at any time without penalty by vote of the Directors (with
respect to the Company or a Fund) or, with respect to any Fund, by vote of the
Directors or the shareholders of that Fund, or by the Adviser, on 60 days
written notice by either party to the Agreement and will terminate
automatically if assigned.
The Managers
The Adviser has entered into Portfolio Management Agreements with one
or more Managers for each Fund. Each Manager provides services to the
particular Fund as Manager. The Funds' Managers are as follows:
o ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.,
Brandes Investment Partners, Inc. and Equitable Asset
Management (an affiliate of the Adviser).
o ESC Strategic Global Equity Fund -- GlobeFlex Capital, L.P.
and Murray Johnstone International Limited.
o ESC Strategic Income Fund -- Llama Asset Management Company,
L.P., Cincinnati Asset Management, Inc. and Murray Johnstone
International Limited.
o ESC Small Cap Fund -- Equitable Asset Management (a division
of the Adviser's subsidiary, Equitable Trust Company).
o ESC Strategic Asset Preservation Fund -- Equitable Trust
Company.
For more information on each Manager, see the Prospectus. The following is
information regarding fees, in dollars and as a percentage of each Fund's
assets, paid by the Adviser to Managers of each of the Funds for the periods
indicated:
<TABLE>
<CAPTION>
Period Ended Fiscal Year Ended
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C> <C> <C>
ESC Strategic
Appreciation Fund:
- ------------------
Aggregate fees to
Adviser $55,847 .21% $224,856 .95%
Aggregate fees to
Manager* $45,074 .17% $158,435 .67%
</TABLE>
- 19 -
<PAGE> 102
<TABLE>
<CAPTION>
Period Ended Fiscal Year Ended
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C> <C> <C>
Fees retained by
Adviser $10,773 .04% $ 66,421 .28%
Fees paid to Equitable
Asset Management $11,554 .04% $ 41,231 .17%
ESC Strategic Global
Equity Fund
- --------------------
Aggregate fees to
Adviser $43,382 .25% $156,881 1.0%
Aggregate fees to
Manager* $22,009 .13% $ 76,894 .49%
Fees retained by
Adviser $21,373 .12% $ 79,987 .51%
ESC Strategic Small
Cap Fund
- ------------------
Aggregate fees to
Adviser $52,773 .16% $199,170 .88%
Aggregate fees to
Manager* $61,569 .19% $166,841 .73%
Fees retained by
Adviser $(8,796) (.03)% $ 32,329 .15%
ESC Strategic Income
Fund
- -----------------
Aggregate fees to
Adviser $96,561 .25% $373,088 1.0%
Aggregate fees to
Manager* $24,164 .06% $ 93,525 .25%
Fees retained by
Adviser $72,397 .19% $279,563 .75%
ESC Strategic Asset
Preservation Fund
- -----------------
Aggregate fees to
Adviser $8,250 .06% $ 16,394 .13%
</TABLE>
- 20 -
<PAGE> 103
<TABLE>
<CAPTION>
Period Ended Fiscal Year Ended
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C> <C> <C>
Aggregate fees to
Manager* $ 0 0% $ 0 0%
Fees retained by
Adviser $8,250 .06% $16,394 .13%
</TABLE>
__________________________
* Pursuant to exemptive relief obtained from the Securities and
Exchange Commission, the Funds are permitted to disclose fees and fee rates
on an aggregate basis for individual Managers that are not affiliated with
the Adviser.
For the fiscal year ended March 31, 1996, pursuant to an agreement to
limit fund expenses, the Adviser waived fees of $50,302, $25,762 and $11,800
for the Asset Preservation, Small Cap and Appreciation Funds, respectively.
Absent these waivers, Advisory fees would have been $63,894, $224,932 and
$236,656 for the Asset Preservation, Small Cap and Appreciation Funds,
respectively. The Adviser received fees of $373,088 and $156,881 from the
Income and Global Equity Funds, respectively, for the fiscal year ended March
31, 1996.
For the period ended March 31, 1995, pursuant to an agreement to limit
Fund expenses, the Adviser waived fees of $48,047, $0, $49,973, $21,417 and
$32,786 for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. Absent this waiver agreement, Advisory fees
would have been $48,047, $277,567, $87,665, $71,388 and $82,592 for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
Each Manager performs services pursuant to a Portfolio Management
Agreement appointing the Manager to act as Manager to a Fund, with
responsibility for management of such portion of the Fund's assets as the
Adviser shall allocate to the Manager from time to time.
Each Portfolio Management Agreement provides that the Manager's
services to the Fund are not exclusive. Each Manager is free to and does
provide investment advisory services to others.
Each Portfolio Management Agreement provides that it will continue in
effect for a period beyond two years from the date of its execution only so
long as such continuance is approved at least annually by (i) the Directors or
by vote of the holders of a majority of the Fund's outstanding voting
securities and (ii) by a majority of the Directors who are not parties to the
Portfolio Management Agreement or interested persons of any such party. The
Portfolio Management Agreement with Llama Asset
- 21 -
<PAGE> 104
Management Company, L.P. with respect to ESC Strategic Income Fund was approved
by the Board of Directors, including a majority of the Company's independent
Directors, at a meeting held July 20, 1994, and was approved by shareholders of
ESC Strategic Income Fund at a meeting held September 7, 1994. The other
Portfolio Management Agreements for each Fund were approved by the Board of
Directors, including a majority of the Directors who are not parties to any
Portfolio Management Agreement or interested persons of any such party, at a
meeting held on April 4, 1994, and by the sole shareholder of each Fund on
April 4, 1994. The Portfolio Management Agreements were recently re-approved
at the April 16, 1996 Board of Directors Meeting. Each Portfolio Management
Agreement may be terminated at any time without penalty (a) by the Adviser, by
the Fund upon vote of a majority of the Directors, or by vote of a majority of
the Fund's outstanding voting securities, each upon sixty days' written notice
to the Manager; or (b) by the Manager upon sixty days' notice to the Company or
the Adviser. A Portfolio Management Agreement will also terminate
automatically in the event of its assignment. The Company has received
exemptive relief that permits the Board of Directors, without shareholder
approval, to approve and cause the Company to enter into new Portfolio
Management Agreements in the event a new Manager is retained or an existing
Portfolio Management Agreement is amended, unless the Agreement is with a
Manager affiliated with the Adviser.
Distribution of Fund Shares
Equitable (the "Distributor") serves as principal underwriter for the
shares of the Funds pursuant to a Distribution Contract. The Distribution
Contract provides that the Distributor will use its best efforts to maintain a
broad distribution of the Funds' shares among bona fide investors and may enter
into selling group agreements with responsible dealers and dealer managers as
well as sell the Funds' shares to individual investors. The Distributor is not
obligated to sell any specific amount of shares.
Service and distribution plans (the "Plans") have been adopted by each
of the Funds. The Plan for each Fund except ESC Strategic Asset Preservation
Fund, which has only one class of shares, provides for different rates of fee
payment with respect to each class of shares, as described in the Prospectus.
Pursuant to the Plans, the Funds may pay directly or reimburse the Distributor
monthly in amounts described in the Prospectus for costs and expenses of
marketing the shares, or classes of shares, of the Funds. The Board of
Directors has concluded that there is a reasonable likelihood that the Plans
will benefit the Funds and their shareholders.
- 22 -
<PAGE> 105
Each Plan provides that it may not be amended to increase materially
the costs which the Funds or a class of shares may bear pursuant to the Plan
without shareholder approval and that other material amendments of the Plans
must be approved by the Board of Directors, and by the Directors who are
neither "interested persons" (as defined in the 1940 Act) of the Company nor
have any direct or indirect financial interest in the operation of the
particular Plan or any related agreement, by vote cast in person at a meeting
called for the purpose of considering such amendments. The selection and
nomination of the Directors of the Company have been committed to the
discretion of the Directors who are not "interested persons" of the Company.
The Plans were approved by the Board of Directors and by the Directors who are
neither "interested persons" nor have any direct or indirect financial interest
in the operation of any Plan ("Plan Director"), by vote cast in person at an
April 4, 1994 meeting called for the purpose of voting on the Plans, and by the
sole shareholder of ESC Strategic Asset Preservation Fund and by the sole
shareholder of each class of shares of each of the other Funds on April 4,
1994. The continuance of the Plans was recently re-approved by the Directors
and by a majority of the Plan Directors at a meeting held on January 16, 1996.
The Plan for ESC Strategic Asset Preservation Fund is terminable at any time by
vote of a majority of the Plan Directors or by vote of the holders of a
majority of the Fund's shares. For the other Funds, each Plan is terminable
with respect to a class of shares of a Fund at any time by a vote of a majority
of the Plan Directors or by vote of the holders of a majority of the shares of
the class.
For the fiscal year ended March 31, 1996, the Distributor received
$10,557, $32,859; $16,888; $40,962 and $55,323 for Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds, respectively for Class A
shares. For the period, the Distributor received $10,400; $27,060; $36,932 and
$15,516 for the Income, Global Equity, Small Cap and Appreciation Funds,
respectively pursuant to Class D Plans (which were formerly Class B shares).
For the period ended March 31, 1995 the Distributor received $13,765,
$27,828; $10,299; $11,355 and $13,314 for the Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds, respectively for Class A
shares. For the period ended March 31, 1995, the Distributor received $2,185;
$6,800; $9,355 and $4,068 for the Income, Global Equity, Small Cap and
Appreciation Funds, respectively pursuant to Class D Plans (which were formerly
Class B shares).
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Administrative Services
Furman Selz (the "Administrator") provides administrative services
necessary for the operation of the Funds, including among other things, (i)
preparation of shareholder reports and communications, (ii) regulatory
compliance, such as reports to and filings with the Securities and Exchange
Commission ("SEC") and state securities commissions and (iii) general
supervision of the operation of the Funds, including coordination of the
services performed by the Funds' Adviser, Managers, Distributor, custodians,
independent accountants, legal counsel and others. In addition, Furman Selz
furnishes office space and facilities required for conducting the business of
the Funds and pays the compensation of the Funds' officers, employees and
Directors affiliated with Furman Selz. For these services, Furman Selz
receives from each Fund a fee, payable monthly, at the annual rate of 0.15% of
each Fund's average daily net assets.
On June 28, 1996 Furman Selz and BISYS Group, Inc. ("BISYS") announced
a definitive agreement which provides for Furman Selz to transfer its mutual
fund clients to BISYS. This transaction is expected to close within 90 days.
The Board of Directors approved BISYS' Fund Administration Agreement, Fund
Transfer Agency Agreement and Fund Accounting Agreement on behalf of the
Company at their July 16, 1996 Board of Directors Meeting. BISYS,
headquartered in Little Falls, New Jersey, supports more than 5,000 financial
institutions and corporate clients through two strategic business units. BISYS
Information Services Group designs, administers and distributes over 30
families of proprietary mutual funds consisting of more than 365 portfolios,
and provides 401(k) marketing support, administration, and recordkeeping
services in partnership with 18 of the nation's leading bank and investment
management companies.
For the period ended March 31, 1996, the Administrator was entitled to
and received fees in the amount of $55,963, $23,532, $33,740 and $35,498 from
the Income, Global Equity, Small Cap and Appreciation Funds, respectively. The
Administrator was entitled to $19,168 in fees from the Asset Preservation Fund,
but voluntarily waived $14,250 for the same period.
For the period ended March 31, 1995, pursuant to an agreement to limit
Fund expenses, the Administrator waived fees of $14,414, $0, $9,525, $5,442 and
$6,884 for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. Absent this waiver agreement, administrative
fees would have been $14,414, $43,736, $13,150, $10,709 and $12,389 for the
Asset Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
The Administrative Services Contract for the Funds was approved by the
Board of Directors, including a majority of the Directors who are not parties
to the Contract or interested persons of such parties, at its meeting held on
April 4, 1994 and by the sole shareholder of each of the Funds on April 4, 1994
and was recently re-approved at the April 16, 1996 Board of Directors
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<PAGE> 107
Meeting. The Administrative Services Contract is terminable with respect to a
Fund or the Company without penalty, at any time, by vote of a majority of the
Directors or, with respect to a Fund, by vote of the holders of a majority of
the shares of the Fund, each upon not more than 60 days written notice to the
Administrator, and upon 60 days notice, by the Administrator.
Service Organizations
The Company may also contract with banks, trust companies,
broker-dealers (other than Furman Selz) or other financial organizations
("Service Organizations") to provide certain administrative services for the
Funds. Services provided by Service Organizations may include among other
things: providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with client orders to purchase or redeem shares;
verifying and guaranteeing client signatures in connection with redemption
orders, transfers among and changes in client-designating accounts; providing
periodic statements showing a client's account balance and, to the extent
practicable, integrating such information with other client transactions;
furnishing periodic and annual statements and confirmations of all purchases
and redemptions of shares in a client's account; transmitting proxy statements,
annual reports, and updating prospectuses and other communications from the
Funds to clients; and providing such other services as the Funds or a client
reasonably may request, to the extent permitted by applicable statute, rule or
regulation. Neither Furman Selz, the Adviser nor any Manager will be a Service
Organization or receive fees for servicing.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more
than the minimum initial or subsequent investments specified by the Funds or
charging a direct fee for servicing. If imposed, these fees would be in
addition to any amounts that might be paid to the Service Organization by the
Funds. Each Service Organization has agreed to transmit to its clients a
schedule of any such fees. Shareholders using Service Organizations are urged
to consult them regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks
from performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or
interpretations of such laws, as well as changes in either Federal or state
statutes or regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, could prevent a bank from continuing to
perform all or a part of its servicing activities. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial
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institutions may be required to register as dealers pursuant to state law. If
a bank were prohibited from so acting, its shareholder clients would be
permitted to remain shareholders of the Funds and alternative means for
continuing the servicing of such shareholders would be sought. In that event,
changes in the operation of the Funds might occur and a shareholder serviced by
such a bank might no longer be able to avail itself of any services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
DETERMINATION OF NET ASSET VALUE
The Funds value their portfolio securities in accordance with the
procedures described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Managers are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in
the Manager's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
The Funds have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Company's Board of Directors, the Managers are
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Funds to obtain the
best results taking into account the broker-dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities. While the Managers
generally seek reasonably competitive spreads or commissions, the Funds will
not necessarily by paying the lowest spread or commission available.
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Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on
an exchange. The purchase or sale of equity securities will frequently involve
the payment of a commission to a broker-dealer who effects the transaction on
behalf of a Fund. Debt securities normally will be purchased or sold from or
to issuers directly or to dealers serving as market makers for the securities
at a net price. Generally, money market securities are traded on a net basis
and do not involve brokerage commissions. Under the 1940 Act, persons
affiliated with the Funds, the Adviser, the Managers or Furman Selz are
prohibited from dealing with the Funds as a principal in the purchase and sale
of securities unless a permissive order allowing such transactions is obtained
from the SEC.
A Manager may, in circumstances in which two or more broker-dealers
are in a position to offer comparable results, give preference to a dealer that
has provided statistical or other research services to the Manager. By
allocating transactions in this manner, the Manager is able to supplement its
research and analysis with the views and information of securities firms.
These items, which in some cases may also be purchased for cash, include such
matters as general economic and securities market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to the Manager in
advising various of its clients (including the Funds), although not all of
these services are necessarily useful and of value in managing the Funds. The
management fee paid by the Funds is not reduced because the Manager and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "Act"), a Manager may cause a Fund to pay a broker-dealer that provides
"brokerage and research services" (as defined in the Act) to the Manager an
amount of disclosed commission for effecting a securities transaction for the
Fund in excess of the commission which another broker-dealer would have charged
for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Managers may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds.
For the fiscal year ended March 31, 1996, the Appreciation Fund, Small
Cap and the Global Equity Fund paid brokerage commissions of $29,031, $1,595
and $11,994, respectively, to Equitable
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Securities, a subsidiary of the Adviser's subsidiary, Equitable Trust Company.
The Funds were advised that front-end sales charges of $3,682, $7,901, $106,790
and $42,946 were paid to the Adviser from the Income, Global Equity, Small Cap
and Appreciation Funds, respectively.
During the period ended March 31, 1995 the Appreciation Fund and the
Global Equity Fund paid brokerage commissions in total of $17,257 to Equitable
Securities, a subsidiary of the Adviser's subsidiary, Equitable Trust Company.
Brokerage commissions of $625 were paid from the Income Fund to Furman Selz.
The Funds were advised that sales load commissions of $62,681, $27,800, $44,998
and $18,635 were paid to ESC from the Income, Global Equity, Small Cap and
Appreciation Funds, respectively.
Portfolio Turnover
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Funds whenever such changes are believed to be
in the best interests of the Funds and their shareholders. It is anticipated
that the annual portfolio turnover rate for a Fund normally will not exceed
100%, although it may be higher under some circumstances. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less. The portfolio
turnover rate for the fiscal year ended March 31, 1996 was 40%, 138%, 92%, 102%
and 78% for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. The portfolio turnover rate for the fiscal
period ended March 31, 1995 was 30%, 92%, 76%, 151% and 58% for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. The portfolio turnover rate for each Fund with Multiple Managers
will be an aggregate of the rates for each portion of assets managed by a
particular Manager. Rates for each portion may vary significantly.
TAXATION
The Funds intend to continue to qualify annually as regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). To qualify as a regulated investment company, a Fund
must (a) distribute to shareholders at least 90% of its investment company
taxable income (which includes, among other items, dividends, taxable interest
less expenses and the excess of net short-term capital gains over net long-term
capital losses); (b) derive in each taxable year at least 90% of its gross
income from dividends,
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<PAGE> 111
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (c) derive less than 30% of its gross income from the sale or other
disposition of certain assets (namely, in the case of a Fund, (i) stock or
securities; (ii) options, futures, and forward contracts (other than those on
foreign currencies), and (iii) foreign currencies (including options, futures,
and forward contracts on such currencies) not directly related to the Fund's
principal business of investing in stock or securities (or options and futures
with respect to stocks or securities)) held less than 3 months; and (d)
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash and cash items (including receivables), U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and not greater than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers that the Fund controls and that are determined to be engaged in the
same business or similar or related businesses. By meeting these requirements,
a Fund generally will not be subject to Federal income tax on its investment
company taxable income and net capital gains which are distributed to
shareholders. If the Funds do not meet all of these Code requirements, they
will be taxed as ordinary corporations.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the excise tax, each Fund must distribute for
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) for the one-year period ending October
31 of such year, and (3) all ordinary income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of a calendar year if it is declared by a Fund during October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are
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declared, rather than the calendar year in which the distributions are
received.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions from certain of the
Funds may be eligible for the dividends-received deduction available to
corporations. Distributions of net capital gains, if any, designated by the
Funds as capital gain dividends are taxable to shareholders as long-term
capital gain, regardless of the length of time the Funds' shares have been held
by a shareholder. All distributions are taxable to the shareholder in the same
manner whether reinvested in additional shares or received in cash.
Shareholders will be notified annually as to the Federal tax status of
distributions.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution, nevertheless, would be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital.
In particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Funds. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
will nevertheless generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of
shares of a Fund, a shareholder may realize a gain or loss depending upon his
basis in his shares. Such gain or loss generally will be treated as capital
gain or loss if the shares are capital assets in the shareholder's hands. Such
gain or loss will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. However, a loss realized by a
shareholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held
by the shareholder for six months or less. A loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced (whether
by reinvestment of distributions or otherwise) within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss. Shareholders receiving distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in
each share received equal to the net asset value of a share of the Funds on the
reinvestment date.
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<PAGE> 113
Under certain circumstances, the sales charge incurred in acquiring
shares of a Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies where shares of a Fund
are exchanged within 90 days after the date they were purchased and new shares
of a Fund are acquired without a sales charge or at a reduced sales charge. In
that case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred the sales charge
initially. Instead, the portion of the sales charge affected by this rule will
be treated as a sales charge paid for the new shares.
The taxation of equity options is governed by the Code section 1234.
Pursuant to Code section 1234, the premium received by a Fund for selling a put
or call option is not included in income at the time of receipt. If the option
expires, the premium is short-term capital gain to the Fund. If the Fund
enters into a closing transaction, the difference between the amount paid to
close out its position and the premium received is short-term capital gain or
loss. If a call option written by a Fund is exercised, thereby requiring the
Fund to sell the underlying security, the premium will increase the amount
realized upon the sale of such security and any resulting gain or loss will be
a capital gain or loss, and will be long-term or short-term depending upon the
holding period of the security. With respect to a put or call option that is
purchased by a Fund, if the option is sold, any resulting gain or loss will be
a capital gain or loss, and will be long-term or short-term, depending upon the
holding period of the option. If the option expires, the resulting loss is a
capital loss and is long-term or short-term, depending upon the holding period
of the option. If the option is exercised, the cost of the option, in the case
of a call option, is added to the basis of the purchased security and, in the
case of a put option, reduces the amount realized on the underlying security in
determining gain or loss.
Certain of the options, futures contracts, and forward foreign
currency exchange contracts that several of the Funds may invest in are
so-called "section 1256 contracts." With certain exceptions, gains or losses
on section 1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"). Also, section 1256 contracts
held by a Fund at the end of each taxable year (and, generally, for purposes of
the 4% excise tax, on October 31 of each year) are "marked-to-market" with the
result that unrealized gains or losses are treated as though they were realized
and the resulting gain or loss is treated as 60/40 gain or loss.
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<PAGE> 114
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on a position that is part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. Hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to stockholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
A Fund will not realize gain or loss on a short sale of a security
until it closes the transaction by delivering the borrowed security to the
lender. All or a portion of any gain arising from a short sale may be treated
as short-term capital gain, regardless of the period for which the Fund held
the security used to close the short sale. In addition, a Fund's holding
period of any security which is substantially identical to that which is sold
short may be reduced or eliminated as a result of the short sale.
Certain requirements that must be met under the Code in order for a
Fund to qualify as a regulated investment company may limit the extent to which
a Fund will be able to engage in short sales and transactions in options,
futures, and forward contracts.
Certain of the debt securities acquired by a Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as
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<PAGE> 115
the difference between the price at which a security was issued and its stated
redemption price at maturity. Although no cash income is actually received by
the Fund, original issue discount on a taxable debt security earned in a given
year generally is treated for Federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements of the
Code.
Some of the debt securities may be purchased by a Fund at a discount
which exceeds the original issue discount on such debt securities, if any.
This additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any debt security, including
a tax-exempt debt security, having market discount will be treated as ordinary
income to the extent it does not exceed the accrued market discount on such
debt security. Generally, market discount accrues on a daily basis for each
day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency, and the time the Fund actually collects such receivables or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain options and forward and futures contracts, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or losses, may increase, decrease, or
eliminate the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
Some Funds may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs").
In general, a foreign company is classified as a PFIC under the Code if at
least one- half of its assets constitutes investment-type assets or 75% or more
of its gross income is investment-type income. Under the PFIC rules, an
"excess distribution" received with respect to PFIC stock is treated as having
been realized ratably over the period during which the Fund held the PFIC
stock. A Fund itself will be subject to tax on the portion, if any, of the
excess distribution that is allocated to the Fund's holding period in prior
taxable years (and an interest factor will be added to the tax, as if the
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tax had actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve
marking to market the Fund's PFIC shares at the end of each taxable year (and
on certain other dates prescribed in the Code), with the result that unrealized
gains are treated as though they were realized. If this election were made,
tax at the Fund level under the PFIC rules would generally be eliminated, but
the Fund could, in limited circumstances, incur nondeductible interest charges.
Each Fund's intention to qualify annually as a regulated investment company may
limit its elections with respect to PFIC stock.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to treat such foreign taxes paid by the
Fund that qualify as income or similar taxes under U.S. income tax principles
as paid by its shareholders. Pursuant to this election, a shareholder would be
required to include in gross income (in addition to taxable dividends actually
received) his pro rata share of the foreign taxes paid by a Fund, and would be
entitled either to deduct his pro rata share of foreign taxes in computing his
taxable income or to use it as a foreign tax credit against his U.S. Federal
income tax liability, subject to limitations. No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions, but such a
shareholder may be eligible to claim the foreign tax credit (see below). Each
shareholder will be notified within 60 days after the close of a Fund's taxable
year whether the foreign taxes paid by a Fund will "pass-through" for that year
and, if so, such notification will designate (a) the shareholder's portion of
the foreign taxes paid to each such country and (b) the portion of the dividend
which represents income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax
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attributable to his total foreign source taxable income. For this purpose, if
a Fund makes the election described in the preceding paragraph, the source of
the Fund's income flows through to its shareholders. With respect to a Fund,
gains from the sale of securities will be treated as derived from U.S. sources
and certain currency fluctuations gains, including fluctuation gains from
foreign currency-denominated debt securities, receivables and payables,
will be treated as ordinary income derived from U.S. sources. The limitation
on the foreign tax credit is applied separately to foreign source passive
income (as defined for purposes of the foreign tax credit) including foreign
source passive income of a Fund. The foreign tax credit may offset only 90% of
the alternative minimum tax imposed on corporations and individuals, and
foreign taxes generally may not be deducted in computing alternative minimum
taxable income.
The Funds are required to report to the Internal Revenue Service
("IRS") all distributions except in the case of certain exempt shareholders.
All such distributions generally are subject to withholding of Federal income
tax at a rate of 31% ("backup withholding") in the case of non-exempt
shareholders if (1) the shareholder fails to furnish the Funds with and to
certify the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the Funds or a shareholder that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he is not subject to backup
withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will
be reduced by the amounts required to be withheld. Backup withholding is not
an additional tax. Any amount withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to consult
their tax advisors about the applicability of the backup withholding
provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds
also may be subject to state and local taxes and their treatment under state
and local income tax laws may differ from the Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be exempt
from state and local taxes in certain states. Shareholders should consult
their tax advisors with respect to particular questions of Federal, state and
local taxation. Shareholders who are not U.S. persons should consult their tax
advisors regarding U.S. and foreign tax consequences of ownership of shares of
the Funds including the likelihood that
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distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
Changes in the tax law frequently come under consideration. Since the
Funds do not undertake to furnish tax advice, it is important for shareholders
to consult their tax advisers regularly about the tax consequences to them of
investing in one or more of the Funds.
OTHER INFORMATION
Capitalization
The Company is a Maryland corporation established under Articles of
Incorporation dated November 24, 1993 and currently consists of five separately
managed portfolios (the Company has two other portfolios which are currently
inactive). Four of the Funds currently being offered have two classes of
shares. The capitalization of the Company consists solely of 650 million
shares of common stock with a par value of $0.001 per share. The Board of
Directors may establish additional Funds (with different investment objectives
and fundamental policies), or additional classes of shares, at any time in the
future. Establishment and offering of additional Funds or classes will not
alter the rights of the Company's shareholders. When issued, shares are fully
paid, non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In any liquidation of a Fund or
class, each shareholder is entitled to receive his pro rata share of the net
assets of that Fund or class.
Expenses incurred in connection with each Fund's organization and the
public offering of its shares for the period ended March 31, 1996 was $8,842
for Asset Preservation, $8,843 for Income, $8,843 for Global Equity, $10,910
for Small Cap and $8,842 for Appreciation. These costs have been deferred and
are being amortized on a straight-line basis over a period of not less than
five years.
Principal Shareholders
As of July 12, 1996, the following persons owned of record or
beneficially 5% or more shares of a class of the Funds:
- 36 -
<PAGE> 119
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
<S> <C> <C>
ESC STRATEGIC APPRECIATION FUND - CLASS A
Alex Brown & Sons Incorporated 464,374.95 17.50%
FBO 495-20895-16
P.O. Box 1346
Baltimore, MD 21203-1346
Equitable Trust Company 256,990.85 9.68%
511 Union Street
Suite 800
Nashville, TN 37219-1729
Wachovia Bank of North Carolina 1,315,787.55 49.57%
Successor TTEE U/A for Avondale
Mills Inc Assoc Profit Share Plan
Dtd 4-1-90
301 N. Main Street MC-NC31051
Winston-Salem, NC 27150-0001
ESC STRATEGIC APPRECIATION FUND - CLASS D
Alex Brown & Sons Incorporated 10,228 .79 5.18%
FBO 495-21495-18
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 16,400 .82 8.31%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 13,741 .05 6.96%
FBO 495-77221-11
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 10,310 .24 5.22%
FBO 495-10076-18
P.O. Box 1346
Baltimore, MD 21203-1346
Charles Lee Phillips Trust Dtd 15,048 .71 7.62%
6-27-94 H. Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Edward Randall Phillips II Trust 15,048 .71 7.62%
U/A Dtd 6-27-94 H. Ronald Burton
TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Harry Jason Phillips Trust 15,048 .52 7.62%
H. Ronald Burton TTEE Dtd 6-27-94
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
ESC STRATEGIC GLOBAL EQUITY FUND - CLASS A
Equitable Trust Company 206,633.92 15.05%
511 Union Street Suite 800
Nashville, TN 37219-1729
</TABLE>
- 37 -
<PAGE> 120
<TABLE>
<S> <C> <C>
Nationsbank of TN N.A. C/F FBO 445,906.71 32.47%
U/A Nashville Memorial Health
Systems Foundations/Attn SAS
A/C 65066006841050
P.O. Box 831575
Dallas, TX 75283-1575
Comerica Bank TTEE 100,171.78 7.29%
Republic Automotive Parts Employees
Retirement Plan #72144
POB 75000/Attn M/C 3446 M/F Dept.
Detroit, MI 48275-0001
ESC STRATEGIC GLOBAL EQUITY FUND - CLASS D
Alex Brown & Sons Incorporated 34,137.17 9.66%
FBO 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 21,476.09 6.08%
FBO 495-21923-10
P.O. Box 1346
Baltimore, MD 21203-1346
Trustman 113,415.53 32.09%
P.O. Box 105870
Atlanta, GA 30348-5870
ESC STRATEGIC SMALL CAP FUND - CLASS A
Equitable Trust Company 243,926.59 11.02%
511 Union Company Suite 800
Nashville, TN 37219-1729
ESC STRATEGIC SMALL CAP FUND - CLASS D
John E. Steuri & Grace D. Steuri JTWROS 39,518.16 5.68%
52 River Ridge Road
Little Rock, AR 72227-1518
Alex Brown & Sons Incorporated 40,442.08 5.81%
FBO 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
ESC STRATEGIC INCOME FUND - CLASS A
Homeowners Association of Amer 266,631.72 7.00%
6365 Taft Street, Suite 2000
Hollywood, FL 33024-5934
Nationsbank of TN N.A. Cust FBO 1,927,798.70 50.63%
U/A Nashville Memorial Health
Systems Foundation/Attn SAS
A/C 65066006841050
P.O. Box 831575
Dallas, TX 75283-1575
Wright Industries Inc. 232,187.55 6.10%
Employee Pension Trust
First American Trust Company Ttee
707 Spence Lane
Nashville, TN 37217-1143
</TABLE>
- 38 -
<PAGE> 121
<TABLE>
<S> <C> <C>
Wachovia Bank of North Carolina 879,750.83 23.10%
Successor Ttee U/A for Avondale
Mills Inc Assoc Profit Share Plan
DTD 4-1-90
301 N. Main Street MC-NC31051
Winston-Salem, NC 27150-0001
ESC STRATEGIC INCOME FUND - CLASS D
Alex Brown & Sons Incorporated 12,307.85 8.24%
FBO 495-07032-17
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 9,293.22 6.22%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 15,682.14 10.50%
FBO 495-77221-11
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 26,324.81 17.63%
FBO 495-12543-19
P.O. Box 1346
Baltimore, MD 21203-1346
Harry Jason Phillips Trust 10,826.60 7.25%
UA Dtd 6-2-94
H Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Charles Lee Phillips Trust Dtd 10,795.23 7.23%
6-27-94 H. Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Edward Randall Phillips II Trust 10,795.23 7.23%
UA Dtd 6-27-94 H. Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
ESC STRATEGIC ASSET PRESERVATION FUND
Alex Brown & Sons Incorporated 78,601.87 6.12%
FBO 495-17167-13
P.O. Box 1346
Baltimore, MD 21203-1346
Wachovia Bank of North Carolina 662,345.46 51.56%
Successor TTEE U/A for Avondale
Mills Inc Assoc Profit Share Plan
Dtd 4-1-90
301 N. Main Street MC-NC31051
Winston Salem, NC 27150-0001
Nationsbank of TN NA Escrow Agent 490,096.13 38.15%
FBO Healthtrust Inc Nashville Mem
Health Systems Inc U/A 3-31-94
Attn SAS Acct 65011000064238
P.O. Box 831575
Dallas, TX 75283-1575
</TABLE>
- 39 -
<PAGE> 122
Voting Rights
Under the Articles of Incorporation, the Company is not required to
hold annual meetings of each Fund's shareholders to elect Directors or for
other purposes. It is not anticipated that the Company will hold shareholders'
meetings unless required by law or the Articles of Incorporation. In this
regard, the retention of a new investment adviser for the Company, or a new
Manager with respect to a Fund, requires approval both by a majority of the
Company's directors, including a majority of its directors who are not parties
to such contract or "interested persons" (as defined in the Investment Company
Act of 1940) of any such party, and by a vote of a majority of the outstanding
voting securities of the Company or Fund, as applicable. For this purpose, the
"vote of a majority of the outstanding voting securities" of the Company or a
Fund, as applicable, means the vote of the lesser of (1) 67% of the shares of
the Company or Fund, as applicable, if the holders of more than 50% of the
outstanding shares of the Company or Fund, as applicable, are present in person
or by proxy; or (2) more than 50% of the outstanding shares of the Company or
Fund, as applicable. The Company received an order from the Securities and
Exchange Commission that permits it to retain new Managers and to approve
amendments of agreements with Managers without obtaining shareholder approval,
unless they are affiliated with the Adviser. Additionally, the Company will be
required to hold a meeting to elect Directors to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Directors have been
elected by the shareholders of the Company. In addition, the Articles of
Incorporation provide that the holders of not less than a majority of the
outstanding shares of the Company may remove persons serving as Director.
The Company's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board
of Directors, in which case the holders of the remaining shares would not be
able to elect any Directors.
Custodian, Transfer Agent and Dividend Disbursing Agent
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, acts as custodian of the Company's assets, but plays no role in
making decisions as to the purchase or sale of portfolio securities for the
Funds.
Furman Selz serves as the Company's transfer agent pursuant to a
Service Agreement. For the fiscal year ended March 31, 1996, Furman Selz
voluntarily waived transfer agency fees of $10,000 for each Fund. Absent these
waivers, the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds would have incurred $11,796, $14,942, $16,307, $23,536 and
$16,395, respectively. For the period ended March 31, 1995, pursuant to an
agreement to limit Fund expenses, the Transfer Agent waived fees of $7,842,
$4,464, $3,310, $2,102, and $2,946 for the Asset Preservation, Income, Global
Equity, Small Cap and Appreciation Funds, respectively. Absent this waiver
agreement, transfer agent fees would have been $9,342, $9,096, $8,877, $8,137
and $7,370
- 40 -
<PAGE> 123
for the Asset Preservation, Income, Global Equity, Small Cap and Appreciation
Funds, respectively. Pursuant to a Fund Accounting Agreement, the Company
compensates Furman Selz for providing fund accounting services for the Funds.
For the fiscal year ended March 31, 1996, Furman Selz earned $34,056, $40,222,
$39,554, $31,533 and $39,370 in fund accounting services from the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. For the period ended March 31, 1995, Furman Selz earned for fund
accounting services $32,273; $36,180; $35,020; $25,666 and $22,016 for the
Asset Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
Yield and Performance Information
The Funds may, from time to time, include their yield, effective
yield, tax equivalent yield and average annual total return in advertisements
or reports to shareholders or prospective investors.
Quotations of yield for each class of shares of the Funds will be
based on the investment income per share earned during a particular 30-day
period, less expenses accrued with respect to that class during a period ("net
investment income"), and will be computed by dividing net investment income for
the class by the maximum offering price per share of that class on the last day
of the period, according to the following formula:
YIELD = 2[(a-b + 1)(6)-1]
---
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the
last day of the period.
The 30-day yield for the period ended March 31, 1996 was 5.09% and
5.43% for the Asset Preservation and Income Funds, respectively.
Quotations of average annual total return will be expressed in terms
of the average annual compounded rate of return of a hypothetical investment in
each class of shares of a Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula:
P (1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return for the class, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect the deduction of the maximum
sales charge and a proportional share of Fund and class-specific expenses (net
of certain reimbursed expenses) on an annual basis, and will assume that all
dividends and distributions are reinvested when paid.
- 41 -
<PAGE> 124
Quotations of yield and total return will reflect only the performance
of a hypothetical investment in a class of shares of the Funds during the
particular time period shown. Yield and total return for the Funds will vary
based on changes in the market conditions and the level of the Fund's (and
classes') expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
For the period April 25, 1994, May 4, 1994, May 12, 1994, June 8, 1994
and July 6, 1994 (commencement of operations) respectively through March 31,
1996, the average annual total returns for Class A shares were as follows:
5.47% for the Asset Preservation Fund, 4.25% for the Income Fund, 4.34% for the
Global Equity Fund, 29.65% for the Small Cap Fund and 15.37% for the
Appreciation Fund. For the period May 4, 1994, May 12, 1994, June 8, 1994 and
July 6, 1994 (commencement of operations) respectively through March 31, 1996,
the average annual total returns for Class D shares were as follows: 5.36% for
the Income Fund, 5.38% for the Global Equity Fund, 31.35% for the Small Cap
Fund and 16.89% for the Appreciation Fund.
For the fiscal year ended March 31, 1996, the average annual total
returns for Class A shares were as follows: 6.85% for the Asset Preservation
Fund, 7.67% for the Income Fund, 14.41% for the Global Equity Fund, 45.88% for
the Small Cap Fund and 25.07% for the Appreciation Fund. For the same period,
the average annual total returns for Class D shares were as follows: 7.11% for
the Income Fund, 14.01% for the Global Equity Fund, 45.19% for the Small Cap
Fund and 24.50% for the Appreciation Fund.
In connection with communicating its yields or total return to current
or prospective unit holders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow
Jones Industrial Average, or other unmanaged indices so that investors may
compare the Funds' results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in a Fund.
Investors who purchase and redeem shares of the Funds through a
customer account maintained at a Service Organization may be charged one or
more of the following types of fees as agreed upon by the Service Organization
and the investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating
- 42 -
<PAGE> 125
balance requirements (a minimum dollar amount a customer must maintain in order
to obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid
on those assets). Such fees will have the effect of reducing the yield and
average annual total return of the Funds for those investors.
Independent Accountants
Price Waterhouse LLP serves as the independent accountants for the
Company. Price Waterhouse LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of SEC filings.
Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C., 20005,
passes upon certain legal matters in connection with the shares offered by the
Company and also acts as Counsel to the Company.
Registration Statement
This SAI and the Prospectus do not contain all the information
included in the Company's Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of
the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
- 43 -
<PAGE> 126
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC ASSET PRESERVATION FUND
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C>
CORPORATE OBLIGATIONS -- 62.2%
ASSET BACKED -- 1.8%
AAA/Aaa Prudential Home Mortgage
Securities,
6.50%, 2/25/2000....... 234,748 $ 232,900
-----------
BANKING -- 8.1%
A-/A2 BankAmerica Corp.,
7.50%, 3/15/1997....... 250,000 253,918
A-/A3 First Union Corp.,
9.45%, 6/15/1999....... 250,000 272,079
A/A2 NationsBank Corp.,
5.125%, 9/15/1998...... 250,000 243,769
BBB-/NR Union Planters Corp.,
10.125%, 4/01/1999..... 300,000 300,932
-----------
1,070,698
-----------
CHEMICALS -- 4.6%
A+/A2 ICI Wilmington Corp.,
7.625%, 3/15/1997...... 465,000 472,685
A/A1 Monsanto Corp.,
6.00%, 7/01/2000....... 140,000 137,802
-----------
610,487
-----------
COMPUTERS -- 3.0%
A/A3 IBM Corp.,
6.375%, 11/01/1997..... 250,000 251,250
A/A3 IBM Corp.,
6.375%, 6/15/2000...... 150,000 149,958
-----------
401,208
-----------
ENTERTAINMENT -- 1.9%
A+/A1 Bass America, Inc.,
6.75%, 8/01/1999....... 250,000 252,963
-----------
FINANCIAL SERVICES -- 17.1%
AA-/AA3 Associates Corp. North
America,
8.50%, 1/10/2000....... 100,000 106,750
A-/A3 Chrysler Financial Corp.,
Medium Term Note,
7.10%, 4/14/1997....... 250,000 253,194
AAA/Aaa General Motors Acceptance
Corp.,
8.10%, 9/19/1996....... 250,000 252,903
BBB/A3 Hutton (E.F.) Group Inc.,
8.875%, 5/01/1996...... 250,000 250,604
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C>
FINANCIAL SERVICES (CONTINUED)
A+/A1 ITT Hartford, Inc.,
7.25%, 12/01/1996...... 400,000 $ 402,966
A/Baa1 Lehman Brothers Holdings
Corp.,
6.90%, 7/15/1999....... 200,000 201,274
BBB/Baa1 Salomon, Inc., Medium
Term Note,
5.00%, 7/15/1996....... 250,000 249,232
BBB/Baa1 Salomon, Inc.,
6.00%, 4/15/1998....... 200,000 197,180
A/A3 Smith Barney Shearson
Holdings Corp.,
6.00%, 3/15/1997....... 250,000 250,479
A+/A2 Travelers, Inc.,
7.75%, 6/15/1999....... 100,000 103,873
-----------
2,268,455
-----------
FOOD SERVICING -- 1.9%
A+/A2 Grand Metropolitan
Investment Corp.,
6.50%, 9/15/1999....... 250,000 250,851
-----------
INSURANCE -- 2.3%
A+/A2 International Lease
Finance Corp.,
6.625%, 6/01/1996...... 300,000 300,503
-----------
INDUSTRIAL COMPONENT -- 1.9%
A/A1 Pepsico, Inc.,
6.80%, 5/15/2000....... 250,000 253,642
-----------
OIL/GAS - EXPLORATION -- 1.9%
AA-/A1 BP America Corp.,
7.43%, 2/15/1999....... 250,000 256,967
-----------
PHARMACEUTICALS -- 2.7%
A-/A2 American Home Products
Corp.,
7.70%, 2/15/2000....... 250,000 260,889
A-/A2 American Home Products
Corp.,
6.875%, 4/15/1997...... 100,000 101,080
-----------
361,969
-----------
</TABLE>
See accompanying notes to financial statements.
1
<PAGE> 127
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC ASSET PRESERVATION FUND
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
RETAIL -- 7.8%
BBB-/Baa3 Black & Decker,
6.625%, 11/15/2000..... 60,000 $ 59,792
BBB+/A3 Dayton Hudson Corp.,
9.50%, 3/1/2000........ 250,000 272,085
A-/Baa1 Mattel, Inc., 6.75%,
5/15/2000.............. 90,000 90,375
BBB+/Baa1 Sears Roebuck & Co.,
8.55%, 8/01/1996....... 250,000 252,449
BBB+/A2 Sears Roebuck & Co.,
8.20%, 4/15/1999....... 100,000 104,302
AA/Aa1 Wal-Mart Stores, Inc.,
6.125%, 10/01/1999..... 250,000 249,013
-----------
1,028,016
-----------
TOBACCO -- 3.1%
A/A2 American Brands, Inc.,
7.50%, 5/15/1999....... 100,000 103,261
A/A2 Philip Morris Co.,
6.375%, 1/15/1998...... 300,000 300,694
-----------
403,955
-----------
TRANSPORTATION - SHIPPING -- 1.1%
AA/Aa Federal Express Corp.,
9.83%, 7/09/1996....... 150,000 151,684
-----------
UTILITIES -- 1.9%
A-/A2 Carolina Power & Light
Co.,
6.875%, 10/01/1998..... 250,000 251,043
-----------
WASTE SERVICES -- 1.1%
A+/A1 WMX Technologies, Inc.,
4.875%, 6/15/1996...... 140,000 139,835
-----------
TOTAL CORPORATE
OBLIGATIONS (IDENTIFIED
COST $8,176,067)....... 8,235,176
-----------
MUNICIPAL OBLIGATIONS --
TENNESSEE -- 8.8%
GOVERNMENT AGENCY -- 0.8%
A/NR Loudon County Tennessee,
4.90%, 3/01/1997....... 105,000 104,436
-----------
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
MUNICIPAL OBLIGATIONS (CONTINUED)
HOUSING DEVELOPMENT -- 3.7%
AA/Aa Tennessee HDC,
5.20%, 1/01/1998....... 500,000 $ 490,214
-----------
UTILITIES -- 4.3%
AAA/Aaa West Knox Utilities
District, 8.40%,
12/01/1997............. 450,000 465,072
AAA/Aaa White House Utility
District of Robertson &
Summer Co.,
7.60%, 1/01/2000....... 100,000 104,443
-----------
569,515
-----------
TOTAL MUNICIPAL
OBLIGATIONS (IDENTIFIED
COST $1,149,064)....... 1,164,165
-----------
U.S. GOVERNMENT OBLIGATIONS -- 26.4%
MORTGAGED BACKED SECURITIES -- 13.0%
NR/NR Government National
Mortgage Association
Pool #276718,
9.75%, 8/15/1998....... 164,657 173,507
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #M90304,
6.00%, 11/01/1998...... 155,030 154,605
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #L90057,
6.00%, 11/01/1998...... 174,029 173,552
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #M15202,
6.00%, 9/01/1997....... 346,046 342,477
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #13099,
6.00%, 3/01/1997....... 238,756 236,294
NR/NR Federal Home Loan
Mortgage Corp. Pool
#M90163,
7.00%, 12/01/1997...... 179,138 180,761
NR/NR Federal Home Loan
Mortgage Corp. Gold
Balloon #L90037,
6.00%, 7/01/1998....... 405,522 401,340
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 128
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC ASSET PRESERVATION FUND
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (CONTINUED)
MORTGAGED BACKED SECURITIES (CONTINUED)
NR/NR Federal National Mortgage
Association #1508,
6.00%, 3/01/1998....... 71,162 $ 65,802
-----------
1,728,338
-----------
GOVERNMENT AGENCY OBLIGATIONS -- 13.4%
NR/NR Federal Home Loan Bank,
5.345%, 11/10/1997..... 100,000 99,090
NR/NR Federal Home Loan Bank,
5.49%, 2/28/2000....... 200,000 193,324
NR/NR Federal Home Loan Bank,
6.155%, 3/22/1999...... 250,000 247,419
NR/NR Federal Home Loan Bank,
6.405%, 4/10/2001**.... 250,000 248,255
NR/NR Federal Home Loan
Mortgage Corp.,
6.53%, 9/28/2000....... 250,000 247,931
NR/NR Federal Home Loan
Mortgage Corp.,
6.15%, 12/01/2000...... 100,000 98,566
NR/NR Federal National Mortgage
Association,
5.25%, 5/13/1998....... 250,000 245,345
NR/NR Federal National Mortgage
Association,
5.93%, 1/29/2001....... 100,000 96,535
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
GOVERNMENT AGENCY OBLIGATIONS (CONTINUED)
NR/NR Federal National Mortgage
Association,
6.46%, 11/27/2000...... 300,000 $ 294,312
-----------
1,770,777
-----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED
COST $3,517,604)....... 3,499,115
-----------
U.S. TREASURY OBLIGATIONS -- 1.9%
NR/NR U.S. Treasury Notes,
6.875%, 10/31/1996..... 250,000 252,109
-----------
TOTAL U.S. TREASURY
OBLIGATIONS (IDENTIFIED
COST $251,373)......... 252,109
-----------
TOTAL INVESTMENTS -- 99.3%
(IDENTIFIED COST
$13,094,108)+............ $13,150,565
Cash and other assets in
excess of
liabilities -- 0.7%.... 90,106
-----------
NET ASSETS -- 100.0%..... $13,240,671
===========
</TABLE>
+ The cost of securities for federal income tax purposes is substantially the
same.
* See page 16 for Credit Ratings.
** When-issued security.
See accompanying notes to financial statements.
3
<PAGE> 129
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 42.0%
ADVERTISING/COMMUNICATIONS -- 0.9%
B/B2 Big Flower Press,
Inc.,
10.75%, 8/01/2003... 167,000 $ 170,340
B/B2 Heritage Media Corp.,
8.75%, 2/15/2006.... 181,000 175,117
-----------
345,457
-----------
AUTO RELATED -- 0.6%
A-/A3 General Motors Corp.,
8.125%, 4/15/2016... 250,000 250,897
-----------
BANKING -- 8.8%
BB-/B1 Banco Rio de la Plata,
8.50%, 7/15/1998.... 420,000 421,050
A-/A2 Comerica Bank,
8.375%, 7/15/2024... 350,000 371,020
NR/Aaa International Bank of
Reconstruction &
Development,
4.50%, 6/20/2000.... 75,000,000(H) 774,638
NR/Aaa Japanese Development
Bank,
6.50%, 9/20/2001.... 158,000,000(H) 1,793,137
-----------
3,359,845
-----------
BUILDING/FOREST PRODUCTS -- 1.2%
B+/B3 Pacific Lumber Co.,
10.50%, 3/01/2003... 500,000 477,500
-----------
BROADCASTING -- CABLE
TELEVISION -- 3.3%
B/B3 Adelphia
Communications
Corp.,
12.50%, 5/15/2002... 500,000 516,250
BB-/Ba3 Century Communications
Corp.,
9.75%, 2/15/2002.... 350,000 360,500
B+/B1 Jones Intercable Inc.,
11.50%, 7/15/2004... 350,000 385,000
-----------
1,261,750
-----------
CASINO & GAMBLING -- 0.8%
BB-/B2 California Hotel
Finance Corp.,
11.00%,
12/01/2002.......... 300,000 317,250
-----------
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
CHEMICALS -- 2.7%
B/B1 NL Industries, Inc.,
11.75%,
10/15/2003.......... 500,000 $ 518,750
BB-/B1 Rexene Corp.,
11.75%,
12/01/2004.......... 500,000 517,500
-----------
1,036,250
-----------
CONTAINERS - METAL -- 0.7%
BB-/B1 Sea Containers, Ltd.,
12.50%,
12/01/2004.......... 250,000 271,875
-----------
EDUCATION -- 0.3%
B/B2 Herff Jones, Inc.,
11.00%, 8/15/2005... 100,000 106,000
-----------
FOOD AND HOUSEHOLD
PRODUCTS -- 2.1%
B+/B1 Chiquita Brands Int'l,
Inc., 9.625%,
1/15/2004........... 350,000 347,375
B-/B2 Flagstar Corp.,
10.875%, 12/01/2002... 500,000 453,125
-----------
800,500
-----------
HEALTH CARE -- 0.3%
B-/B3 Merit Behavioral Care
Corp.,
11.50%, 11/15/2005++ . . . 90,000 96,300
-----------
INDUSTRIAL COMPONENTS -- 1.0%
NR/NR DESC Sociedad de
Fomento,
11.00%,
12/15/1997.......... 375,000 380,625
-----------
OFFICE EQUIPMENT -- 2.1%
B-/B3 Knoll Group, Inc.,
10.875%, 3/15/2006++ . . .250,000 255,000
B-/B3 United Stationers
Supply Co.,
12.75%, 5/01/2005... 500,000 562,500
-----------
817,500
-----------
OIL/GAS - EXPLORATION -- 1.9%
B-/B2 Plains Resources,
Inc.,
10.25%,
3/15/2006++......... 220,000 221,650
BB-/B2 Trans Texas Gas Corp.,
11.50%, 6/15/2002... 500,000 488,750
-----------
710,400
-----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 130
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
PAGING -- 0.9%
B-/B2 Metrocall, Inc.,
10.375%,
10/01/2007.......... 350,000 $ 343,875
-----------
PAPER PRODUCTS -- 3.1%
B+/B1 Container Corp.,
9.75%, 4/01/2003.... 350,000 347,813
BB-/Ba3 Repap New Brunswick,
9.875%, 7/15/2000... 350,000 350,000
B/B2 Stone Container,
Corp.,
10.75%, 4/01/2002... 500,000 483,125
-----------
1,180,938
-----------
PLASTIC PRODUCTS -- 1.8%
B/B2 Applied Extrusion
Technologies Corp.,
11.50%,
4/01/2002++ . . . . 350,000 360,500
B-/B3 Plastic Specialties &
Technologies Inc.,
11.25%,
12/01/2003.......... 350,000 337,750
-----------
698,250
-----------
POLLUTION CONTROL -- 1.0%
B/B3 Allied Waste
Industries, Inc.,
12.00%, 2/01/2004... 350,000 378,000
-----------
RETAIL -- 2.5%
B-/B3 Bruno's Inc.,
10.50%, 8/01/2005... 350,000 336,875
B/B1 Orchard Supply
Hardware Corp.,
9.375%, 2/15/2002... 350,000 343,000
B-/Caa Parisian, Inc.,
9.875%, 7/15/2003... 300,000 270,000
-----------
949,875
-----------
STEEL -- 0.9%
B/B2 Weirton Steel Corp.,
10.875%,
10/15/1999 . . . . . 350,000 357,000
-----------
TELECOMMUNICATIONS -- 1.8%
AAA/Aaa British Telecom plc,
7.125%, 9/15/2003... 275,000(K) 395,189
BB-/B1 Telecom Argentina,
8.375%,
10/18/2000 . . . . . . 315,000 297,105
-----------
692,294
-----------
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C> <C>
TEXTILES & APPAREL -- 2.7%
B/B3 Hartmarx Corp.,
10.875%,
1/15/2002........... 375,000 $ 318,750
D/Ca Ithaca Industries
Inc.,
11.125%, 12/15/2002## . . 500,000 215,000
B+/B3 West Point Stevens
Inc., 9.375%,
12/15/2005.......... 500,000 496,250
-----------
1,030,000
-----------
UTILITIES -- 0.6%
A+/A1 Consolidated Edison
Co., New York, Inc.,
7.50%, 6/15/2023.... 250,000 240,625
-----------
TOTAL CORPORATE
OBLIGATIONS
(IDENTIFIED COST
$16,242,214)........ 16,103,006
-----------
GOVERNMENT OBLIGATIONS -- 40.8%
ARGENTINA GOVERNMENT -- 1.1%
NR/NR Republic of Argentina,
Brady Bond, 5.00%,
3/31/2023#.......... 715,000 407,550
-----------
AUSTRALIA GOVERNMENT -- 0.6%
AAA/NR Australia Government,
13.00%, 7/15/2000... 240,000(A) 216,855
-----------
BELGIUM GOVERNMENT -- 0.7%
NR/Aa1 Belgium (Kingdom of),
8.25%, 2/14/2000.... 250,000(B) 267,776
-----------
CANADA GOVERNMENT -- 0.8%
NR/Aa1 Canada Government,
7.75%, 9/01/1999.... 195,000(C) 147,627
NR/Aa1 Canada Government,
7.25%, 6/01/2003.... 245,000(C) 178,129
-----------
325,756
-----------
DENMARK GOVERNMENT -- 1.7%
NR/NR Denmark (Kingdom of),
6.00%, 12/10/1999... 2,430,000(D) 433,232
NR/Aaa Denmark (Kingdom of),
8.00%, 3/15/2006.... 1,240,000(D) 225,701
-----------
658,933
-----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 131
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
GOVERNMENT OBLIGATIONS (CONTINUED)
FRANCE GOVERNMENT -- 3.3%
NR/Aaa France O.A.T.,
5.50%, 4/25/2004.... 1,490,000(E) $ 279,824
NR/Aaa France O.A.T.,
8.50%, 4/25/2003.... 4,300,000(E) 968,402
-----------
1,248,226
-----------
GERMANY GOVERNMENT -- 5.2%
NR/NR Deutsche Bundesbahn,
6.125%,
10/28/2003.......... 555,000(F) 379,864
NR/NR Deutsche Bundesbahn,
6.00%, 8/03/1998.... 1,335,000(F) 940,606
AAA/Aaa Treuhandansalt GRM,
6.25%, 3/04/2004.... 675,000(F) 469,449
AAA/Aaa Treuhandansalt GRM,
6.625%, 7/09/2003... 290,000(F) 207,815
-----------
1,997,734
-----------
ITALY GOVERNMENT -- 2.3%
NR/NR Buoni Poliennali del
Tesoro, 9.50%,
2/01/2001........... 920,000,000(G) 572,281
NR/NR Buoni Poliennali del
Tesoro, 12.50%,
3/19/1998........... 480,000,000(G) 319,008
-----------
891,289
-----------
NETHERLANDS GOVERNMENT -- 0.7%
NR/NR Netherlands
Government,
6.50%, 4/15/2003.... 180,000(I) 112,322
NR/NR Netherlands
Government,
5.75%, 1/15/2004.... 294,000(I) 173,734
-----------
286,056
-----------
SPAIN GOVERNMENT -- 1.6%
NR/NR Spain Government,
10.15%, 1/31/2006... 27,000,000(J) 223,500
NR/NR Spain Government,
9.90%, 10/31/1998... 46,000,000(J) 381,035
-----------
604,535
-----------
UNITED KINGDOM GOVERNMENT -- 1.8%
NR/Aaa Treasury Bond,
8.00%, 12/07/2000... 135,000(K) 210,712
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
UNITED KINGDOM GOVERNMENT (CONTINUED)
NR/NR Treasury Bond,
8.50%, 12/07/2005... 315,000(K) $ 492,100
-----------
702,812
-----------
UNITED STATES GOVERNMENT -- 21.0%
MORTGAGE-BACKED
SECURITIES -- 10.2%
NR/NR Government National
Mortgage Association
#417293,
6.50%, 3/15/2026.... 1,020,000 966,763
NR/NR Government National
Mortgage Association
#423295,
6.50%, 3/15/2026.... 1,020,000 966,763
NR/NR Government National
Mortgage Association
#389070,
7.00%, 3/15/2026.... 1,019,702 993,885
NR/NR Government National
Mortgage Association
#425972,
7.00%, 3/15/2026.... 1,020,000 994,176
-----------
3,921,587
-----------
GOVERNMENT AGENCY
OBLIGATIONS -- 2.5%
NR/NR Federal National
Mortgage Assoc.,
5.83%, 2/20/2001.... 750,000 722,197
NR/NR Tennessee Valley
Authority,
7.75%, 12/15/2022... 250,000 248,438
-----------
970,635
-----------
U.S. TREASURY OBLIGATIONS -- 8.3%
NR/NR U.S. Treasury Note,
5.875%, 7/31/1997... 3,150,000 3,160,823
-----------
TOTAL UNITED STATES
GOVERNMENT
OBLIGATIONS......... 8,053,045
-----------
TOTAL GOVERNMENT
OBLIGATIONS
(IDENTIFIED COST
$15,624,005)........ 15,660,567
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 132
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT PRINCIPAL/ MARKET
RATING* SHARES VALUE
- -------- ----------- -----------
<S> <C> <C>
EQUITIES -- 1.5%
COMMON STOCK -- 0.1%
RETAIL -- 0.1%
NA/NA Grand Union Co.++..... 4,419 $ 26,514
-----------
PREFERRED STOCK -- 1.4%
PUBLISHING & PRINTING -- 1.4%
B/B2 K-III Communications
Corp., 2.875%, Sr.
Exchangeable........ 20,000 537,500
-----------
TOTAL EQUITIES
(IDENTIFIED COST
$777,450)........... 564,014
-----------
TOTAL INVESTMENTS
EXCLUDING SHORT-TERM
(IDENTIFIED COST
$32,643,669)........ 32,327,587
-----------
SHORT-TERM INVESTMENTS -- 1.6%
MONEY MARKET -- 1.6%
NR/NR Chase Manhattan Bank,
Bournemouth
5.375%, 4/01/1996... 615,000 615,000
-----------
TOTAL SHORT-TERM
INVESTMENTS
(IDENTIFIED COST
$615,000)........... 615,000
-----------
TOTAL INVESTMENTS -- 85.9%
(IDENTIFIED
COST $33,258,669)+............. 32,942,587
Cash and other assets,
net of
liabilities -- 14.1%... 5,394,559
-----------
NET ASSETS -- 100.0%............. $38,337,146
==========
</TABLE>
+ The cost of securities for Federal income tax purposes
is substantially the same.
++ Non-income producing security.
# Step bond. Republic of Argentina, Brady Bond, 5.00%
through 3/31/97; maturity rate increases to 6.00% on
3/31/99, until ultimate maturity date of 3/31/23.
* See page 16 for Credit Ratings.
** See page 16 for Concentration by Country.
++ Security restricted as to resale to qualified
institutional buyers under Rule 144A of the Securities
Act.
## Issuer in default.
Principal denominated in U.S. Dollars unless indicated by the following
currencies:
(A) Australian Dollars
(B) Belgian Francs
(C) Canadian Dollars
(D) Danish Krone
(E) French Francs
(F) German Deutsche Marks
(G) Italian Lira
(H) Japanese Yen
(I) Dutch Guilder
(J) Spanish Pesetas
(K) British Pounds
See accompanying notes to financial statements.
7
<PAGE> 133
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS -- 89.1%
AEROSPACE/DEFENSE -- 1.1%
16,000 Mitsubishi Heavy
Industries, Ltd. ..... $ 132,111 $ 139,170
20,000 Rolls-Royce plc ........ 52,853 66,001
------------ -----------
184,964 205,171
------------ -----------
AGRICULTURE -- 0.4%
88,000 Parmalat Finanziaria
S.p.A................. 80,542 81,084
------------ -----------
AUTO RELATED -- 2.6%
5,500 Debica S.A.............. 70,950 133,681
35,400 Magneti Marelli
S.p.A. ............... 75,477 47,954
21,000 Nissan Diesel Motor Co.
Ltd. ................. 131,444 163,683
10,000 Suzuki Motor Co.,
Ltd. ................. 114,748 124,259
------------ -----------
392,619 469,577
------------ -----------
BANKING -- 11.4%
5,600 Abbey National plc...... 46,952 48,168
3,100 Ahmanson (H.F.) &
Co. .................. 67,321 75,175
26,070 Allied Irish Banks
plc................... 124,106 132,633
2,100 AmSouth Bancorp......... 85,684 81,637
6,000 Banco Frances del Rio de
la Plata
S.A. -- ADR#.......... 106,041 164,250
2,020 Banco Santander S.A. ... 85,031 96,486
12,000 Bangkok Bank Co.,
Ltd. ................. 104,626 161,584
50,000 CMIC Finance &
Securities Co.,
Ltd. ................. 189,066 166,337
415 Commerzbank AG.......... 91,104 96,144
2,700 First Security Corp. ... 75,087 74,925
1,600 First American Corp. ... 72,019 71,200
6,150 Komercni Banka
A.S. -- GDR*++........ 119,925 153,258
8,112 Lloyds TSB Group plc.... 32,068 38,730
18,000 Malayan Banking
Berhad................ 173,562 168,038
14,000 Oversea -- Chinese
Banking Corp. Ltd..... 165,124 188,167
3,700 Peoples Bank of
Bridgeport............ 77,424 79,550
4,000 Sumitomo Bank Ltd. ..... 77,996 81,333
10,000 Sumitomo Trust &
Banking Ltd. ......... 142,647 138,379
2,600 Washington Mutual,
Inc. ................. 77,891 77,350
------------ -----------
1,913,674 2,093,344
------------ -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
BUILDING MATERIALS AND COMPONENTS -- 2.8%
16,500 Blue Circle Industries
plc................... $ 77,546 $ 85,962
4,290 Cimpor Cimentos De
Portugal S.A. ........ 69,823 81,094
4,800 Matsumoto Kenko
Co., Ltd.*............ 162,151 160,407
1,685 Portland Valderrivas
S.A................... 125,835 104,453
1,300 Texas Industries,
Inc. ................. 78,415 82,712
------------ -----------
513,770 514,628
------------ -----------
BREWERY -- 0.4%
3,800 Coors (Adolph) Co.
Cl. "B"................. 82,854 67,925
------------ -----------
BUSINESS EQUIPMENT -- 0.7%
7,000 Canon Inc. ............. 114,257 134,425
------------ -----------
CHEMICALS -- 2.4%
4,000 BOC Group plc........... 45,135 54,084
10,000 Nippon Sanso Corp. ..... 52,693 52,245
3,145 Norsk Hydro AS.......... 138,029 137,496
5,000 Reliance Industries,
Ltd. -- GDR*++........ 69,375 72,500
2,200 Sociedad Quimica Y
Minera De
Chile -- ADR#......... 94,158 114,950
------------ -----------
399,390 431,275
------------ -----------
COMMERCIAL SERVICES -- 0.6%
2,100 Robert Half
International,
Inc.*................. 49,600 102,112
------------ -----------
COMPUTER EQUIPMENT -- 3.0%
1,800 Adaptec, Inc.*.......... 59,060 86,850
3,600 Cognex Corp.*........... 69,858 92,250
2,800 Gateway 2000, Inc.*..... 56,000 78,050
2,600 Komag, Inc.*............ 90,776 63,050
1,900 Seagate Technology,
Inc.*................. 44,435 104,025
1,000 U.S. Robotics Corp. .... 70,363 129,250
------------ -----------
390,492 553,475
------------ -----------
COMPUTER SOFTWARE -- 0.9%
1,350 McAfee Associates,
Inc.*................. 46,706 73,912
2,200 Parametric Technology
Corp.*................ 73,994 86,075
------------ -----------
120,700 159,987
------------ -----------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 134
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CONGLOMERATE -- 1.4%
10,000 I.T.C.,
Ltd. -- GDR*++........ $ 75,500 $ 75,000
327,500 Mondragon International
Philippines, Inc.*.... 93,459 187,500
------------ -----------
168,959 262,500
------------ -----------
CONSTRUCTION -- 3.0%
1,900 Centex Corp. ........... 67,888 58,900
8,400 Gujarat Ambuja Cements,
Ltd. -- GDR*++........ 50,000 102,901
4,800 Kaufman & Broad
Home Corp. ........... 77,895 76,800
5,000 Keppel Corporation
Ltd................... 42,155 45,513
2,800 Lennar Corp. ........... 69,468 70,350
2,300 Pulte Corp. ............ 74,668 61,812
11,000 Sekisui House, Ltd. .... 140,392 138,756
------------ -----------
522,466 555,032
------------ -----------
ELECTRICAL AND ELECTRONICS -- 7.7%
1,100 Altera Corp.*........... 75,416 61,462
2,700 Atmel Corp.*............ 34,188 68,512
1,700 Avnet, Inc. ............ 92,690 82,025
5,800 Cypress Semiconductor
Corp.*................ 62,471 68,150
84 General Electric Co.
plc................... 341 470
3,900 International
Rectifier Corp.*...... 93,492 70,200
2,400 Kent Electronics
Corp.*................ 79,453 84,900
2,000 Lattice Semiconductor
Corp.*................ 76,701 56,750
1,600 Linear Technology
Corp. ................ 61,200 66,800
6,000 Matsushita
Communications
Industrial Co. ....... 139,090 143,462
2,300 Maxim Integrated
Products, Inc.*....... 66,838 71,300
1,100 Novellus Systems,
Inc.*................. 38,940 48,400
7,000 Omron Corp. ............ 129,104 156,171
1,900 SCI Systems, Inc.*...... 67,761 69,588
1,800 Silicon Valley Group,
Inc.*................. 79,667 43,875
1,600 Solectron Corp.*........ 78,283 70,400
3,000 TDK Corp. .............. 142,084 155,606
2,400 Wyle Electronics Co. ... 97,205 83,100
------------ ----------
1,414,924 1,401,17
------------ ----------
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
ENTERTAINMENT -- 1.9%
4,690 Filmes Lusomundo Co. ... $ 58,780 $ 30,847
1,800 King World Productions,
Inc.*................. 75,463 74,475
12,000 Rank Organisation plc... 81,557 88,918
28,000 Resorts World Berhad.... 161,372 159,494
------------ -----------
377,172 353,734
------------ -----------
FINANCIAL SERVICES -- 5.8%
1,600 Alex Brown, Inc. ....... 65,096 83,000
4,100 Bear Stearns Companies,
Inc. ................. 83,821 101,475
1,650 Cie Parisienne De
Reescompte............ 124,312 143,018
530 Cie Bancaire S.A. ...... 52,250 54,388
2,900 Edwards (A.G.), Inc. ... 67,237 72,138
1,600 Golden West
Financial Corp. ...... 83,971 85,800
10,800 Instituto Mobiliare
Italiano S.p.A........ 72,452 74,116
3,600 Lehman Brothers Holding,
Inc. ................. 74,978 96,300
6,000 Nomura Securities Co.
Ltd. ................. 113,296 132,731
3,400 Paine Webber Group,
Inc. ................. 66,079 74,800
1,900 Salomon, Inc. .......... 69,939 71,250
1,400 SunAmerica Inc. ........ 67,109 70,525
----------- -----------
940,540 1,059,541
----------- -----------
FOOD & HOUSEHOLD PRODUCTS -- 1.2%
90 Nestle SA............... 97,039 101,812
6,000 Unilever plc............ 119,071 111,835
------------ -----------
216,110 213,647
------------ -----------
FOREST PRODUCTS & PAPER -- 0.2%
5,200 Grupo Industrial
Durango,
S.A. -- ADR*#......... 69,532 35,750
------------ -----------
HOLDING COMPANIES, DIVERSIFIED -- 2.2%
15,000 Barlow, Ltd. ........... 210,842 192,081
16,500 Benpress Holdings
Corp. -- GDR*++....... 111,250 107,250
19,000 BTR plc................. 102,678 91,584
1,240 Italmobiliare S.p.A..... 40,133 17,788
------------ -----------
464,903 408,703
------------ -----------
INSURANCE -- 4.5%
2,000 American Bankers
Insurance Group,
Inc. ................. 57,750 70,500
1,100 American National
Insurance Co. ........ 71,145 74,250
3,500 Assurances Generales
de France............. 114,955 97,637
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 135
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
INSURANCE (CONTINUED)
2,057 AXA Co. ................ $ 103,414 $ 126,848
3,300 Bankers Life Holding
Corp. ................ 75,480 73,837
1,600 Berkley Corp. .......... 77,221 74,000
5,500 Commercial Union plc.... 52,227 47,897
1,300 Conseco, Inc. .......... 70,008 94,087
3,450 Fremont General
Corp. ................ 81,142 81,506
2,800 Penncorp Financial
Group, Inc. .......... 64,568 88,200
------------ -----------
767,910 828,762
------------ -----------
INVESTMENT COMPANIES -- 1.4%
15,000 Korea-Europe Fund
Ltd. ................. 110,625 121,875
13,000 ROC Taiwan Fund*........ 135,040 134,875
------------ -----------
245,665 256,750
------------ -----------
MACHINERY & MANUFACTURING -- 1.6%
340 Mannesmann AG........... 111,531 124,621
7,000 Mori Seiki Co. ......... 150,381 148,922
380 Orkla A.S. Cl. "A"...... 20,357 17,535
------------ -----------
282,269 291,078
------------ -----------
MEDICAL SUPPLIES -- 0.4%
1,473 Boston Scientific
Corp.*................ 24,908 67,758
------------ -----------
METALS -- DIVERSIFIED -- 1.3%
3,400 Madeco S.A. --ADR#...... 84,783 85,000
29,000 Mitsubishi Materials
Corp. ................ 137,564 156,971
------------ -----------
222,347 241,971
------------ -----------
MINING -- 1.2%
7,000 De Beers Consolidated
Mines, Ltd.+++........ 214,497 224,973
------------ -----------
OIL/GAS - EXPLORATION -- 3.8%
4,000 British Petroleum plc... 25,157 35,048
1,700 Columbia Gas System,
Inc. ................. 74,872 77,988
2,200 Cooper Cameron Corp.*... 77,694 92,400
2,200 Helmerich & Payne,
Inc. ................. 74,511 74,250
8,000 Noble Drilling
Corp.* ............... 79,625 99,000
3,200 Valero Energy Corp. .... 65,286 78,800
1,500 Williams Cos., Inc. .... 65,029 75,562
8,100 YPF Sociedad
Anonima -- ADR#....... 142,953 163,012
------------ -----------
605,127 696,060
------------ -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
PETROCHEMICALS -- 0.7%
90,000 Aromatics (Thailand)
plc*.................. $ 125,889 $ 120,297
------------ -----------
PHARMACEUTICALS -- 1.3%
1,300 Cardinal Health,
Inc. ................. 77,428 83,525
2,000 Glaxo Wellcome plc...... 23,939 25,086
6,000 Yamanouchi
Pharmaceutical Co. ... 135,479 134,425
------------ -----------
236,846 243,036
------------ -----------
PUBLISHING & PRINT -- 2.2%
1,790 Elsevier NV............. 16,370 27,490
41,000 News Corp., Ltd. ....... 238,072 239,960
8,550 Vnu -- Ver Ned Uitgev
Ver Bezit............. 105,791 142,725
------------ -----------
360,233 410,175
------------ -----------
REAL ESTATE -- 3.1%
15,000 Cheung Kong Holdings,
Ltd. ................. 82,038 105,723
40,000 Hong Kong Land Holdings,
Ltd................... 78,517 96,036
20,000 Singapore Land Ltd...... 129,033 146,494
24,000 Sotogrande S.A.*........ 76,353 51,208
12,000 Sun Hung Kai Properties
Ltd. ................. 74,044 107,469
3,450 Vallehermoso S.A........ 60,871 62,180
------------ -----------
500,856 569,110
------------ -----------
RETAIL -- 4.7%
10,000 Argyll Group plc........ 47,330 46,903
80,000 Cifra S.A. de
C.V. -- ADR*#......... 128,400 106,504
14,000 Cia Brasileira de Distr.
Grupo Pao de Acucar --
GDR*++##.............. 150,500 171,500
1,900 COMPUSA, Inc.* ......... 61,389 105,213
21,000 Itochu Corp. ........... 141,774 148,263
7,000 Kingfisher plc.......... 55,629 60,852
2,900 Ross Stores, Inc. ...... 74,080 72,863
2,400 Vendex International
NV.................... 70,387 68,909
2,300 Vons Companies, Inc.*... 42,042 71,587
------------ -----------
771,531 852,594
------------ -----------
SHOES -- 0.5%
1,200 Nike, Inc. Cl. "B"...... 37,086 97,500
------------ -----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 136
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
STEEL -- 1.5%
40,000 Nippon Steel Co. ....... $ 141,818 $ 138,567
49,000 Nippon Kokan Kabushiki
Corp.*................ 129,700 142,530
------------ -----------
271,518 281,097
------------ -----------
TELECOMMUNICATIONS -- 4.4%
6,000 Cable & Wireless plc.... 36,985 48,767
1,700 Glenayre Technologies,
Inc.* . . 60,138 65,025
45,000 PT Indonesian
Satellite -- Foreign
Registered............ 165,359 154,459
50,000 Telecom Corporation of
New Zealand........... 184,265 224,301
32,000 Telecom Italia Mobile
S.p.A................. 38,179 58,275
59,600 Telecom Italia Mobile
S.p.A. -- Drnc.
Risp. ................ 58,100 65,808
1,800 Telecomunicacoes
Brasileiras
S.A. -- ADR#.......... 72,675 91,122
3,000 Telefonos De Mexico
S.A., Cl.
"L" -- ADR#........... 115,085 98,625
------------ -----------
730,786 806,382
------------ -----------
TEXTILES AND APPAREL -- 1.4%
2,400 Liz Claiborne, Inc. .... 67,944 82,200
33,000 Teijin Ltd. ............ 168,174 183,282
------------ -----------
236,118 265,482
------------ -----------
TRANSPORTATION -- 1.6%
2,900 Comair Holdings,
Inc. ................. 73,985 100,775
1,700 Continental Airlines,
Inc. Cl "B"*.......... 78,562 95,837
10,000 Swire Pacific, Ltd. Cl.
"A"................... 81,454 87,941
------------ -----------
234,001 284,553
------------ -----------
UTILITIES -- 3.6%
1,400 Consolidated Natural Gas
Co. . . 62,384 60,900
2,200 Illinova Corp. ......... 65,032 61,875
2,900 Indiana Energy, Inc. ... 76,248 69,600
2,300 National Fuel Gas
Co. .................. 75,749 79,638
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
UTILITIES (CONTINUED)
8,400 Noram Energy Corp. ..... $ 77,754 $ 77,700
3,000 Oneok, Inc. ............ 65,151 71,625
2,600 Pacific Enterprises..... 66,711 67,275
2,400 Peoples Energy Corp. ... 76,503 77,700
3,723 Union Electrica Fenosa
S.A. ................. 17,546 20,401
3,000 Washington Gas Light
Co. .................. 66,247 65,625
------------ -----------
649,325 652,339
------------ -----------
WINE & SPIRITS -- 0.2%
4,500 Grand Metropolitan
plc................... 28,771 29,013
------------ -----------
TOTAL COMMON STOCKS..... 14,963,151 16,322,011
------------ -----------
TOTAL EXCLUDING
SHORT-TERM
INVESTMENTS . . 14,963,151 16,322,011
------------ -----------
SHORT-TERM INVESTMENTS -- 8.3%
1,527,000 Chase Manhattan Bank,
London Time Deposit,
5.375%, due
4/01/1996............. 1,527,000 1,527,000
------------ -----------
TOTAL SHORT-TERM
INVESTMENTS........... 1,527,000 1,527,000
------------ -----------
TOTAL
INVESTMENTS -- 97.4%.. $16,490,151+ 17,849,011
===========
Cash and other assets,
net of
liabilities -- 2.6%... 473,120
-----------
NET ASSETS -- 100.0%.... $18,322,131
==========
* Non-Income Producing Securities.
+ The cost of securities for Federal income tax purposes
is substantially the same.
** See page 16 for Concentration by Country.
# American Depository Receipts.
++ Global Depository Receipts.
## At fair value as determined by the Board of Directors.
+++ Shares represent a unit, consisting of one deferred
share and one depositary receipt.
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 137
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC SMALL CAP FUND
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------- ----------- -----------
<C> <S> <C>
COMMON STOCKS -- 78.6%
AUTO RELATED -- 2.2%
37,400 Metrotrans Corp.* ....... $ 372,781 $ 467,500
50,000 Spartan Motors, Inc. .... 528,133 381,250
----------- -----------
900,914 848,750
----------- -----------
BANKING -- 2.4%
38,950 Sirrom Capital Corp. .... 467,856 890,981
----------- -----------
CHEMICALS -- 4.9%
45,000 Synalloy Corp. .......... 648,005 855,000
55,000 Carbide/Graphite Group, 850,525 990,000
Inc. (The)*............
----------- -----------
1,498,530 1,845,000
----------- -----------
COMMERCIAL SERVICES -- 13.3%
71,300 B.I., Inc.*.............. 520,804 597,138
59,800 Childrens Comprehensive 396,484 642,850
Services, Inc.* .......
84,000 Compucom Systems, 536,390 724,500
Inc.*..................
32,000 Norrell Corp., Inc. ..... 700,799 1,060,000
28,800 Regis Corp............... 517,666 885,600
37,650 Right Management 637,919 1,110,675
Consultants, Co.*......
----------- -----------
3,310,062 5,020,763
----------- -----------
COMPUTER SOFTWARE -- 1.1%
16,000 Micro Systems, Inc.* .... 434,456 400,000
----------- -----------
ELECTRICAL & ELECTRONICS -- 4.8%
40,200 Aseco Corp.*............. 393,224 462,300
40,000 CEM Corp.*............... 522,287 560,000
30,000 Electro Scientific 767,835 558,750
Industries, Inc.*......
38,700 Quad Systems Corp..*..... 248,589 246,712
----------- -----------
1,931,935 1,827,762
----------- -----------
ENTERTAINMENT -- 3.6%
48,300 Speedway Motorsports, 546,231 1,364,475
Inc.*..................
----------- -----------
FINANCIAL SERVICES -- 2.5%
64,700 Amresco, Inc. ........... 774,938 946,238
----------- -----------
FURNITURE/HOME APPLIANCE -- 2.2%
39,200 Aaron Rents, Inc. Cl. 569,951 813,400
"B"....................
----------- -----------
HEALTH CARE PROVIDERS -- 9.8%
94,000 American Healthcorp 885,863 834,250
Inc.*..................
30,000 American Homepatient, 645,865 1,177,500
Inc.* . .
39,000 Renal Treatment Centers, 453,664 926,250
Inc.* . .
36,500 Res-Care, Inc.*.......... 719,563 761,938
----------- -----------
2,704,955 3,699,938
----------- -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ------- ----------- -----------
<C> <S> <C>
INSURANCE -- 2.2%
25,950 Vesta Insurance Group, $ 569,389 $ 846,619
Inc. ..................
----------- -----------
MACHINERY -- 4.9%
47,700 Computational Systems, 702,732 846,675
Inc.* . .
21,450 Roper Industries Inc. ... 760,229 986,700
----------- -----------
1,462,961 1,833,375
----------- -----------
MANUFACTURING -- 4.6%
33,000 Asyst Technologies, 992,717 750,750
Inc.*..................
64,000 Cavalier Homes, Inc. .... 469,480 992,000
----------- -----------
1,462,197 1,742,750
----------- -----------
MEDICAL SUPPLIES -- 0.2%
5,000 Fischer Imaging Corp. ... 66,250 72,500
----------- -----------
METALS -- DIVERSIFIED -- 2.7%
25,000 Wolverine Tube, Inc.*.... 789,560 1,015,625
----------- -----------
OIL -- GAS EXPLORATION -- 1.4%
40,000 Oceaneering 486,863 545,000
International, Inc.*...
----------- -----------
PHARMACEUTICALS -- 1.6%
25,000 Medicis 611,854 600,000
Pharmaceutical*........
----------- -----------
PERSONAL CARE -- 5.5%
45,400 Inbrand Corp.*........... 673,424 1,032,850
34,800 Rexall Sundown, Inc.*.... 513,104 1,048,350
----------- -----------
1,186,528 2,081,200
----------- -----------
PUBLISHING & PRINT -- 1.1%
23,400 Cadmus Communications 570,525 400,725
Corp. .................
----------- -----------
RESTAURANT -- 2.7%
40,300 Daka International, 930,718 1,017,575
Inc.*..................
----------- -----------
SHOES -- 3.0%
44,700 Fuqua Enterprises, 1,011,837 1,145,437
Inc.*..................
----------- -----------
TRANSPORTATION -- AIR -- 1.9%
62,500 Mesaba Holdings Inc. .... 480,625 703,125
----------- -----------
$22,769,135+ $29,661,238
TOTAL
INVESTMENTS -- 78.6%...
==========
8,076,041
Cash and other assets,
net of
liabilities -- 21.4%...
-----------
$37,737,279
NET ASSETS -- 100.0%.....
==========
</TABLE>
* Non-Income Producing Securities
+ The cost of securities for Federal income tax purposes is substantially
the same.
See accompanying notes to financial statements.
12
<PAGE> 138
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C> <C>
COMMON STOCKS -- 95.8%
AUTO RELATED -- 2.7%
9,000 Custom Chrome, Inc.*..... $ 180,540 $ 219,375
5,000 Daimler Benz 246,275 270,625
AG -- ADR# . .
9,400 Metrotrans Corp.*........ 93,125 117,500
19,200 Spartan Motors, Inc. .... 187,119 146,400
----------- -----------
707,059 753,900
----------- -----------
BANKING -- 11.0%
4,400 Ahmanson (H.F.) & Co. ... 95,552 106,700
3,100 Amsouth Bancorporation... 121,086 120,513
1,900 Astoria Financial
Corp. ................. 60,677 96,663
3,000 Banco Bilbao Vizcaya --
ADR#................... 67,417 111,375
7,800 Corp Bancaria Espana --
ADR#................... 166,218 162,825
2,400 First American Corp.
Tennessee ............. 108,029 106,800
9,200 First Bell Bancorp,
Inc. .................. 112,590 126,500
6,500 First Mutual Bancorp,
Inc. .................. 83,077 83,687
4,000 First Security Corp. .... 111,240 111,000
5,900 Frankfort First Bancorp,
Inc. .................. 74,004 83,338
14,600 F.S.F. Financial
Corp. ................. 187,975 184,325
13,000 Glendale Federal Bank
FSB*................... 126,030 235,625
5,500 GP Financial Corp. ...... 132,055 151,250
8,140 IBS Financial Corp. ..... 69,819 117,013
6,000 Industrial Bancorp,
Inc. .................. 75,042 91,500
13,400 Instituto Mobiliare
Italiano -- ADR#....... 251,891 278,050
2,400 Morgan (J.P.) & Co. ..... 146,444 199,200
3,400 MLF Bancorp, Inc......... 47,804 81,175
5,900 Peoples Bank of
Bridgeport............. 120,441 126,850
14,000 Sirrom Capital Corp. .... 163,688 320,250
4,000 Washington Mutual,
Inc. .................. 119,846 119,000
5,400 Westerfed Financial
Corp. ................. 73,224 80,325
----------- -----------
2,514,149 3,093,964
----------- -----------
BREWERY -- 0.4%
5,500 Coors (Adolph) Company,
Inc. Cl. "B"........... 124,644 98,313
----------- -----------
BUILDING MATERIALS &
COMPONENTS -- 0.5%
2,000 Texas Industries,
Inc. .................. 120,638 127,250
----------- -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
CHEMICALS -- 1.9%
12,600 Carbide/Graphite Group,
Inc. (The)*............ $ 212,840 $ 226,800
16,000 Synalloy Corp. .......... 205,925 304,000
----------- -----------
418,765 530,800
----------- -----------
COMMERCIAL SERVICES -- 6.1%
20,000 B.I., Inc.*.............. 143,153 167,500
9,900 Children's Comprehensive
Services, Inc.*........ 54,598 106,425
30,000 Compucom Systems,
Inc.*.................. 180,000 258,750
9,000 Norrell Corp. ........... 175,500 298,125
11,900 Regis Corp. ............. 181,838 365,925
12,150 Right Management
Consultants, Inc.*..... 169,263 358,425
3,100 Robert Half
International, Inc.*... 68,730 150,738
----------- -----------
973,082 1,705,888
----------- -----------
COMPUTER EQUIPMENT -- 3.3%
2,500 Adaptec, Inc.*........... 82,028 120,625
4,800 Cognex Corp.*............ 93,144 123,000
4,300 Gateway 2000, Inc.*...... 91,902 119,863
3,800 Komag, Inc.*............. 122,972 92,150
3,400 Parametric Technology
Corp.* ................ 114,344 133,025
2,800 Seagate Technology,
Inc.*.................. 71,074 153,300
1,400 U.S. Robotics Corp.*..... 98,509 180,950
----------- -----------
673,973 922,913
----------- -----------
COMPUTER SOFTWARE -- 0.8%
2,150 McAfee Associates,
Inc.*.................. 74,383 117,713
4,000 Micros Systems, Inc.*.... 105,214 100,000
----------- -----------
179,597 217,713
----------- -----------
ELECTRICAL & ELECTRONICS -- 11.9%
25,000 Alcatel
Alsthom -- ADR#........ 463,875 462,500
1,600 Altera Corp.*............ 109,696 89,400
13,000 Aseco Corp.*............. 105,500 149,500
3,900 Atmel Corp.*............. 61,891 99,450
2,500 Avnet, Inc. ............. 125,026 120,625
1,600 BBC Brown Boveri,
Ltd. -- ADR#........... 131,896 194,483
16,000 CEM Corp.*............... 210,390 224,000
13,100 Checkmate Electronics,
Inc.*.................. 118,638 170,300
8,600 Cypress Semiconductor
Corp.* ................ 92,921 101,050
8,500 Electro Scientific
Industries Inc.*....... 182,500 158,312
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 139
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
ELECTRICAL & ELECTRONICS (CONTINUED)
4,700 Hitachi, Ltd. ........... $ 478,811 $ 458,838
5,800 Int'l Rectifier
Corp.* ................ 134,374 104,400
3,600 Kent Electronics
Corp.*................. 119,180 127,350
2,700 Lattice Semiconductor
Corp.*................. 103,424 76,613
2,500 Linear Technology
Corp. ................. 95,625 104,375
3,500 Maxim Integrated
Products............... 126,637 108,500
1,600 Novellus Systems,
Inc.*.................. 75,125 71,200
20,000 Quad Systems Corp.*...... 130,700 127,500
2,800 Sci Systems, Inc.*....... 99,868 102,550
2,300 Silicon Valley Group,
Inc.*.................. 101,815 56,063
2,500 Solectron Corp.*......... 122,317 110,000
3,400 Wyle Electronics Co. .... 129,406 117,725
----------- -----------
3,319,615 3,334,734
----------- -----------
ENTERTAINMENT -- 2.0%
2,700 King World Productions,
Inc.* . . 113,195 111,713
16,000 Speedway Motorsports,
Inc.*.................. 144,480 452,000
----------- -----------
257,675 563,713
----------- -----------
FINANCIAL SERVICES -- 4.7%
2,200 Alex Brown, Inc. ........ 112,332 114,125
22,000 Ampresco, Inc. .......... 270,450 321,750
6,000 Bear Stearns Cos.,
Inc. .................. 122,190 148,500
5,000 Edwards (A.G.), Inc. .... 117,470 124,375
2,400 Golden West Financial
Corp. . . 125,957 128,700
5,500 Lehman Brothers Holding,
Inc. .................. 115,043 147,125
4,900 Paine Webber Group,
Inc. .................. 95,232 107,800
3,000 Salomon, Inc. ........... 111,507 112,500
2,200 Sunamerica, Inc. ........ 105,457 110,825
----------- -----------
1,175,638 1,315,700
----------- -----------
FOOD & HOUSEHOLD PRODUCTS -- 2.7%
15,000 Groupe Danone ADR#....... 479,235 459,974
5,200 Nestle S.A. -- ADR#...... 233,477 293,103
----------- -----------
712,712 753,077
----------- -----------
FURNITURE/HOME APPLIANCE -- 1.2%
16,000 Aaron Rents, Inc. Cl.
"B".................... 228,637 332,000
----------- -----------
HOMEBUILDERS -- 1.4%
2,900 Centex Corp. ............ 103,619 89,900
7,000 Kaufman & Broad Home
Corp. ................. 113,597 112,000
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
HOMEBUILDERS (CONTINUED)
4,300 Lennar Corp. ............ $ 110,953 $ 106,963
3,300 Pulte Corp. ............. 108,948 88,688
----------- -----------
437,117 397,551
----------- -----------
HEALTH CARE PROVIDERS -- 3.9%
29,000 American Healthcorp.,
Inc.*.................. 275,500 257,375
9,000 American Homepatient,
Inc.* . . 179,000 353,250
12,000 Renal Treatment Centers,
Inc.* . . 138,133 285,000
9,900 Res -- Care, Inc.*....... 199,931 206,663
----------- -----------
792,564 1,102,288
----------- -----------
INSURANCE -- 6.2%
3,100 American Bankers
Insurance Group,
Inc. .................. 92,924 109,275
1,500 American National
Insurance Co. ......... 93,693 101,250
4,800 Bankers Life Holding
Corp. ................. 109,815 107,400
2,300 Berkley Corp. ........... 110,879 106,375
1,900 Conseco, Inc. ........... 102,319 137,513
5,250 Fremont General Corp. ... 123,381 124,031
4,100 Lincoln National
Corp. ................. 148,982 208,075
2,800 Loews Corp............... 123,409 211,750
4,100 Penncorp Financial Group,
Inc. .................. 113,491 129,150
5,600 Safeco Corp. ............ 158,493 187,600
9,750 Vesta Insurance Group,
Inc. .................. 204,567 318,094
----------- -----------
1,381,953 1,740,513
----------- -----------
MANUFACTURING -- 5.3%
10,000 Asyst Technologies,
Inc.*.................. 298,713 227,500
22,500 Cavalier Homes, Inc. .... 146,891 348,750
11,750 Computational Systems,
Inc.* . . 171,844 208,563
7,000 Roper Industries,
Inc. .................. 241,500 322,000
3,400 Seimens AG -- ADR#....... 329,700 374,225
----------- -----------
1,188,648 1,481,038
----------- -----------
MEDICAL SUPPLIES -- 0.4%
2,256 Boston Scientific
Corp.*................. 38,148 103,776
----------- -----------
METALS -- DIVERSIFIED -- 1.0%
7,000 Wolverine Tube, Inc.*.... 196,188 284,375
------------ -----------
MULTI-INDUSTRY -- 0.6%
23,000 Jardine Matheson Holdings
Ltd. -- ADR#........... 172,690 179,400
----------- -----------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 140
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
OIL/GAS - EXPLORATION -- 5.4%
2,500 Columbia Gas............. $ 110,106 $ 114,688
3,200 Cooper Cameron Corp.*.... 112,881 134,400
7,300 Elf Aquitane -- ADR#..... 255,988 247,288
3,300 Helmerich & Payne........ 111,766 111,375
11,700 Noble Drilling Corp.*.... 116,438 144,788
7,800 Repsol S.A. -- ADR#...... 238,093 291,525
4,700 Valero Energy Corp. ..... 95,906 115,737
2,300 Williams Cos. Inc. ...... 99,691 115,861
11,400 YPF Sociedad Anonima --
ADR#................... 221,847 229,425
----------- -----------
1,362,716 1,505,087
----------- -----------
PERSONAL CARE -- 2.4%
12,500 Inbrand Corp.*........... 172,720 284,375
13,000 Rexall Sundown, Inc.*.... 168,938 391,625
----------- -----------
341,658 676,000
----------- -----------
PUBLISHING & PRINTING -- 0.7%
10,550 Cadmus Communications
Corp. ................. 255,284 180,669
----------- -----------
PHARMACEUTICALS -- 1.0%
1,900 Cardinal Health, Inc. ... 113,163 122,075
7,000 Medicis Pharmaceutical
Corp.* . . 175,000 168,000
----------- -----------
288,163 290,075
----------- -----------
RESTAURANTS -- 1.1%
12,000 Daka International,
Inc.*.................. 218,750 303,000
----------- -----------
RETAIL -- 2.6%
2,700 COMPUSA, Inc.*........... 93,477 149,512
4,200 Ross Stores, Inc. ....... 107,288 105,525
3,500 Vons Companies, Inc.*.... 63,975 108,936
23,000 Woolworth Corp.*......... 327,968 359,375
----------- -----------
592,708 723,348
----------- -----------
SHOES -- 3.7%
11,800 Fuqua Enterprises,
Inc.*.................. 282,613 302,374
1,800 Nike, Inc. Cl. "B"....... 69,775 146,250
17,200 Reebok International, 502,471 475,150
Ltd. ..................
14,000 Stride Rite Corp. ....... 170,252 127,750
----------- -----------
1,025,111 1,051,524
----------- -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
TELECOMMUNICATIONS -- 6.2%
2,600 Glenayre Technologies,
Inc.*.................. $ 91,975 $ 99,450
14,800 Stet-Societa Finanziaria
Telefonica
P.A. -- ADR#........... 439,603 410,591
15,700 Tele Danmark
AS -- ADR#............. 421,759 406,236
9,000 Telefonica de Espana --
ADR#................... 353,115 427,500
12,100 Telefonos de Mexico S.A.
Cl. "L" -- ADR#........ 455,613 399,300
----------- -----------
1,762,065 1,743,077
----------- -----------
TEXTILES & APPAREL -- 0.4%
3,600 Liz Claiborne, Inc. ..... 101,916 123,300
----------- -----------
TRANSPORTATION -- 1.0%
4,300 Comair Holdings, Inc. ... 109,702 149,425
2,400 Continental Airlines,
Inc. Cl. "B"........... 91,344 135,300
----------- -----------
201,046 284,725
----------- -----------
UTILITIES -- 3.3%
2,100 Consolidated Natural Gas
Co. ................... 95,676 91,350
3,300 Illinova Corp. .......... 97,548 92,812
4,200 Indiana Energy, Inc. .... 110,427 100,800
3,900 Pacific Enterprises...... 97,809 100,912
3,600 Peoples Energy Corp. .... 114,798 116,550
3,400 National Fuel Gas Co. ... 112,002 117,725
12,300 Noram Energy Corp. ...... 113,855 113,775
4,300 Oneok, Inc. ............. 93,342 102,661
4,500 Washington Gas Light
Co. ................... 99,370 98,437
----------- -----------
934,827 935,022
----------- -----------
TOTAL
INVESTMENTS -- 95.8% . . $22,697,736+ $26,854,733
==========
CASH AND OTHER ASSETS,
NET OF
LIABILITIES -- 4.2%.... 1,188,060
-----------
NET ASSETS -- 100.0%..... $28,042,793
==========
+ The cost of securities for federal income tax purposes
is substantially the same.
* Non-income producing security.
# American Depository Receipts.
** See page 16 for Concentration by Country.
</TABLE>
See accompanying notes to financial statements.
15
<PAGE> 141
ESC STRATEGIC FUNDS, INC.
Concentration by Country
<TABLE>
<CAPTION>
INCOME FUND GLOBAL EQUITY FUND APPRECIATION FUND
COUNTRY MARKET VALUE MARKET VALUE MARKET VALUE
------------ ------------------ ------------------
<S> <C> <C> <C>
Argentina............................................... $ 1,533,255 $ 327,262 $ 229,425
Australia............................................... 216,855 239,960 --
Belgium................................................. 267,776 -- --
Brazil.................................................. -- 262,622 --
Canada.................................................. 325,756 -- --
Chile................................................... -- 114,950 --
Czech Republic.......................................... -- 153,258 --
Denmark................................................. 658,933 -- 406,236
France.................................................. 1,248,226 421,890 1,169,762
Germany................................................. 1,997,734 220,766 644,850
Great Britain........................................... 1,098,001 1,011,482 --
Hong Kong............................................... -- 301,132 --
India................................................... -- 250,401 --
Indonesia............................................... -- 154,459 --
Italy................................................... 891,289 345,024 688,641
Japan................................................... 2,567,775 2,773,586 --
Malaysia................................................ -- 327,532 --
Mexico.................................................. 380,625 325,879 399,300
Netherlands............................................. 286,056 239,123 --
New Zealand............................................. -- 224,301 --
Norway.................................................. -- 155,031 --
Philippines............................................. -- 187,500 --
Poland.................................................. -- 133,681 --
Portugal................................................ -- 111,941 --
Singapore............................................... -- 476,210 179,400
South Africa............................................ -- 417,054 --
Spain................................................... 604,535 334,728 993,225
Switzerland............................................. -- 101,812 487,586
Thailand................................................ -- 448,218 --
United States........................................... 20,865,771 7,789,209 21,656,308
----------- ----------- -----------
Total Investments....................................... $32,942,587 $ 17,849,011 $ 26,854,733
=========== =========== ===========
</TABLE>
* CREDIT RATINGS (unaudited)
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
-------- ------------------
<C> <C> <S>
Aaa AAA Instrument judged to be of the highest quality
and carrying the smallest amount of investment
risk.
Aa AA Instrument judged to be of high quality by all
standards.
A A Instrument judged to be adequate by all
standards.
Baa BBB Instrument judged to be of moderate quality by
all standards.
Ba-B BB-B Instrument judged to have speculative elements,
and generally lack desirable characteristics.
Caa-C CCC-C Instrument judged to be predominately speculative
with respect to pay interest and repay
principal in accordance with terms of
obligation.
NR NR Not Rated. In the opinion of the Investment
Adviser, instrument judged to be of comparable
investment quality to rated securities which
may be purchased by the Fund.
</TABLE>
For items possessing the strongest investment attributes of their
category, Moody's gives that letter rating followed by a number. The
Standard & Poor's ratings may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
U.S. Government Issues have an assumed rating of AAA/Aaa.
16
<PAGE> 142
ESC STRATEGIC FUNDS, INC.
Statement of Assets and Liabilities
March 31, 1996
<TABLE>
<CAPTION>
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at value (cost $13,094,108; $32,643,669;
$14,963,151; $22,769,135; $22,697,736,
respectively)...................................... $13,150,565 $32,327,587 $16,322,011 $29,661,238 $26,854,733
Short-term investments (cost $0; $615,000;
$1,527,000; $0; $0, respectively).................. 0 615,000 1,527,000 0 0
Cash................................................. 365,521 4,635,507 556,614 7,455,021 1,240,766
Foreign Cash (cost $0; $17,074; $4,343; $0; $0)...... 0 17,020 4,302 0 0
Dividends and interest receivable.................... 208,517 786,982 25,972 4,740 13,428
Receivable for investments sold...................... 0 0 184,832 475,876 0
Receivable for fund shares sold...................... 2,452 29,525 30,982 341,178 35,551
Receivable from sponsor.............................. 10,811 0 0 0 0
Withholding tax reclaim.............................. 0 0 486 0 325
Unamortized organizational expenses (Note 2e)........ 27,042 27,259 27,452 34,677 28,781
------------ ----------- ----------- ----------- ------------
Total Assets................................... 13,764,908 38,438,880 18,679,651 37,972,730 28,173,584
------------ ----------- ----------- ----------- ------------
LIABILITIES
Payable for securities purchased..................... 488,625 0 288,581 105,795 54,060
Payable for fund shares repurchased.................. 0 0 0 8,699 0
Advisory fee payable (Note 3)........................ 0 32,444 15,147 28,436 11,800
Administrative services fee payable (Note 3)......... 840 4,867 2,272 4,265 3,540
Transfer agent fee payable (Note 3).................. 548 1,367 1,843 4,548 1,844
12b-1 Distribution fee payable (Note 3).............. 3,000 12,000 12,000 24,000 21,000
Other accrued expenses............................... 31,224 51,056 37,677 59,708 38,547
------------ ----------- ----------- ----------- ------------
Total Liabilities.............................. 524,237 101,734 357,520 235,451 130,791
------------ ----------- ----------- ----------- ------------
NET ASSETS............................................. $13,240,671 $38,337,146 $18,322,131 $37,737,279 $28,042,793
=========== =========== =========== =========== ===========
Net Assets Consist of
Capital Stock........................................ $ 1,324 $ 3,876 $ 1,658 $ 2,381 $ 2,156
Additional paid-in capital........................... 13,193,975 38,512,147 16,784,009 29,034,316 22,850,325
Accumulated undistributed net investment income/
(loss) on investments.............................. 0 509,096 83,525 0 0
Accumulated undistributed realized gain/(loss) on
investments and foreign currencies................. (11,085) (372,635) 94,120 1,808,479 1,033,315
Net unrealized appreciation/(depreciation) on
investments
and foreign currencies translations................ 56,457 (315,338) 1,358,819 6,892,103 4,156,997
------------ ----------- ----------- ----------- ------------
NET ASSETS........................................... $13,240,671 $38,337,146 $18,322,131 $37,737,279 $28,042,793
=========== =========== =========== =========== ===========
SHARES OF BENEFICIAL INTEREST
Class A:
Shares of beneficial interest outstanding.......... 1,323,793 3,730,042 1,321,204 1,816,310 1,963,842
========= ========= ========= ========= =========
Net asset value per share outstanding.............. $10.00 $9.89 $11.08 $15.88 $13.02
====== ===== ====== ====== ======
Maximum offering price per share (N/A; $9.89/.955;
$11.08/.955; $15.88/.955; $13.02/.955,
respectively).................................... $10.00 $10.36 $11.60 $16.63 $13.63
====== ====== ====== ====== ======
Class D:
Shares of beneficial interest outstanding.......... N/A 145,876 336,540 564,447 192,247
==== ======= ======= ======= =======
Net asset value per share outstanding.............. N/A $9.89 $10.95 $15.76 $12.91
==== ===== ====== ====== ======
Maximum offering price per share (N/A; $9.89/.985;
$10.95/.985; $15.76/.985; $12.91/.985,
respectively).................................... N/A $10.04 $11.12 $16.00 $13.11
==== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
17
<PAGE> 143
ESC STRATEGIC FUNDS, INC.
Statement of Operations
For Year Ended March 31, 1996
<TABLE>
<CAPTION>
ASSET
PRESERVATION INCOME GLOBAL EQUITY SMALL CAP APPRECIATION
------------ ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest (net of withholding tax of $0,
$13,818, $0, $0, $0, respectively)........ $820,672 $2,792,331 $ 88,950 $ 191,996 $ 84,775
Dividends (net of withholding tax
of $0, $0, $17,377, $0, $1,129,
respectively)............................. 0 43,125 227,582 80,840 296,001
------------ ---------- ------------- ---------- ------------
820,672 2,835,456 316,532 272,836 380,776
------------ ---------- ------------- ---------- ------------
Expenses:
Advisory (Note 3)........................... 63,894 373,088 156,881 224,932 236,656
Fund Accounting (Note 3).................... 34,056 40,222 39,554 31,533 39,370
Legal....................................... 7,069 17,849 8,090 9,995 12,100
Administrative services (Note 3)............ 19,168 55,963 23,532 33,740 35,498
Reports to shareholders..................... 2,790 6,712 7,562 27,900 11,200
Audit....................................... 16,000 16,000 19,000 16,000 16,000
Registration................................ 7,031 23,173 17,433 27,493 24,013
Custodian................................... 13,226 28,240 43,821 21,231 24,032
12b-1 Distribution fee Class A (Note 3)..... 10,557 32,859 16,888 40,962 55,323
12b-1 Distribution fee Class D (Note 3)..... 0 10,400 27,060 36,932 15,516
Directors................................... 4,000 4,000 4,000 4,000 4,000
Transfer agent fees and expenses (Note 3)... 11,796 14,942 16,307 23,536 16,395
Amortization of organizational expenses..... 8,842 8,843 8,843 10,910 8,842
Insurance................................... 1,965 5,668 1,982 1,965 2,724
Miscellaneous............................... 1,498 34,621 2,524 13,370 5,096
------------ ---------- ------------- ---------- ------------
Total expenses before waivers............... 201,892 672,580 393,477 524,499 506,765
Less: Expenses waived/reimbursed by Adviser,
Administrator and Transfer Agent....... (85,363) (10,000) (10,000) (35,762) (21,800)
Expenses paid by third parties........... (1,434) (5,990) (514) (8,890) (2,924)
------------ ---------- ------------- ---------- ------------
Net expenses................................ 115,095 656,590 382,963 479,847 482,041
------------ ---------- ------------- ---------- ------------
Net investment income/(loss).................. 705,577 2,178,866 (66,431) (207,011) (101,265)
------------ ---------- ------------- ---------- ------------
Realized gain on investments.................. 1,024 419,866 849,710 2,358,416 1,695,907
Net realized gain on foreign currencies
transactions and assets and liabilities
denominated in foreign currencies........... 0 321,634 49,817 0 0
Change in unrealized
appreciation/(depreciation) of
investments................................. 128,200 102,858 1,135,281 6,353,643 3,346,495
Change in net unrealized gain/(loss) on
foreign currencies translation.............. 0 (388,539) (942) 0 0
------------ ---------- ------------- ---------- ------------
Net realized/unrealized gain on investments
and foreign currencies transactions......... 129,224 455,819 2,033,866 8,712,059 5,042,402
------------ ---------- ------------- ---------- ------------
Net increase in net assets resulting from
operations.................................. $834,801 $2,634,685 $ 1,967,435 $8,505,048 $4,941,137
=========== ========== ============ ========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE> 144
ESC STRATEGIC FUNDS, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
ASSET PRESERVATION INCOME
------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income/(loss)................ $ 705,577 $ 496,552 $ 2,178,866 $ 1,753,017
Net realized gain/(loss) on investments and
foreign currencies transactions........... 1,024 (23,866) 741,500 182,152
Change in unrealized
appreciation/(depreciation) of investments
and foreign currencies transactions....... 128,200 (71,743) (285,681) (29,657)
-------------- -------------- -------------- --------------
Net increase/(decrease) in net assets
resulting from operations................... 834,801 400,943 2,634,685 1,905,512
-------------- -------------- -------------- --------------
Distributions to shareholders from net
investment income:
Class A..................................... (705,577) (496,552) (2,104,878) (1,712,325)
Class D..................................... 0 0 (73,988) (40,688)
-------------- -------------- -------------- --------------
(705,577) (496,552) (2,178,866) (1,753,013)
-------------- -------------- -------------- --------------
Distributions to shareholders from realized
gains:
Class A..................................... 0 0 (741,974) (25,981)
Class D..................................... 0 0 (28,940) (837)
-------------- -------------- -------------- --------------
0 0 (770,914) (26,818)
-------------- -------------- -------------- --------------
Decrease in net assets resulting from
distributions to shareholders............. (705,577) (496,552) (2,949,780) (1,779,831)
-------------- -------------- -------------- --------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A................................... 1,045,974 12,524,556 4,281,407 35,978,038
Class D................................... 0 0 307,314 1,181,686
-------------- -------------- -------------- --------------
1,045,974 12,524,556 4,588,721 37,159,724
-------------- -------------- -------------- --------------
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions:
Class A................................... 705,053 493,006 2,614,384 1,629,846
Class D................................... 0 0 67,280 31,401
-------------- -------------- -------------- --------------
705,053 493,006 2,681,664 1,661,247
-------------- -------------- -------------- --------------
Net asset value of shares redeemed:
Class A................................... (563,282) (1,005,947) (2,073,972) (5,347,616)
Class D................................... 0 0 (158,592) 0
-------------- -------------- -------------- --------------
(563,282) (1,005,947) (2,232,564) (5,347,616)
-------------- -------------- -------------- --------------
Net increase in net assets from capital
share transactions...................... 1,187,745 12,011,615 5,037,821 33,473,355
-------------- -------------- -------------- --------------
Total increase in net assets.................. 1,316,969 11,916,006 4,722,726 33,599,036
Net Assets:
Beginning of year........................... 11,923,702 7,696 33,614,420 15,384
-------------- -------------- -------------- --------------
End of year................................. $ 13,240,671 $ 11,923,702 $ 38,337,146 $ 33,614,420
============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 145
ESC STRATEGIC FUNDS, INC.
Statement of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
GLOBAL EQUITY SMALL CAP
------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income/(loss)................ $ (66,431) $ (71,034) $ (207,011) $ (38,590)
Net realized gain/(loss) on investments and
foreign currencies transactions........... 899,527 (255,749) 2,358,416 734,152
Change in unrealized
appreciation/(depreciation) of investments
and foreign currencies transactions....... 1,134,339 224,480 6,353,643 538,460
-------------- -------------- -------------- --------------
Net increase/(decrease) in net assets
resulting from operations................... 1,967,435 (102,303) 8,505,048 1,234,022
-------------- -------------- -------------- --------------
Distributions to shareholders from net
investment income:
Class A..................................... 0 (13,738) 0 0
Class D..................................... 0 (2,281) 0 0
-------------- -------------- -------------- --------------
0 (16,019)* 0 0
-------------- -------------- -------------- --------------
Distributions to shareholders from realized
gains:
Class A..................................... (282,697) 0 (648,997) (165,997)
Class D..................................... (75,804) 0 (188,574) (48,635)
-------------- -------------- -------------- --------------
(358,501) 0 (837,571) (214,632)
-------------- -------------- -------------- --------------
Decrease in net assets resulting from
distributions to shareholders............. (358,501) (16,019) (837,571) (214,632)
-------------- -------------- -------------- --------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A................................... 4,242,822 9,446,593 14,484,625 7,982,612
Class D................................... 419,411 3,411,563 3,972,125 3,244,649
-------------- -------------- -------------- --------------
4,662,233 12,858,156 18,456,750 11,227,261
-------------- -------------- -------------- --------------
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions:
Class A................................... 210,986 11,265 555,664 137,196
Class D................................... 77,940 1,399 186,118 48,033
-------------- -------------- -------------- --------------
288,926 12,664 741,782 185,229
-------------- -------------- -------------- --------------
Net asset value of shares redeemed:
Class A................................... (242,681) (161,554) (887,112) (134,515)
Class D................................... (530,488) (71,121) (393,753) (160,614)
-------------- -------------- -------------- --------------
(773,169) (232,675) (1,280,865) (295,129)
-------------- -------------- -------------- --------------
Net increase in net assets from capital
share transactions...................... 4,177,990 12,638,145 17,917,667 11,117,361
-------------- -------------- -------------- --------------
Total increase in net assets.................. 5,786,924 12,519,823 25,585,144 12,136,751
Net Assets:
Beginning of year........................... 12,535,207 15,384 12,152,135 15,384
-------------- -------------- -------------- --------------
End of year................................. $ 18,322,131 $ 12,535,207 $ 37,737,279 $ 12,152,135
============== ============== ============== ==============
</TABLE>
* Represents distribution in excess of net investment income.
See accompanying notes to financial statements.
20
<PAGE> 146
ESC STRATEGIC FUNDS, INC.
Statement of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
APPRECIATION
-------------------------------
YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Operations:
Net investment (loss)................................................... $ (101,265) $ (7,090)
Net realized gain on investments and foreign currencies transactions.... 1,695,907 145,295
Change in unrealized appreciation/(depreciation) of investments and
foreign
currencies transactions............................................... 3,346,495 810,502
----------- -----------
Net increase/(decrease) in net assets resulting from operations........... 4,941,137 948,707
----------- -----------
Distributions to shareholders from net investment income:
Class A................................................................. 0 0
Class D................................................................. 0 0
----------- -----------
0 0
----------- -----------
Distributions to shareholders from realized gains:
Class A................................................................. (572,885) (78,778)
Class D................................................................. (50,608) (6,832)
----------- -----------
(623,493) (85,610)
----------- -----------
Decrease in net assets resulting from distributions to shareholders..... (623,493) (85,610)
----------- -----------
Capital Share Transactions:
Proceeds from sales of shares:
Class A............................................................... 8,089,429 14,310,886
Class D............................................................... 669,839 1,616,586
----------- -----------
8,759,268 15,927,472
----------- -----------
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions:
Class A............................................................... 495,951 69,925
Class D............................................................... 49,839 6,469
----------- -----------
545,790 76,394
----------- -----------
Net asset value of shares redeemed:
Class A............................................................... (2,076,796) (57,078)
Class D............................................................... (322,285) (6,097)
----------- -----------
(2,399,081) (63,175)
----------- -----------
Net increase in net assets from capital share transactions............ 6,905,977 15,940,691
----------- -----------
Total increase in net assets.............................................. 11,223,621 16,803,788
Net Assets:
Beginning of year....................................................... 16,819,172 15,384
----------- -----------
End of year............................................................. $ 28,042,793 $ 16,819,172
=========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE> 147
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- March 31, 1996
1. DESCRIPTION. The ESC Strategic Funds, Inc. (the "Company") was
incorporated in Maryland on November 24, 1993. The Company currently comprises
five portfolios, ESC Strategic Asset Preservation (commencement date April 25,
1994), ESC Strategic Income (commencement date May 4, 1994), ESC Strategic
Global Equity (commencement date May 12, 1994), ESC Strategic Small Cap
(commencement date June 8, 1994), ESC Strategic Appreciation (commencement date
July 6, 1994) (collectively the "Funds"). The Company is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Each Fund, with the exception of the Small Cap
Fund, operates as a diversified fund. The Small Cap Fund operates as a
non-diversified fund. The Company's Articles of Incorporation authorize the
issuance of two classes of common stock designated as Class A and Class D for
each Fund, except for the Asset Preservation Fund, which shall only have Class A
Shares. Class A shares are offered with a maximum front-end sales charge of
4.50%, which may be reduced or waived in certain cases. 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 a front-end sales charge of 1.50% 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. Prior to November 1, 1995, the 1.50% sales load
on Class D shares was being waived. The Asset Preservation Fund offers only one
class of shares with no front-end sales charge and a Service and Distribution
Fee calculated at an annual rate of up to 0.25% of the average daily value of
its net assets. The Company's Board of Directors may, in the future, authorize
the issuance of additional classes of capital stock for the Funds.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies followed by the Funds:
A. Portfolio Valuation. Investments in securities (including options
and financial futures) are valued at the last sales price on the securities
exchange or the NASDAQ National Market System on which such securities are
primarily traded or, if there are no trades, at the current bid price, as
of 4:15 p.m. eastern time. Over-the-counter securities, or securities for
which there were no transactions, are valued at the closing bid price,
except for open short positions, when the asked price is used. Bid price is
used when no asked price is available. 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. 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. Short-term
securities which mature in 60 days or less are valued at amortized cost, if
their terms to maturity at purchase were 60 days or less, or by amortizing
their value on the 61st day prior to maturity, if their original term to
maturity at purchase exceeded 60 days.
B. Securities transactions and investment income. Securities
transactions are recorded on a trade date basis. Realized gains and losses
from securities transactions are recorded on the identified cost basis.
Dividend income is recognized on the ex-dividend date and interest income,
including amortization of premium and accretion of discount on investments,
is accrued daily as earned.
C. Dividend and Capital Gain Distributions to
Shareholders. Distributions to shareholders are recorded on the
ex-dividend date. The amount of dividends and distributions are determined
in accordance with federal income tax regulations which may differ from
generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. Dividends and distributions
which exceed net investment income and net realized capital gains for
financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of
net realized capital gains.
22
<PAGE> 148
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
For the year ended March 31, 1996, the reclassification arising from
permanent book/tax differences resulted in increases (decreases) to the
components of net assets as follows:
<TABLE>
<CAPTION>
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Accumulated undistributed net
investment income/(loss) on
investments...................... $ (867) $ 360,285 $ 149,956 $ 207,011 $101,265
Accumulated undistributed net
realized gain/(loss) on
investments...................... 7,514 (354,775) (152,039) (199,439) (95,759)
Additional paid-in capital......... (6,647) (5,510) 2,083 (7,572) (5,506)
</TABLE>
Permanent book/tax differences are primarily attributable to
non-deductible organization costs, foreign exchange gains/losses and net
operating losses.
D. Federal income taxes. It is the policy of each of the Funds to
qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. By so qualifying, the Funds will
not be subject to Federal income taxes to the extent that they distribute
all of their taxable and tax-exempt income for the fiscal year. The Funds
also intend to meet the distribution requirements to avoid the payment of
an excise tax. Accordingly, no provision for taxes is recorded.
E. Organizational expenses. Costs incurred in connection with the
organization and initial registration of the Funds have been deferred and
are being amortized on a straightline basis over sixty months beginning
with each Fund's commencement of operations. In the event any of the
initial shares of the Funds are redeemed during the amortization period,
the redemption proceeds will be reduced by a pro rata portion of any
unamortized organization expenses in the proportion as the number of shares
being redeemed bears to the number of initial shares outstanding at the
time of redemption.
F. Determination of net asset value and calculation of
expenses. Expenses directly attributable to a Fund are charged to that
Fund. Other expenses are allocated proportionately among each Fund in
relation to the net assets of each Fund or on another reasonable basis. In
calculating net asset value per share of each class, investment income,
realized and unrealized gains and losses, and expenses other than class
specific expenses are allocated daily to each class of shares based upon
the proportion of net assets of each class at the beginning of each day.
Distribution expenses are solely borne by the class incurring the expense.
G. Foreign Exchange Transactions. The books and records of the Fund
are maintained in U.S. dollars non-U.S. dollar denominated amounts are
translated into U.S. dollars as follows with the resultant exchange gains
and losses recorded in the Statement of Operations:
(i) market value of investment securities and other assets and
liabilities at the exchange rate on the valuation date,
(ii) purchases and sales of investment securities, income and
expenses at the exchange rate prevailing on the respective date of such
transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, currency gains and losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Funds' books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses
23
<PAGE> 149
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
arise from changes in the value of the assets and liabilities other than
investments in securities at year end, resulting from changes in the
foreign exchange rate.
H. Forward Foreign Exchange Contracts. A forward foreign exchange
contract is a commitment to sell a foreign currency at a future date at a
negotiated exchange rate. The Funds bear the market risk which arises from
possible changes in foreign exchange values. Risks may arise from the
potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of the foreign currency
relative to the U.S. dollar. The gain or loss from the difference between
the cost or original contracts and the amount realized upon the closing of
such contracts is included in net realized gain on foreign exchange.
I. Use of Estimates. Estimates and assumptions are required to be
made regarding assets, liabilities, and changes in net assets resulting
from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ from these
amounts.
J. Other. The Funds maintain cash balances with their custodian and
receive a reduction of their custody fees and expenses for the amount of
interest earned on such uninvested cash balances. For financial reporting
purposes for the year ended March 31, 1996, custodian fees and expenses
paid by third parties were increased by $1,434, $5,990, $514, $8,890, and
$2,924 for the Asset Preservation, Income, Global Equity, Small Cap, and
Appreciation Funds, respectively. There was no effect on interest income.
The Funds could have invested such cash amounts in an income producing
asset if they had not agreed to a reduction of fees under the expense
offset arrangement with their custodian.
3. INVESTMENT ADVISORY AND ADMINISTRATION CONTRACTS AND DISTRIBUTION
AGREEMENT. The Company entered into an investment advisory agreement (the
"Investment Advisory Agreement") with Equitable Securities Corporation ("ESC")
(the "Adviser"). The Investment Advisory Agreement provides for the Adviser to
be paid a fee calculated and accrued daily and paid monthly at the annual rates
of 0.50% for ESC Strategic Asset Preservation Fund and 1.00% for each of the
other funds. The Adviser provides portfolio management supervision and certain
administrative, clerical and bookkeeping services for the Company. Equitable
Asset Management is the Advisor for Asset Preservation, Small Cap and also
advises 34.6% of the assets of the Appreciation Fund. The Adviser has entered
into agreements with various portfolio managers to advise the Global Equity
Fund, Income Fund and the remaining assets of the Appreciation Fund. Any fees
payable under these agreements are paid by the Adviser. For the year ended March
31, 1996, the Adviser voluntarily waived fees of $50,302; $25,762 and $11,800
for the Asset Preservation, Small Cap and Appreciation Funds, respectively.
Furman Selz LLC ("Furman Selz") provides the Funds with administrative,
fund accounting, dividend and capital gain distribution disbursing and transfer
agency services pursuant to the administration agreement (the "Administration
Agreement"). The services under the Administration Agreement are subject to the
supervision of the Company's Board of Directors and officers and include
day-to-day administration of matters related to the corporate existence of the
Company, maintenance of its records, preparation of reports, supervision of the
Funds' arrangement with their custodian and assistance in the preparation of the
Company's Registration Statement under federal and state laws. Pursuant to the
Administration Agreement, the Funds pay Furman Selz a monthly fee for its
services at the annual rate of 0.15% of the average daily net assets of the
Funds and is accrued daily. Furman Selz voluntarily waived fees of $14,250 for
the Asset Preservation Fund for the year ended March 31, 1996.
Pursuant to a Services Agreement between the Funds and Furman Selz, Furman
Selz will provide the Funds with transfer and dividend and capital gain
disbursing agent services, for which it receives a fee of $15.00 per account per
year subject to a required minimum fee of $10,000 for each Fund, plus
out-of-pocket expenses. Pursuant to the Fund Accounting Agreement between the
Funds and Furman Selz, Furman Selz assists the Funds in calculating net asset
values
24
<PAGE> 150
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
and provides certain other account services for each Fund for an annual fee of
$30,000 per fund plus out-of-pocket expenses. For the year ended March 31, 1996,
Furman Selz voluntarily waived Transfer Agent fees of $10,000 for each portfolio
of the Funds. For Fund Accounting Services, Furman Selz earned fees, including
out of pocket expenses as shown in the Statement of Operations.
ESC has voluntarily agreed to reimburse the Funds to the extent that their
ratios of expenses to average net assets exceed certain percentages as follows:
Appreciation -- 2.00% (Class A), 2.50% (Class D); Global Equity -- 2.50% (Class
A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D);
Income -- 1.70% (Class A), 2.20% (Class D); Asset Preservation -- 0.90% (Class
A). ESC has agreed to reimburse expenses to the Asset Preservation Fund in the
amount of $10,811. No reimbursements were necessary for the Appreciation, Global
Equity, Small Cap, or Income Funds.
The Company entered into a distribution agreement (the "Distribution
Agreement") with ESC. Under the Distribution Agreement, ESC as agent for the
Funds, agrees to use its best efforts as sole distributor of the Funds' shares.
ESC does not receive compensation under the Distribution Agreement. Under the
Plan of Distribution, Class A shares will pay the Distributor a fee at an annual
rate up to 0.25% of the value of average daily net assets of Class A shares in
return for financing certain distribution and shareholder service activities
related to Class A shares. During the year ended March 31, 1996, the actual
rates incurred by Class A shares were: 0.08%; 0.09%; 0.14%; 0.23% and 0.25% for
the Asset Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. The Plans provide that Class D shares will pay the Distributor
amounts up to an annual rate up to 0.75% of the average daily net assets of
Class D shares to finance certain distribution and shareholder services
activities related to Class D shares. During the year ended March 31, 1996, the
actual rates incurred by Class D shares were: 0.75%; 0.75%; 0.71% and 0.75% for
the Income, Global Equity, Small Cap and Appreciation Funds, respectively.
During the year ended March 31, 1996, the Appreciation Fund, Small Cap Fund
and the Global Equity Fund paid brokerage commissions of $29,031, $1,595 and
$11,994, respectively, to Equitable Securities, a subsidiary of the Adviser's
subsidiary, Equitable Trust Company. The Funds were advised that front-end sales
charges of $3,682, $7,901, $106,790 and $42,946 were paid to ESC from the
Income, Global Equity, Small Cap and Appreciation Funds, respectively.
4. SECURITIES TRANSACTIONS.
A. Purchase and sale transactions. The aggregate amount of purchases
and sales of investment securities, other than short-term securities, for
the year ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
COMMON STOCKS U.S. GOVERNMENT
AND CORPORATE BONDS OBLIGATIONS
-------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Asset
Preservation.... $ 3,983,919 $ 0 $ 2,829,058 $ 1,650,000
Income............ 21,607,286 20,457,453 24,519,225 22,855,036
Global Equity..... 17,576,428 12,528,377 0 0
Small Cap......... 30,502,059 18,578,705 0 0
Appreciation...... 24,214,327 16,973,908 0 0
</TABLE>
25
<PAGE> 151
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
B. Federal Income Tax basis. Cost for book and Federal Income Tax
purposes were substantially identical as of March 31, 1996. Gross
unrealized appreciation and depreciation on investment securities at March
31, 1996, based on cost for Federal income tax purposes is as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
---------- --------- ----------
<S> <C> <C> <C>
Asset Preservation................ $ 108,733 $ (52,276) $ 56,457
Income............................ 519,723 (835,805) (316,082)
Global Equity..................... 1,901,056 (542,237) 1,358,819
Small Cap......................... 7,759,638 (867,535) 6,892,103
Appreciation...................... 4,931,457 (774,460) 4,156,997
</TABLE>
5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650
million shares of capital stock with a par value $0.001 each. Transactions in
shares of the Funds for the years ended March 31, 1996, and March 31, 1995, were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
-------------------------------------------------------------------
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CLASS A
Beginning Balance..................... 1,205,690 3,256,233 931,096 780,607 1,418,131
------------ --------- --------- --------- ------------
Shares sold........................... 103,797 421,654 392,583 1,059,794 670,203
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... 70,131 259,064 19,718 38,534 40,093
Shares redeemed....................... (55,825) (206,909) (22,193) (62,625) (164,585)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... 118,103 473,809 390,108 1,035,703 545,711
------------ --------- --------- --------- ------------
Closing Balance....................... 1,323,793 3,730,042 1,321,204 1,816,310 1,963,842
============ ========= ========= ========= ============
CLASS D
Beginning Balance..................... -- 124,831 338,355 300,196 159,350
------------ --------- --------- --------- ------------
Shares sold........................... -- 30,034 39,211 280,236 55,499
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... -- 6,665 7,360 12,979 4,055
Shares redeemed....................... -- (15,654) (48,386) (28,964) (26,657)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... -- 21,045 (1,815) 264,251 32,897
------------ --------- --------- --------- ------------
Closing Balance....................... -- 145,876 336,540 564,447 192,247
============ ========= ========= ========= ============
</TABLE>
26
<PAGE> 152
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
-------------------------------------------------------------------
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CLASS A
Beginning Balance..................... 769 769 769 769 769
------------ --------- --------- --------- ------------
Shares sold........................... 1,256,945 3,639,895 945,598 779,556 1,416,032
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... 49,971 168,037 1,187 12,870 6,896
Shares redeemed....................... (101,995) (552,468) (16,458) (12,588) (5,566)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... 1,204,921 3,255,464 930,327 779,838 1,417,362
------------ --------- --------- --------- ------------
Closing Balance....................... 1,205,690 3,256,233 931,096 780,607 1,418,131
=========== ========= ========= ========= ===========
CLASS D
Beginning Balance..................... -- 769 769 769 769
------------ --------- --------- --------- ------------
Shares sold........................... -- 120,814 344,535 309,594 158,543
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... -- 3,248 146 4,514 640
Shares redeemed....................... -- 0 (7,095) (14,681) (602)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... -- 124,062 337,586 299,427 158,581
------------ --------- --------- --------- ------------
Closing Balance....................... -- 124,831 338,355 300,196 159,350
=========== ========= ========= ========= ===========
</TABLE>
6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance both of the total Fund portfolio and of each
Manager and will reallocate Fund assets among individual managers, or recommend
to the Company that it employ or terminate particular Managers, to the extent
the Adviser deems appropriate to achieve the overall objectives of the
particular Fund.
The Managers are as follows:
ESC Strategic Asset Preservation Fund -- Equitable Asset Management,
Inc.
ESC Strategic Income Fund -- Llama Asset Management Company; Cincinnati
Asset Management, Inc. and Murray Johnstone International Limited.
ESC Strategic Global Equity Fund -- Globeflex Capital, L.P. and Murray
Johnstone International Limited.
ESC Strategic Small Cap Fund -- Equitable Asset Management, Inc.
ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.; Brandes
Investment Partners, Inc., and Equitable Asset Management, Inc.
Equitable Asset Management, Inc. is an affiliate of the Adviser.
27
<PAGE> 153
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
7. OFF-BALANCE SHEET RISK. The Funds may invest in various financial
instruments with off-balance sheet risk. These financial instruments include
taking positions in forward contracts. The Funds enter into such contracts for
the purpose of hedging exposure to change in foreign currency exchange rates on
their portfolio holdings. The lack of correlation between the price of the
security and the underlying contract could result in a loss to the Funds. The
Global Equity Fund had one open forward currency contract at March 31, 1996. At
such date, the Global Equity Fund contracted to deliver $183,862 (U.S. Dollars)
for Y19,584,932 (Japanese Yen) on April 1, 1996. The resulting unrealized
appreciation of $502 is included in net unrealized appreciation/(depreciation)
in the statement of assets and liabilities.
8. FEDERAL INCOME TAXES. Capital losses and foreign currency losses
incurred after October 31, 1995 through March 31, 1996, are deemed to arise on
the first business day of the following fiscal year. The Funds incurred and will
elect to defer post October capital losses and foreign currency losses of
approximately $372,635 and $102,223 for the Income Fund and Global Equity Fund,
respectively.
At March 31, 1996, the Asset Preservation Fund had net capital loss
carryforwards of approximately $18,000, which will be available through March
2003 to offset future capital gains as provided by the regulations. To the
extent that these carryover losses are used to offset future capital gains, the
gains so offset would not be distributed to the shareholders. During the year
ended March 31, 1996, the Global Equity Fund utilized $42,000 of available
capital loss carryforward.
28
<PAGE> 154
ESC STRATEGIC FUNDS, INC.
Financial Highlights
<TABLE>
<CAPTION>
ASSET PRESERVATION
----------------------------------
YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+
--------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period.................................... $ 9.89 $ 10.00
------- -------
Income from Investment Operations:
Net investment income/(loss).......................................... 0.56 0.47
Net realized/unrealized gain/(loss) on investments.................... 0.11 (0.11)
------- -------
Total from Investment Operations...................................... 0.67 0.36
------- -------
Less Distributions:
Dividends from net investment income.................................. (0.56) (0.47)
Distributions from realized gains..................................... 0 0
------- -------
Total Distributions..................................................... (0.56) (0.47)
------- -------
Net Asset Value, End of Period.......................................... $ 10.00 $ 9.89
======= =======
Total Return (not reflecting sales load)................................ 6.85% 3.75%
Net Assets, End of Period (in thousands)................................ $13,241 $11,924
Ratios to Average Net Assets of:
Net investment income................................................. 5.53% 5.15%*
Expenses net of waivers/reimbursements/expenses paid by third
parties............................................................. 0.90% 1.00%*
Expenses before waivers/reimbursements/expenses paid by third
parties............................................................. 1.58% 2.12%*
Portfolio Turnover Rate................................................. 40% 30%
</TABLE>
+ For the period April 25, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
<TABLE>
<CAPTION>
INCOME
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 9.94 $ 10.00 $ 9.94 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment income/(loss)............. 0.59 0.55 0.54 0.50
Net realized/unrealized gain/(loss)
on investments......................... 0.16 (0.05) 0.16 (0.05)
------- ------- ------- -------
Total from Investment Operations......... 0.75 0.50 0.70 0.45
------- ------- ------- -------
Less Distributions:
Dividends from net investment income..... (0.59) (0.55) (0.54) (0.50)
Distributions from realized gains........ (0.21) (0.01) (0.21) (0.01)
------- ------- ------- -------
Total Distributions........................ (0.80) (0.56) (0.75) (0.51)
------- ------- ------- -------
Net Asset Value, End of Period............. $ 9.89 $ 9.94 $ 9.89 $ 9.94
======= ======= ======= =======
Total Return (not reflecting sales load)... 7.67% 5.30% 7.11% 4.74%
Net Assets, End of Period (in thousands)... $36,891 $32,373 $ 1,446 $ 1,241
Ratios to Average Net Assets of:
Net investment income.................... 5.87% 6.29%* 5.37% 5.73%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 1.70% 1.85%* 2.20% 2.29%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 1.75% 1.86%* 2.25% 2.31%*
Portfolio Turnover Rate.................... 138% 92% 138% 92%
</TABLE>
+ For the period May 4, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
See accompanying notes to financial statements.
29
<PAGE> 155
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
GLOBAL EQUITY
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 9.90 $ 10.00 $ 9.82 $ 10.00
------- ------ ------ ------
Income from Investment Operations:
Net investment income/(loss)............. (0.04) (0.05) (0.09) (0.07)
Net realized/unrealized gain/(loss) on
investments............................ 1.46 (0.03) 1.46 (0.10)
------- ------ ------ ------
Total from Investment Operations......... 1.42 (0.08) 1.37 (0.17)
------- ------ ------ ------
Less Distributions:
Dividends from net investment income..... 0 (0.02) 0 (0.01)
Distributions from realized gains........ (0.24) 0 (0.24) 0
------- ------ ------ ------
Total Distributions........................ (0.24) (0.02) (0.24) (0.01)
------- ------ ------ ------
Net Asset Value, End of Period............. $ 11.08 $ 9.90 $ 10.95 $ 9.82
======= ====== ====== ======
Total Return (not reflecting sales load)... 14.41% (0.84)% 14.01% (1.72)%
Net Assets, End of Period (in thousands)... $14,597 $ 9,213 $ 3,725 $ 3,322
Ratios to Average Net Assets of:
Net investment income.................... (0.36)% (0.65)%* (0.83)% (1.51)%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 2.37% 2.50%* 2.87% 2.98%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 2.43% 3.22%* 2.96% 3.69%*
Portfolio Turnover Rate.................... 92% 76% 92% 76%
</TABLE>
+ For the period May 12, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
<TABLE>
<CAPTION>
SMALL CAP
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 11.25 $ 10.00 $ 11.22 $ 10.00
------- ------ ------ ------
Income from Investment Operations:
Net investment income/(loss)............. (0.08) (0.03) (0.16) (0.05)
Net realized/unrealized gain/(loss) on
investments............................ 5.19 1.52 5.18 1.51
------- ------ ------ ------
Total from Investment Operations......... 5.11 1.49 5.02 1.46
------- ------ ------ ------
Less Distributions:
Dividends from net investment income..... 0 0 0 0
Distributions from realized gains........ (0.48) (0.24) (0.48) (0.24)
------- ------ ------ ------
Total Distributions........................ (0.48) (0.24) (0.48) (0.24)
------- ------ ------ ------
Net Asset Value, End of Period............. $ 15.88 $ 11.25 $ 15.76 $ 11.22
======= ====== ====== ======
Total Return (not reflecting sales load)... 45.88% 15.03% 45.19% 14.72%
Net Assets, End of Period (in thousands)... $28,840 $ 8,785 $ 8,897 $ 3,367
Ratios to Average Net Assets of:
Net investment income.................... (0.80)% (0.43)%* (1.30)% (0.93)%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 2.00% 2.00%* 2.50% 2.50%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 2.18% 3.28%* 2.74% 3.68%*
Portfolio Turnover Rate.................... 102% 151% 102% 151%
</TABLE>
+ For the period June 8, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
See accompanying notes to financial statements.
30
<PAGE> 156
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 10.67 $ 10.00 $ 10.63 $ 10.00
------- ------- ------ ------
Income from Investment Operations:
Net investment income/(loss)............. (0.05) 0 (0.09) (0.03)
Net realized/unrealized gain/(loss) on
investments............................ 2.71 0.73 2.68 0.72
------- ------- ------ ------
Total from Investment Operations......... 2.66 0.73 2.59 0.69
------- ------- ------ ------
Less Distributions:
Dividends from net investment income..... 0 0 0 0
Distributions from realized gains........ (0.31) (0.06) (0.31) (0.06)
------- ------- ------ ------
Total Distributions........................ (0.31) (0.06) (0.31) (0.06)
------- ------- ------ ------
Net Asset Value, End of Period............. $ 13.02 $ 10.67 $ 12.91 $ 10.63
======= ======= ====== ======
Total Return (not reflecting sales load)... 25.07% 7.32% 24.50% 6.92%
Net Assets, End of Period (in thousands)... $25,561 $15,126 $ 2,482 $ 1,693
Ratios to Average Net Assets of:
Net investment income.................... (0.39)% (0.04)%* (0.86)% (0.56)%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 2.00% 2.00%* 2.50% 2.50%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 2.10% 2.88%* 2.64% 3.40%*
Portfolio Turnover Rate.................... 78% 58% 78% 58%
</TABLE>
+ For the period July 6, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
See accompanying notes to financial statements.
31
<PAGE> 157
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of ESC Strategic Funds, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of ESC Strategic Asset Preservation
Fund, ESC Strategic Income Fund, ESC Strategic Global Equity Fund, ESC Strategic
Small Cap Fund and ESC Strategic Appreciation Fund (constituting ESC Strategic
Funds, Inc., hereafter referred to as the "Fund") at March 31, 1996, the results
of each of their operations for the year then ended and the changes in each of
their net assets and the financial highlights for the year then ended and for
the period from commencement of operations (as indicated in the respective
statements) through March 31, 1995, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at March 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
May 16, 1996
FEDERAL TAXATION NOTICE -- UNAUDITED
During the fiscal year ended March 31, 1996, Global Equity Fund, Small Cap Fund
and Appreciation Fund made long-term capital gain distributions of $0.187,
$0.041, $0.156 per share, respectively.
<PAGE> 158
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) 662-8417
- --------------------------------------------------------------------------------
EQUITABLE SECURITIES CORPORATION --
INVESTMENT ADVISER AND DISTRIBUTOR
FURMAN SELZ LLC -
ADMINISTRATOR, TRANSFER AGENT AND FUND ACCOUNTING AGENT
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes ESC
Strategic Small Cap Fund (the "Fund"), one of five funds offered by ESC
Strategic Funds, Inc. (the "Company"). The Fund is advised by Equitable
Securities Corporation (the "Adviser"). Its portfolio manager is Equitable
Asset Management (the "Manager"), an affiliate of the Adviser. See
"Management." Shares of the Fund are sold to the public by the Distributor as
an investment vehicle for individuals, institutions, corporations and
fiduciaries, including customers of the Adviser or its affiliates.
The Company is offering an indefinite number of shares of each class
of the Fund.
This SAI is not a prospectus and is authorized for distribution only
when preceded or accompanied by the prospectus for the Fund dated July 26, 1996
(the "Prospectus"). This SAI contains additional and more detailed information
than that set forth in the Prospectus and should be read in conjunction with
the Prospectus. The Prospectus may be obtained without charge by writing or
calling the Fund at the address and information numbers printed above.
July 26, 1996
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TABLE OF CONTENTS
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INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Bank Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Corporate Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Variable and Floating Rate Demand and Master Demand Notes . . . . . . . . . . . . . . . . . . . 2
Loans of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Forward Foreign Currency Exchange Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Stock Index Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Option Writing and Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Options on Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Risks of Futures and Options Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Limitations on Futures Contracts and Options on Futures Contracts . . . . . . . . . . . . . . . 8
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Distribution of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Administrative Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Custodian, Transfer Agent and Dividend Disbursing Agent . . . . . . . . . . . . . . . . . . . . 29
Yield and Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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INVESTMENT POLICIES
The Prospectus discusses the investment objective of the Fund and the
policies to be employed to achieve that objective. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Fund may invest, the investment policies and portfolio
strategies that the Fund may utilize, and certain risks attendant to such
investments, policies and strategies.
Bank Obligations. These obligations include negotiable certificates
of deposit and bankers' acceptances. A description of the banks the
obligations of which the Fund may purchase are set forth in the Prospectus. A
certificate of deposit is a short-term, interest-bearing negotiable certificate
issued by a commercial bank against funds deposited in the bank. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction. The
borrower is liable for payment as is the bank, which unconditionally guarantees
to pay the draft at its face amount on the maturity date.
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 and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by the Fund
must meet the Fund's minimum rating criteria.
Corporate Debt Securities. Fund investments in these securities are
limited to corporate debt securities (corporate bonds, debentures, notes and
similar corporate debt instruments) which meet the Fund's rating criteria.
After purchase by the Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Manager will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent the ratings given by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") or another rating agency may change as a result of changes in such
organizations or their rating systems, the Fund will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in the Prospectus and in this SAI.
Repurchase Agreements. The Fund may invest in securities subject to
repurchase agreements with U.S. banks or broker-dealers. Such agreements may
be considered to be loans by the Funds for purposes of the Investment Company
Act of 1940, as amended (the "1940 Act"). A repurchase agreement is a
transaction in which the seller of a security commits itself at
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the time of the sale to repurchase that security from the buyer at a mutually
agreed-upon time and price. The repurchase price exceeds the sale price,
reflecting an agreed-upon interest rate effective for the period the buyer owns
the security subject to repurchase. The agreed-upon rate is unrelated to the
interest rate on that security. The Manager will monitor the value of the
underlying security at the time the transaction is entered into and at all
times during the term of the repurchase agreement to insure that the value of
the security always equals or exceeds the repurchase price. 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 incur
costs and experience time delays in connection with the disposition of such
securities.
Variable and Floating Rate Demand and Master Demand Notes. The Fund
may, from time to time, buy variable 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 in the 5 to 20 year range but carry with them the
right of the holder to put the securities to a remarketing agent or other
entity on short notice, typically seven days or less. The obligation of the
issuer of the put to repurchase the securities is backed up by a letter of
credit or other obligation issued by a financial institution. The purchase
price is ordinarily par plus accrued and unpaid interest. Ordinarily, the
remarketing agent will adjust the interest rate every seven days (or at other
intervals corresponding to the notice period for the put), in order to maintain
the interest rate at the prevailing rate for securities with a seven-day
maturity.
The Fund may also buy variable rate master demand notes. The terms of
these obligations permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. They 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 prepay 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 lender and the borrower, it is not generally contemplated that they
will be traded, and there is no secondary market for them, although they are
redeemable (and thus, immediately repayable by the borrower) at principal
amount, plus accrued interest, at any time. The Fund has no limitations on the
type of issuer from whom the notes will be purchased. However, in connection
with such purchase and on an ongoing
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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, if not so rated, 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 the Prospectus for other comparable debt obligations.
Floating rate demand and master demand notes are similar to variable
rate instruments except that their interest rates vary with a designated market
index or market rate, such as the coupon equivalent of the U.S. Treasury bill
rate.
Loans of Portfolio Securities. The Fund may lend its portfolio
securities to brokers, dealers and financial institutions, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Fund may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 5% of the total
assets of the Fund.
The Fund will earn income for lending its securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Fund may pay
reasonable finders, administrative and custodial fees. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral.
Foreign Securities. As described in the Prospectus, changes in
foreign exchange rates will affect the value of securities denominated or
quoted in currencies other than the U.S. dollar.
Since the Fund may invest in securities denominated in currencies
other than the U.S. dollar, and since the Fund may, for various periods pending
investment for non speculative purposes, hold funds in bank deposits or other
money market investments denominated in foreign currencies, the Fund may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. Changes in foreign
currency exchange rates will influence values of securities in the Fund's
portfolio, from the perspective of U.S. investors. Changes in foreign currency
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exchange rates may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities, and net investment income
and gains, if any, to be distributed to shareholders by the Fund. The rate of
exchange between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation and other factors.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted between currency traders (usually large commercial banks) and their
customers. Forward foreign currency exchange contracts may be bought or sold
to protect the Fund against a possible loss resulting from an adverse change in
the relationship between foreign currencies and the U.S. dollar, or between
foreign currencies. Although such contracts are intended to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result should the value of
such currency increase.
Stock Index Futures Contracts. The Fund may enter into stock index
futures contracts in order to protect the value of its common stock
investments. A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined
by the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller will recognize a gain determined by
the difference between the two index levels at the expiration of the stock
index futures contract, and the purchaser will realize a loss. Stock index
futures contracts expire on a fixed date,
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currently one to seven months from the date of the contract, and are settled
upon expiration of the contract.
The Fund intends to utilize stock index futures contracts only for the
purpose of attempting to protect the value of its common stock portfolio in the
event of a decline in stock prices and, therefore, usually will be a seller of
stock index futures contracts. This risk management strategy is an alternative
to selling securities in the portfolio and investing in money market
instruments. Also, stock index futures contracts may be purchased to protect
the Fund against an increase in prices of stocks which the Fund intends to
purchase. If the Fund is unable to invest its cash (or cash equivalents) in
stock in an orderly fashion, the Fund could purchase a stock index futures
contract which may be used to offset any increase in the price of the stock.
However, it is possible that the market may decline instead, resulting in a
loss on the stock index futures contract. If the Fund then concludes not to
invest in stock at that time, or if the price of the securities to be purchased
remains constant or increases, the Fund will realize a loss on the stock index
futures contract that is not offset by a reduction in the price of securities
purchased. The Fund also may buy or sell stock index futures contracts to
close out existing futures positions.
Option Writing and Purchasing. The Fund may write (or sell) put and
call options on the securities that the Fund is authorized to buy or already
holds in its portfolio. These option contracts may be listed for trading on a
national securities exchange or traded over-the-counter. The Fund may also
purchase put and call options. The Fund will not write covered calls on more
than 5% of its portfolio, and the Fund will not write covered calls with strike
prices lower than the underlying securities' cost basis on more than 5% of its
total portfolio. The Fund may not invest more than 5% of its total assets in
option purchases.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an
amount, known as a premium, to the option writer in exchange for the right
under the option contract.
The Fund may sell "covered" put and call options as a means of hedging
the price risk of securities in the Fund's portfolio. The sale of a call
option against an amount of cash equal to the put's potential liability
constitutes a "covered put." When a
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Fund sells an option, if the underlying securities do not increase (in the case
of a call option) or decrease (in the case of a put option) to a price level
that would make the exercise of the option profitable to the holder of the
option, the option will generally expire without being exercised and the Fund
will realize as profit the premium paid for such option. When a call option of
which the Fund is the writer is exercised, the option holder purchases the
underlying security at the strike price and the Fund does not participate in
any increase in the price of such securities above the strike price. When a
put option of which the Fund is the writer is exercised, the Fund will be
required to purchase the underlying securities at the strike price, which may
be in excess of the market value of such securities.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for
a wider range of expiration dates and exercise prices than exchange-traded
options. Because OTC options are not traded on an exchange, pricing is
normally done by reference to information from a market marker. This
information is carefully monitored by the Manager and verified in appropriate
cases. OTC options transactions will be made by the Fund only with recognized
U.S. Government securities dealers.
It may be the Fund's policy, in order to avoid the exercise of an
option sold by it, to cancel its obligation under the option by entering into a
closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of cancelling the Fund's
position as a seller. The premium which the Fund will pay in executing a
closing purchase transaction may be higher than the premium received when the
option was sold, depending in large part upon the relative price of the
underlying security at the time of each transaction. To the extent options
sold by the Fund are exercised and the Fund either delivers portfolio
securities to the holder of a call option or liquidates securities in its
portfolio as a source of funds to purchase securities put to the Fund, the
Fund's portfolio turnover rate may increase, resulting in a possible increase
in short-term capital gains and a possible decrease in long-term capital gains.
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Options on Futures Contracts. The Fund may purchase and write put and
call options on futures contracts that are traded on a U.S. exchange or board
of trade and enter into related closing transactions to attempt to gain
additional protection against the effects of equity market fluctuations. There
can be no assurance that such closing transactions will be available at all
times. In return for the premium paid, such an option gives the purchaser the
right to assume a position in a futures contract at any time during the option
period for a specified exercise price.
The Fund may purchase put options on futures contracts in lieu of, and
for the same purpose as, the sale of a futures contract. It also may purchase
such put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve
the same purpose as the actual purchase of the futures contracts. The Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
The Fund may write a call option on a futures contract in order to
hedge against a decline in the prices of the index or securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, the
Fund would pay more than the market price for the underlying securities or
index units. The net cost to the Fund would be reduced, however, by the
premium received on the sale of the put, less any transactions costs.
Risks of Futures and Options Investments. The Fund will incur
brokerage fees in connection with its futures and options transactions, and it
will be required to segregate funds for the benefit of brokers as margin to
guarantee performance of its futures and options contracts. In addition, while
such contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while the Fund may benefit from
the use of futures contracts and related options, unanticipated changes in
interest rates may result in a poorer overall performance for the Fund than if
it had not entered into any such contracts. Additionally, the skills required
to invest successfully in futures and options may differ from skills required
for managing other assets in the Fund's portfolio. Further, although the
Manager may engage in transactions with
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respect to index-based futures contracts if the Manager believes a correlation
exists between price movements in the index and in the Fund's portfolio
securities, such a correlation is not likely to be perfect because the Fund's
portfolio is not likely to duplicate the index, making the futures contract an
imperfect hedge.
Limitations on Futures Contracts and Options on Futures Contracts.
The Fund will use financial futures contracts and related options only for
"bona fide hedging" purposes, as such term is defined in applicable regulations
of the CFTC, or, with respect to positions in financial futures and related
options that do not qualify as "bona fide hedging" positions, will enter such
non-hedging positions only to the extent that aggregate initial margin deposits
plus premiums paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5% of the Fund's
total assets.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund, and
except as otherwise indicated, may not be changed with respect to the Fund
without the approval of a majority of the outstanding voting securities of the
Fund which, as defined in the Investment Company Act of 1940 ("1940 Act"),
means the lesser of (1) 67% of the shares of the Fund present at a meeting if
the holders of more than 50% of the outstanding shares of the Fund are present
in person or by proxy, or (2) more than 50% of the outstanding voting shares of
the Fund.
The Fund may not:
(1) 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, provided that the Fund may make no
purchases if its outstanding borrowings exceed 5% of its total assets;
(2) Invest in real estate, provided that the Fund may
invest in readily marketable securities (except limited partnership
interests) of issuers that deal in real estate and securities secured
by real estate or interests therein and the Fund may hold and sell
real estate (a) used principally for its own office space or (b)
acquired as a result of the Fund's ownership of securities;
(3) Engage in the business of underwriting securities of
other issuers, except to the extent that the purchase of securities
directly from the issuer (either alone or as one
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of a group of bidders) or the disposal of an investment position may
technically cause it to be considered an underwriter as that term is
defined under the Securities Act of 1933;
(4) Make loans, except that the Fund may (a) lend its
portfolio securities, (b) enter into repurchase agreements and (c)
purchase the types of debt instruments described in the Prospectus or
the SAI;
(5) Purchase securities or instruments which would cause
25% or more of the market value of the Fund's 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;
(6) Issue any senior securities, except as appropriate to
evidence indebtedness which it is permitted to incur, and provided
that collateral arrangements with respect to forward contracts,
futures contracts or options, including deposits of initial and
variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction; or
(7) Purchase or sell commodity contracts, except that the
Fund may invest in futures contracts and in options related to such
contracts (for purposes of this restriction, forward foreign currency
exchange contracts are not deemed to be commodities).
For purposes of investment restriction number 6, public utilities are
not deemed to be a single industry but are separated by industrial categories,
such as telephone or gas utilities.
The following policies of the Fund are non-fundamental and may be
changed by the Board of Directors without shareholder approval. These policies
provide that the Fund, except as otherwise specified, may not:
(a) Invest in companies for the purpose of exercising control
or management;
(b) Knowingly purchase securities of other investment
companies, except (i) in connection with a merger, consolidation,
acquisition, or reorganization; and (ii) the Fund may invest up to 10%
of its total assets in shares of other investment companies;
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(c) Purchase securities on margin, except that the Fund
may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities;
(d) Mortgage, pledge, or hypothecate any of its assets,
except that the Fund may pledge not more than 15% of the current value
of its total net assets;
(e) Purchase or retain the securities of any issuer, if
those individual officers and Directors of the Company, the Adviser,
the Manager, the Administrator, or the Distributor, each owning
beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer;
(f) Invest more than 5% of its net assets in warrants
which are unattached to securities; included within that amount, no
more than 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges;
(g) Write, purchase or sell puts, calls or combinations
thereof, except as described in the Prospectus or SAI;
(h) Invest more than 5% of the current value of its total
assets in the securities of companies which, including predecessors,
have a record of less than three years' continuous operation;
(i) 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); or
(j) Invest in oil, gas or other mineral exploration or
development programs, although it may invest in issuers that own or
invest in such programs.
MANAGEMENT
Directors and Officers
The principal occupations of the Directors and executive officers of
the Company for the past five years are listed below. The address of each,
unless otherwise indicated, is 230 Park Avenue, New York, New York 10169.
Directors deemed to be
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"interested persons" of the Company for purposes of the 1940 Act are
indicated by an asterisk.
<TABLE>
<CAPTION>
Name, Address
and Age Position with Company Principal Occupation
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<S> <C> <C>
*William Howard Director and Equitable Securities
Cammack, Sr.(1) President Corporation Chairman
800 Nashville City and Managing Director.
Center
511 Union Street
Nashville, TN
37219-1743
Age: 65
*William Howard Director and Equitable Securities
Cammack, Jr.(1) Treasurer Corporation -
800 Nashville Managing Director
City Center
511 Union Street
Nashville, TN
37219-1743
Age: 39
J. Bransford Wallace Director Willis Coroon
26 Century Boulevard Corporations
Nashville, TN 37214 (insurance) - Vice
Age: 64 Chairman (1994);
Chairman (1992-93);
various positions
since prior
to 1989.
Brownlee O. Director Osborn
Currey,Jr. Communications, Inc.
1100 Broadway -Chairman; Nashville
Nashville, TN 37203 Banner Publishing -
Age: 68 Company President.
E. Townes Duncan Director Comptronix
Three Maryland Farms Corporation (contract
Suite 140 manufacturing) -
Brentwood, TN 37027 Chairman and Chief
Age: 43 Executive Officer
(1993-present);
Massey Burch
Investment Group
(venture capital) -
Principal (1985-1993).
</TABLE>
(1) William Howard Cammack, Sr. and William Howard Cammack, Jr. are father
and son.
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<PAGE> 171
<TABLE>
<S> <C> <C>
John J. Pileggi Secretary Furman Selz LLC -
Age: 37 Senior Managing
Director (1992-
present); Managing
Director (1984-1992).
Joan Fiore Assistant Furman Selz LLC -
Age: 40 Secretary Managing Director
and Counsel (1991-
present); Securities
and Exchange
Commission - Staff
Attorney (1986-1991).
Sheryl Hirschfeld Assistant Furman Selz LLC
Age: 36 Secretary Director, Corporate
Secretary Services;
The Dreyfus
Corporation -
Assistant to the
Corporate Secretary
and General Counsel
(1982-1994).
John L. McAllister Assistant Secretary Equitable Securities
Age: 33 and Assistant Corporation - Vice
Treasurer President (1990-
present). Copyright
Management, Inc. -
Analyst (1988-1989).
Gordon M. Forrester Assistant Treasurer Furman Selz LLC -
Age: 35 Managing Director
(1987-present).
</TABLE>
Directors of the Company not affiliated with the Adviser, the Manager,
a manager of another fund of the Company, or the Administrator receive from the
Company an annual retainer of $2,000 and a fee of $250 for each Board of
Directors and Board committee meeting of the Company attended and are
reimbursed for all out-of-pocket expenses relating to attendance at such
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<PAGE> 172
meetings. Directors who are affiliated with the Adviser, the Manager, another
manager of a fund of the Company, or the Administrator do not receive
compensation from the Company. For the fiscal year ended March 31, 1996, the
Directors received $4,000.
As of July 12, 1996, officers and Directors of the Company, as a
group, owned 10.42% of the outstanding shares of the Fund.
Investment Adviser
Equitable Securities Corporation (the "Adviser") 511 Union Street,
Nashville, Tennessee 37219-1743, serves as investment adviser to the Fund,
providing overall supervision of the Manager. For these services, the Adviser
receives from the Fund a fee at an annual rate of 1.0% of the Fund's average
daily net assets. Out of these fees, the Adviser pays fees of the Manager.
Under the terms of the Investment Advisory Agreement between the
Company and the Adviser ("Agreement"), the investment advisory services of the
Adviser to the Fund are not exclusive. The Adviser is free to, and does, render
investment advisory services to others.
The Agreement will continue in effect with respect to the Fund for a
period more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of the Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Agreement or interested
persons of any such parties, at its meeting held on April 4, 1994, and by the
sole shareholder of the Fund on April 4, 1994. The Agreement was recently
re-approved at the January 16, 1996 Board of Directors Meeting. The Agreement
may be terminated at any time without penalty by vote of the Directors (with
respect to the Company or the Fund) or, with respect to the Fund, by vote of
the Directors or the shareholders of the Fund, or by the Adviser, on 60 days
written notice by either party to the Agreement and will terminate
automatically if assigned. For the fiscal year ended March 31, 1996, pursuant
to an agreement to limit fund expenses, The Adviser waived $25,762 in fees.
Absent this waiver agreement, the advisory fee would have been $224,932. 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.
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<PAGE> 173
The Manager
The Adviser has entered into a Portfolio Management Agreement for the
Fund with Equitable Asset Management (the "Manager"), a division of the
Adviser's subsidiary, Equitable Trust Company.
For more information on the Manager, see the Prospectus. The
Manager's fee, which is paid by the Adviser is at an annual rate of 0.50% of
the Fund's average daily net assets.
The Portfolio Management Agreement provides that the Manager's
services to the Fund are not exclusive. The Manager is free to and does
provide investment advisory services to others.
The Portfolio Management Agreement provides that it will continue in
effect for a period beyond two years from the date of its execution only so
long as such continuance is approved at least annually by (i) the Directors or
by vote of the holders of a majority of the Fund's outstanding voting
securities and (ii) by a majority of the Directors who are not parties to the
Portfolio Management Agreement or interested persons of any such party. The
Portfolio Management Agreement for the Fund was approved by the Board of
Directors, including a majority of the Directors who are not parties to the
Portfolio Management Agreement or interested persons of any such party, at a
meeting held on April 4, 1994, and by the sole shareholder of the Fund on April
4, 1994. The Portfolio Management Agreement was recently re-approved at the
April 16, 1996 Board of Directors Meeting. The Portfolio Management Agreement
may be terminated at any time without penalty (a) by the Adviser, by the Fund
upon vote of a majority of the Directors, or by vote of a majority of the
Fund's outstanding voting securities, each upon sixty days' written notice to
the Manager; or (b) by the Manager upon sixty days' notice to the Company or
the Adviser. The Portfolio Management Agreement will also terminate
automatically in the event of its assignment.
Distribution of Fund Shares
Equitable Securities Corporation (the "Distributor") serves as
principal underwriter for the shares of the Fund pursuant to a Distribution
Contract. The Distribution Contract provides that the Distributor will use its
best efforts to maintain a broad distribution of the Fund's shares among bona
fide investors and may enter into selling group agreements with responsible
dealers and dealer managers as well as sell the Fund's shares to individual
investors. The Distributor is not obligated to sell any specific amount of
shares.
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<PAGE> 174
The Fund has adopted a service and distribution plan (the "Plan").
The Plan provides for the different rates of fee payment with respect to each
class of shares, as described in the Prospectus. Pursuant to the Plan, the
Fund may pay directly or reimburse the Distributor monthly in amounts described
in the Prospectus for costs and expenses of marketing the shares, or classes of
shares, of the Fund. The Board of Directors has concluded that there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan provides that it may not be amended to increase materially
the costs which the Fund or a class of shares may bear pursuant to the Plan
without shareholder approval and that other material amendments of the Plan
must be approved by the Board of Directors, and by the Directors who are
neither "interested persons" (as defined in the 1940 Act) of the Company nor
have any direct or indirect financial interest in the operation of the Plan or
any related agreement, by vote cast in person at a meeting called for the
purpose of considering such amendments. The selection and nomination of the
Directors of the Company have been committed to the discretion of the Directors
who are not "interested persons" of the Company. The Plan was approved by the
Board of Directors and by the Directors who are neither "interested persons"
nor have any direct or indirect financial interest in the operation of the Plan
("Plan Director"), by vote cast in person at an April 4, 1994 meeting called
for the purpose of voting on the Plan, and by the sole shareholder of each
class of shares of the Fund on April 4, 1994. The continuance of the Plans is
subject to similar annual approval by the Directors and the Plan Directors.
The Plan was recently re-approved at the January 16, 1996 Board of Directors
Meeting. The Plan is terminable with respect to a class of shares of the Fund
at any time by a vote of a majority of the Plan Directors or by vote of the
holders of a majority of the shares of the class. For the fiscal year ended
March 31, 1996, the Distributor received $40,962 for Class A shares and $36,932
for Class D shares. For the period ended March 31, 1995, the Distributor
received $11,355 for Class A shares and $9,355 for Class D shares.
Administrative Services
Furman Selz (the "Administrator") provides administrative services
necessary for the operation of the Fund, including among other things, (i)
preparation of shareholder reports and communications, (ii) regulatory
compliance, such as reports to and filings with the Securities and Exchange
Commission ("SEC") and state securities commissions and (iii) general
supervision of the operation of the Fund, including coordination of the
services performed by the Adviser, Manager, Distributor, custodians,
independent accountants, legal counsel and others. In addition,
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<PAGE> 175
Furman Selz furnishes office space and facilities required for conducting the
business of the Fund and pays the compensation of the Fund's officers,
employees and Directors affiliated with Furman Selz. 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 fiscal year ended
March 31, 1996, the Administrator received $33,740 in fees from the Fund. 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.
On June 28, 1996 Furman Selz and BISYS Group, Inc. ("BISYS") announced
a definitive agreement which provides for Furman Selz to transfer its mutual
fund clients to BISYS. This transaction is expected to close within 90 days.
The Board of Directors approved BISYS' Fund Administration Agreement, Fund
Transfer Agency Agreement and Fund Accounting Agreement on behalf of the
Company at their July 16, 1996 Board of Directors Meeting. BISYS,
headquartered in Little Falls, New Jersey, supports more than 5,000 financial
institutions and corporate clients through two strategic business units. BISYS
Information Services Group designs, administers and distributes over 30
families of proprietary mutual funds consisting of more than 365 portfolios,
and provides 401(k) marketing support, administration, and recordkeeping
services in partnership with 18 of the nation's leading bank and investment
management companies.
The Administrative Services Contract for the Fund was approved by the
Board of Directors, including a majority of the Directors who are not parties
to the Contract or interested persons of such parties, at its meeting held on
April 4, 1994 and by the sole shareholder of the Fund on April 4, 1994 and was
recently re-approved at the April 16, 1996 Board of Directors Meeting. The
Administrative Services Contract is terminable with respect to the Fund or the
Company without penalty, at any time, by vote of a majority of the Directors
or, with respect to the Fund, by vote of the holders of a majority of the
shares of the Fund, each upon not more than 60 days written notice to the
Administrator, and upon 60 days notice, by the Administrator.
Service Organizations
The Company may also contract with banks, trust companies,
broker-dealers (other than Furman Selz) or other financial organizations
("Service Organizations") to provide certain administrative services for the
Fund. Services provided by Service Organizations may include among other
things: providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with client orders to purchase or redeem shares;
verifying and guaranteeing client signatures in connection with redemption
orders, transfers among and changes in client-designating accounts; providing
periodic statements showing a client's account balance and, to the extent
practicable, integrating such information with other
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<PAGE> 176
client transactions; furnishing periodic and annual statements and
confirmations of all purchases and redemptions of shares in a client's account;
transmitting proxy statements, annual reports, and updating prospectuses and
other communications from the Fund to clients; and providing such other
services as the Fund or a client reasonably may request, to the extent
permitted by applicable statute, rule or regulation. Neither Furman Selz, the
Adviser nor the Manager will be a Service Organization or receive fees for
servicing.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more
than the minimum initial or subsequent investments specified by the Fund or
charging a direct fee for servicing. If imposed, these fees would be in
addition to any amounts that 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 them regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks
from performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or
interpretations of such laws, as well as changes in either Federal or state
statutes or regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, could prevent a bank from continuing to
perform all or a part of its servicing activities. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law. If a bank were prohibited from so
acting, its shareholder clients would be permitted to remain shareholders of
the Fund and alternative means for continuing the servicing of such
shareholders would be sought. In that event, changes in the operation of the
Fund might occur and a shareholder serviced by such a bank might no longer be
able to avail itself of any services then being provided by the bank. It is
not expected that shareholders would suffer any adverse financial consequences
as a result of any of these occurrences.
DETERMINATION OF NET ASSET VALUE
The Fund values its portfolio securities in accordance with the
procedures described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Fund and for the other investment
advisory clients of the Manager are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a partic-
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<PAGE> 177
ular security may be bought or sold for certain clients even though it could
have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Manager's
opinion is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
The Fund has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, the Manager is primarily
responsible for portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Fund to obtain the best results
taking into account the broker-dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities. While the Manager generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on
an exchange. The purchase or sale of equity securities will frequently involve
the payment of a commission to a broker-dealer who effects the transaction on
behalf of the Fund. Debt securities normally will be purchased or sold from or
to issuers directly or to dealers serving as market makers for the securities
at a net price. Generally, money market securities are traded on a net basis
and do not involve brokerage commissions. Under the 1940 Act, persons
affiliated with the Fund, the Adviser, the Manager or Furman Selz are
prohibited from dealing with the Fund as a principal in the purchase and sale
of securities unless a permissive order allowing such transactions is obtained
from the SEC.
The Manager may, in circumstances in which two or more broker-dealers
are in a position to offer comparable results, give preference to a dealer that
has provided statistical or other research services to the Manager. By
allocating transactions in this manner, the Manager is able to supplement its
research and analysis with the views and information of securities firms.
These items, which in some cases may also be purchased for cash, include such
matters as general economic and securities market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase
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<PAGE> 178
and sale of securities. Some of these services are of value to the Manager in
advising various of its clients (including the Fund), although not all of these
services are necessarily useful and of value in managing the Funds. The
management fee paid by the Fund is not reduced because the Manager and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "Act"), the Manager may cause the Fund to pay a broker-dealer that
provides "brokerage and research services" (as defined in the Act) to the
Manager an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
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. For the
fiscal year ended March 31, 1996, the Fund paid brokerage commissions of $1,595
to ESC. During the period ended March 31, 1995, the Fund paid sales load
commissions of $44,998 to ESC.
Portfolio Turnover
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its shareholders. It is anticipated that
the annual portfolio turnover rate for the Fund normally will not exceed 100%,
although it may be higher under some circumstances. The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities by the average monthly value of the Fund's portfolio securities.
For purposes of this calculation, portfolio securities exclude all securities
having a maturity when purchased of one year or less. The portfolio turnover
rate for the fiscal periods ended March 31, 1996 and March 31, 1995 was 102%
and 151%, respectively.
TAXATION
The Fund intends to continue to qualify annually as regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
must (a) distribute to shareholders at least 90% of its investment company
taxable income (which includes, among other items, dividends, taxable interest
less expenses and the excess of net short-term capital
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<PAGE> 179
gains over net long-term capital losses); (b) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies or other income derived with respect to its
business of investing in such stock, securities or currencies; (c) derive less
than 30% of its gross income from the sale or other disposition of certain
assets (namely, in the case of the Fund, (i) stock or securities; (ii) options,
futures, and forward contracts (other than those on foreign currencies), and
(iii) foreign currencies (including options, futures, and forward contracts on
such currencies) not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect to stocks
or securities)) held less than 3 months; and (d) diversify its holdings so
that, at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items
(including receivables), U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies), or of two or more issuers that the Fund
controls and that are determined to be engaged in the same business or similar
or related businesses. By meeting these requirements, the Fund generally will
not be subject to Federal income tax on its investment company taxable income
and net capital gains which are distributed to shareholders. If the Fund does
not meet all of these Code requirements, it will be taxed as an ordinary
corporation.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the excise tax, the Fund must distribute for
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) for the one-year period ending October
31 of such year, and (3) all ordinary income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of a calendar year if it is declared by the Fund during October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the
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<PAGE> 180
following 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.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions from the Fund may be
eligible for the dividends-received deduction available to corporations.
Distributions of net capital gains, if any, designated by the Fund as capital
gain dividends are taxable to shareholders as long-term capital gain,
regardless of the length of time the Fund shares have been held by a
shareholder. All distributions are taxable to the shareholder in the same
manner whether reinvested in additional shares or received in cash.
Shareholders will be notified annually as to the Federal tax status of
distributions.
Distributions by the Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution, nevertheless, would be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital.
In particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
will nevertheless generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of
shares of the Fund, a shareholder may realize a gain or loss depending upon his
basis in his shares. Such gain or loss generally will be treated as capital
gain or loss if the shares are capital assets in the shareholder's hands. Such
gain or loss will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. However, a loss realized by a
shareholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held
by the shareholder for six months or less. A loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced (whether
by reinvestment of distributions or otherwise) within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss. Shareholders receiving distributions in the form of
additional shares will have a cost
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<PAGE> 181
basis for Federal income tax purposes in each share received equal to the net
asset value of a Fund share on the reinvestment date.
Under certain circumstances, the sales charge incurred in acquiring
Fund shares may not be taken into account in determining the gain or loss on
the disposition of those shares. This rule applies where shares of the Fund
are exchanged within 90 days after the date they were purchased and new shares
of a Fund are acquired without a sales charge or at a reduced sales charge. In
that case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred the sales charge
initially. Instead, the portion of the sales charge affected by this rule will
be treated as a sales charge paid for the new shares.
The taxation of equity options is governed by the Code section 1234.
Pursuant to Code section 1234, the premium received by the Fund for selling a
put or call option is not included in income at the time of receipt. If the
option expires, the premium is short-term capital gain to the Fund. If the
Fund enters into a closing transaction, the difference between the amount paid
to close out its position and the premium received is short-term capital gain
or loss. If a call option written by the Fund is exercised, thereby requiring
the Fund to sell the underlying security, the premium will increase the amount
realized upon the sale of such security and any resulting gain or loss will be
a capital gain or loss, and will be long-term or short-term depending upon the
holding period of the security. With respect to a put or call option that is
purchased by the Fund, if the option is sold, any resulting gain or loss will
be a capital gain or loss, and will be long-term or short-term, depending upon
the holding period of the option. If the option expires, the resulting loss is
a capital loss and is long-term or short-term, depending upon the holding
period of the option. If the option is exercised, the cost of the option, in
the case of a call option, is added to the basis of the purchased security and,
in the case of a put option, reduces the amount realized on the underlying
security in determining gain or loss.
Certain of the options, futures contracts, and forward foreign
currency exchange contracts that the Fund may invest in are so-called "section
1256 contracts." With certain exceptions, gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by the Fund
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at the end of each taxable year (and, generally, for purposes of the 4% excise
tax, on October 31 of each year) are "marked-to-market" with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on a position that is part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. Hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to stockholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections may operate to accelerate the recognition of gains or losses from
the affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The Fund will not realize gain or loss on a short sale of a security
until it closes the transaction by delivering the borrowed security to the
lender. All or a portion of any gain arising from a short sale may be treated
as short-term capital gain, regardless of the period for which the Fund held
the security used to close the short sale. In addition, the Fund's holding
period of any security which is substantially identical to that which is sold
short may be reduced or eliminated as a result of the short sale.
Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in
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short sales and transactions in options, futures, and forward contracts.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which
a security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any.
This additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any debt security having
market discount will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency, and the time the Fund actually collects such receivables or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain options and forward and futures contracts, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or losses, may increase, decrease, or
eliminate the amount of the Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general,
a foreign company is classified as a PFIC under the Code if at least one- half
of its assets constitutes investment-type assets or 75% or more of its gross
income is investment-type income. Under the PFIC rules, an "excess
-24-
<PAGE> 184
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock.
The Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve
marking to market the Fund's PFIC shares at the end of each taxable year (and
on certain other dates prescribed in the Code), with the result that unrealized
gains are treated as though they were realized. If this election were made,
tax at the Fund level under the PFIC rules would generally be eliminated, but
the Fund could, in limited circumstances, incur nondeductible interest charges.
The Fund's intention to qualify annually as a regulated investment company may
limit its elections with respect to PFIC stock.
Income received by the Fund from sources within foreign countries may
be subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to treat such foreign taxes paid by the
Fund that qualify as income or similar taxes under U.S. income tax principles
as paid by its shareholders. Pursuant to this election, a shareholder would be
required to include in gross income (in addition to taxable dividends actually
received) his pro rata share of the foreign taxes paid by the Fund, and would
be entitled either to deduct his pro rata share of foreign taxes in computing
his taxable income or to use it as a foreign tax credit against his U.S.
Federal income tax liability, subject to limitations. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions, but such
a shareholder may be eligible to claim the foreign tax credit (see below).
Each shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by a Fund will "pass-through" for
that year and, if so, such
-25-
<PAGE> 185
notification will designate (a) the shareholder's portion of the foreign taxes
paid to each such country and (b) the portion of the dividend which represents
income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his total
foreign source taxable income. For this purpose, if the Fund makes the
election described in the preceding paragraph, the source of the Fund's income
flows through to its shareholders. With respect to the Fund, gains from the
sale of securities will be treated as derived from U.S. sources and certain
currency fluctuations gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be treated
as ordinary income derived from U.S. sources. The limitation on the foreign
tax credit is applied separately to foreign source passive income (as defined
for purposes of the foreign tax credit) including foreign source passive income
of the Fund. The foreign tax credit may offset only 90% of the alternative
minimum tax imposed on corporations and individuals, and foreign taxes
generally may not be deducted in computing alternative minimum taxable income.
The Fund is required to report to the Internal Revenue Service ("IRS")
all distributions except in the case of certain exempt shareholders. All such
distributions generally are subject to withholding of Federal income tax at a
rate of 31% ("backup withholding") in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Fund with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions, whether
reinvested in additional shares or taken in cash, will be reduced by the
amounts required to be withheld. Backup withholding is not an additional tax.
Any amount withheld may be credited against the shareholder's U.S. Federal
income tax liability. Investors may wish to consult their tax advisors about
the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Fund
also may be subject to state and local taxes and their treatment under state
and local income tax laws may differ from the Federal income tax treatment.
Distributions of the Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies
-26-
<PAGE> 186
and instrumentalities may be exempt from state and local taxes in certain
states. Shareholders should consult their tax advisors with respect to
particular questions of Federal, state and local taxation. Shareholders who
are not U.S. persons should consult their tax advisors regarding U.S. and
foreign tax consequences of ownership of shares of the Fund including the
likelihood that distributions to them would be subject to withholding of U.S.
tax at a rate of 30% (or at a lower rate under a tax treaty).
Changes in the tax law frequently come under consideration. Since the
Fund does not undertake to furnish tax advice, it is important for shareholders
to consult their tax advisers regularly about the tax consequences to them of
investing in the Fund.
OTHER INFORMATION
Capitalization
The Company is a Maryland corporation established under Articles of
Incorporation dated November 24, 1993 and currently consists of five separately
managed portfolios ("funds"). (The Company has two other portfolios which are
currently inactive.) Four of the funds currently being offered, including the
Fund, offer two classes of shares. The capitalization of the Company consists
solely of 650 million shares of common stock with a par value of $0.001 per
share. The Board of Directors may establish additional funds (with different
investment objectives and fundamental policies), or additional classes of
shares, at any time in the future. Establishment and offering of additional
funds or classes will not alter the rights of the Company's shareholders. When
issued, shares are fully paid, non-assessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights. In
any liquidation of the Fund or class, each shareholder is entitled to receive
his pro rata share of the net assets of the Fund or class.
Expenses incurred in connection with the Fund's organization and the
public offering of its shares for the period ended March 31, 1996 was $10,910.
These costs have been deferred and are being amortized on a straight-line basis
over a period of not less than five years.
Principal Shareholders
As of July 12, 1996, the following persons owned of record or
beneficially 5% or more shares of a class of the Fund:
-27-
<PAGE> 187
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
<S> <C> <C>
ESC STRATEGIC SMALL CAP FUND - CLASS A
Equitable Trust Company 243,926.59 11.02%
511 Union Company Suite 800
Nashville, TN 37219-1729
ESC STRATEGIC SMALL CAP FUND - CLASS D
John E. Steuri & Grace D. Steuri JTWROS 39,518.16 5.68%
52 River Ridge Road
Little Rock, AR 72227-1518
Alex Brown & Sons Incorporated 40,442.08 5.81%
FBO 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
Voting Rights
Under the Articles of Incorporation, the Company is not required to
hold annual meetings of the Fund's or the Company's shareholders to elect
Directors or for other purposes. It is not anticipated that the Company will
hold shareholders' meetings unless required by law or the Articles of
Incorporation. In this regard, the retention of a new investment adviser for
the Company, or a new Manager affiliated with the Adviser with respect to the
Fund, requires approval both by a majority of the Company's directors,
including a majority of its directors who are not parties to such contract or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party, and by a vote of a majority of the outstanding voting securities of
the Company or Fund, as applicable. For this purpose, the "vote of a majority
of the outstanding voting securities" of the Company or the Fund, as
applicable, means the vote of the lesser of (1) 67% of the shares of the
Company or Fund, as applicable, if the holders of more than 50% of the
outstanding shares of the Company or Fund, as applicable, are present in person
or by proxy; or (2) more than 50% of the outstanding shares of the Company or
Fund, as applicable. The Company has received an order from the Securities and
Exchange Commission that permits it to retain new Managers that are not
affiliated with the Adviser without obtaining shareholder approval.
Additionally, the Company will be required to hold a meeting to elect Directors
to fill any existing vacancies on the Board if, at any time, fewer than a
majority of the Directors have been elected by the shareholders of the Company.
In addition, the Articles of Incorporation provide that the holders of not less
than a majority of the outstanding shares of the Company may remove persons
serving as Director.
The Company's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board
of Directors, in which case the holders of the remaining shares would not be
able to elect any Directors.
-28-
<PAGE> 188
Custodian, Transfer Agent and Dividend Disbursing Agent
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, acts as custodian of the Company's assets, but plays no role in
making decisions as to the purchase or sale of portfolio securities for the
Fund.
Furman Selz serves as the Company's transfer agent pursuant to a
Service Agreement. For the periods ended March 31, 1996 and March 31, 1995,
pursuant to an agreement to limit Fund expenses, the Transfer Agent waived the
fees of $10,000 and $2,102 for the Small Cap Fund. Absent this waiver
agreement, the transfer agent fee would have been $23,536 and $8,137,
respectively. Pursuant to a Fund Accounting Agreement, the Company compensates
Furman Selz for providing fund accounting services for the Fund. Furman Selz
received $31,533 and $25,666 in fund accounting fees for the periods ended
March 31, 1996 and March 31, 1995, respectively.
Yield and Performance Information
The Fund may, from time to time, include its yield, effective yield
and average annual total return in advertisements or reports to shareholders or
prospective investors.
Quotations of yield for each class of shares will be based on the
investment income per share earned during a particular 30-day period, less
expenses accrued with respect to that class during a period ("net investment
income"), and will be computed by dividing net investment income for the class
by the maximum offering price per share of that class on the last day of the
period, according to the following formula:
YIELD = 2[(a-b + 1)(6)-1]
---
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the
last day of the period.
Quotations of average annual total return will be expressed in terms
of the average annual compounded rate of return of a hypothetical investment in
each class of shares of the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula:
P (1 + T)(n) = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return for the class, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect the deduction of the maximum
-29-
<PAGE> 189
sales charge and a proportional share of Fund and class-specific expenses (net
of certain reimbursed expenses) on an annual basis, and will assume that all
dividends and distributions are reinvested when paid.
Quotations of yield and total return will reflect only the performance
of a hypothetical investment in a class of shares of the Fund during the
particular time period shown. Yield and total return for the Fund will vary
based on changes in the market conditions and the level of the Fund's (and
classes') expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
In connection with communicating its yields or total return to current
or prospective unit holders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
For the period June 8, 1994 (commencement of operations) through March
31, 1996, the average annual total return for Class A shares was 29.65%. For
the period June 8, 1994 (commencement of operations) through March 31, 1996,
the average annual total return for Class D shares was 31.35%.
For the fiscal year ended March 31, 1996, the average annual total
return for Class A shares was 45.88% and 45.19% for Class D shares.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow
Jones Industrial Average, or other unmanaged indices so that investors may
compare the Fund's results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Fund.
Investors who purchase and redeem shares of the Fund through a
customer account maintained at a Service Organization may be charged one or
more of the following types of fees as agreed upon by the Service Organization
and the investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid
on those assets). Such fees will have the effect of reducing the yield and
average annual total return of the Fund for those investors.
-30-
<PAGE> 190
Independent Accountants
Price Waterhouse LLP serves as the independent accountants for the
Company. Price Waterhouse LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of SEC filings.
Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C., 20005,
passes upon certain legal matters in connection with the shares offered by the
Company and also acts as Counsel to the Company.
Registration Statement
This SAI and the Prospectus do not contain all the information
included in the Company's Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of
the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
-31-
<PAGE> 191
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC ASSET PRESERVATION FUND
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C>
CORPORATE OBLIGATIONS -- 62.2%
ASSET BACKED -- 1.8%
AAA/Aaa Prudential Home Mortgage
Securities,
6.50%, 2/25/2000....... 234,748 $ 232,900
-----------
BANKING -- 8.1%
A-/A2 BankAmerica Corp.,
7.50%, 3/15/1997....... 250,000 253,918
A-/A3 First Union Corp.,
9.45%, 6/15/1999....... 250,000 272,079
A/A2 NationsBank Corp.,
5.125%, 9/15/1998...... 250,000 243,769
BBB-/NR Union Planters Corp.,
10.125%, 4/01/1999..... 300,000 300,932
-----------
1,070,698
-----------
CHEMICALS -- 4.6%
A+/A2 ICI Wilmington Corp.,
7.625%, 3/15/1997...... 465,000 472,685
A/A1 Monsanto Corp.,
6.00%, 7/01/2000....... 140,000 137,802
-----------
610,487
-----------
COMPUTERS -- 3.0%
A/A3 IBM Corp.,
6.375%, 11/01/1997..... 250,000 251,250
A/A3 IBM Corp.,
6.375%, 6/15/2000...... 150,000 149,958
-----------
401,208
-----------
ENTERTAINMENT -- 1.9%
A+/A1 Bass America, Inc.,
6.75%, 8/01/1999....... 250,000 252,963
-----------
FINANCIAL SERVICES -- 17.1%
AA-/AA3 Associates Corp. North
America,
8.50%, 1/10/2000....... 100,000 106,750
A-/A3 Chrysler Financial Corp.,
Medium Term Note,
7.10%, 4/14/1997....... 250,000 253,194
AAA/Aaa General Motors Acceptance
Corp.,
8.10%, 9/19/1996....... 250,000 252,903
BBB/A3 Hutton (E.F.) Group Inc.,
8.875%, 5/01/1996...... 250,000 250,604
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C>
FINANCIAL SERVICES (CONTINUED)
A+/A1 ITT Hartford, Inc.,
7.25%, 12/01/1996...... 400,000 $ 402,966
A/Baa1 Lehman Brothers Holdings
Corp.,
6.90%, 7/15/1999....... 200,000 201,274
BBB/Baa1 Salomon, Inc., Medium
Term Note,
5.00%, 7/15/1996....... 250,000 249,232
BBB/Baa1 Salomon, Inc.,
6.00%, 4/15/1998....... 200,000 197,180
A/A3 Smith Barney Shearson
Holdings Corp.,
6.00%, 3/15/1997....... 250,000 250,479
A+/A2 Travelers, Inc.,
7.75%, 6/15/1999....... 100,000 103,873
-----------
2,268,455
-----------
FOOD SERVICING -- 1.9%
A+/A2 Grand Metropolitan
Investment Corp.,
6.50%, 9/15/1999....... 250,000 250,851
-----------
INSURANCE -- 2.3%
A+/A2 International Lease
Finance Corp.,
6.625%, 6/01/1996...... 300,000 300,503
-----------
INDUSTRIAL COMPONENT -- 1.9%
A/A1 Pepsico, Inc.,
6.80%, 5/15/2000....... 250,000 253,642
-----------
OIL/GAS - EXPLORATION -- 1.9%
AA-/A1 BP America Corp.,
7.43%, 2/15/1999....... 250,000 256,967
-----------
PHARMACEUTICALS -- 2.7%
A-/A2 American Home Products
Corp.,
7.70%, 2/15/2000....... 250,000 260,889
A-/A2 American Home Products
Corp.,
6.875%, 4/15/1997...... 100,000 101,080
-----------
361,969
-----------
</TABLE>
See accompanying notes to financial statements.
1
<PAGE> 192
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC ASSET PRESERVATION FUND
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
RETAIL -- 7.8%
BBB-/Baa3 Black & Decker,
6.625%, 11/15/2000..... 60,000 $ 59,792
BBB+/A3 Dayton Hudson Corp.,
9.50%, 3/1/2000........ 250,000 272,085
A-/Baa1 Mattel, Inc., 6.75%,
5/15/2000.............. 90,000 90,375
BBB+/Baa1 Sears Roebuck & Co.,
8.55%, 8/01/1996....... 250,000 252,449
BBB+/A2 Sears Roebuck & Co.,
8.20%, 4/15/1999....... 100,000 104,302
AA/Aa1 Wal-Mart Stores, Inc.,
6.125%, 10/01/1999..... 250,000 249,013
-----------
1,028,016
-----------
TOBACCO -- 3.1%
A/A2 American Brands, Inc.,
7.50%, 5/15/1999....... 100,000 103,261
A/A2 Philip Morris Co.,
6.375%, 1/15/1998...... 300,000 300,694
-----------
403,955
-----------
TRANSPORTATION - SHIPPING -- 1.1%
AA/Aa Federal Express Corp.,
9.83%, 7/09/1996....... 150,000 151,684
-----------
UTILITIES -- 1.9%
A-/A2 Carolina Power & Light
Co.,
6.875%, 10/01/1998..... 250,000 251,043
-----------
WASTE SERVICES -- 1.1%
A+/A1 WMX Technologies, Inc.,
4.875%, 6/15/1996...... 140,000 139,835
-----------
TOTAL CORPORATE
OBLIGATIONS (IDENTIFIED
COST $8,176,067)....... 8,235,176
-----------
MUNICIPAL OBLIGATIONS --
TENNESSEE -- 8.8%
GOVERNMENT AGENCY -- 0.8%
A/NR Loudon County Tennessee,
4.90%, 3/01/1997....... 105,000 104,436
-----------
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
MUNICIPAL OBLIGATIONS (CONTINUED)
HOUSING DEVELOPMENT -- 3.7%
AA/Aa Tennessee HDC,
5.20%, 1/01/1998....... 500,000 $ 490,214
-----------
UTILITIES -- 4.3%
AAA/Aaa West Knox Utilities
District, 8.40%,
12/01/1997............. 450,000 465,072
AAA/Aaa White House Utility
District of Robertson &
Summer Co.,
7.60%, 1/01/2000....... 100,000 104,443
-----------
569,515
-----------
TOTAL MUNICIPAL
OBLIGATIONS (IDENTIFIED
COST $1,149,064)....... 1,164,165
-----------
U.S. GOVERNMENT OBLIGATIONS -- 26.4%
MORTGAGED BACKED SECURITIES -- 13.0%
NR/NR Government National
Mortgage Association
Pool #276718,
9.75%, 8/15/1998....... 164,657 173,507
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #M90304,
6.00%, 11/01/1998...... 155,030 154,605
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #L90057,
6.00%, 11/01/1998...... 174,029 173,552
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #M15202,
6.00%, 9/01/1997....... 346,046 342,477
NR/NR Federal Home Loan
Mortgage Corp., Gold
Balloon #13099,
6.00%, 3/01/1997....... 238,756 236,294
NR/NR Federal Home Loan
Mortgage Corp. Pool
#M90163,
7.00%, 12/01/1997...... 179,138 180,761
NR/NR Federal Home Loan
Mortgage Corp. Gold
Balloon #L90037,
6.00%, 7/01/1998....... 405,522 401,340
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 193
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC ASSET PRESERVATION FUND
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (CONTINUED)
MORTGAGED BACKED SECURITIES (CONTINUED)
NR/NR Federal National Mortgage
Association #1508,
6.00%, 3/01/1998....... 71,162 $ 65,802
-----------
1,728,338
-----------
GOVERNMENT AGENCY OBLIGATIONS -- 13.4%
NR/NR Federal Home Loan Bank,
5.345%, 11/10/1997..... 100,000 99,090
NR/NR Federal Home Loan Bank,
5.49%, 2/28/2000....... 200,000 193,324
NR/NR Federal Home Loan Bank,
6.155%, 3/22/1999...... 250,000 247,419
NR/NR Federal Home Loan Bank,
6.405%, 4/10/2001**.... 250,000 248,255
NR/NR Federal Home Loan
Mortgage Corp.,
6.53%, 9/28/2000....... 250,000 247,931
NR/NR Federal Home Loan
Mortgage Corp.,
6.15%, 12/01/2000...... 100,000 98,566
NR/NR Federal National Mortgage
Association,
5.25%, 5/13/1998....... 250,000 245,345
NR/NR Federal National Mortgage
Association,
5.93%, 1/29/2001....... 100,000 96,535
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- ---------- --------- -----------
<S> <C> <C>
GOVERNMENT AGENCY OBLIGATIONS (CONTINUED)
NR/NR Federal National Mortgage
Association,
6.46%, 11/27/2000...... 300,000 $ 294,312
-----------
1,770,777
-----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED
COST $3,517,604)....... 3,499,115
-----------
U.S. TREASURY OBLIGATIONS -- 1.9%
NR/NR U.S. Treasury Notes,
6.875%, 10/31/1996..... 250,000 252,109
-----------
TOTAL U.S. TREASURY
OBLIGATIONS (IDENTIFIED
COST $251,373)......... 252,109
-----------
TOTAL INVESTMENTS -- 99.3%
(IDENTIFIED COST
$13,094,108)+............ $13,150,565
Cash and other assets in
excess of
liabilities -- 0.7%.... 90,106
-----------
NET ASSETS -- 100.0%..... $13,240,671
===========
</TABLE>
+ The cost of securities for federal income tax purposes is substantially the
same.
* See page 16 for Credit Ratings.
** When-issued security.
See accompanying notes to financial statements.
3
<PAGE> 194
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 42.0%
ADVERTISING/COMMUNICATIONS -- 0.9%
B/B2 Big Flower Press,
Inc.,
10.75%, 8/01/2003... 167,000 $ 170,340
B/B2 Heritage Media Corp.,
8.75%, 2/15/2006.... 181,000 175,117
-----------
345,457
-----------
AUTO RELATED -- 0.6%
A-/A3 General Motors Corp.,
8.125%, 4/15/2016... 250,000 250,897
-----------
BANKING -- 8.8%
BB-/B1 Banco Rio de la Plata,
8.50%, 7/15/1998.... 420,000 421,050
A-/A2 Comerica Bank,
8.375%, 7/15/2024... 350,000 371,020
NR/Aaa International Bank of
Reconstruction &
Development,
4.50%, 6/20/2000.... 75,000,000(H) 774,638
NR/Aaa Japanese Development
Bank,
6.50%, 9/20/2001.... 158,000,000(H) 1,793,137
-----------
3,359,845
-----------
BUILDING/FOREST PRODUCTS -- 1.2%
B+/B3 Pacific Lumber Co.,
10.50%, 3/01/2003... 500,000 477,500
-----------
BROADCASTING -- CABLE
TELEVISION -- 3.3%
B/B3 Adelphia
Communications
Corp.,
12.50%, 5/15/2002... 500,000 516,250
BB-/Ba3 Century Communications
Corp.,
9.75%, 2/15/2002.... 350,000 360,500
B+/B1 Jones Intercable Inc.,
11.50%, 7/15/2004... 350,000 385,000
-----------
1,261,750
-----------
CASINO & GAMBLING -- 0.8%
BB-/B2 California Hotel
Finance Corp.,
11.00%,
12/01/2002.......... 300,000 317,250
-----------
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
CHEMICALS -- 2.7%
B/B1 NL Industries, Inc.,
11.75%,
10/15/2003.......... 500,000 $ 518,750
BB-/B1 Rexene Corp.,
11.75%,
12/01/2004.......... 500,000 517,500
-----------
1,036,250
-----------
CONTAINERS - METAL -- 0.7%
BB-/B1 Sea Containers, Ltd.,
12.50%,
12/01/2004.......... 250,000 271,875
-----------
EDUCATION -- 0.3%
B/B2 Herff Jones, Inc.,
11.00%, 8/15/2005... 100,000 106,000
-----------
FOOD AND HOUSEHOLD
PRODUCTS -- 2.1%
B+/B1 Chiquita Brands Int'l,
Inc., 9.625%,
1/15/2004........... 350,000 347,375
B-/B2 Flagstar Corp.,
10.875%, 12/01/2002... 500,000 453,125
-----------
800,500
-----------
HEALTH CARE -- 0.3%
B-/B3 Merit Behavioral Care
Corp.,
11.50%, 11/15/2005++ . . . 90,000 96,300
-----------
INDUSTRIAL COMPONENTS -- 1.0%
NR/NR DESC Sociedad de
Fomento,
11.00%,
12/15/1997.......... 375,000 380,625
-----------
OFFICE EQUIPMENT -- 2.1%
B-/B3 Knoll Group, Inc.,
10.875%, 3/15/2006++ . . .250,000 255,000
B-/B3 United Stationers
Supply Co.,
12.75%, 5/01/2005... 500,000 562,500
-----------
817,500
-----------
OIL/GAS - EXPLORATION -- 1.9%
B-/B2 Plains Resources,
Inc.,
10.25%,
3/15/2006++......... 220,000 221,650
BB-/B2 Trans Texas Gas Corp.,
11.50%, 6/15/2002... 500,000 488,750
-----------
710,400
-----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 195
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
PAGING -- 0.9%
B-/B2 Metrocall, Inc.,
10.375%,
10/01/2007.......... 350,000 $ 343,875
-----------
PAPER PRODUCTS -- 3.1%
B+/B1 Container Corp.,
9.75%, 4/01/2003.... 350,000 347,813
BB-/Ba3 Repap New Brunswick,
9.875%, 7/15/2000... 350,000 350,000
B/B2 Stone Container,
Corp.,
10.75%, 4/01/2002... 500,000 483,125
-----------
1,180,938
-----------
PLASTIC PRODUCTS -- 1.8%
B/B2 Applied Extrusion
Technologies Corp.,
11.50%,
4/01/2002++ . . . . 350,000 360,500
B-/B3 Plastic Specialties &
Technologies Inc.,
11.25%,
12/01/2003.......... 350,000 337,750
-----------
698,250
-----------
POLLUTION CONTROL -- 1.0%
B/B3 Allied Waste
Industries, Inc.,
12.00%, 2/01/2004... 350,000 378,000
-----------
RETAIL -- 2.5%
B-/B3 Bruno's Inc.,
10.50%, 8/01/2005... 350,000 336,875
B/B1 Orchard Supply
Hardware Corp.,
9.375%, 2/15/2002... 350,000 343,000
B-/Caa Parisian, Inc.,
9.875%, 7/15/2003... 300,000 270,000
-----------
949,875
-----------
STEEL -- 0.9%
B/B2 Weirton Steel Corp.,
10.875%,
10/15/1999 . . . . . 350,000 357,000
-----------
TELECOMMUNICATIONS -- 1.8%
AAA/Aaa British Telecom plc,
7.125%, 9/15/2003... 275,000(K) 395,189
BB-/B1 Telecom Argentina,
8.375%,
10/18/2000 . . . . . . 315,000 297,105
-----------
692,294
-----------
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C> <C>
TEXTILES & APPAREL -- 2.7%
B/B3 Hartmarx Corp.,
10.875%,
1/15/2002........... 375,000 $ 318,750
D/Ca Ithaca Industries
Inc.,
11.125%, 12/15/2002## . . 500,000 215,000
B+/B3 West Point Stevens
Inc., 9.375%,
12/15/2005.......... 500,000 496,250
-----------
1,030,000
-----------
UTILITIES -- 0.6%
A+/A1 Consolidated Edison
Co., New York, Inc.,
7.50%, 6/15/2023.... 250,000 240,625
-----------
TOTAL CORPORATE
OBLIGATIONS
(IDENTIFIED COST
$16,242,214)........ 16,103,006
-----------
GOVERNMENT OBLIGATIONS -- 40.8%
ARGENTINA GOVERNMENT -- 1.1%
NR/NR Republic of Argentina,
Brady Bond, 5.00%,
3/31/2023#.......... 715,000 407,550
-----------
AUSTRALIA GOVERNMENT -- 0.6%
AAA/NR Australia Government,
13.00%, 7/15/2000... 240,000(A) 216,855
-----------
BELGIUM GOVERNMENT -- 0.7%
NR/Aa1 Belgium (Kingdom of),
8.25%, 2/14/2000.... 250,000(B) 267,776
-----------
CANADA GOVERNMENT -- 0.8%
NR/Aa1 Canada Government,
7.75%, 9/01/1999.... 195,000(C) 147,627
NR/Aa1 Canada Government,
7.25%, 6/01/2003.... 245,000(C) 178,129
-----------
325,756
-----------
DENMARK GOVERNMENT -- 1.7%
NR/NR Denmark (Kingdom of),
6.00%, 12/10/1999... 2,430,000(D) 433,232
NR/Aaa Denmark (Kingdom of),
8.00%, 3/15/2006.... 1,240,000(D) 225,701
-----------
658,933
-----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 196
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
GOVERNMENT OBLIGATIONS (CONTINUED)
FRANCE GOVERNMENT -- 3.3%
NR/Aaa France O.A.T.,
5.50%, 4/25/2004.... 1,490,000(E) $ 279,824
NR/Aaa France O.A.T.,
8.50%, 4/25/2003.... 4,300,000(E) 968,402
-----------
1,248,226
-----------
GERMANY GOVERNMENT -- 5.2%
NR/NR Deutsche Bundesbahn,
6.125%,
10/28/2003.......... 555,000(F) 379,864
NR/NR Deutsche Bundesbahn,
6.00%, 8/03/1998.... 1,335,000(F) 940,606
AAA/Aaa Treuhandansalt GRM,
6.25%, 3/04/2004.... 675,000(F) 469,449
AAA/Aaa Treuhandansalt GRM,
6.625%, 7/09/2003... 290,000(F) 207,815
-----------
1,997,734
-----------
ITALY GOVERNMENT -- 2.3%
NR/NR Buoni Poliennali del
Tesoro, 9.50%,
2/01/2001........... 920,000,000(G) 572,281
NR/NR Buoni Poliennali del
Tesoro, 12.50%,
3/19/1998........... 480,000,000(G) 319,008
-----------
891,289
-----------
NETHERLANDS GOVERNMENT -- 0.7%
NR/NR Netherlands
Government,
6.50%, 4/15/2003.... 180,000(I) 112,322
NR/NR Netherlands
Government,
5.75%, 1/15/2004.... 294,000(I) 173,734
-----------
286,056
-----------
SPAIN GOVERNMENT -- 1.6%
NR/NR Spain Government,
10.15%, 1/31/2006... 27,000,000(J) 223,500
NR/NR Spain Government,
9.90%, 10/31/1998... 46,000,000(J) 381,035
-----------
604,535
-----------
UNITED KINGDOM GOVERNMENT -- 1.8%
NR/Aaa Treasury Bond,
8.00%, 12/07/2000... 135,000(K) 210,712
<CAPTION>
CREDIT MARKET
RATING* PRINCIPAL VALUE
- -------- ----------- -----------
<S> <C> <C>
UNITED KINGDOM GOVERNMENT (CONTINUED)
NR/NR Treasury Bond,
8.50%, 12/07/2005... 315,000(K) $ 492,100
-----------
702,812
-----------
UNITED STATES GOVERNMENT -- 21.0%
MORTGAGE-BACKED
SECURITIES -- 10.2%
NR/NR Government National
Mortgage Association
#417293,
6.50%, 3/15/2026.... 1,020,000 966,763
NR/NR Government National
Mortgage Association
#423295,
6.50%, 3/15/2026.... 1,020,000 966,763
NR/NR Government National
Mortgage Association
#389070,
7.00%, 3/15/2026.... 1,019,702 993,885
NR/NR Government National
Mortgage Association
#425972,
7.00%, 3/15/2026.... 1,020,000 994,176
-----------
3,921,587
-----------
GOVERNMENT AGENCY
OBLIGATIONS -- 2.5%
NR/NR Federal National
Mortgage Assoc.,
5.83%, 2/20/2001.... 750,000 722,197
NR/NR Tennessee Valley
Authority,
7.75%, 12/15/2022... 250,000 248,438
-----------
970,635
-----------
U.S. TREASURY OBLIGATIONS -- 8.3%
NR/NR U.S. Treasury Note,
5.875%, 7/31/1997... 3,150,000 3,160,823
-----------
TOTAL UNITED STATES
GOVERNMENT
OBLIGATIONS......... 8,053,045
-----------
TOTAL GOVERNMENT
OBLIGATIONS
(IDENTIFIED COST
$15,624,005)........ 15,660,567
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 197
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC INCOME FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
CREDIT PRINCIPAL/ MARKET
RATING* SHARES VALUE
- -------- ----------- -----------
<S> <C> <C>
EQUITIES -- 1.5%
COMMON STOCK -- 0.1%
RETAIL -- 0.1%
NA/NA Grand Union Co.++..... 4,419 $ 26,514
-----------
PREFERRED STOCK -- 1.4%
PUBLISHING & PRINTING -- 1.4%
B/B2 K-III Communications
Corp., 2.875%, Sr.
Exchangeable........ 20,000 537,500
-----------
TOTAL EQUITIES
(IDENTIFIED COST
$777,450)........... 564,014
-----------
TOTAL INVESTMENTS
EXCLUDING SHORT-TERM
(IDENTIFIED COST
$32,643,669)........ 32,327,587
-----------
SHORT-TERM INVESTMENTS -- 1.6%
MONEY MARKET -- 1.6%
NR/NR Chase Manhattan Bank,
Bournemouth
5.375%, 4/01/1996... 615,000 615,000
-----------
TOTAL SHORT-TERM
INVESTMENTS
(IDENTIFIED COST
$615,000)........... 615,000
-----------
TOTAL INVESTMENTS -- 85.9%
(IDENTIFIED
COST $33,258,669)+............. 32,942,587
Cash and other assets,
net of
liabilities -- 14.1%... 5,394,559
-----------
NET ASSETS -- 100.0%............. $38,337,146
==========
</TABLE>
+ The cost of securities for Federal income tax purposes
is substantially the same.
++ Non-income producing security.
# Step bond. Republic of Argentina, Brady Bond, 5.00%
through 3/31/97; maturity rate increases to 6.00% on
3/31/99, until ultimate maturity date of 3/31/23.
* See page 16 for Credit Ratings.
** See page 16 for Concentration by Country.
++ Security restricted as to resale to qualified
institutional buyers under Rule 144A of the Securities
Act.
## Issuer in default.
Principal denominated in U.S. Dollars unless indicated by the following
currencies:
(A) Australian Dollars
(B) Belgian Francs
(C) Canadian Dollars
(D) Danish Krone
(E) French Francs
(F) German Deutsche Marks
(G) Italian Lira
(H) Japanese Yen
(I) Dutch Guilder
(J) Spanish Pesetas
(K) British Pounds
See accompanying notes to financial statements.
7
<PAGE> 198
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS -- 89.1%
AEROSPACE/DEFENSE -- 1.1%
16,000 Mitsubishi Heavy
Industries, Ltd. ..... $ 132,111 $ 139,170
20,000 Rolls-Royce plc ........ 52,853 66,001
------------ -----------
184,964 205,171
------------ -----------
AGRICULTURE -- 0.4%
88,000 Parmalat Finanziaria
S.p.A................. 80,542 81,084
------------ -----------
AUTO RELATED -- 2.6%
5,500 Debica S.A.............. 70,950 133,681
35,400 Magneti Marelli
S.p.A. ............... 75,477 47,954
21,000 Nissan Diesel Motor Co.
Ltd. ................. 131,444 163,683
10,000 Suzuki Motor Co.,
Ltd. ................. 114,748 124,259
------------ -----------
392,619 469,577
------------ -----------
BANKING -- 11.4%
5,600 Abbey National plc...... 46,952 48,168
3,100 Ahmanson (H.F.) &
Co. .................. 67,321 75,175
26,070 Allied Irish Banks
plc................... 124,106 132,633
2,100 AmSouth Bancorp......... 85,684 81,637
6,000 Banco Frances del Rio de
la Plata
S.A. -- ADR#.......... 106,041 164,250
2,020 Banco Santander S.A. ... 85,031 96,486
12,000 Bangkok Bank Co.,
Ltd. ................. 104,626 161,584
50,000 CMIC Finance &
Securities Co.,
Ltd. ................. 189,066 166,337
415 Commerzbank AG.......... 91,104 96,144
2,700 First Security Corp. ... 75,087 74,925
1,600 First American Corp. ... 72,019 71,200
6,150 Komercni Banka
A.S. -- GDR*++........ 119,925 153,258
8,112 Lloyds TSB Group plc.... 32,068 38,730
18,000 Malayan Banking
Berhad................ 173,562 168,038
14,000 Oversea -- Chinese
Banking Corp. Ltd..... 165,124 188,167
3,700 Peoples Bank of
Bridgeport............ 77,424 79,550
4,000 Sumitomo Bank Ltd. ..... 77,996 81,333
10,000 Sumitomo Trust &
Banking Ltd. ......... 142,647 138,379
2,600 Washington Mutual,
Inc. ................. 77,891 77,350
------------ -----------
1,913,674 2,093,344
------------ -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
BUILDING MATERIALS AND COMPONENTS -- 2.8%
16,500 Blue Circle Industries
plc................... $ 77,546 $ 85,962
4,290 Cimpor Cimentos De
Portugal S.A. ........ 69,823 81,094
4,800 Matsumoto Kenko
Co., Ltd.*............ 162,151 160,407
1,685 Portland Valderrivas
S.A................... 125,835 104,453
1,300 Texas Industries,
Inc. ................. 78,415 82,712
------------ -----------
513,770 514,628
------------ -----------
BREWERY -- 0.4%
3,800 Coors (Adolph) Co.
Cl. "B"................. 82,854 67,925
------------ -----------
BUSINESS EQUIPMENT -- 0.7%
7,000 Canon Inc. ............. 114,257 134,425
------------ -----------
CHEMICALS -- 2.4%
4,000 BOC Group plc........... 45,135 54,084
10,000 Nippon Sanso Corp. ..... 52,693 52,245
3,145 Norsk Hydro AS.......... 138,029 137,496
5,000 Reliance Industries,
Ltd. -- GDR*++........ 69,375 72,500
2,200 Sociedad Quimica Y
Minera De
Chile -- ADR#......... 94,158 114,950
------------ -----------
399,390 431,275
------------ -----------
COMMERCIAL SERVICES -- 0.6%
2,100 Robert Half
International,
Inc.*................. 49,600 102,112
------------ -----------
COMPUTER EQUIPMENT -- 3.0%
1,800 Adaptec, Inc.*.......... 59,060 86,850
3,600 Cognex Corp.*........... 69,858 92,250
2,800 Gateway 2000, Inc.*..... 56,000 78,050
2,600 Komag, Inc.*............ 90,776 63,050
1,900 Seagate Technology,
Inc.*................. 44,435 104,025
1,000 U.S. Robotics Corp. .... 70,363 129,250
------------ -----------
390,492 553,475
------------ -----------
COMPUTER SOFTWARE -- 0.9%
1,350 McAfee Associates,
Inc.*................. 46,706 73,912
2,200 Parametric Technology
Corp.*................ 73,994 86,075
------------ -----------
120,700 159,987
------------ -----------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 199
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CONGLOMERATE -- 1.4%
10,000 I.T.C.,
Ltd. -- GDR*++........ $ 75,500 $ 75,000
327,500 Mondragon International
Philippines, Inc.*.... 93,459 187,500
------------ -----------
168,959 262,500
------------ -----------
CONSTRUCTION -- 3.0%
1,900 Centex Corp. ........... 67,888 58,900
8,400 Gujarat Ambuja Cements,
Ltd. -- GDR*++........ 50,000 102,901
4,800 Kaufman & Broad
Home Corp. ........... 77,895 76,800
5,000 Keppel Corporation
Ltd................... 42,155 45,513
2,800 Lennar Corp. ........... 69,468 70,350
2,300 Pulte Corp. ............ 74,668 61,812
11,000 Sekisui House, Ltd. .... 140,392 138,756
------------ -----------
522,466 555,032
------------ -----------
ELECTRICAL AND ELECTRONICS -- 7.7%
1,100 Altera Corp.*........... 75,416 61,462
2,700 Atmel Corp.*............ 34,188 68,512
1,700 Avnet, Inc. ............ 92,690 82,025
5,800 Cypress Semiconductor
Corp.*................ 62,471 68,150
84 General Electric Co.
plc................... 341 470
3,900 International
Rectifier Corp.*...... 93,492 70,200
2,400 Kent Electronics
Corp.*................ 79,453 84,900
2,000 Lattice Semiconductor
Corp.*................ 76,701 56,750
1,600 Linear Technology
Corp. ................ 61,200 66,800
6,000 Matsushita
Communications
Industrial Co. ....... 139,090 143,462
2,300 Maxim Integrated
Products, Inc.*....... 66,838 71,300
1,100 Novellus Systems,
Inc.*................. 38,940 48,400
7,000 Omron Corp. ............ 129,104 156,171
1,900 SCI Systems, Inc.*...... 67,761 69,588
1,800 Silicon Valley Group,
Inc.*................. 79,667 43,875
1,600 Solectron Corp.*........ 78,283 70,400
3,000 TDK Corp. .............. 142,084 155,606
2,400 Wyle Electronics Co. ... 97,205 83,100
------------ ----------
1,414,924 1,401,17
------------ ----------
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
ENTERTAINMENT -- 1.9%
4,690 Filmes Lusomundo Co. ... $ 58,780 $ 30,847
1,800 King World Productions,
Inc.*................. 75,463 74,475
12,000 Rank Organisation plc... 81,557 88,918
28,000 Resorts World Berhad.... 161,372 159,494
------------ -----------
377,172 353,734
------------ -----------
FINANCIAL SERVICES -- 5.8%
1,600 Alex Brown, Inc. ....... 65,096 83,000
4,100 Bear Stearns Companies,
Inc. ................. 83,821 101,475
1,650 Cie Parisienne De
Reescompte............ 124,312 143,018
530 Cie Bancaire S.A. ...... 52,250 54,388
2,900 Edwards (A.G.), Inc. ... 67,237 72,138
1,600 Golden West
Financial Corp. ...... 83,971 85,800
10,800 Instituto Mobiliare
Italiano S.p.A........ 72,452 74,116
3,600 Lehman Brothers Holding,
Inc. ................. 74,978 96,300
6,000 Nomura Securities Co.
Ltd. ................. 113,296 132,731
3,400 Paine Webber Group,
Inc. ................. 66,079 74,800
1,900 Salomon, Inc. .......... 69,939 71,250
1,400 SunAmerica Inc. ........ 67,109 70,525
----------- -----------
940,540 1,059,541
----------- -----------
FOOD & HOUSEHOLD PRODUCTS -- 1.2%
90 Nestle SA............... 97,039 101,812
6,000 Unilever plc............ 119,071 111,835
------------ -----------
216,110 213,647
------------ -----------
FOREST PRODUCTS & PAPER -- 0.2%
5,200 Grupo Industrial
Durango,
S.A. -- ADR*#......... 69,532 35,750
------------ -----------
HOLDING COMPANIES, DIVERSIFIED -- 2.2%
15,000 Barlow, Ltd. ........... 210,842 192,081
16,500 Benpress Holdings
Corp. -- GDR*++....... 111,250 107,250
19,000 BTR plc................. 102,678 91,584
1,240 Italmobiliare S.p.A..... 40,133 17,788
------------ -----------
464,903 408,703
------------ -----------
INSURANCE -- 4.5%
2,000 American Bankers
Insurance Group,
Inc. ................. 57,750 70,500
1,100 American National
Insurance Co. ........ 71,145 74,250
3,500 Assurances Generales
de France............. 114,955 97,637
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 200
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
INSURANCE (CONTINUED)
2,057 AXA Co. ................ $ 103,414 $ 126,848
3,300 Bankers Life Holding
Corp. ................ 75,480 73,837
1,600 Berkley Corp. .......... 77,221 74,000
5,500 Commercial Union plc.... 52,227 47,897
1,300 Conseco, Inc. .......... 70,008 94,087
3,450 Fremont General
Corp. ................ 81,142 81,506
2,800 Penncorp Financial
Group, Inc. .......... 64,568 88,200
------------ -----------
767,910 828,762
------------ -----------
INVESTMENT COMPANIES -- 1.4%
15,000 Korea-Europe Fund
Ltd. ................. 110,625 121,875
13,000 ROC Taiwan Fund*........ 135,040 134,875
------------ -----------
245,665 256,750
------------ -----------
MACHINERY & MANUFACTURING -- 1.6%
340 Mannesmann AG........... 111,531 124,621
7,000 Mori Seiki Co. ......... 150,381 148,922
380 Orkla A.S. Cl. "A"...... 20,357 17,535
------------ -----------
282,269 291,078
------------ -----------
MEDICAL SUPPLIES -- 0.4%
1,473 Boston Scientific
Corp.*................ 24,908 67,758
------------ -----------
METALS -- DIVERSIFIED -- 1.3%
3,400 Madeco S.A. --ADR#...... 84,783 85,000
29,000 Mitsubishi Materials
Corp. ................ 137,564 156,971
------------ -----------
222,347 241,971
------------ -----------
MINING -- 1.2%
7,000 De Beers Consolidated
Mines, Ltd.+++........ 214,497 224,973
------------ -----------
OIL/GAS - EXPLORATION -- 3.8%
4,000 British Petroleum plc... 25,157 35,048
1,700 Columbia Gas System,
Inc. ................. 74,872 77,988
2,200 Cooper Cameron Corp.*... 77,694 92,400
2,200 Helmerich & Payne,
Inc. ................. 74,511 74,250
8,000 Noble Drilling
Corp.* ............... 79,625 99,000
3,200 Valero Energy Corp. .... 65,286 78,800
1,500 Williams Cos., Inc. .... 65,029 75,562
8,100 YPF Sociedad
Anonima -- ADR#....... 142,953 163,012
------------ -----------
605,127 696,060
------------ -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
PETROCHEMICALS -- 0.7%
90,000 Aromatics (Thailand)
plc*.................. $ 125,889 $ 120,297
------------ -----------
PHARMACEUTICALS -- 1.3%
1,300 Cardinal Health,
Inc. ................. 77,428 83,525
2,000 Glaxo Wellcome plc...... 23,939 25,086
6,000 Yamanouchi
Pharmaceutical Co. ... 135,479 134,425
------------ -----------
236,846 243,036
------------ -----------
PUBLISHING & PRINT -- 2.2%
1,790 Elsevier NV............. 16,370 27,490
41,000 News Corp., Ltd. ....... 238,072 239,960
8,550 Vnu -- Ver Ned Uitgev
Ver Bezit............. 105,791 142,725
------------ -----------
360,233 410,175
------------ -----------
REAL ESTATE -- 3.1%
15,000 Cheung Kong Holdings,
Ltd. ................. 82,038 105,723
40,000 Hong Kong Land Holdings,
Ltd................... 78,517 96,036
20,000 Singapore Land Ltd...... 129,033 146,494
24,000 Sotogrande S.A.*........ 76,353 51,208
12,000 Sun Hung Kai Properties
Ltd. ................. 74,044 107,469
3,450 Vallehermoso S.A........ 60,871 62,180
------------ -----------
500,856 569,110
------------ -----------
RETAIL -- 4.7%
10,000 Argyll Group plc........ 47,330 46,903
80,000 Cifra S.A. de
C.V. -- ADR*#......... 128,400 106,504
14,000 Cia Brasileira de Distr.
Grupo Pao de Acucar --
GDR*++##.............. 150,500 171,500
1,900 COMPUSA, Inc.* ......... 61,389 105,213
21,000 Itochu Corp. ........... 141,774 148,263
7,000 Kingfisher plc.......... 55,629 60,852
2,900 Ross Stores, Inc. ...... 74,080 72,863
2,400 Vendex International
NV.................... 70,387 68,909
2,300 Vons Companies, Inc.*... 42,042 71,587
------------ -----------
771,531 852,594
------------ -----------
SHOES -- 0.5%
1,200 Nike, Inc. Cl. "B"...... 37,086 97,500
------------ -----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 201
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC GLOBAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
STEEL -- 1.5%
40,000 Nippon Steel Co. ....... $ 141,818 $ 138,567
49,000 Nippon Kokan Kabushiki
Corp.*................ 129,700 142,530
------------ -----------
271,518 281,097
------------ -----------
TELECOMMUNICATIONS -- 4.4%
6,000 Cable & Wireless plc.... 36,985 48,767
1,700 Glenayre Technologies,
Inc.* . . 60,138 65,025
45,000 PT Indonesian
Satellite -- Foreign
Registered............ 165,359 154,459
50,000 Telecom Corporation of
New Zealand........... 184,265 224,301
32,000 Telecom Italia Mobile
S.p.A................. 38,179 58,275
59,600 Telecom Italia Mobile
S.p.A. -- Drnc.
Risp. ................ 58,100 65,808
1,800 Telecomunicacoes
Brasileiras
S.A. -- ADR#.......... 72,675 91,122
3,000 Telefonos De Mexico
S.A., Cl.
"L" -- ADR#........... 115,085 98,625
------------ -----------
730,786 806,382
------------ -----------
TEXTILES AND APPAREL -- 1.4%
2,400 Liz Claiborne, Inc. .... 67,944 82,200
33,000 Teijin Ltd. ............ 168,174 183,282
------------ -----------
236,118 265,482
------------ -----------
TRANSPORTATION -- 1.6%
2,900 Comair Holdings,
Inc. ................. 73,985 100,775
1,700 Continental Airlines,
Inc. Cl "B"*.......... 78,562 95,837
10,000 Swire Pacific, Ltd. Cl.
"A"................... 81,454 87,941
------------ -----------
234,001 284,553
------------ -----------
UTILITIES -- 3.6%
1,400 Consolidated Natural Gas
Co. . . 62,384 60,900
2,200 Illinova Corp. ......... 65,032 61,875
2,900 Indiana Energy, Inc. ... 76,248 69,600
2,300 National Fuel Gas
Co. .................. 75,749 79,638
<CAPTION>
MARKET
SHARES COST VALUE
- ---------- ----------- -----------
<C> <S> <C>
UTILITIES (CONTINUED)
8,400 Noram Energy Corp. ..... $ 77,754 $ 77,700
3,000 Oneok, Inc. ............ 65,151 71,625
2,600 Pacific Enterprises..... 66,711 67,275
2,400 Peoples Energy Corp. ... 76,503 77,700
3,723 Union Electrica Fenosa
S.A. ................. 17,546 20,401
3,000 Washington Gas Light
Co. .................. 66,247 65,625
------------ -----------
649,325 652,339
------------ -----------
WINE & SPIRITS -- 0.2%
4,500 Grand Metropolitan
plc................... 28,771 29,013
------------ -----------
TOTAL COMMON STOCKS..... 14,963,151 16,322,011
------------ -----------
TOTAL EXCLUDING
SHORT-TERM
INVESTMENTS . . 14,963,151 16,322,011
------------ -----------
SHORT-TERM INVESTMENTS -- 8.3%
1,527,000 Chase Manhattan Bank,
London Time Deposit,
5.375%, due
4/01/1996............. 1,527,000 1,527,000
------------ -----------
TOTAL SHORT-TERM
INVESTMENTS........... 1,527,000 1,527,000
------------ -----------
TOTAL
INVESTMENTS -- 97.4%.. $16,490,151+ 17,849,011
===========
Cash and other assets,
net of
liabilities -- 2.6%... 473,120
-----------
NET ASSETS -- 100.0%.... $18,322,131
==========
* Non-Income Producing Securities.
+ The cost of securities for Federal income tax purposes
is substantially the same.
** See page 16 for Concentration by Country.
# American Depository Receipts.
++ Global Depository Receipts.
## At fair value as determined by the Board of Directors.
+++ Shares represent a unit, consisting of one deferred
share and one depositary receipt.
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 202
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC SMALL CAP FUND
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------- ----------- -----------
<C> <S> <C>
COMMON STOCKS -- 78.6%
AUTO RELATED -- 2.2%
37,400 Metrotrans Corp.* ....... $ 372,781 $ 467,500
50,000 Spartan Motors, Inc. .... 528,133 381,250
----------- -----------
900,914 848,750
----------- -----------
BANKING -- 2.4%
38,950 Sirrom Capital Corp. .... 467,856 890,981
----------- -----------
CHEMICALS -- 4.9%
45,000 Synalloy Corp. .......... 648,005 855,000
55,000 Carbide/Graphite Group, 850,525 990,000
Inc. (The)*............
----------- -----------
1,498,530 1,845,000
----------- -----------
COMMERCIAL SERVICES -- 13.3%
71,300 B.I., Inc.*.............. 520,804 597,138
59,800 Childrens Comprehensive 396,484 642,850
Services, Inc.* .......
84,000 Compucom Systems, 536,390 724,500
Inc.*..................
32,000 Norrell Corp., Inc. ..... 700,799 1,060,000
28,800 Regis Corp............... 517,666 885,600
37,650 Right Management 637,919 1,110,675
Consultants, Co.*......
----------- -----------
3,310,062 5,020,763
----------- -----------
COMPUTER SOFTWARE -- 1.1%
16,000 Micro Systems, Inc.* .... 434,456 400,000
----------- -----------
ELECTRICAL & ELECTRONICS -- 4.8%
40,200 Aseco Corp.*............. 393,224 462,300
40,000 CEM Corp.*............... 522,287 560,000
30,000 Electro Scientific 767,835 558,750
Industries, Inc.*......
38,700 Quad Systems Corp..*..... 248,589 246,712
----------- -----------
1,931,935 1,827,762
----------- -----------
ENTERTAINMENT -- 3.6%
48,300 Speedway Motorsports, 546,231 1,364,475
Inc.*..................
----------- -----------
FINANCIAL SERVICES -- 2.5%
64,700 Amresco, Inc. ........... 774,938 946,238
----------- -----------
FURNITURE/HOME APPLIANCE -- 2.2%
39,200 Aaron Rents, Inc. Cl. 569,951 813,400
"B"....................
----------- -----------
HEALTH CARE PROVIDERS -- 9.8%
94,000 American Healthcorp 885,863 834,250
Inc.*..................
30,000 American Homepatient, 645,865 1,177,500
Inc.* . .
39,000 Renal Treatment Centers, 453,664 926,250
Inc.* . .
36,500 Res-Care, Inc.*.......... 719,563 761,938
----------- -----------
2,704,955 3,699,938
----------- -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ------- ----------- -----------
<C> <S> <C>
INSURANCE -- 2.2%
25,950 Vesta Insurance Group, $ 569,389 $ 846,619
Inc. ..................
----------- -----------
MACHINERY -- 4.9%
47,700 Computational Systems, 702,732 846,675
Inc.* . .
21,450 Roper Industries Inc. ... 760,229 986,700
----------- -----------
1,462,961 1,833,375
----------- -----------
MANUFACTURING -- 4.6%
33,000 Asyst Technologies, 992,717 750,750
Inc.*..................
64,000 Cavalier Homes, Inc. .... 469,480 992,000
----------- -----------
1,462,197 1,742,750
----------- -----------
MEDICAL SUPPLIES -- 0.2%
5,000 Fischer Imaging Corp. ... 66,250 72,500
----------- -----------
METALS -- DIVERSIFIED -- 2.7%
25,000 Wolverine Tube, Inc.*.... 789,560 1,015,625
----------- -----------
OIL -- GAS EXPLORATION -- 1.4%
40,000 Oceaneering 486,863 545,000
International, Inc.*...
----------- -----------
PHARMACEUTICALS -- 1.6%
25,000 Medicis 611,854 600,000
Pharmaceutical*........
----------- -----------
PERSONAL CARE -- 5.5%
45,400 Inbrand Corp.*........... 673,424 1,032,850
34,800 Rexall Sundown, Inc.*.... 513,104 1,048,350
----------- -----------
1,186,528 2,081,200
----------- -----------
PUBLISHING & PRINT -- 1.1%
23,400 Cadmus Communications 570,525 400,725
Corp. .................
----------- -----------
RESTAURANT -- 2.7%
40,300 Daka International, 930,718 1,017,575
Inc.*..................
----------- -----------
SHOES -- 3.0%
44,700 Fuqua Enterprises, 1,011,837 1,145,437
Inc.*..................
----------- -----------
TRANSPORTATION -- AIR -- 1.9%
62,500 Mesaba Holdings Inc. .... 480,625 703,125
----------- -----------
$22,769,135+ $29,661,238
TOTAL
INVESTMENTS -- 78.6%...
==========
8,076,041
Cash and other assets,
net of
liabilities -- 21.4%...
-----------
$37,737,279
NET ASSETS -- 100.0%.....
==========
</TABLE>
* Non-Income Producing Securities
+ The cost of securities for Federal income tax purposes is substantially
the same.
See accompanying notes to financial statements.
12
<PAGE> 203
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C> <C>
COMMON STOCKS -- 95.8%
AUTO RELATED -- 2.7%
9,000 Custom Chrome, Inc.*..... $ 180,540 $ 219,375
5,000 Daimler Benz 246,275 270,625
AG -- ADR# . .
9,400 Metrotrans Corp.*........ 93,125 117,500
19,200 Spartan Motors, Inc. .... 187,119 146,400
----------- -----------
707,059 753,900
----------- -----------
BANKING -- 11.0%
4,400 Ahmanson (H.F.) & Co. ... 95,552 106,700
3,100 Amsouth Bancorporation... 121,086 120,513
1,900 Astoria Financial
Corp. ................. 60,677 96,663
3,000 Banco Bilbao Vizcaya --
ADR#................... 67,417 111,375
7,800 Corp Bancaria Espana --
ADR#................... 166,218 162,825
2,400 First American Corp.
Tennessee ............. 108,029 106,800
9,200 First Bell Bancorp,
Inc. .................. 112,590 126,500
6,500 First Mutual Bancorp,
Inc. .................. 83,077 83,687
4,000 First Security Corp. .... 111,240 111,000
5,900 Frankfort First Bancorp,
Inc. .................. 74,004 83,338
14,600 F.S.F. Financial
Corp. ................. 187,975 184,325
13,000 Glendale Federal Bank
FSB*................... 126,030 235,625
5,500 GP Financial Corp. ...... 132,055 151,250
8,140 IBS Financial Corp. ..... 69,819 117,013
6,000 Industrial Bancorp,
Inc. .................. 75,042 91,500
13,400 Instituto Mobiliare
Italiano -- ADR#....... 251,891 278,050
2,400 Morgan (J.P.) & Co. ..... 146,444 199,200
3,400 MLF Bancorp, Inc......... 47,804 81,175
5,900 Peoples Bank of
Bridgeport............. 120,441 126,850
14,000 Sirrom Capital Corp. .... 163,688 320,250
4,000 Washington Mutual,
Inc. .................. 119,846 119,000
5,400 Westerfed Financial
Corp. ................. 73,224 80,325
----------- -----------
2,514,149 3,093,964
----------- -----------
BREWERY -- 0.4%
5,500 Coors (Adolph) Company,
Inc. Cl. "B"........... 124,644 98,313
----------- -----------
BUILDING MATERIALS &
COMPONENTS -- 0.5%
2,000 Texas Industries,
Inc. .................. 120,638 127,250
----------- -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
CHEMICALS -- 1.9%
12,600 Carbide/Graphite Group,
Inc. (The)*............ $ 212,840 $ 226,800
16,000 Synalloy Corp. .......... 205,925 304,000
----------- -----------
418,765 530,800
----------- -----------
COMMERCIAL SERVICES -- 6.1%
20,000 B.I., Inc.*.............. 143,153 167,500
9,900 Children's Comprehensive
Services, Inc.*........ 54,598 106,425
30,000 Compucom Systems,
Inc.*.................. 180,000 258,750
9,000 Norrell Corp. ........... 175,500 298,125
11,900 Regis Corp. ............. 181,838 365,925
12,150 Right Management
Consultants, Inc.*..... 169,263 358,425
3,100 Robert Half
International, Inc.*... 68,730 150,738
----------- -----------
973,082 1,705,888
----------- -----------
COMPUTER EQUIPMENT -- 3.3%
2,500 Adaptec, Inc.*........... 82,028 120,625
4,800 Cognex Corp.*............ 93,144 123,000
4,300 Gateway 2000, Inc.*...... 91,902 119,863
3,800 Komag, Inc.*............. 122,972 92,150
3,400 Parametric Technology
Corp.* ................ 114,344 133,025
2,800 Seagate Technology,
Inc.*.................. 71,074 153,300
1,400 U.S. Robotics Corp.*..... 98,509 180,950
----------- -----------
673,973 922,913
----------- -----------
COMPUTER SOFTWARE -- 0.8%
2,150 McAfee Associates,
Inc.*.................. 74,383 117,713
4,000 Micros Systems, Inc.*.... 105,214 100,000
----------- -----------
179,597 217,713
----------- -----------
ELECTRICAL & ELECTRONICS -- 11.9%
25,000 Alcatel
Alsthom -- ADR#........ 463,875 462,500
1,600 Altera Corp.*............ 109,696 89,400
13,000 Aseco Corp.*............. 105,500 149,500
3,900 Atmel Corp.*............. 61,891 99,450
2,500 Avnet, Inc. ............. 125,026 120,625
1,600 BBC Brown Boveri,
Ltd. -- ADR#........... 131,896 194,483
16,000 CEM Corp.*............... 210,390 224,000
13,100 Checkmate Electronics,
Inc.*.................. 118,638 170,300
8,600 Cypress Semiconductor
Corp.* ................ 92,921 101,050
8,500 Electro Scientific
Industries Inc.*....... 182,500 158,312
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 204
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
ELECTRICAL & ELECTRONICS (CONTINUED)
4,700 Hitachi, Ltd. ........... $ 478,811 $ 458,838
5,800 Int'l Rectifier
Corp.* ................ 134,374 104,400
3,600 Kent Electronics
Corp.*................. 119,180 127,350
2,700 Lattice Semiconductor
Corp.*................. 103,424 76,613
2,500 Linear Technology
Corp. ................. 95,625 104,375
3,500 Maxim Integrated
Products............... 126,637 108,500
1,600 Novellus Systems,
Inc.*.................. 75,125 71,200
20,000 Quad Systems Corp.*...... 130,700 127,500
2,800 Sci Systems, Inc.*....... 99,868 102,550
2,300 Silicon Valley Group,
Inc.*.................. 101,815 56,063
2,500 Solectron Corp.*......... 122,317 110,000
3,400 Wyle Electronics Co. .... 129,406 117,725
----------- -----------
3,319,615 3,334,734
----------- -----------
ENTERTAINMENT -- 2.0%
2,700 King World Productions,
Inc.* . . 113,195 111,713
16,000 Speedway Motorsports,
Inc.*.................. 144,480 452,000
----------- -----------
257,675 563,713
----------- -----------
FINANCIAL SERVICES -- 4.7%
2,200 Alex Brown, Inc. ........ 112,332 114,125
22,000 Ampresco, Inc. .......... 270,450 321,750
6,000 Bear Stearns Cos.,
Inc. .................. 122,190 148,500
5,000 Edwards (A.G.), Inc. .... 117,470 124,375
2,400 Golden West Financial
Corp. . . 125,957 128,700
5,500 Lehman Brothers Holding,
Inc. .................. 115,043 147,125
4,900 Paine Webber Group,
Inc. .................. 95,232 107,800
3,000 Salomon, Inc. ........... 111,507 112,500
2,200 Sunamerica, Inc. ........ 105,457 110,825
----------- -----------
1,175,638 1,315,700
----------- -----------
FOOD & HOUSEHOLD PRODUCTS -- 2.7%
15,000 Groupe Danone ADR#....... 479,235 459,974
5,200 Nestle S.A. -- ADR#...... 233,477 293,103
----------- -----------
712,712 753,077
----------- -----------
FURNITURE/HOME APPLIANCE -- 1.2%
16,000 Aaron Rents, Inc. Cl.
"B".................... 228,637 332,000
----------- -----------
HOMEBUILDERS -- 1.4%
2,900 Centex Corp. ............ 103,619 89,900
7,000 Kaufman & Broad Home
Corp. ................. 113,597 112,000
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
HOMEBUILDERS (CONTINUED)
4,300 Lennar Corp. ............ $ 110,953 $ 106,963
3,300 Pulte Corp. ............. 108,948 88,688
----------- -----------
437,117 397,551
----------- -----------
HEALTH CARE PROVIDERS -- 3.9%
29,000 American Healthcorp.,
Inc.*.................. 275,500 257,375
9,000 American Homepatient,
Inc.* . . 179,000 353,250
12,000 Renal Treatment Centers,
Inc.* . . 138,133 285,000
9,900 Res -- Care, Inc.*....... 199,931 206,663
----------- -----------
792,564 1,102,288
----------- -----------
INSURANCE -- 6.2%
3,100 American Bankers
Insurance Group,
Inc. .................. 92,924 109,275
1,500 American National
Insurance Co. ......... 93,693 101,250
4,800 Bankers Life Holding
Corp. ................. 109,815 107,400
2,300 Berkley Corp. ........... 110,879 106,375
1,900 Conseco, Inc. ........... 102,319 137,513
5,250 Fremont General Corp. ... 123,381 124,031
4,100 Lincoln National
Corp. ................. 148,982 208,075
2,800 Loews Corp............... 123,409 211,750
4,100 Penncorp Financial Group,
Inc. .................. 113,491 129,150
5,600 Safeco Corp. ............ 158,493 187,600
9,750 Vesta Insurance Group,
Inc. .................. 204,567 318,094
----------- -----------
1,381,953 1,740,513
----------- -----------
MANUFACTURING -- 5.3%
10,000 Asyst Technologies,
Inc.*.................. 298,713 227,500
22,500 Cavalier Homes, Inc. .... 146,891 348,750
11,750 Computational Systems,
Inc.* . . 171,844 208,563
7,000 Roper Industries,
Inc. .................. 241,500 322,000
3,400 Seimens AG -- ADR#....... 329,700 374,225
----------- -----------
1,188,648 1,481,038
----------- -----------
MEDICAL SUPPLIES -- 0.4%
2,256 Boston Scientific
Corp.*................. 38,148 103,776
----------- -----------
METALS -- DIVERSIFIED -- 1.0%
7,000 Wolverine Tube, Inc.*.... 196,188 284,375
------------ -----------
MULTI-INDUSTRY -- 0.6%
23,000 Jardine Matheson Holdings
Ltd. -- ADR#........... 172,690 179,400
----------- -----------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 205
ESC STRATEGIC FUNDS, INC.
THE ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1996
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
OIL/GAS - EXPLORATION -- 5.4%
2,500 Columbia Gas............. $ 110,106 $ 114,688
3,200 Cooper Cameron Corp.*.... 112,881 134,400
7,300 Elf Aquitane -- ADR#..... 255,988 247,288
3,300 Helmerich & Payne........ 111,766 111,375
11,700 Noble Drilling Corp.*.... 116,438 144,788
7,800 Repsol S.A. -- ADR#...... 238,093 291,525
4,700 Valero Energy Corp. ..... 95,906 115,737
2,300 Williams Cos. Inc. ...... 99,691 115,861
11,400 YPF Sociedad Anonima --
ADR#................... 221,847 229,425
----------- -----------
1,362,716 1,505,087
----------- -----------
PERSONAL CARE -- 2.4%
12,500 Inbrand Corp.*........... 172,720 284,375
13,000 Rexall Sundown, Inc.*.... 168,938 391,625
----------- -----------
341,658 676,000
----------- -----------
PUBLISHING & PRINTING -- 0.7%
10,550 Cadmus Communications
Corp. ................. 255,284 180,669
----------- -----------
PHARMACEUTICALS -- 1.0%
1,900 Cardinal Health, Inc. ... 113,163 122,075
7,000 Medicis Pharmaceutical
Corp.* . . 175,000 168,000
----------- -----------
288,163 290,075
----------- -----------
RESTAURANTS -- 1.1%
12,000 Daka International,
Inc.*.................. 218,750 303,000
----------- -----------
RETAIL -- 2.6%
2,700 COMPUSA, Inc.*........... 93,477 149,512
4,200 Ross Stores, Inc. ....... 107,288 105,525
3,500 Vons Companies, Inc.*.... 63,975 108,936
23,000 Woolworth Corp.*......... 327,968 359,375
----------- -----------
592,708 723,348
----------- -----------
SHOES -- 3.7%
11,800 Fuqua Enterprises,
Inc.*.................. 282,613 302,374
1,800 Nike, Inc. Cl. "B"....... 69,775 146,250
17,200 Reebok International, 502,471 475,150
Ltd. ..................
14,000 Stride Rite Corp. ....... 170,252 127,750
----------- -----------
1,025,111 1,051,524
----------- -----------
<CAPTION>
MARKET
SHARES COST VALUE
- ------ ----------- -----------
<C> <S> <C>
TELECOMMUNICATIONS -- 6.2%
2,600 Glenayre Technologies,
Inc.*.................. $ 91,975 $ 99,450
14,800 Stet-Societa Finanziaria
Telefonica
P.A. -- ADR#........... 439,603 410,591
15,700 Tele Danmark
AS -- ADR#............. 421,759 406,236
9,000 Telefonica de Espana --
ADR#................... 353,115 427,500
12,100 Telefonos de Mexico S.A.
Cl. "L" -- ADR#........ 455,613 399,300
----------- -----------
1,762,065 1,743,077
----------- -----------
TEXTILES & APPAREL -- 0.4%
3,600 Liz Claiborne, Inc. ..... 101,916 123,300
----------- -----------
TRANSPORTATION -- 1.0%
4,300 Comair Holdings, Inc. ... 109,702 149,425
2,400 Continental Airlines,
Inc. Cl. "B"........... 91,344 135,300
----------- -----------
201,046 284,725
----------- -----------
UTILITIES -- 3.3%
2,100 Consolidated Natural Gas
Co. ................... 95,676 91,350
3,300 Illinova Corp. .......... 97,548 92,812
4,200 Indiana Energy, Inc. .... 110,427 100,800
3,900 Pacific Enterprises...... 97,809 100,912
3,600 Peoples Energy Corp. .... 114,798 116,550
3,400 National Fuel Gas Co. ... 112,002 117,725
12,300 Noram Energy Corp. ...... 113,855 113,775
4,300 Oneok, Inc. ............. 93,342 102,661
4,500 Washington Gas Light
Co. ................... 99,370 98,437
----------- -----------
934,827 935,022
----------- -----------
TOTAL
INVESTMENTS -- 95.8% . . $22,697,736+ $26,854,733
==========
CASH AND OTHER ASSETS,
NET OF
LIABILITIES -- 4.2%.... 1,188,060
-----------
NET ASSETS -- 100.0%..... $28,042,793
==========
+ The cost of securities for federal income tax purposes
is substantially the same.
* Non-income producing security.
# American Depository Receipts.
** See page 16 for Concentration by Country.
</TABLE>
See accompanying notes to financial statements.
15
<PAGE> 206
ESC STRATEGIC FUNDS, INC.
Concentration by Country
<TABLE>
<CAPTION>
INCOME FUND GLOBAL EQUITY FUND APPRECIATION FUND
COUNTRY MARKET VALUE MARKET VALUE MARKET VALUE
------------ ------------------ ------------------
<S> <C> <C> <C>
Argentina............................................... $ 1,533,255 $ 327,262 $ 229,425
Australia............................................... 216,855 239,960 --
Belgium................................................. 267,776 -- --
Brazil.................................................. -- 262,622 --
Canada.................................................. 325,756 -- --
Chile................................................... -- 114,950 --
Czech Republic.......................................... -- 153,258 --
Denmark................................................. 658,933 -- 406,236
France.................................................. 1,248,226 421,890 1,169,762
Germany................................................. 1,997,734 220,766 644,850
Great Britain........................................... 1,098,001 1,011,482 --
Hong Kong............................................... -- 301,132 --
India................................................... -- 250,401 --
Indonesia............................................... -- 154,459 --
Italy................................................... 891,289 345,024 688,641
Japan................................................... 2,567,775 2,773,586 --
Malaysia................................................ -- 327,532 --
Mexico.................................................. 380,625 325,879 399,300
Netherlands............................................. 286,056 239,123 --
New Zealand............................................. -- 224,301 --
Norway.................................................. -- 155,031 --
Philippines............................................. -- 187,500 --
Poland.................................................. -- 133,681 --
Portugal................................................ -- 111,941 --
Singapore............................................... -- 476,210 179,400
South Africa............................................ -- 417,054 --
Spain................................................... 604,535 334,728 993,225
Switzerland............................................. -- 101,812 487,586
Thailand................................................ -- 448,218 --
United States........................................... 20,865,771 7,789,209 21,656,308
----------- ----------- -----------
Total Investments....................................... $32,942,587 $ 17,849,011 $ 26,854,733
=========== =========== ===========
</TABLE>
* CREDIT RATINGS (unaudited)
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
-------- ------------------
<C> <C> <S>
Aaa AAA Instrument judged to be of the highest quality
and carrying the smallest amount of investment
risk.
Aa AA Instrument judged to be of high quality by all
standards.
A A Instrument judged to be adequate by all
standards.
Baa BBB Instrument judged to be of moderate quality by
all standards.
Ba-B BB-B Instrument judged to have speculative elements,
and generally lack desirable characteristics.
Caa-C CCC-C Instrument judged to be predominately speculative
with respect to pay interest and repay
principal in accordance with terms of
obligation.
NR NR Not Rated. In the opinion of the Investment
Adviser, instrument judged to be of comparable
investment quality to rated securities which
may be purchased by the Fund.
</TABLE>
For items possessing the strongest investment attributes of their
category, Moody's gives that letter rating followed by a number. The
Standard & Poor's ratings may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
U.S. Government Issues have an assumed rating of AAA/Aaa.
16
<PAGE> 207
ESC STRATEGIC FUNDS, INC.
Statement of Assets and Liabilities
March 31, 1996
<TABLE>
<CAPTION>
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at value (cost $13,094,108; $32,643,669;
$14,963,151; $22,769,135; $22,697,736,
respectively)...................................... $13,150,565 $32,327,587 $16,322,011 $29,661,238 $26,854,733
Short-term investments (cost $0; $615,000;
$1,527,000; $0; $0, respectively).................. 0 615,000 1,527,000 0 0
Cash................................................. 365,521 4,635,507 556,614 7,455,021 1,240,766
Foreign Cash (cost $0; $17,074; $4,343; $0; $0)...... 0 17,020 4,302 0 0
Dividends and interest receivable.................... 208,517 786,982 25,972 4,740 13,428
Receivable for investments sold...................... 0 0 184,832 475,876 0
Receivable for fund shares sold...................... 2,452 29,525 30,982 341,178 35,551
Receivable from sponsor.............................. 10,811 0 0 0 0
Withholding tax reclaim.............................. 0 0 486 0 325
Unamortized organizational expenses (Note 2e)........ 27,042 27,259 27,452 34,677 28,781
------------ ----------- ----------- ----------- ------------
Total Assets................................... 13,764,908 38,438,880 18,679,651 37,972,730 28,173,584
------------ ----------- ----------- ----------- ------------
LIABILITIES
Payable for securities purchased..................... 488,625 0 288,581 105,795 54,060
Payable for fund shares repurchased.................. 0 0 0 8,699 0
Advisory fee payable (Note 3)........................ 0 32,444 15,147 28,436 11,800
Administrative services fee payable (Note 3)......... 840 4,867 2,272 4,265 3,540
Transfer agent fee payable (Note 3).................. 548 1,367 1,843 4,548 1,844
12b-1 Distribution fee payable (Note 3).............. 3,000 12,000 12,000 24,000 21,000
Other accrued expenses............................... 31,224 51,056 37,677 59,708 38,547
------------ ----------- ----------- ----------- ------------
Total Liabilities.............................. 524,237 101,734 357,520 235,451 130,791
------------ ----------- ----------- ----------- ------------
NET ASSETS............................................. $13,240,671 $38,337,146 $18,322,131 $37,737,279 $28,042,793
=========== =========== =========== =========== ===========
Net Assets Consist of
Capital Stock........................................ $ 1,324 $ 3,876 $ 1,658 $ 2,381 $ 2,156
Additional paid-in capital........................... 13,193,975 38,512,147 16,784,009 29,034,316 22,850,325
Accumulated undistributed net investment income/
(loss) on investments.............................. 0 509,096 83,525 0 0
Accumulated undistributed realized gain/(loss) on
investments and foreign currencies................. (11,085) (372,635) 94,120 1,808,479 1,033,315
Net unrealized appreciation/(depreciation) on
investments
and foreign currencies translations................ 56,457 (315,338) 1,358,819 6,892,103 4,156,997
------------ ----------- ----------- ----------- ------------
NET ASSETS........................................... $13,240,671 $38,337,146 $18,322,131 $37,737,279 $28,042,793
=========== =========== =========== =========== ===========
SHARES OF BENEFICIAL INTEREST
Class A:
Shares of beneficial interest outstanding.......... 1,323,793 3,730,042 1,321,204 1,816,310 1,963,842
========= ========= ========= ========= =========
Net asset value per share outstanding.............. $10.00 $9.89 $11.08 $15.88 $13.02
====== ===== ====== ====== ======
Maximum offering price per share (N/A; $9.89/.955;
$11.08/.955; $15.88/.955; $13.02/.955,
respectively).................................... $10.00 $10.36 $11.60 $16.63 $13.63
====== ====== ====== ====== ======
Class D:
Shares of beneficial interest outstanding.......... N/A 145,876 336,540 564,447 192,247
==== ======= ======= ======= =======
Net asset value per share outstanding.............. N/A $9.89 $10.95 $15.76 $12.91
==== ===== ====== ====== ======
Maximum offering price per share (N/A; $9.89/.985;
$10.95/.985; $15.76/.985; $12.91/.985,
respectively).................................... N/A $10.04 $11.12 $16.00 $13.11
==== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
17
<PAGE> 208
ESC STRATEGIC FUNDS, INC.
Statement of Operations
For Year Ended March 31, 1996
<TABLE>
<CAPTION>
ASSET
PRESERVATION INCOME GLOBAL EQUITY SMALL CAP APPRECIATION
------------ ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest (net of withholding tax of $0,
$13,818, $0, $0, $0, respectively)........ $820,672 $2,792,331 $ 88,950 $ 191,996 $ 84,775
Dividends (net of withholding tax
of $0, $0, $17,377, $0, $1,129,
respectively)............................. 0 43,125 227,582 80,840 296,001
------------ ---------- ------------- ---------- ------------
820,672 2,835,456 316,532 272,836 380,776
------------ ---------- ------------- ---------- ------------
Expenses:
Advisory (Note 3)........................... 63,894 373,088 156,881 224,932 236,656
Fund Accounting (Note 3).................... 34,056 40,222 39,554 31,533 39,370
Legal....................................... 7,069 17,849 8,090 9,995 12,100
Administrative services (Note 3)............ 19,168 55,963 23,532 33,740 35,498
Reports to shareholders..................... 2,790 6,712 7,562 27,900 11,200
Audit....................................... 16,000 16,000 19,000 16,000 16,000
Registration................................ 7,031 23,173 17,433 27,493 24,013
Custodian................................... 13,226 28,240 43,821 21,231 24,032
12b-1 Distribution fee Class A (Note 3)..... 10,557 32,859 16,888 40,962 55,323
12b-1 Distribution fee Class D (Note 3)..... 0 10,400 27,060 36,932 15,516
Directors................................... 4,000 4,000 4,000 4,000 4,000
Transfer agent fees and expenses (Note 3)... 11,796 14,942 16,307 23,536 16,395
Amortization of organizational expenses..... 8,842 8,843 8,843 10,910 8,842
Insurance................................... 1,965 5,668 1,982 1,965 2,724
Miscellaneous............................... 1,498 34,621 2,524 13,370 5,096
------------ ---------- ------------- ---------- ------------
Total expenses before waivers............... 201,892 672,580 393,477 524,499 506,765
Less: Expenses waived/reimbursed by Adviser,
Administrator and Transfer Agent....... (85,363) (10,000) (10,000) (35,762) (21,800)
Expenses paid by third parties........... (1,434) (5,990) (514) (8,890) (2,924)
------------ ---------- ------------- ---------- ------------
Net expenses................................ 115,095 656,590 382,963 479,847 482,041
------------ ---------- ------------- ---------- ------------
Net investment income/(loss).................. 705,577 2,178,866 (66,431) (207,011) (101,265)
------------ ---------- ------------- ---------- ------------
Realized gain on investments.................. 1,024 419,866 849,710 2,358,416 1,695,907
Net realized gain on foreign currencies
transactions and assets and liabilities
denominated in foreign currencies........... 0 321,634 49,817 0 0
Change in unrealized
appreciation/(depreciation) of
investments................................. 128,200 102,858 1,135,281 6,353,643 3,346,495
Change in net unrealized gain/(loss) on
foreign currencies translation.............. 0 (388,539) (942) 0 0
------------ ---------- ------------- ---------- ------------
Net realized/unrealized gain on investments
and foreign currencies transactions......... 129,224 455,819 2,033,866 8,712,059 5,042,402
------------ ---------- ------------- ---------- ------------
Net increase in net assets resulting from
operations.................................. $834,801 $2,634,685 $ 1,967,435 $8,505,048 $4,941,137
=========== ========== ============ ========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE> 209
ESC STRATEGIC FUNDS, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
ASSET PRESERVATION INCOME
------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income/(loss)................ $ 705,577 $ 496,552 $ 2,178,866 $ 1,753,017
Net realized gain/(loss) on investments and
foreign currencies transactions........... 1,024 (23,866) 741,500 182,152
Change in unrealized
appreciation/(depreciation) of investments
and foreign currencies transactions....... 128,200 (71,743) (285,681) (29,657)
-------------- -------------- -------------- --------------
Net increase/(decrease) in net assets
resulting from operations................... 834,801 400,943 2,634,685 1,905,512
-------------- -------------- -------------- --------------
Distributions to shareholders from net
investment income:
Class A..................................... (705,577) (496,552) (2,104,878) (1,712,325)
Class D..................................... 0 0 (73,988) (40,688)
-------------- -------------- -------------- --------------
(705,577) (496,552) (2,178,866) (1,753,013)
-------------- -------------- -------------- --------------
Distributions to shareholders from realized
gains:
Class A..................................... 0 0 (741,974) (25,981)
Class D..................................... 0 0 (28,940) (837)
-------------- -------------- -------------- --------------
0 0 (770,914) (26,818)
-------------- -------------- -------------- --------------
Decrease in net assets resulting from
distributions to shareholders............. (705,577) (496,552) (2,949,780) (1,779,831)
-------------- -------------- -------------- --------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A................................... 1,045,974 12,524,556 4,281,407 35,978,038
Class D................................... 0 0 307,314 1,181,686
-------------- -------------- -------------- --------------
1,045,974 12,524,556 4,588,721 37,159,724
-------------- -------------- -------------- --------------
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions:
Class A................................... 705,053 493,006 2,614,384 1,629,846
Class D................................... 0 0 67,280 31,401
-------------- -------------- -------------- --------------
705,053 493,006 2,681,664 1,661,247
-------------- -------------- -------------- --------------
Net asset value of shares redeemed:
Class A................................... (563,282) (1,005,947) (2,073,972) (5,347,616)
Class D................................... 0 0 (158,592) 0
-------------- -------------- -------------- --------------
(563,282) (1,005,947) (2,232,564) (5,347,616)
-------------- -------------- -------------- --------------
Net increase in net assets from capital
share transactions...................... 1,187,745 12,011,615 5,037,821 33,473,355
-------------- -------------- -------------- --------------
Total increase in net assets.................. 1,316,969 11,916,006 4,722,726 33,599,036
Net Assets:
Beginning of year........................... 11,923,702 7,696 33,614,420 15,384
-------------- -------------- -------------- --------------
End of year................................. $ 13,240,671 $ 11,923,702 $ 38,337,146 $ 33,614,420
============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 210
ESC STRATEGIC FUNDS, INC.
Statement of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
GLOBAL EQUITY SMALL CAP
------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income/(loss)................ $ (66,431) $ (71,034) $ (207,011) $ (38,590)
Net realized gain/(loss) on investments and
foreign currencies transactions........... 899,527 (255,749) 2,358,416 734,152
Change in unrealized
appreciation/(depreciation) of investments
and foreign currencies transactions....... 1,134,339 224,480 6,353,643 538,460
-------------- -------------- -------------- --------------
Net increase/(decrease) in net assets
resulting from operations................... 1,967,435 (102,303) 8,505,048 1,234,022
-------------- -------------- -------------- --------------
Distributions to shareholders from net
investment income:
Class A..................................... 0 (13,738) 0 0
Class D..................................... 0 (2,281) 0 0
-------------- -------------- -------------- --------------
0 (16,019)* 0 0
-------------- -------------- -------------- --------------
Distributions to shareholders from realized
gains:
Class A..................................... (282,697) 0 (648,997) (165,997)
Class D..................................... (75,804) 0 (188,574) (48,635)
-------------- -------------- -------------- --------------
(358,501) 0 (837,571) (214,632)
-------------- -------------- -------------- --------------
Decrease in net assets resulting from
distributions to shareholders............. (358,501) (16,019) (837,571) (214,632)
-------------- -------------- -------------- --------------
Capital Share Transactions:
Proceeds from sales of shares:
Class A................................... 4,242,822 9,446,593 14,484,625 7,982,612
Class D................................... 419,411 3,411,563 3,972,125 3,244,649
-------------- -------------- -------------- --------------
4,662,233 12,858,156 18,456,750 11,227,261
-------------- -------------- -------------- --------------
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions:
Class A................................... 210,986 11,265 555,664 137,196
Class D................................... 77,940 1,399 186,118 48,033
-------------- -------------- -------------- --------------
288,926 12,664 741,782 185,229
-------------- -------------- -------------- --------------
Net asset value of shares redeemed:
Class A................................... (242,681) (161,554) (887,112) (134,515)
Class D................................... (530,488) (71,121) (393,753) (160,614)
-------------- -------------- -------------- --------------
(773,169) (232,675) (1,280,865) (295,129)
-------------- -------------- -------------- --------------
Net increase in net assets from capital
share transactions...................... 4,177,990 12,638,145 17,917,667 11,117,361
-------------- -------------- -------------- --------------
Total increase in net assets.................. 5,786,924 12,519,823 25,585,144 12,136,751
Net Assets:
Beginning of year........................... 12,535,207 15,384 12,152,135 15,384
-------------- -------------- -------------- --------------
End of year................................. $ 18,322,131 $ 12,535,207 $ 37,737,279 $ 12,152,135
============== ============== ============== ==============
</TABLE>
* Represents distribution in excess of net investment income.
See accompanying notes to financial statements.
20
<PAGE> 211
ESC STRATEGIC FUNDS, INC.
Statement of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
APPRECIATION
-------------------------------
YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Operations:
Net investment (loss)................................................... $ (101,265) $ (7,090)
Net realized gain on investments and foreign currencies transactions.... 1,695,907 145,295
Change in unrealized appreciation/(depreciation) of investments and
foreign
currencies transactions............................................... 3,346,495 810,502
----------- -----------
Net increase/(decrease) in net assets resulting from operations........... 4,941,137 948,707
----------- -----------
Distributions to shareholders from net investment income:
Class A................................................................. 0 0
Class D................................................................. 0 0
----------- -----------
0 0
----------- -----------
Distributions to shareholders from realized gains:
Class A................................................................. (572,885) (78,778)
Class D................................................................. (50,608) (6,832)
----------- -----------
(623,493) (85,610)
----------- -----------
Decrease in net assets resulting from distributions to shareholders..... (623,493) (85,610)
----------- -----------
Capital Share Transactions:
Proceeds from sales of shares:
Class A............................................................... 8,089,429 14,310,886
Class D............................................................... 669,839 1,616,586
----------- -----------
8,759,268 15,927,472
----------- -----------
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions:
Class A............................................................... 495,951 69,925
Class D............................................................... 49,839 6,469
----------- -----------
545,790 76,394
----------- -----------
Net asset value of shares redeemed:
Class A............................................................... (2,076,796) (57,078)
Class D............................................................... (322,285) (6,097)
----------- -----------
(2,399,081) (63,175)
----------- -----------
Net increase in net assets from capital share transactions............ 6,905,977 15,940,691
----------- -----------
Total increase in net assets.............................................. 11,223,621 16,803,788
Net Assets:
Beginning of year....................................................... 16,819,172 15,384
----------- -----------
End of year............................................................. $ 28,042,793 $ 16,819,172
=========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE> 212
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- March 31, 1996
1. DESCRIPTION. The ESC Strategic Funds, Inc. (the "Company") was
incorporated in Maryland on November 24, 1993. The Company currently comprises
five portfolios, ESC Strategic Asset Preservation (commencement date April 25,
1994), ESC Strategic Income (commencement date May 4, 1994), ESC Strategic
Global Equity (commencement date May 12, 1994), ESC Strategic Small Cap
(commencement date June 8, 1994), ESC Strategic Appreciation (commencement date
July 6, 1994) (collectively the "Funds"). The Company is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Each Fund, with the exception of the Small Cap
Fund, operates as a diversified fund. The Small Cap Fund operates as a
non-diversified fund. The Company's Articles of Incorporation authorize the
issuance of two classes of common stock designated as Class A and Class D for
each Fund, except for the Asset Preservation Fund, which shall only have Class A
Shares. Class A shares are offered with a maximum front-end sales charge of
4.50%, which may be reduced or waived in certain cases. 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 a front-end sales charge of 1.50% 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. Prior to November 1, 1995, the 1.50% sales load
on Class D shares was being waived. The Asset Preservation Fund offers only one
class of shares with no front-end sales charge and a Service and Distribution
Fee calculated at an annual rate of up to 0.25% of the average daily value of
its net assets. The Company's Board of Directors may, in the future, authorize
the issuance of additional classes of capital stock for the Funds.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies followed by the Funds:
A. Portfolio Valuation. Investments in securities (including options
and financial futures) are valued at the last sales price on the securities
exchange or the NASDAQ National Market System on which such securities are
primarily traded or, if there are no trades, at the current bid price, as
of 4:15 p.m. eastern time. Over-the-counter securities, or securities for
which there were no transactions, are valued at the closing bid price,
except for open short positions, when the asked price is used. Bid price is
used when no asked price is available. 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. 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. Short-term
securities which mature in 60 days or less are valued at amortized cost, if
their terms to maturity at purchase were 60 days or less, or by amortizing
their value on the 61st day prior to maturity, if their original term to
maturity at purchase exceeded 60 days.
B. Securities transactions and investment income. Securities
transactions are recorded on a trade date basis. Realized gains and losses
from securities transactions are recorded on the identified cost basis.
Dividend income is recognized on the ex-dividend date and interest income,
including amortization of premium and accretion of discount on investments,
is accrued daily as earned.
C. Dividend and Capital Gain Distributions to
Shareholders. Distributions to shareholders are recorded on the
ex-dividend date. The amount of dividends and distributions are determined
in accordance with federal income tax regulations which may differ from
generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. Dividends and distributions
which exceed net investment income and net realized capital gains for
financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of
net realized capital gains.
22
<PAGE> 213
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
For the year ended March 31, 1996, the reclassification arising from
permanent book/tax differences resulted in increases (decreases) to the
components of net assets as follows:
<TABLE>
<CAPTION>
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Accumulated undistributed net
investment income/(loss) on
investments...................... $ (867) $ 360,285 $ 149,956 $ 207,011 $101,265
Accumulated undistributed net
realized gain/(loss) on
investments...................... 7,514 (354,775) (152,039) (199,439) (95,759)
Additional paid-in capital......... (6,647) (5,510) 2,083 (7,572) (5,506)
</TABLE>
Permanent book/tax differences are primarily attributable to
non-deductible organization costs, foreign exchange gains/losses and net
operating losses.
D. Federal income taxes. It is the policy of each of the Funds to
qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. By so qualifying, the Funds will
not be subject to Federal income taxes to the extent that they distribute
all of their taxable and tax-exempt income for the fiscal year. The Funds
also intend to meet the distribution requirements to avoid the payment of
an excise tax. Accordingly, no provision for taxes is recorded.
E. Organizational expenses. Costs incurred in connection with the
organization and initial registration of the Funds have been deferred and
are being amortized on a straightline basis over sixty months beginning
with each Fund's commencement of operations. In the event any of the
initial shares of the Funds are redeemed during the amortization period,
the redemption proceeds will be reduced by a pro rata portion of any
unamortized organization expenses in the proportion as the number of shares
being redeemed bears to the number of initial shares outstanding at the
time of redemption.
F. Determination of net asset value and calculation of
expenses. Expenses directly attributable to a Fund are charged to that
Fund. Other expenses are allocated proportionately among each Fund in
relation to the net assets of each Fund or on another reasonable basis. In
calculating net asset value per share of each class, investment income,
realized and unrealized gains and losses, and expenses other than class
specific expenses are allocated daily to each class of shares based upon
the proportion of net assets of each class at the beginning of each day.
Distribution expenses are solely borne by the class incurring the expense.
G. Foreign Exchange Transactions. The books and records of the Fund
are maintained in U.S. dollars non-U.S. dollar denominated amounts are
translated into U.S. dollars as follows with the resultant exchange gains
and losses recorded in the Statement of Operations:
(i) market value of investment securities and other assets and
liabilities at the exchange rate on the valuation date,
(ii) purchases and sales of investment securities, income and
expenses at the exchange rate prevailing on the respective date of such
transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, currency gains and losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Funds' books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses
23
<PAGE> 214
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
arise from changes in the value of the assets and liabilities other than
investments in securities at year end, resulting from changes in the
foreign exchange rate.
H. Forward Foreign Exchange Contracts. A forward foreign exchange
contract is a commitment to sell a foreign currency at a future date at a
negotiated exchange rate. The Funds bear the market risk which arises from
possible changes in foreign exchange values. Risks may arise from the
potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of the foreign currency
relative to the U.S. dollar. The gain or loss from the difference between
the cost or original contracts and the amount realized upon the closing of
such contracts is included in net realized gain on foreign exchange.
I. Use of Estimates. Estimates and assumptions are required to be
made regarding assets, liabilities, and changes in net assets resulting
from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ from these
amounts.
J. Other. The Funds maintain cash balances with their custodian and
receive a reduction of their custody fees and expenses for the amount of
interest earned on such uninvested cash balances. For financial reporting
purposes for the year ended March 31, 1996, custodian fees and expenses
paid by third parties were increased by $1,434, $5,990, $514, $8,890, and
$2,924 for the Asset Preservation, Income, Global Equity, Small Cap, and
Appreciation Funds, respectively. There was no effect on interest income.
The Funds could have invested such cash amounts in an income producing
asset if they had not agreed to a reduction of fees under the expense
offset arrangement with their custodian.
3. INVESTMENT ADVISORY AND ADMINISTRATION CONTRACTS AND DISTRIBUTION
AGREEMENT. The Company entered into an investment advisory agreement (the
"Investment Advisory Agreement") with Equitable Securities Corporation ("ESC")
(the "Adviser"). The Investment Advisory Agreement provides for the Adviser to
be paid a fee calculated and accrued daily and paid monthly at the annual rates
of 0.50% for ESC Strategic Asset Preservation Fund and 1.00% for each of the
other funds. The Adviser provides portfolio management supervision and certain
administrative, clerical and bookkeeping services for the Company. Equitable
Asset Management is the Advisor for Asset Preservation, Small Cap and also
advises 34.6% of the assets of the Appreciation Fund. The Adviser has entered
into agreements with various portfolio managers to advise the Global Equity
Fund, Income Fund and the remaining assets of the Appreciation Fund. Any fees
payable under these agreements are paid by the Adviser. For the year ended March
31, 1996, the Adviser voluntarily waived fees of $50,302; $25,762 and $11,800
for the Asset Preservation, Small Cap and Appreciation Funds, respectively.
Furman Selz LLC ("Furman Selz") provides the Funds with administrative,
fund accounting, dividend and capital gain distribution disbursing and transfer
agency services pursuant to the administration agreement (the "Administration
Agreement"). The services under the Administration Agreement are subject to the
supervision of the Company's Board of Directors and officers and include
day-to-day administration of matters related to the corporate existence of the
Company, maintenance of its records, preparation of reports, supervision of the
Funds' arrangement with their custodian and assistance in the preparation of the
Company's Registration Statement under federal and state laws. Pursuant to the
Administration Agreement, the Funds pay Furman Selz a monthly fee for its
services at the annual rate of 0.15% of the average daily net assets of the
Funds and is accrued daily. Furman Selz voluntarily waived fees of $14,250 for
the Asset Preservation Fund for the year ended March 31, 1996.
Pursuant to a Services Agreement between the Funds and Furman Selz, Furman
Selz will provide the Funds with transfer and dividend and capital gain
disbursing agent services, for which it receives a fee of $15.00 per account per
year subject to a required minimum fee of $10,000 for each Fund, plus
out-of-pocket expenses. Pursuant to the Fund Accounting Agreement between the
Funds and Furman Selz, Furman Selz assists the Funds in calculating net asset
values
24
<PAGE> 215
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
and provides certain other account services for each Fund for an annual fee of
$30,000 per fund plus out-of-pocket expenses. For the year ended March 31, 1996,
Furman Selz voluntarily waived Transfer Agent fees of $10,000 for each portfolio
of the Funds. For Fund Accounting Services, Furman Selz earned fees, including
out of pocket expenses as shown in the Statement of Operations.
ESC has voluntarily agreed to reimburse the Funds to the extent that their
ratios of expenses to average net assets exceed certain percentages as follows:
Appreciation -- 2.00% (Class A), 2.50% (Class D); Global Equity -- 2.50% (Class
A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D);
Income -- 1.70% (Class A), 2.20% (Class D); Asset Preservation -- 0.90% (Class
A). ESC has agreed to reimburse expenses to the Asset Preservation Fund in the
amount of $10,811. No reimbursements were necessary for the Appreciation, Global
Equity, Small Cap, or Income Funds.
The Company entered into a distribution agreement (the "Distribution
Agreement") with ESC. Under the Distribution Agreement, ESC as agent for the
Funds, agrees to use its best efforts as sole distributor of the Funds' shares.
ESC does not receive compensation under the Distribution Agreement. Under the
Plan of Distribution, Class A shares will pay the Distributor a fee at an annual
rate up to 0.25% of the value of average daily net assets of Class A shares in
return for financing certain distribution and shareholder service activities
related to Class A shares. During the year ended March 31, 1996, the actual
rates incurred by Class A shares were: 0.08%; 0.09%; 0.14%; 0.23% and 0.25% for
the Asset Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. The Plans provide that Class D shares will pay the Distributor
amounts up to an annual rate up to 0.75% of the average daily net assets of
Class D shares to finance certain distribution and shareholder services
activities related to Class D shares. During the year ended March 31, 1996, the
actual rates incurred by Class D shares were: 0.75%; 0.75%; 0.71% and 0.75% for
the Income, Global Equity, Small Cap and Appreciation Funds, respectively.
During the year ended March 31, 1996, the Appreciation Fund, Small Cap Fund
and the Global Equity Fund paid brokerage commissions of $29,031, $1,595 and
$11,994, respectively, to Equitable Securities, a subsidiary of the Adviser's
subsidiary, Equitable Trust Company. The Funds were advised that front-end sales
charges of $3,682, $7,901, $106,790 and $42,946 were paid to ESC from the
Income, Global Equity, Small Cap and Appreciation Funds, respectively.
4. SECURITIES TRANSACTIONS.
A. Purchase and sale transactions. The aggregate amount of purchases
and sales of investment securities, other than short-term securities, for
the year ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
COMMON STOCKS U.S. GOVERNMENT
AND CORPORATE BONDS OBLIGATIONS
-------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Asset
Preservation.... $ 3,983,919 $ 0 $ 2,829,058 $ 1,650,000
Income............ 21,607,286 20,457,453 24,519,225 22,855,036
Global Equity..... 17,576,428 12,528,377 0 0
Small Cap......... 30,502,059 18,578,705 0 0
Appreciation...... 24,214,327 16,973,908 0 0
</TABLE>
25
<PAGE> 216
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
B. Federal Income Tax basis. Cost for book and Federal Income Tax
purposes were substantially identical as of March 31, 1996. Gross
unrealized appreciation and depreciation on investment securities at March
31, 1996, based on cost for Federal income tax purposes is as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
---------- --------- ----------
<S> <C> <C> <C>
Asset Preservation................ $ 108,733 $ (52,276) $ 56,457
Income............................ 519,723 (835,805) (316,082)
Global Equity..................... 1,901,056 (542,237) 1,358,819
Small Cap......................... 7,759,638 (867,535) 6,892,103
Appreciation...................... 4,931,457 (774,460) 4,156,997
</TABLE>
5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650
million shares of capital stock with a par value $0.001 each. Transactions in
shares of the Funds for the years ended March 31, 1996, and March 31, 1995, were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
-------------------------------------------------------------------
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CLASS A
Beginning Balance..................... 1,205,690 3,256,233 931,096 780,607 1,418,131
------------ --------- --------- --------- ------------
Shares sold........................... 103,797 421,654 392,583 1,059,794 670,203
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... 70,131 259,064 19,718 38,534 40,093
Shares redeemed....................... (55,825) (206,909) (22,193) (62,625) (164,585)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... 118,103 473,809 390,108 1,035,703 545,711
------------ --------- --------- --------- ------------
Closing Balance....................... 1,323,793 3,730,042 1,321,204 1,816,310 1,963,842
============ ========= ========= ========= ============
CLASS D
Beginning Balance..................... -- 124,831 338,355 300,196 159,350
------------ --------- --------- --------- ------------
Shares sold........................... -- 30,034 39,211 280,236 55,499
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... -- 6,665 7,360 12,979 4,055
Shares redeemed....................... -- (15,654) (48,386) (28,964) (26,657)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... -- 21,045 (1,815) 264,251 32,897
------------ --------- --------- --------- ------------
Closing Balance....................... -- 145,876 336,540 564,447 192,247
============ ========= ========= ========= ============
</TABLE>
26
<PAGE> 217
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
-------------------------------------------------------------------
ASSET GLOBAL
PRESERVATION INCOME EQUITY SMALL CAP APPRECIATION
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CLASS A
Beginning Balance..................... 769 769 769 769 769
------------ --------- --------- --------- ------------
Shares sold........................... 1,256,945 3,639,895 945,598 779,556 1,416,032
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... 49,971 168,037 1,187 12,870 6,896
Shares redeemed....................... (101,995) (552,468) (16,458) (12,588) (5,566)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... 1,204,921 3,255,464 930,327 779,838 1,417,362
------------ --------- --------- --------- ------------
Closing Balance....................... 1,205,690 3,256,233 931,096 780,607 1,418,131
=========== ========= ========= ========= ===========
CLASS D
Beginning Balance..................... -- 769 769 769 769
------------ --------- --------- --------- ------------
Shares sold........................... -- 120,814 344,535 309,594 158,543
Shares issued in reinvestment of net
investment income and capital gain
distributions....................... -- 3,248 146 4,514 640
Shares redeemed....................... -- 0 (7,095) (14,681) (602)
------------ --------- --------- --------- ------------
Net increase/(decrease) in shares..... -- 124,062 337,586 299,427 158,581
------------ --------- --------- --------- ------------
Closing Balance....................... -- 124,831 338,355 300,196 159,350
=========== ========= ========= ========= ===========
</TABLE>
6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance both of the total Fund portfolio and of each
Manager and will reallocate Fund assets among individual managers, or recommend
to the Company that it employ or terminate particular Managers, to the extent
the Adviser deems appropriate to achieve the overall objectives of the
particular Fund.
The Managers are as follows:
ESC Strategic Asset Preservation Fund -- Equitable Asset Management,
Inc.
ESC Strategic Income Fund -- Llama Asset Management Company; Cincinnati
Asset Management, Inc. and Murray Johnstone International Limited.
ESC Strategic Global Equity Fund -- Globeflex Capital, L.P. and Murray
Johnstone International Limited.
ESC Strategic Small Cap Fund -- Equitable Asset Management, Inc.
ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.; Brandes
Investment Partners, Inc., and Equitable Asset Management, Inc.
Equitable Asset Management, Inc. is an affiliate of the Adviser.
27
<PAGE> 218
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1996
7. OFF-BALANCE SHEET RISK. The Funds may invest in various financial
instruments with off-balance sheet risk. These financial instruments include
taking positions in forward contracts. The Funds enter into such contracts for
the purpose of hedging exposure to change in foreign currency exchange rates on
their portfolio holdings. The lack of correlation between the price of the
security and the underlying contract could result in a loss to the Funds. The
Global Equity Fund had one open forward currency contract at March 31, 1996. At
such date, the Global Equity Fund contracted to deliver $183,862 (U.S. Dollars)
for Y19,584,932 (Japanese Yen) on April 1, 1996. The resulting unrealized
appreciation of $502 is included in net unrealized appreciation/(depreciation)
in the statement of assets and liabilities.
8. FEDERAL INCOME TAXES. Capital losses and foreign currency losses
incurred after October 31, 1995 through March 31, 1996, are deemed to arise on
the first business day of the following fiscal year. The Funds incurred and will
elect to defer post October capital losses and foreign currency losses of
approximately $372,635 and $102,223 for the Income Fund and Global Equity Fund,
respectively.
At March 31, 1996, the Asset Preservation Fund had net capital loss
carryforwards of approximately $18,000, which will be available through March
2003 to offset future capital gains as provided by the regulations. To the
extent that these carryover losses are used to offset future capital gains, the
gains so offset would not be distributed to the shareholders. During the year
ended March 31, 1996, the Global Equity Fund utilized $42,000 of available
capital loss carryforward.
28
<PAGE> 219
ESC STRATEGIC FUNDS, INC.
Financial Highlights
<TABLE>
<CAPTION>
ASSET PRESERVATION
----------------------------------
YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+
--------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period.................................... $ 9.89 $ 10.00
------- -------
Income from Investment Operations:
Net investment income/(loss).......................................... 0.56 0.47
Net realized/unrealized gain/(loss) on investments.................... 0.11 (0.11)
------- -------
Total from Investment Operations...................................... 0.67 0.36
------- -------
Less Distributions:
Dividends from net investment income.................................. (0.56) (0.47)
Distributions from realized gains..................................... 0 0
------- -------
Total Distributions..................................................... (0.56) (0.47)
------- -------
Net Asset Value, End of Period.......................................... $ 10.00 $ 9.89
======= =======
Total Return (not reflecting sales load)................................ 6.85% 3.75%
Net Assets, End of Period (in thousands)................................ $13,241 $11,924
Ratios to Average Net Assets of:
Net investment income................................................. 5.53% 5.15%*
Expenses net of waivers/reimbursements/expenses paid by third
parties............................................................. 0.90% 1.00%*
Expenses before waivers/reimbursements/expenses paid by third
parties............................................................. 1.58% 2.12%*
Portfolio Turnover Rate................................................. 40% 30%
</TABLE>
+ For the period April 25, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
<TABLE>
<CAPTION>
INCOME
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 9.94 $ 10.00 $ 9.94 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment income/(loss)............. 0.59 0.55 0.54 0.50
Net realized/unrealized gain/(loss)
on investments......................... 0.16 (0.05) 0.16 (0.05)
------- ------- ------- -------
Total from Investment Operations......... 0.75 0.50 0.70 0.45
------- ------- ------- -------
Less Distributions:
Dividends from net investment income..... (0.59) (0.55) (0.54) (0.50)
Distributions from realized gains........ (0.21) (0.01) (0.21) (0.01)
------- ------- ------- -------
Total Distributions........................ (0.80) (0.56) (0.75) (0.51)
------- ------- ------- -------
Net Asset Value, End of Period............. $ 9.89 $ 9.94 $ 9.89 $ 9.94
======= ======= ======= =======
Total Return (not reflecting sales load)... 7.67% 5.30% 7.11% 4.74%
Net Assets, End of Period (in thousands)... $36,891 $32,373 $ 1,446 $ 1,241
Ratios to Average Net Assets of:
Net investment income.................... 5.87% 6.29%* 5.37% 5.73%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 1.70% 1.85%* 2.20% 2.29%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 1.75% 1.86%* 2.25% 2.31%*
Portfolio Turnover Rate.................... 138% 92% 138% 92%
</TABLE>
+ For the period May 4, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
See accompanying notes to financial statements.
29
<PAGE> 220
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
GLOBAL EQUITY
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 9.90 $ 10.00 $ 9.82 $ 10.00
------- ------ ------ ------
Income from Investment Operations:
Net investment income/(loss)............. (0.04) (0.05) (0.09) (0.07)
Net realized/unrealized gain/(loss) on
investments............................ 1.46 (0.03) 1.46 (0.10)
------- ------ ------ ------
Total from Investment Operations......... 1.42 (0.08) 1.37 (0.17)
------- ------ ------ ------
Less Distributions:
Dividends from net investment income..... 0 (0.02) 0 (0.01)
Distributions from realized gains........ (0.24) 0 (0.24) 0
------- ------ ------ ------
Total Distributions........................ (0.24) (0.02) (0.24) (0.01)
------- ------ ------ ------
Net Asset Value, End of Period............. $ 11.08 $ 9.90 $ 10.95 $ 9.82
======= ====== ====== ======
Total Return (not reflecting sales load)... 14.41% (0.84)% 14.01% (1.72)%
Net Assets, End of Period (in thousands)... $14,597 $ 9,213 $ 3,725 $ 3,322
Ratios to Average Net Assets of:
Net investment income.................... (0.36)% (0.65)%* (0.83)% (1.51)%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 2.37% 2.50%* 2.87% 2.98%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 2.43% 3.22%* 2.96% 3.69%*
Portfolio Turnover Rate.................... 92% 76% 92% 76%
</TABLE>
+ For the period May 12, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
<TABLE>
<CAPTION>
SMALL CAP
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 11.25 $ 10.00 $ 11.22 $ 10.00
------- ------ ------ ------
Income from Investment Operations:
Net investment income/(loss)............. (0.08) (0.03) (0.16) (0.05)
Net realized/unrealized gain/(loss) on
investments............................ 5.19 1.52 5.18 1.51
------- ------ ------ ------
Total from Investment Operations......... 5.11 1.49 5.02 1.46
------- ------ ------ ------
Less Distributions:
Dividends from net investment income..... 0 0 0 0
Distributions from realized gains........ (0.48) (0.24) (0.48) (0.24)
------- ------ ------ ------
Total Distributions........................ (0.48) (0.24) (0.48) (0.24)
------- ------ ------ ------
Net Asset Value, End of Period............. $ 15.88 $ 11.25 $ 15.76 $ 11.22
======= ====== ====== ======
Total Return (not reflecting sales load)... 45.88% 15.03% 45.19% 14.72%
Net Assets, End of Period (in thousands)... $28,840 $ 8,785 $ 8,897 $ 3,367
Ratios to Average Net Assets of:
Net investment income.................... (0.80)% (0.43)%* (1.30)% (0.93)%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 2.00% 2.00%* 2.50% 2.50%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 2.18% 3.28%* 2.74% 3.68%*
Portfolio Turnover Rate.................... 102% 151% 102% 151%
</TABLE>
+ For the period June 8, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
See accompanying notes to financial statements.
30
<PAGE> 221
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION
------------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
MARCH 31, 1996 MARCH 31, 1995+ MARCH 31, 1996 MARCH 31, 1995+
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 10.67 $ 10.00 $ 10.63 $ 10.00
------- ------- ------ ------
Income from Investment Operations:
Net investment income/(loss)............. (0.05) 0 (0.09) (0.03)
Net realized/unrealized gain/(loss) on
investments............................ 2.71 0.73 2.68 0.72
------- ------- ------ ------
Total from Investment Operations......... 2.66 0.73 2.59 0.69
------- ------- ------ ------
Less Distributions:
Dividends from net investment income..... 0 0 0 0
Distributions from realized gains........ (0.31) (0.06) (0.31) (0.06)
------- ------- ------ ------
Total Distributions........................ (0.31) (0.06) (0.31) (0.06)
------- ------- ------ ------
Net Asset Value, End of Period............. $ 13.02 $ 10.67 $ 12.91 $ 10.63
======= ======= ====== ======
Total Return (not reflecting sales load)... 25.07% 7.32% 24.50% 6.92%
Net Assets, End of Period (in thousands)... $25,561 $15,126 $ 2,482 $ 1,693
Ratios to Average Net Assets of:
Net investment income.................... (0.39)% (0.04)%* (0.86)% (0.56)%*
Expenses net of
waivers/reimbursements/expenses paid by
third parties.......................... 2.00% 2.00%* 2.50% 2.50%*
Expenses before
waivers/reimbursements/expenses paid by
third parties.......................... 2.10% 2.88%* 2.64% 3.40%*
Portfolio Turnover Rate.................... 78% 58% 78% 58%
</TABLE>
+ For the period July 6, 1994 (commencement of operations) through March 31,
1995.
* Annualized.
See accompanying notes to financial statements.
31
<PAGE> 222
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of ESC Strategic Funds, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of ESC Strategic Asset Preservation
Fund, ESC Strategic Income Fund, ESC Strategic Global Equity Fund, ESC Strategic
Small Cap Fund and ESC Strategic Appreciation Fund (constituting ESC Strategic
Funds, Inc., hereafter referred to as the "Fund") at March 31, 1996, the results
of each of their operations for the year then ended and the changes in each of
their net assets and the financial highlights for the year then ended and for
the period from commencement of operations (as indicated in the respective
statements) through March 31, 1995, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at March 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
May 16, 1996
FEDERAL TAXATION NOTICE -- UNAUDITED
During the fiscal year ended March 31, 1996, Global Equity Fund, Small Cap Fund
and Appreciation Fund made long-term capital gain distributions of $0.187,
$0.041, $0.156 per share, respectively.
<PAGE> 223
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the periods ended
March 31, 1996 and March 31, 1995.
Included in Statement of Additional Information:
(1) Portfolio of Investments at March 31, 1996.
(2) Statement of Assets and Liabilities dated
March 31, 1996.
(3) Statement of Operations for the fiscal year
ended March 31, 1996.
(4) Statement of Changes in Net Assets for the
fiscal periods ended March 31, 1996 and
March 31, 1995.
(5) Notes to Financial Statements at March 31, 1996.
(6) Selected Per Share Data for the fiscal periods
ended March 31, 1996 and March 31, 1995.
(6) Report of Independent Accountants.
(b) Exhibits:*
(1) (a) Articles of Incorporation of Registrant. (*)
(b) Certificate of Correction. (*)
(2) By-laws of Registrant. (*)
(3) Not applicable.
(4) Specimen certificates of shares of common
stock of Registrant. (*)
(5) (a) Investment Advisory Agreement. (**)
(b) Portfolio Management Agreement. (**)
(c) Portfolio Management Agreement with
Cincinnati Asset Management, Inc. (**)
(6) (a) Master Distribution Contract. (**)
(b) Distribution Contract Supplement. (**)
(c) Form of Dealer and Selling Group
Agreement. (*)
(d) Form of Escrow Agreement. (*)
(7) Not applicable.
(8) Custody Agreement. (**)
<PAGE> 224
(9) (a) Master Administrative Services
Contract. (**)
(b) Administrative Services Contract
Supplement. (**)
(c) Transfer Agency Agreement. (**)
(d) Sub-Transfer Agency Agreement. (**)
(e) Accounting Agent Contract. (**)
(f) Form of Services Agreement. (*)
(10) Opinion of Counsel. (*)
(11) Consent of Independent Accountants.
(12) Not applicable.
(13) Purchase Agreement. (**)
(14) Not applicable.
(15) (a) Form of Master Distribution Plan. (*)
(b) Forms of Distribution Plan Supplement. (*)
(16) Schedules for Computation.
(17) Not applicable.
(18) Form of Multi-Class Plan (**)
(27) Financial Data Schedule
- ------------------------------
* Filed with Pre-Effective Amendment No. 3, April 5, 1994, and are
incorporated herein by reference.
** Filed with Post-Effective Amendment No. 2, July 28, 1995, and are
incorporated herein by reference.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of July 12, 1996, the number of record holders of each class of
shares of each Fund was as follows:
<TABLE>
<CAPTION>
Number of
Fund/Class Record Owners
---------- -------------
<S> <C>
ESC Strategic Appreciation Fund
Class A 264
Class D 85
</TABLE>
<PAGE> 225
<TABLE>
<S> <C>
ESC Strategic Global Equity Fund
Class A 261
Class D 88
ESC Strategic Small Cap Fund
Class A 1,250
Class D 377
ESC Strategic Income Fund
Class A 131
Class D 44
ESC Strategic Asset Preservation Fund 26
</TABLE>
Item 27. Indemnification
Reference is made to Article VII of Registrant's Articles of
Incorporation.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Articles of Incorporation or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Investment Company Act of 1940 and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by
directors, officers or controlling persons of the Registrant
in connection with the successful defense of any act, suit or
proceeding) is asserted by such directors, officers or
controlling persons in connection with the shares being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Investment Company Act of 1940 and will be
governed by the final adjudication of such issues.
Item 28. Business and Other Connections of Investment Adviser
Equitable Securities Corporation, the investment adviser to
ESC Strategic Funds, Inc., is a New York Stock Exchange member
investment banking and securities brokerage firm. The names
of Equitable Securities Corporation's directors and officers
and their business and other connections for at least the past
two years are as follows: (1)
<TABLE>
<CAPTION>
Business and
------------
Name Title Other Connections
- ---- ----- -----------------
<S> <C> <C>
William H. Cammack, Sr. Chairman, Managing Position with Equitable
Director and Director Securities Corporation,
1972 to present; Director
and President, ESC
Strategic Funds, Inc.,
1994 to present.
Katie H. Gambill President, Head of Position with Equitable
Equity Capital Securities Corporation,
Markets, Managing 1972 to present.
Director and Director
</TABLE>
<PAGE> 226
<TABLE>
<S> <C> <C>
Frank D. Inman Managing Director Position with Equitable
Securities Corporation,
1989 to present.
William P. Johnston Chief Executive Position with Equitable
Officer, Managing Securities Corporation,
Director and Director 1987 to present.
Hershel L. Smith, Jr. Chief Financial Position with Equitable
Officer, Chief Securities Corporation,
Operations Officer 1986 to present.
and Managing Director
Tom R. Steele Managing Director and Position with Equitable
Director Securities Corporation,
1988 to present.
W. Howard Cammack, Jr. Managing Director and Position with Equitable
Director Securities Corporation,
1979 to present; Director
and Treasurer, ESC
Strategic Funds, Inc.,
1994 to present.
</TABLE>
- --------------------
(1) The Address of all Directors and Officers of Equitable
Securities Corporation is 800 Nashville City Center, 511 Union Street,
Nashville, Tennessee 37279-1743.
Item 29. Principal Underwriters
(a) Not applicable.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address (1) with Underwriter with Registrant
- -------------------- --------------------- ---------------------
<S> <C> <C>
William H. Cammack, Sr. Chairman, Managing Director and President
Director
Katie H. Gambill President, Head of None
Equity Capital
Markets, Managing
Director and Director
Frank D. Inman Managing Director None
William P. Johnston Chief Executive None
Officer, Managing
Director and Director
Hershel L. Smith, Jr. Chief Financial None
Officer, Chief
Operations Officer
and Managing Director
</TABLE>
<PAGE> 227
<TABLE>
<S> <C> <C>
Tom R. Steele Managing Director and None
Director
W. Howard Cammack, Jr. Managing Director and Director and Treasurer
Director
</TABLE>
(1) The address of all directors and officers is 800 Nashville
City Center, 511 Union Street, Nashville, Tennessee 37219-1743.
(c) Not applicable.
Item 30. Location of Accounts and Records
The accounts, books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940, and the Rules thereunder will
be maintained at the offices of Furman Selz LLC, 230 Park
Avenue, New York, New York 10169.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
<PAGE> 228
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, the Registrant certifies that
it meets all of the requirements for effectiveness of this Post-Effective
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended and Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed in its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 26th day of July, 1996.
ESC STRATEGIC FUNDS, INC. ESC STRATEGIC FUNDS, INC.
* By: /s/ Gordon M. Forrester
- ------------------------- -----------------------
William H. Cammack, Sr. Gordon M. Forrester
President Assistant Treasurer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment to the Registration Statement has been
signed by the following persons in the capacities indicated on the 26th day of
July, 1996.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
* Director and President
- ---------------------------
William H. Cammack, Sr.
* Director and Treasurer
- ---------------------------
William H. Cammack, Jr.
* Director
- ---------------------------
J. Bransford Wallace
* Director
- ---------------------------
Brownlee O. Currey, Jr.
* Director
- ---------------------------
E. Townes Duncan
/s/ Gordon M. Forrester Assistant Treasurer
- ---------------------------
Gordon M. Forrester
*By: /s/ Joan V. Fiore
-----------------
Joan V. Fiore
Attorney-in-Fact
</TABLE>
<PAGE> 229
ESC STRATEGIC FUNDS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------- ---------------------- ------------
<S> <C> <C>
11 Consent of Independent Accountants
16 Schedules for Computation
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting parts of this Post-Effective Amendment No. 3 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated May
16, 1996, relating to the financial statements and financial highlights of ESC
Strategic Funds, Inc., which appears in such Statements of Additional
Information, and to the incorporation by reference of our report into the
Prospectuses which constitute parts of this Registration Statement. We also
consent to the reference to us under the heading "Independent Accountants" in
such Statements of Additional Information.
/s/ Price Waterhouse LLP
- --------------------------------------
PRICE WATERHOUSE LLP
New York, New York
July 24, 1996
<PAGE> 1
ESC STRATEGIC ASSET PRESERVATION FUND EXHIBIT 16A
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 10.849 10.849 5.469 1,108.492 5.469 1,108.492
FISCAL YEAR 6.846 6.846 6.846 1,068.462 6.846 1,068.462
YEAR TO DATE 0.198 0.198 0.198 1,001.984 0.198 1,001.984
12 MONTH 6.846 6.846 6.846 1,068.462 6.846 1,068.462
6 MONTH 2.395 2.396 2.396 1,023.964 2.396 1,023.964
3 MONTH 0.198 0.198 0.198 1,001.984 0.198 1,001.984
1 MONTH -0.140 -0.140 -0.140 998.602 -0.140 998.602
2 YEARS 10.849 10.849 5.469 1,108.492 5.469 1,108.492
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC APPRECIATION FUND D EXHIBIT 16B
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 33.106 31.138 16.748 1,311.382 17.745 1,331.055
FISCAL YEAR 24.495 22.649 22.649 1,226.487 24.495 1,244.948
YEAR TO DATE 4.365 2.787 2.787 1,027.868 4.366 1,043.657
12 MONTH 24.495 22.649 22.649 1,226.487 24.495 1,244.948
6 MONTH 4.285 2.748 2.748 1,027.476 4.285 1,042.854
3 MONTH 4.365 2.787 2.787 1,027.868 4.366 1,043.657
1 MONTH 0.780 -0.769 -0.769 992.314 0.781 1,007.806
2 YEARS N/A N/A N/A N/A N/A N/A
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC APPRECIATION FUND A EXHIBIT 16C
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 34.216 28.191 15.242 1,281.912 18.305 1,342.161
FISCAL YEAR 25.065 19.468 19.468 1,194.679 25.066 1,250.659
YEAR TO DATE 4.578 -0.154 -0.154 998.464 4.578 1,045.779
12 MONTH 25.065 19.468 19.468 1,194.679 25.066 1,250.659
6 MONTH 4.580 -0.116 -0.116 998.835 4.581 1,045.808
3 MONTH 4.578 -0.154 -0.154 998.464 4.578 1,045.779
1 MONTH 0.852 -3.699 -3.699 963.011 0.852 1,008.516
2 YEARS N/A N/A N/A N/A N/A N/A
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC GLOBAL EQUITY FUND A EXHIBIT 16D
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 13.444 8.352 4.271 1,083.519 6.799 1,134.444
FISCAL YEAR 14.408 9.223 9.223 1,092.232 14.408 1,144.084
YEAR TO DATE 3.261 -1.423 -1.423 985.765 3.262 1,032.622
12 MONTH 14.408 9.223 9.223 1,092.232 14.408 1,144.084
6 MONTH 3.061 -1.595 -1.595 984.053 3.062 1,030.616
3 MONTH 3.261 -1.423 -1.423 985.765 3.262 1,032.622
1 MONTH 0.090 -4.401 -4.401 955.993 0.090 1,000.900
2 YEARS 13.444 8.352 4.271 1,083.519 6.799 1,134.444
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC GLOBAL EQUITY FUND D EXHIBIT 16E
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 12.052 10.396 5.292 1,103.960 6.113 1,120.521
FISCAL YEAR 14.013 12.298 12.298 1,122.979 14.013 1,140.131
YEAR TO DATE 3.204 1.672 1.672 1,016.718 3.205 1,032.048
12 MONTH 14.013 12.298 12.298 1,122.979 14.013 1,140.131
6 MONTH 2.905 1.322 1.322 1,013.223 2.906 1,029.055
3 MONTH 3.204 1.672 1.672 1,016.718 3.205 1,032.048
1 MONTH 0.091 -1.440 -1.440 985.598 0.092 1,000.917
2 YEARS 12.052 10.396 5.292 1,103.960 6.113 1,120.521
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC SMALL CAP FUND A EXHIBIT 16F
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 67.803 60.271 29.350 1,602.707 32.632 1,678.034
FISCAL YEAR 45.875 39.313 39.313 1,393.131 45.876 1,458.759
YEAR TO DATE 7.807 2.983 2.983 1,029.833 7.808 1,078.077
12 MONTH 45.875 39.313 39.313 1,393.131 45.876 1,458.759
6 MONTH 14.602 9.480 9.480 1,094.795 14.601 1,146.014
3 MONTH 7.807 2.983 2.983 1,029.833 7.808 1,078.077
1 MONTH 3.655 -0.998 -0.998 990.022 3.655 1,036.551
2 YEARS N/A N/A N/A N/A N/A N/A
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC SMALL CAP FUND D EXHIBIT 16G
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 66.572 64.110 31.032 1,641.104 32.101 1,665.723
FISCAL YEAR 45.186 43.019 43.019 1,430.192 45.187 1,451.874
YEAR TO DATE 7.576 5.984 5.984 1,059.844 7.576 1,075.761
12 MONTH 45.186 43.019 43.019 1,430.192 45.187 1,451.874
6 MONTH 14.235 12.500 12.500 1,125.000 14.235 1,142.348
3 MONTH 7.576 5.984 5.984 1,059.844 7.576 1,075.761
1 MONTH 3.616 2.073 2.073 1,020.727 3.616 1,036.156
2 YEARS N/A N/A N/A N/A N/A N/A
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC INCOME FUND A EXHIBIT 16H
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 13.373 8.284 4.256 1,082.837 6.794 1,133.731
FISCAL YEAR 7.668 2.807 2.807 1,028.065 7.669 1,076.685
YEAR TO DATE 0.055 -4.428 -4.428 955.722 0.055 1,000.546
12 MONTH 7.668 2.807 2.807 1,028.065 7.669 1,076.685
6 MONTH 2.220 -2.395 -2.395 976.045 2.221 1,022.205
3 MONTH 0.055 -4.428 -4.428 955.722 0.055 1,000.546
1 MONTH -0.264 -4.759 -4.759 952.413 -0.264 997.363
2 YEARS 13.373 8.284 4.256 1,082.837 6.794 1,133.731
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<PAGE> 1
ESC STRATEGIC INCOME FUND D EXHIBIT 16I
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
INCEPTION 12.198 10.540 5.388 1,105.395 6.212 1,121.978
FISCAL YEAR 7.112 5.520 5.520 1,055.197 7.113 1,071.125
YEAR TO DATE -0.093 -1.568 -1.568 984.321 -0.094 999.056
12 MONTH 7.112 5.520 5.520 1,055.197 7.113 1,071.125
6 MONTH 1.946 0.461 0.461 1,004.613 1.946 1,019.461
3 MONTH -0.093 -1.568 -1.568 984.321 -0.094 999.056
1 MONTH -0.306 -1.785 -1.785 982.146 -0.306 996.941
2 YEARS 12.198 10.540 5.388 1,105.395 6.212 1,121.978
3 YEARS N/A N/A N/A N/A N/A N/A
4 YEARS N/A N/A N/A N/A N/A N/A
5 YEARS N/A N/A N/A N/A N/A N/A
10 YEARS N/A N/A N/A N/A N/A N/A
</TABLE>
BEGINNING INVESTMENT.... $1,000
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> ESC STRATEGIC ASSET PRESERVATION FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 13094
<INVESTMENTS-AT-VALUE> 13151
<RECEIVABLES> 222
<ASSETS-OTHER> 392
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13765
<PAYABLE-FOR-SECURITIES> 489
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35
<TOTAL-LIABILITIES> 524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13195
<SHARES-COMMON-STOCK> 1324
<SHARES-COMMON-PRIOR> 1206
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 56
<NET-ASSETS> 13241
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 821
<OTHER-INCOME> 0
<EXPENSES-NET> 115
<NET-INVESTMENT-INCOME> 706
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 128
<NET-CHANGE-FROM-OPS> 835
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 706
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104
<NUMBER-OF-SHARES-REDEEMED> 56
<SHARES-REINVESTED> 70
<NET-CHANGE-IN-ASSETS> 1317
<ACCUMULATED-NII-PRIOR> 1
<ACCUMULATED-GAINS-PRIOR> (20)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 202
<AVERAGE-NET-ASSETS> 12765
<PER-SHARE-NAV-BEGIN> 9.89
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> ESC STRATEGIC GLOBAL ENTITY FUND-CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 16490
<INVESTMENTS-AT-VALUE> 17849
<RECEIVABLES> 242
<ASSETS-OTHER> 589
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15680
<PAYABLE-FOR-SECURITIES> 289
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68
<TOTAL-LIABILITIES> 358
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16786
<SHARES-COMMON-STOCK> 1321
<SHARES-COMMON-PRIOR> 931
<ACCUMULATED-NII-CURRENT> 86
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1359
<NET-ASSETS> 18322
<DIVIDEND-INCOME> 228
<INTEREST-INCOME> 89
<OTHER-INCOME> 0
<EXPENSES-NET> 393
<NET-INVESTMENT-INCOME> (66)
<REALIZED-GAINS-CURRENT> 900
<APPREC-INCREASE-CURRENT> 1134
<NET-CHANGE-FROM-OPS> 1967
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 283
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 393
<NUMBER-OF-SHARES-REDEEMED> 22
<SHARES-REINVESTED> 20
<NET-CHANGE-IN-ASSETS> 5787
<ACCUMULATED-NII-PRIOR> (8)
<ACCUMULATED-GAINS-PRIOR> (295)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 157
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 393
<AVERAGE-NET-ASSETS> 12098
<PER-SHARE-NAV-BEGIN> 9.9
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 1.46
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.24
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.08
<EXPENSE-RATIO> 2.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> ESC STRATEGIC GLOBAL EQUITY FUND-CLASS D
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 16490
<INVESTMENTS-AT-VALUE> 17849
<RECEIVABLES> 242
<ASSETS-OTHER> 589
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18680
<PAYABLE-FOR-SECURITIES> 289
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68
<TOTAL-LIABILITIES> 358
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16786
<SHARES-COMMON-STOCK> 337
<SHARES-COMMON-PRIOR> 338
<ACCUMULATED-NII-CURRENT> 84
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1359
<NET-ASSETS> 18322
<DIVIDEND-INCOME> 228
<INTEREST-INCOME> 89
<OTHER-INCOME> 0
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<NET-CHANGE-IN-ASSETS> 5787
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> ESC STRATEGIC INCOME FUND-CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 33259
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<TOTAL-LIABILITIES> 102
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<PAID-IN-CAPITAL-COMMON> 38516
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<ACCUMULATED-NII-CURRENT> 509
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<NET-ASSETS> 38337
<DIVIDEND-INCOME> 43
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<NET-INVESTMENT-INCOME> 2179
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<NET-CHANGE-IN-ASSETS> 4723
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> ESC STRATEGIC INCOME FUND-CLASS D
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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<ACCUMULATED-NII-CURRENT> 509
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (315)
<NET-ASSETS> 38337
<DIVIDEND-INCOME> 43
<INTEREST-INCOME> 2792
<OTHER-INCOME> 0
<EXPENSES-NET> 657
<NET-INVESTMENT-INCOME> 2179
<REALIZED-GAINS-CURRENT> 742
<APPREC-INCREASE-CURRENT> (286)
<NET-CHANGE-FROM-OPS> 2635
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<DISTRIBUTIONS-OF-INCOME> 74
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<NUMBER-OF-SHARES-SOLD> 39
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<SHARES-REINVESTED> 7
<NET-CHANGE-IN-ASSETS> 4723
<ACCUMULATED-NII-PRIOR> 149
<ACCUMULATED-GAINS-PRIOR> 12
<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 673
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<PER-SHARE-NAV-BEGIN> 9.94
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> ESC STRATEGIC SMALL CAP FUND-CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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<ACCUM-APPREC-OR-DEPREC> 6892
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<DIVIDEND-INCOME> 81
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<NET-INVESTMENT-INCOME> (207)
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<NET-CHANGE-IN-ASSETS> 25585
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> ESC STRATEGIC SMALL CAP FUND-CLASS D
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6892
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<DIVIDEND-INCOME> 81
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<NET-INVESTMENT-INCOME> (207)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> ESC STRATEGIC APPRECIATION FUND-CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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<NET-INVESTMENT-INCOME> (101)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> ESC STRATEGIC APPRECIATION FUND-CLASS D
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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<NET-INVESTMENT-INCOME> (101)
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</TABLE>
