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Registration Nos. 33-72190
811-8166
As filed with the Securities and Exchange Commission on October 30, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Post-Effective Amendment No. 9 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 10 X
ESC STRATEGIC FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (800) 662-8417
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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. George O. Martinez, Esq.
Dechert Price & Rhoads BISYS Fund Services
1500 K Street, N.W. 3435 Stelzer Road
Washington, D.C. 20005 Columbus, Ohio 43219-3035
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)
on (date) pursuant to paragraph (a)(2) of rule 485.
DECLARATION PURSUANT TO RULE 24f-2
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, 1997 was filed on May 29, 1997.
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ESC STRATEGIC FUNDS, INC.
CROSS REFERENCE SHEET
(as required by Rule 404(c))
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PART A
N-1A Item No. Location
Item 1. Cover Page Cover Page
Item 2. Synopsis Highlights
Item 3. Condensed Financial Information Not applicable
Item 4. General Description of Registrant The Fund; Description of
Securities and Investment
Practices; Investment
Restrictions
Item 5. Management of the Fund Management of the Fund
Item 5A. Not Applicable Not Applicable
Item 6. Capital Stock and Other Securities Other Information,
Dividends, Distributions
and Federal Income
Taxation
Item 7. Purchase of Securities Being Offered Fund Share Valuation;
Purchase of Fund Shares;
Management of the Fund
Redemption of Fund Shares
Item 8. Redemption or Repurchase Redemption of Fund Shares
Item 9. Pending Legal Proceedings Not Applicable
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<TABLE>
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Part B
N-1A Item No. Location
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
Item 15. Control Persons and Principal Not Applicable
Holders of Securities
Item 16. Investment Advisory and Other Management
Services.
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Other Information
Item 19. Purchase, Redemption and Pricing of Purchase of Fund Shares;
Securities Being Offered 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 Not Applicable
</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.
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PRELIMINARY NOTE
The Registrant's Prospectus dated July 29, 1997, and supplemented on September
24, 1997 and October 3, 1997, to which the interim financial statements
contained herein are added by Post-Effective Amendment No. 9, are incorporated
by reference to the Registrant's filing of definitive copies under Rule 497(c).
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THE VALUE FUND PORTFOLIO OF
ESC STRATEGIC FUNDS, INC.
SUPPLEMENT DATED OCTOBER 30, 1997
TO THE PROSPECTUS DATED JULY 29, 1997
The table of "Financial Highlights (unaudited)" for a share of the Value Fund
Portfolio of ESC Strategic Funds, Inc., outstanding through the period ended
September 30, 1997 below supplements the audited financial statements contained
in the Statement of Additional Information and sets forth certain information
regarding the investment operations of the Value Fund for the period presented.
This Supplement is provided to update, and should be read in conjunction with,
the information provided in the Prospectus.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
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THE VALUE FUND
CLASS A CLASS B
MAY 7, 1997 MAY 7, 1997
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) THROUGH OPERATIONS) THROUGH
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
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Net Asset Value, Beginning of Period........................ $10.00 $10.00
Income from investment operations:
Net investment income..................................... 0.02 0.00
Net realized and unrealized (loss) on investments......... 1.22 1.22
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Total from investment operations.................. 1.24 1.24
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Less Dividends and Distributions:
From net investment income................................ 0.00 0.00
From realized gains....................................... 0.00 0.00
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Total Distributions......................................... 0.00 0.00
Net Asset Value, End of Period.............................. $11.24 $11.22
====== ======
Total Return (excludes sales charge)........................ 12.40%(a) 12.20%(a)
Ratios to Average Net Assets of:
Net investment income..................................... 0.42%(b) 0.07%(b)
Expenses net of waivers/reimbursements and expenses paid
by third parties....................................... 1.14%(b) 1.34%(b)
Expenses before waivers/reimbursements and expenses paid
by third parties....................................... 2.27%(b) 2.46%(b)
Portfolio turnover rate..................................... 6.41% 6.41%
Average Commission per Share................................ $ 0.05 $ 0.05
</TABLE>
(a) Not annualized.
(b) Annualized.
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ESC STRATEGIC FUNDS, INC.
(THE "COMPANY")
3435 STELZER ROAD
COLUMBUS, OHIO 43219-8001
GENERAL AND ACCOUNT INFORMATION: (800) 261-FUND(3863)
EQUITABLE SECURITIES CORPORATION --
INVESTMENT ADVISER AND DISTRIBUTOR
BISYS FUND SERVICES--ADMINISTRATOR
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the seven
funds (the "Funds") advised by Equitable Securities Corporation.(the "Adviser").
The Funds are:
- ESC Strategic Appreciation Fund
- ESC Strategic Global Equity Fund
- ESC Strategic Small Cap Fund*
- ESC Strategic Income Fund
- ESC Strategic Asset Preservation Fund
- ESC Strategic Growth Fund
- ESC Strategic Value 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 29,
1997 and supplemented October 30, 1997 (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 29, 1997.
As supplemented October 30, 1997
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* Currently, shares of the Small Cap Fund are not being offered to the public.
** As of September 29, 1997, the ESC Strategic Asset Preservation Fund was
terminated and is no longer available as an investment.
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TABLE OF CONTENTS
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PAGE
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INVESTMENT POLICIES 3
Bank Obligations 3
Commercial Paper 3
Corporate Debt Securities 3
Repurchase Agreements 3
Variable and Floating Rate Demand and Master Demand Notes 4
Loans of Portfolio Securities 4
Foreign Securities 5
Forward Foreign Currency Exchange Contracts 5
Interest Rate Futures Contracts 5
Stock Index Futures Contracts 6
Option Writing and Purchasing 6
Options on Futures Contracts 7
Risks of Futures and Options Investments 9
Limitations on Futures Contracts and Options on Futures Contracts 9
Municipal Obligations 9
Municipal Lease Obligations 10
Brady Bonds 11
Warrants and Rights 12
Investment Companies, Investment Funds 12
Other Investment Policies of ESC Value Fund 12
INVESTMENT RESTRICTIONS 24
MANAGEMENT 27
Directors and Officers 27
Investment Adviser 30
The Managers 31
Distribution of Fund Shares 34
Administrative Services 35
Service Organizations 36
DETERMINATION OF NET ASSET VALUE 38
PORTFOLIO TRANSACTIONS 38
Portfolio Turnover 39
TAXATION 39
OTHER INFORMATION 44
Capitalization 44
Principal Shareholders 45
Voting Rights 51
Custodian, Transfer Agent and Dividend Disbursing Agent 51
Yield and Performance Information 52
Independent Accountants 53
Counsel 53
Registration Statement 53
FINANCIAL STATEMENTS 54
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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. Unlike a nonconvertible corporate
obligation, a convertible corporate obligation may be converted into or
exchanged for a prescribed amount of common stock or other equity security of
the same or different issuer within a particular period of time at a specified
price or formula. Convertible securities, are senior to common stock in an
issuer's capital structure and generally entail less risk than the issuer's
common stock, although the extent that the risk is reduced depends in large
measure upon a variety of factors, including the creditworthiness of the issuer
and its overall capital structure.
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 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
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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 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.
Inverse Floaters. Inverse floating rate obligations are fixed-income
securities, that have coupon rates that vary inversely at a multiple of a
designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
Inverse floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity.
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.
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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 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 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
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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, ESC Strategic Small Cap Fund, ESC Strategic Growth
Fund and ESC Strategic Value 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 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.
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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 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 canceling 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.
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.
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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.
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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 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.
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.
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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.
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
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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 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 and ESC Strategic Value 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 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 totaling 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
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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.
Warrants and Rights (All Funds). The Fund may invest up to 5% of its
net assets in warrants or rights (other than those acquired in units or attached
to other securities) that entitle the holder to buy equity securities at a
specific price for a specific period of time but will do so only if the equity
securities are deemed appropriate by the Manager for inclusion in the Fund's
portfolio.
Investment Companies and Investment Funds (All Funds). Each Fund is
permitted to invest in shares of other open-end or closed-end investment
companies. The Investment Company Act of 1940, as amended, generally prohibits
each Fund from acquiring more than 3% of the outstanding voting shares of
another investment company and limits such investments to no more than 5% of
each Fund's total assets in any one investment company and no more than 10% in
any combination of investment companies. The Act also prohibits the Fund and
other funds of the Company from acquiring in the aggregate more than 10% of the
outstanding voting shares of any registered closed-end investment company. To
the extent the Fund invests a portion of its assets in investment companies,
those assets will be subject to the expenses of any such investment company as
well as to the expenses of the Fund itself. The Fund may not purchase shares of
any affiliated investment company except as permitted by SEC Rule or Order.
Other Investment Policies of ESC Strategic Value Fund
In respect of ESC Strategic Value Fund, some emerging market countries
have laws and regulations that currently preclude direct foreign investment in
the securities of their companies. However, indirect foreign investment in the
securities of companies listed and traded on the stock exchanges in those
countries is permitted by certain emerging market countries through investment
funds. Any investment by the Fund in these investment funds would be subject to
applicable law. Under certain circumstances, an investment in an investment fund
will be subject to the additional limitations that apply to investments in
investment companies. Such investment funds also involve an extra layer of
expenses in addition to those of the Fund. Additionally such investment may
carry U.S. tax consequences. See "Taxation" section for further explanation.
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Mortgage-Related Securities.
REMICs: A REMIC is a CMO that qualifies for special tax treatment under
the code and invests in certain mortgages principally secured by interests in
real property. Investors may purchase beneficial interests in REMICs, which are
known as "regular" interests, or "residual" interests. Guaranteed REMIC
pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC
represent beneficial ownership interests in a REMIC trust consisting principally
of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through
certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment
of interest, and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates. FNMA
REMIC Certificates are issued and guaranteed as to timely distribution of
principal and interest by FNMA.
Parallel Pay Securities; PAC Bonds: Parallel pay CMOs and REMICs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, that must be
retired by its stated maturity date or final distribution date but may be
retired earlier. Planned Amortization Class CMOs ("PAC Bonds") generally require
payments of a specified amount of principal on each payment date. PAC Bonds are
always parallel pay CMOs with the required principal payment on such securities
having the highest priority after interest has been paid to all classes.
The Fund may also invest in Stripped Mortgage-Backed Securities
("SMBS"), 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.
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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 the Fund to more risk.
Mortgage-Backed Security Rolls. The Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities issued by GNMA, FNMA or
FHLMC. In a forward roll transaction, that is considered to be a borrowing by
the Fund, the Fund will sell a mortgage security to a bank or other permitted
entity and simultaneously agree to repurchase a similar security from the
institution at a later date at an agreed upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of mortgages with different
prepayment histories than those sold. Risks of mortgage-backed security rolls
include: (i) the risk of prepayment prior to maturity, (ii) the possibility that
the proceeds of the sale may have to be invested in money market instruments
(typically repurchase agreements) maturing not later than the expiration of the
roll, and (iii) the possibility that the market value of the securities sold by
the Fund may decline below the price at which the Fund is obligated to purchase
the securities. Upon entering into a mortgage-backed security roll, the Fund
will be required to place cash, U.S. Government Securities or other high-grade
debt securities in a segregated account with its Custodian in an amount equal to
its obligation under the roll.
Assumptions generally accepted by the industry concerning the
probability of early payment may be used in the calculation of maturities for
debt securities that contain put or call provisions, sometimes resulting in a
calculated maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above.
As new types of mortgage-related securities are developed and offered
to investors, the Manager will, consistent with the Fund's investment
objectives, policies and quality standards, consider making investments in such
new types of mortgage-related securities.
Other Asset-Backed Securities. Asset-backed securities are secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, that represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, known as collateralized obligations that are generally issued as
the debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt.
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Asset-backed securities are not issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; however, the payment of principal
and interest on such obligations may be guaranteed up to certain amounts and for
a certain period by a letter of credit issued by a financial institution (such
as a bank or insurance company) unaffiliated with the issuers of such
securities. The purchase of asset-backed securities raises risk considerations
peculiar to the financing of the instruments underlying such securities. For
example, there is a risk that another party could acquire an interest in the
obligations superior to that of the holders of the asset-backed securities.
There also is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
Asset-backed securities entail prepayment risk, that may vary depending on the
type of asset, but is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are unsecured
obligations of the card holder.
The market for asset-backed securities is at a relatively early state
of development. Accordingly, there may be a limited secondary market for such
securities. Some of the asset-backed securities in which the Fund may invest are
described below. 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,
that 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 the Fund in calculating the
maturity for purposes of its investment in asset-backed securities.
Structured Investments. Structured Investments are derivatives in the
form of a unit or units representing an undivided interest(s) in assets held in
a trust that is not an investment company as defined in the Investment Company
Act of 1940. A trust unit pays a return based on the total return of securities
and other investments held by the trust and the trust may enter into one or more
swaps to achieve its objective. For example, a trust may purchase a basket of
securities and agree to exchange the return generated by those securities for
the return generated by another basket or index of securities. The Fund will
purchase structured investments in trusts that engage in such swaps only where
the counterparties are approved by the Manager in accordance with credit-risk
guidelines established by the Board of Directors.
Structured Notes. Structured Notes are derivatives where the amount of
principal repayment and or interest payments is based upon the movement of one
or
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more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of structured notes allows the Fund to tailor
its investments to the specific risks and returns the Manager wishes to accept
while avoiding or reducing certain other risks.
Swaps. Swap contracts are derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specific index and agreed upon notional
amount. The term specified index includes, but is not limited to, currencies,
fixed interest rates, prices and total return on interest rate indices,
fixed-income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, the Fund may
agree to swap the return generated by a fixed-income index for the return
generated by a second fixed-income index. The currency swaps in which the Fund
may enter will generally involve an agreement to pay interest streams in one
currency based on a specified index in exchange for receiving interest streams
denominated in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon national amount.
The Fund will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two returns. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. The Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Fund's Board of Directors.
Interest rate and total rate of return swaps do not involve the
delivery of securities, other underlying assets, or principal. Accordingly, the
risk of loss with respect to interest rate and total rate of return swaps is
limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the other party to an interest rate or total rate of
return swap defaults, the Fund's risk of loss consists of the net amount of
interest payments that a portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
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The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Manager is incorrect in its forecasts
of market values, interest rates, and currency exchange rates, the investment
performance of the Fund would be less favorable than it would have been if this
investment technique were not used.
Zero Coupon Securities and Deferred Interest Obligations. The Fund may
invest in zero coupon securities and deferred interest obligations issued by the
U.S. Treasury or by private issuers such as domestic or foreign corporations.
Zero coupon U.S. Treasury securities include: (1) U.S. Treasury bills without
interest coupons, (2) U.S. Treasury notes and bonds that have been stripped of
their unmatured interest coupons and (3) receipts or certificates representing
interests in such stripped debt obligations or coupons. Zero coupon securities
and deferred interest obligations usually trade at a deep discount from their
face or par value and will be subject to greater fluctuations in market value in
response to changing interest rates than debt obligations of comparable
maturities that make current payments of interest. An additional risk of
private-issuer zero coupon securities and deferred interest obligations is the
credit risk that the issuer will be unable to make payment at maturity of the
obligations.
While zero coupon securities do not require the periodic payment of
interest, deferred interest obligations generally provide for a period of delay
before the regular payment of interest begins. Although this period of delay is
different for each deferred interest obligation, a typical period is
approximately one-third of the obligation's term to maturity. Such investments
benefit the issuer by mitigating its initial need for cash to meet debt service,
but some also provide a higher rate of return to attract investors who are
willing to defer receipt of such cash. With zero coupon securities, however, the
lack of periodic interest payments means that the interest rate is "locked in"
and the investor avoids the risk of having to reinvest periodic interest
payments in securities having lower rates.
Because the Fund accrues taxable income from zero coupon and deferred
interest securities without receiving cash, the Fund may be required to sell
portfolio securities in order to pay dividends or redemption proceeds for its
shares, which require the payment of cash. This will depend on several factors;
the proportion of shareholders who elect to receive dividends in cash rather
than reinvesting dividends in additional shares of the Fund, and the amount of
cash income the Fund receives from other investments and the sale of shares. In
either case, cash distributed or held by the Fund that is not reinvested by
investors in additional Fund shares will hinder the Fund from seeking current
income.
Custodial Receipts. The Fund may acquire U.S. Government Securities and
their unmatured interest coupons that have been separated (stripped) by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts (TIGRs) and Certificate of Accrual on Treasury Securities
(CATS). The stripped coupons are sold separately from the underlying principal,
which is usually sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. The
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underlying U.S. Treasury bonds and notes themselves are generally held in
book-entry form at a Federal Reserve Bank. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most likely
will be deemed the beneficial holders of the underlying U.S. Government
Securities for federal tax and securities purposes. In the case of CATS and
TIGRs, the IRS has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies such
as the Fund. CATS and TIGRs are not considered U.S. Government Securities by the
Staff of the SEC, however. Further, the IRS' conclusion is contained only in a
general counsel memorandum, which is an internal document of no precedential
value or binding effect, and a private letter ruling, which also may not be
relied upon by the Fund. The Company is not aware of any binding legislative,
judicial or administrative authority on this issue.
Loan Participations. Through a loan participation, the Fund can buy
from a lender a portion of a larger loan that it has made to a borrower. By
buying loan participations, the Fund may be able to acquire interests in loans
from financially strong borrowers that the Fund could not otherwise acquire.
These instruments are typically interests in floating or variable rate senior
loans to U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending institution
and are subject to the credit risks of both the borrower and the lending
institution. While loan participations generally trade at par value, if the
borrowers have credit problems, some may sell at discounts. To the extent that
borrower's credit problems are resolved, the loan participations may then
appreciate in value. These loan participations, however, carry substantially the
same risk as that for defaulted debt obligations and may cause loss of the
entire investment. Most loan participations are illiquid and therefore will be
included in the Fund's limitation on illiquid investments.
Pay-in-Kind Bonds. Pay-in-kind bonds are securities that pay interest
through the issuance of additional bonds. The Fund will be deemed to receive
interest over the life of the bonds and be treated as if interest were paid on a
current basis for federal income tax purposes, although no cash interest
payments are received by the Fund until the cash payment date or until the bonds
mature.
Trade Claims. The Fund may invest in trade claims. Trade claims are
interest in amounts owed to suppliers of goods or services and are purchased
from creditors of companies in financial difficulty. For purchasers such as the
Fund, trade claims offer the potential for profits since they are often
purchased at a significant discount from face value and consequently, may
generate capital appreciation in the event that the market value of the claim
increases as the debtor's financial position improves or the claim is paid.
An investment in trade claims is speculative and carries a high degree
of risk. Trade claims are illiquid securities which generally do not pay
interest and there can be no guarantee that the debtor will ever be able to
satisfy the obligation on the trade claim. The markets in trade claims are not
regulated by federal securities laws or the SEC. Because trade claims are
unsecured, holders of trade claims may have a lower priority in terms of payment
than certain other creditors in a bankruptcy proceeding.
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Equity-Linked Securities. The Fund may invest in equity-linked
securities, including, among others, PERCS, ELKS or LYONs, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. It is impossible to predict whether the price of
the underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market. The market for such securities may be shallow, and high volume trades
may be possible only with discounting. In addition to the foregoing risks, the
return on such securities depends on the creditworthiness of the issuer of the
securities, which may be the issuer of the underlying securities or a third
party investment banker or other lender. The creditworthiness of such third
party issuer of equity-linked securities may, and often does, exceed the
creditworthiness of the issuer of the underlying securities. The advantage of
using equity-linked securities over traditional equity and debt securities is
that the former are income producing vehicles that may provide a higher income
than the dividend income on the underlying equity securities while allowing some
participation in the capital appreciation of the underlying equity securities.
Another advantage of using equity-linked securities is that they may be used for
hedging to reduce the risk of investing in the generally more volatile
underlying equity securities.
The following are three examples of equity-linked securities. The Fund
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS")
technically is preferred stock with some characteristics of common stock. PERCS
are mandatorily convertible into common stock after a period of time, usually
three years, during which the investors' capital gains are capped, usually at
30%. Commonly, PERCS may be redeemed by the issuer at any time or if the
issuer's common stock is trading at a specified price level or better. The
redemption price starts at the beginning of the PERCS duration period at a price
that is above the cap by the amount of the extra dividends the PERCS holder is
entitled to receive relative to the common stock over the duration of the PERCS
and declines to the cap price shortly before maturity of the PERCS. In exchange
for having the cap on capital gains and giving the issuer the option to redeem
the PERCS at any time or at the specified common stock price level, the Fund may
be compensated with a substantially higher dividend yield than that on the
underlying common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS
20
<PAGE> 25
are commonly not subject to redemption prior to maturity. ELKS usually bear
interest during the three-year term at a substantially higher rate than the
dividend yield on the underlying common stock. In exchange for having the cap on
the return that might have been received as capital gains on the underlying
common stock, the Fund may be compensated with the higher yield, contingent on
how well the underlying common stock does.
LYONs. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Fund will not receive any interest payments until the notes mature, typically in
15 to 20 years, when the notes are redeemed at face, or par value. The yield on
LYONs, typically, is lower-than-market rate for debt securities of the same
maturity, due in part to the fact that the LYONs are convertible into common
stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better, or, at the option of the holder, upon certain fixed dates. The
redemption price typically is the purchase price of the LYONs plus accrued
original issue discount to the date of redemption, which amounts to the
lower-than-market yield. The Fund will receive only the lower-than-market yield
unless the underlying common stock increases in value at a substantial rate.
LYONs are attractive to investors, like the Fund, when it appears that they will
increase in value due to the rise in value of the underlying common stock.
Arbitrage. The Fund may sell in one market a security which it owns and
simultaneously purchase the same security in another market, or it may buy a
security in one market and simultaneously sell it in another market, in order to
take advantage of differences between the prices of the security in the
different markets. Although the Fund does not actively engage in arbitrage, such
transactions
21
<PAGE> 26
may be entered into only with respect to debt securities and will
occur only in a dealer's market where the buying and selling dealers involved
confirm their prices to the Fund at the time of the transaction, thus
eliminating any risk to the assets of the Fund.
Foreign Index-Linked Instruments. As part of its investment program,
and to maintain greater flexibility, the Fund may invest in instruments which
have the investment characteristics of particular foreign securities, securities
indexes, futures contracts or currencies. Such instruments may take a variety of
forms, such as debt instruments with interest or principal payments determined
by reference to the value of a currency or commodity at a future point in time.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries, or the differential in
interest rates between particular countries. The risks of such investments would
reflect the risks of investing in the index or other instrument, the performance
of which determines the return for the instrument. Tax considerations may limit
the Fund's ability to invest in foreign index-linked instruments.
Venture Capital. The Fund may invest in venture capital limited
partnerships and venture capital funds that, in turn, invest principally in
securities of early stage, developing companies. Investments in venture capital
limited partnerships and venture capital funds present a number of risks not
found in investing in established enterprises including the facts that such a
partnership's or fund's portfolio will be composed almost entirely of
early-stage companies that may lack depth of management and sufficient
resources, that may be marketing a new product for which there is no established
market, and that may be subject to intense competition from larger companies.
Any investment in a venture capital limited partnership or venture capital fund
will lack liquidity, will be difficult to value, and the Fund will not be
entitled to participate in the management of the partnership or fund. If for any
reason the services of the general partners of a venture capital limited
partnership were to become unavailable, such limited partnership could be
adversely affected.
In addition to investing in venture capital limited partnerships and
venture capital funds, the Fund may directly invest in early-stage, developing
companies. The risks associated with investing in these securities are
substantially similar to the risks set forth above. The Fund will typically
purchase equity securities in these early-stage, developing companies; however
from time to time, the Fund may purchase non-investment grade debt securities in
the form of convertible notes.
Such investments involve costs at the venture capital level which are
in addition to those of the Fund.
Leveraged Buyouts. The Fund may invest in leveraged buyout limited
partnerships and funds that, in turn, invest in leveraged buyout transactions
("LBOs"). An LBO, generally, is an acquisition of an existing business by a
newly formed corporation financed largely with debt assumed by such newly formed
corporation to be later repaid with funds generated from the acquired company.
Since most LBOs are by nature highly leveraged (typically with debt to equity
ratios of approximately 9 to 1), equity investments in LBOs may appreciate
substantially in
23
<PAGE> 27
value given only modest growth in the earnings or cash flow of
the acquired business. Investments in LBO partnerships and funds, however,
present a number of risks. Investments in LBO limited partnerships and funds
will normally lack liquidity and may be subject to intense competition from
other LBO limited partnerships and funds. Additionally, if the cash flow of the
acquired company is insufficient to service the debt assumed in the LBO, the LBO
limited partnership or fund could lose all or part of its investment in such
acquired company.
Non-Publicly Traded Securities; Rule 144A Securities. The Fund may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "1933 Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act ("Rule 144A
Securities"). An investment in Rule 144A Securities will be considered illiquid
and therefore subject to the Fund's limitation on the purchase of illiquid
securities, unless the Fund's governing Board determines on an ongoing basis
that an adequate trading market exists for the security. In addition to an
adequate trading market, the Board will also consider factors such as trading
activity, availability of reliable price information and other relevant
information in determining whether a Rule 144A Security is liquid. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become
uninterested for a time in purchasing Rule 144A Securities. The Board will
carefully monitor any investments by the Fund in Rule 144A Securities. The Board
may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring the liquidity of Rule 144A Securities, although the
Board will retain ultimate responsibility for any determination regarding
liquidity.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk and may result in
substantial losses. These securities may be less liquid than publicly traded
securities, and the Fund may take longer to liquidate these positions than would
be the case for publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized on such sales
could be less than those originally paid by the Fund. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements applicable to companies whose securities
are publicly traded. The Fund's investments in illiquid securities are subject
to the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that is deemed to be representative of
their value, the value of the Fund's net assets could be adversely affected.
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.
Each Fund, except as indicated, may not:
(1) Except for ESC Strategic Small Cap Fund and ESC Strategic Value
Fund, with respect to 75% of its total assets, purchase more than 10% of the
voting securities
24
<PAGE> 28
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
(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;
25
<PAGE> 29
(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;
(g) Write, purchase or sell puts, calls or combinations
thereof, except as described in the Prospectus or SAI;
(h) Except for ESC Strategic Value Fund, 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.
26
<PAGE> 30
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 3435 Stelzer Road, Columbus, Ohio 43219.
Directors deemed to be "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
- --------------------- --------------------- --------------------
<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
*William Howard Director and Treasurer Equitable Securities Corporation
Cammack, Jr. (1) - Managing Director and Director.
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.
27
<PAGE> 31
<TABLE>
<CAPTION>
NAME, ADDRESS
AND AGE POSITION WITH COMPANY PRINCIPAL OCCUPATION
- ------------- --------------------- --------------------
<S> <C> <C>
J. Bransford Wallace Director Willis Coroon Corporations
26 Century Boulevard (insurance) - Vice Chairman
Nashville, TN 37214 (1994); Chairman (1992-93);
Age: 65 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: 69
E. Townes Duncan Director Solidus (1997 to present); Comptronix
30 Burton Hill Corporation (contract
Suite 100 manufacturing) - Chairman and
Nashville, TN 37215 Chief Executive Officer (1993-
Age: 44 1996); Massey Burch Investment
Group (venture capital) -
Principal (1985-1993).
John L. McAllister Assistant Secretary and Assistant Equitable Securities Corporation
Age: 34 Treasurer - Senior Vice President (1990-present);
Copyright Management, Inc. -
Analyst (1988-1989).
Ellen Stoutamire Secretary Employee of BISYS Fund Services; prior to
Age: 48 joining BISYS, principally employed as an
attorney for past 15 years
Bruce Treff Assistant Treasurer Employee of BISYS Fund Services
Age: 30
Michael Sakala Assistant Treasurer Employee of BISYS Fund Services
Age: 32
R. Jeffrey Young Assistant Treasurer Employee of BISYS Fund Services
Age: 31
Alaina Metz Assistant Secretary Employee of BISYS Fund Services
Age: 29
</TABLE>
28
<PAGE> 32
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. Total
Compensation disclosed below includes the annual retainer, meeting fees and
out-of-pocket expenses.
29
<PAGE> 33
DIRECTOR COMPENSATION
(FOR FISCAL YEAR ENDED MARCH 31, 1997)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS ESTIMATED REGISTRANT
AGGREGATE ACCRUED ANNUAL AND FUND
NAME OF COMPENSATION AS PART BENEFITS COMPLEX
PERSON FROM OF FUND UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT DIRECTORS
- -------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C>
J. Bransford $7,412 0 N/A $7,412
Wallace
Brownlee O. $8,647 0 N/A $8,647
Currey, Jr.
E. Townes $4,941 0 N/A $4,941
Duncan
</TABLE>
As of October 9, 1997, officers and Directors of the Company, as a
group, owned less than one percent of the outstanding shares of the Funds.
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 0.50% for ESC Strategic Asset Preservation
Fund; 1.0% ESC Strategic Appreciation Fund, ESC Strategic Global Equity Fund,
ESC Strategic Small Cap Fund, and ESC Strategic Income Fund; and 1.25% for ESC
Strategic Growth Fund and ESC Strategic Value Fund. 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
sole shareholder of the Funds on April 4, 1994, except that the initial approval
of the Agreement by the Directors (including a majority of the independent
directors) and sole initial shareholder with respect to ESC Strategic Growth
Fund was on October 23, 1996, and such approvals with respect to ESC Strategic
Value Fund were on January 14, 1997. The Agreement was recently re-approved at
the October 20, 1997 at a Special 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 Adviser has entered into a definitive agreement to be acquired by
SunTrust Banks, Inc. ("SunTrust"). The acquisition is expected to be completed
during the first quarter of 1998. The acquisition will combine the Adviser with
an existing SunTrust subsidiary to form a new SunTrust subsidiary to be named
SunTrust Equitable Securities. The Adviser, as reorganized, will continue to
act as Adviser to the Company and to provide the same services it currently
provides, and there will be no significant change in the terms of the current
investment advisory agreement or the rate of fees payable to the Adviser under
that agreement. Overall, the transaction is expected to expand the Adviser's
general financial service capabilities.
The acquisition will cause a termination in the Company's investment
advisory agreement with the Adviser, as well as the portfolio management
agreements with each of the Managers. On October 20, 1997 the Fund's Board of
Directors approved a new investment advisory agreement with the Adviser and new
portfolio management agreements with each of the current Managers with terms
substantially identical to those of the current agreement except for the name of
the Adviser, the date, term and certain updating changes. Shareholders of all
the Funds will be asked to approve the new investment advisory agreement.
Shareholders of each Fund for which Equitable Asset Management, Inc. ("EAM")
acts as Manager will be asked to approve a new portfolio management agreement
between the Adviser and EAM for those Funds. (These Funds are ESC Strategic
Small Cap Fund, ESC Strategic Growth Fund and ESC Strategic Value Fund.) Under
the terms of an exemptive order received by the Fund and the Adviser from the
Commission, the agreements with the other Managers, none of which is affiliated
with the Adviser, do not require shareholder approval.
30
<PAGE> 34
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:
- ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.,
Brandes Investment Partners, Inc., Scott & Stringfellow
Capital Management, Inc. and Equitable Asset Management, Inc.
(an affiliate of the Adviser).
- ESC Strategic Global Equity Fund -- GlobeFlex Capital, L.P.
and Murray Johnstone International Limited.
- ESC Strategic Income Fund -- Llama Asset Management Company,
L.P., Cincinnati Asset Management, Inc. and Murray Johnstone
International Limited.
- ESC Small Cap Fund -- Equitable Asset Management, Inc.
(a division of the Adviser's subsidiary, Equitable Trust
Company).
- ESC Strategic Asset Preservation Fund -- Equitable Asset
Management, Inc.
- ESC Strategic Growth Fund -- Equitable Asset Management, Inc.
- ESC Strategic Value Fund -- Equitable Asset Management, Inc.
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 FISCAL YEAR ENDED
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997
-------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
ESC Strategic
Appreciation Fund:
Aggregate fees to
Adviser $55,847 .21% $224,856 .95% $419,329 .99%
Aggregate fees to
Manager* $45,074 .17% $158,435 .67% $271,888 .64%
Fees retained by
Adviser $10,773 .04% $ 66,421 .28% $147,441 .35%
Fees paid to Equitable
Asset Management $11,554 .04% $ 41,231 .17% $66,053 .16%
ESC Strategic Global
Equity Fund
Aggregate fees to
Adviser $43,382 .25% $156,881 1.0% $207,116 .99%
Aggregate fees to
Manager* $22,009 .13% $ 76,894 .49% $104,400 .50%
Fees retained by
Adviser $21,373 .12% $ 79,987 .51% $102,716 .49%
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
PERIOD ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997
-------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ESC Strategic Small
Cap Fund
Aggregate fees (Net) to
Adviser $52,773 .16% $199,170 .88% $652,644 .95%
Aggregate fees to
Manager* $61,569 .19% $166,841 .73% $502,819 .73%
Fees retained by
Adviser $(8,796) (.03)% $ 32,329 .15% $149,825 .22%
ESC Strategic Income
Fund
Aggregate fees (Net) to
Adviser $96,561 .25% $373,088 1.0% $380,147 1.0%
Aggregate fees to
Manager* $24,164 .06% $ 93,525 .25% $94,515 .25%
Fees retained by
Adviser $72,397 .19% $279,563 .75% $285,632 .75%
ESC Strategic Asset
Preservation Fund
Aggregate fees (Net) to
Adviser $8,250 .06% $ 16,394 .13% $30,428 .25%
Aggregate fees to
Manager* $ 0 0% $ 0 0% $3,157 .03%
Fees retained by
Adviser $8,250 .06% $16,394 .13% $27,271 .22%
</TABLE>
INCEPTION DATE
(JANUARY 28, 1997)
THROUGH
MARCH 31, 1997
----------------
ESC Strategic
Growth Fund
Aggregate fees to $0 0%
Adviser
Aggregate fees to $4,177 .12%
Manager
Fees retained by
Adviser $0 0%
32
<PAGE> 36
INCEPTION DATE
(MAY 5, 1997)
--------------
ESC Strategic
Value Fund n/a n/a
Aggregate fees to
Adviser n/a n/a
Aggregate fees to
Manager n/a n/a
Fees retained by
Adviser
* 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, 1997, pursuant to an agreement to
limit fund expenses, the Adviser waived fees of $30,428 for the Asset
Preservation Fund and $7,185 for the Growth Fund. Absent these waivers, Advisory
fees would have been $60,856 for the Asset Preservation Fund. The Adviser waived
its fees entirely with respect to the Growth Fund for the period from January
28, 1997 (commencement of operations) through March 31, 1997. The Adviser
received fees of $380,147; $207,116; $652,644 and $419,329 the Income, Global
Equity, Small Cap and Appreciation Funds, respectively, for the fiscal year
ended March 31, 1997. The Value Fund had not yet commenced operations as of
March 31, 1997.
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
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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 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 Portfolio Management Agreement with Scott &
Stringfellow Capital Management, Inc. with respect to ESC Strategic Appreciation
Fund was approved by the Directors, including a majority of the independent
directors, on January 14, 1997. The Portfolio Management Agreement with EAM with
respect to ESC Strategic Growth Fund was approved by the Directors, including a
majority of the independent directors, and by the sole initial shareholder of
that Fund on October 23, 1996. Such approvals of the Portfolio Management
Agreement with EAM for ESC Strategic Value Fund were obtained on January 14,
1997. The other Portfolio Management Agreements for each Fund were obtained
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
re-approved at the October 20, 1997 Special 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.
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
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<PAGE> 38
shares of each of the other Funds on April 4, 1994 (October 23, 1996 with
respect to ESC Strategic Growth Fund and January 14, 1997 with respect to ESC
Strategic Value Fund). The continuance of the Plans was re-approved by the
Directors and by a majority of the Plan Directors at a meeting held on January
14, 1997. 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, 1997, the Distributor received
$17,770; $42,069; $24,898; $127,326; $96,480 and $570 for the Asset
Preservation (single class only), Income, Global Equity, Small Cap,
Appreciation and Growth Funds, respectively for Class A shares. For the
period, the Distributor received $10,963; $30,169; $108,542; $23,480 and $279
for the Income, Global Equity, Small Cap, Appreciation and Growth Funds,
respectively pursuant to Class D Plans (which were formerly Class B shares).
The Value Fund had not commenced operations as of March 31, 1997.
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).
In connection with the anticipated acquisition of the Adviser the
Board has approved a new distribution agreement with an afiliate of the Fund's
Administrator to take effect when the acquisition becomes effective.
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), a subsidiary of The BISYS Group, Inc., currently serves as
Administrator of the Funds. BISYS became the successor Administrator to Furman
Selz LLC effective January 1, 1997. Additionally, effective January 1, 1997,
BISYS Fund Services, Inc., also a subsidiary of The BISYS Group, Inc. ("BFSI")
succeeded Furman Selz LLC as Transfer Agent and Fund Accountant to the Funds.
BISYS (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 SEC and state securities commissions; and (iii)
general supervision of the operation of the Funds, including coordination of the
services performed by the Adviser, the Distributor, transfer agent, custodians,
independent accountants, legal counsel and others. In addition, BISYS furnishes
office space and facilities required for the conducting the business of the
Funds and pays the compensation of the Funds' officers, employees and Trustees
affiliated with BISYS. For these services, BISYS receives from each Fund a fee,
payable monthly, at the annual rate of 0.15% of each Fund's average daily net
assets.
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For the period ended March 31, 1997, Furman Selz LLC as former
administrator was entitled to fees in the amount of $13,579; $43,472; $22,578;
$63,535 and $44,387 from the Asset Preservation, Income, Global Equity, Small
Cap and Appreciation Funds, respectively. Furman Selz LLC voluntarily waived
administration fees of $6,790 for the Asset Preservation Fund. BISYS as
successor Administrator was entitled to fees in the amount of $4,678; $13,550;
$8,489; $33,009; $18,512 and $862 from the Asset Preservation, Income, Global
Equity, Small Cap, Appreciation Funds and Growth, respectively. BISYS
voluntarily waived fees of $2,338 and $862 for the Asset Preservation and
Growth Funds, respectively. The Value Fund had not commenced operations as of
March 31, 1997.
For the period ended March 31, 1996, the Furman Selz LLC 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.
Furman Selz 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, Furman Selz 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 Administration Agreement 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 October
23, 1996 (January 14, 1997 with respect to ESC Strategic Value Fund) and was
re-approved at the April 15, 1997 Board of Directors 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 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
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<PAGE> 40
providing such other services as the Funds or a client reasonably may request,
to the extent permitted by applicable statute, rule or regulation. Neither
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 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.
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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.
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 and BISYS 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
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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, 1997, the Appreciation Fund, Small
Cap and the Global Equity Fund paid brokerage commissions of $38,132, $2,400
and $8,976, respectively, to Equitable Securities Corporation. The Funds were
advised that front-end sales charges of $1,212, $8,018, $212,117, $18,063 and
$74,807 were paid to the Adviser from the Income, Global Equity, Small Cap,
Appreciation and Growth Funds, respectively. The Value Fund had not commenced
operations as of March 31, 1997.
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 Securities Corporation. 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 Corporation. 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, 1997 was 41%, 123%, 94%, 65%,
71% and 14% for the Asset Preservation, Income, Global Equity, Small Cap,
Appreciation and Growth Funds, respectively. The Value Fund had not commenced
operations as of March 31, 1997. 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 Growth Fund had not commenced operations as of March 31,
1996. 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 qualify (in the case of the Growth and Value Funds)
and 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
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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) in each tax
year beginning before August 6, 1997, 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 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. The Funds expect that distributions of net capital gains, if any,
designated by the Funds as capital gain dividends should be 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
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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.
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.
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
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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.
Notwithstanding any of the foregoing, a Fund may recognize gain (but
not loss)from a constructive sale of certain "appreciated financial
position" if the Fund enters into a short sale, notional principal contract,
futures or forward contract transaction with respect to the appreciated
position or substantially identical property. Appreciated financial positions
subject to this constructive sale treatment are interests (including options,
futures and forward contracts and short sales) in stock, partnership interests,
certain actively traded trust instruments and certain debt instruments.
Constructive sale treatment does not apply to certain transactions closed in
the 90-day period ending with the thirtieth day after the close of the Fund's
taxable year, if certain conditions are met. Similarly, if a Fund enters into a
short sale of property that becomes substantially worthless, the Fund will
recognize gain at that time as though it had closed the short sale. Future
Treasury Department regulations may apply similar treatment to other
transactions with respect to property that becomes substantially worthless.
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 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.
42
<PAGE> 46
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 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 is available that involves marking to market the Fund's PFIC
stock at the end of each taxable year with the result that unrealized gains are
treated as though they were realized and are reported as ordinary income; any
mark-to-market losses, as well as loss from any disposition of PFIC stocks, are
reports as ordinary loss to the extent of any net mark-to-market gains included
in income in prior years. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated.
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 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 limitation rules do not apply to certain elections by individual
taxpayers who have limited creditable foreign taxes and no foreign source income
other than passive investment-type income. The foreign tax credit is eliminated
with respect to foreign taxes withheld on dividends if the dividend-paying
shares or the shares of the Fund are held by the Fund or the shareholder, as the
case may be, for less than 16 days (46 days in the case of preferred shares)
during the 30-day period (90-day period for preferred shares) beginning 15 days
(45 days for preferred shares) before the shares become ex-dividend. 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.
43
<PAGE> 47
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 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 six separately
managed portfolios (the Company has two other portfolios which are currently
inactive). The Funds currently 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 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, 1997 was $18,175
for Asset Preservation, $18,416 for Income, $18,585 for Global Equity, $23,736
for Small Cap, $19,914 for Appreciation and $0 for Growth. These costs have been
deferred and are being amortized on a straight-line basis over a period of not
less than five years.
44
<PAGE> 48
PRINCIPAL SHAREHOLDERS
As of October 9, 1997, the following persons owned of record or
beneficially 5% or more shares of a class of the Funds:
<TABLE>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC APPRECIATION FUND - CLASS A
Alex Brown & Sons Incorporated 492,342.9 21.26%
FBO 495-20895-16
P.O. Box 1346
Baltimore, MD 21203-1346
Equitable Trust Company 199,852.510 8.63%
511 Union Street
Suite 800
Nashville, TN 37219-1729
Wachovia Bank of North Carolina 687,577.054 29.69%**
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 24,136.469 7.44%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
- ----------
** Beneficial ownership of shares is disclaimed by record account holder.
45
<PAGE> 49
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC GLOBAL EQUITY FUND - CLASS A
Equitable Trust Company 210,967.73 20.45%
511 Union Street Suite 800
Nashville, TN 37219-1729
Comerica Bank TTEE 100,171.78 9.71%
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 35,192.85 10.43%
FBO 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 22,140.23 6.56%
FBO 495-21923-10
P.O. Box 1346
Baltimore, MD 21203-1346
Trustmark
Trust Account 36866400 33,024.30 9.79%
P.O. Box 105870
Atlanta, GA 30348-5870
Trustmark
Trust Account 36833500 55,052.56 16.32%
P.O. Box 105870
Atlanta, GA 30348-5870
ESC STRATEGIC SMALL CAP FUND - CLASS A
Equitable Trust Company 382,265.913 7.63%
511 Union Company Suite 800
Nashville, TN 37219-1729
ESC STRATEGIC INCOME FUND - CLASS A
Homeowners Association of Amer 222,421.843 8.83%
6365 Taft Street, Suite 2000
Hollywood, FL 33024-5934
</TABLE>
46
<PAGE> 50
Nationsbank of TN N.A. Cust FBO 1,431,369.561 56.83%**
U/A Nashville Memorial Health
Systems Foundation/Attn SAS
A/C 65066006841050
P.O. Box 831575
Dallas, TX 75283-1575
First American National Bank 296,407.720 11.76%
800 First American Center
Nashville, TN 37237-0801
**Beneficial ownership of shares is disclaimed by record account holder.
47
<PAGE> 51
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC INCOME FUND - CLASS D
Alex Brown & Sons Incorporated 12,307.85 16.96%
FBO 495-07032-17
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 11,650.21 16.05%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 7,483.02 10.31%
FBO 495-21922-11
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 27,727.265 28.10%**
FBO 495-12543-19
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 6,037.13 8.32%
FBO 495-18067-12
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
**Beneficial ownership of shares is disclaimed by record account holder.
48
<PAGE> 52
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC GROWTH FUND - CLASS A
Alex Brown & Sons Incorporated 51,104.98 5.63%
FBO 495-08633-18
P.O. Box 1346
Baltimore, MD 21203
Equitable Trust Company 45,807.126 5.05%
511 Union Company Suite 800
Nashville, TN 37219-1729
ESC STRATEGIC GROWTH FUND - CLASS D
ESC STRATEGIC VALUE FUND - CLASS A
Equitable Securities Corp. 50,000.00 5.93%
Customer Fee Account
511 Union Company Suite 800
Nashville, TN 37219-1729
</TABLE>
49
<PAGE> 53
<TABLE>
<S> <C> <C>
ESC STRATEGIC VALUE FUND - CLASS D
Alex Brown & Sons Incorporated 8,849.56 5.42%
FBO 496-10375-14
P.O. Box 1346
Baltimore, MD 21203
Charles Lee Phillips Trust Dtd 10,386.07 6.36%
6-27-94 H. Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Edward Randall Phillips II Trust 10,386.06 6.36%
U/A Dtd 6-27-94 H. Ronald Burton
TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Harry Jason Phillips Trust 9,089.24 5.56%
H. Ronald Burton TTEE Dtd 6-27-94
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
</TABLE>
50
<PAGE> 54
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.
BISYS Fund Services, Inc., a subsidiary of The BISYS Group, Inc.
("BFSI") succeeded Furman Selz LLC as Transfer Agent and Fund Accountant to the
funds effective November 9, 1996. Pursuant to a Transfer Agency Agreement
between the Company and BFSI, BFSI 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, 1997 Furman Selz
LLC, as transfer agent, was entitled to and received fees in the amount of
$7,500 for each of the Asset Preservation, Income, Global Equity and
Appreciation Funds; Furman Selz LLC was entitled to and received fees in the
amount of $20,812 for the Small Cap Fund. BFSI, as successor Transfer Agent, was
entitled to and received fees in the amount of $2,500 for each of the Asset
Preservation, Income, Global Equity and Appreciation Funds; BFSI was entitled to
and received fees in the amount of $12,470 and $1,774 for the Small Cap and
Growth Funds, respectively. The Value Fund had not commenced operations as of
March 31, 1997. 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 for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. Pursuant to a Fund Accounting Agreement,
51
<PAGE> 55
the Company compensates BFSI for providing fund accounting services for the
Funds. For the fiscal year ended March 31, 1997, BFSI and Furman Selz earned a
total of $37,379, $40,289, $54,374, $34,033, $45,913 and $5,923 for the Asset
Preservation, Income, Global Equity, Small Cap and Growth Funds, respectively.
The Value Fund had not yet commenced operations as of March 31, 1997. 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,
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, 1997 was 5.03% for the
Income Fund.
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.
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,
July 6, 1994, and January 28, 1997 (commencement of operations) respectively
through March 31, 1997, the average annual total returns for Class A shares were
as follows: 5.01% for the Asset Preservation Fund, 5.80% for the Income Fund,
7.44% for the Global Equity Fund, 26.32% for the Small Cap Fund, 16.92% for the
Appreciation Fund, and (7.94)% (aggregate) for the Growth Fund. For the period
May 4, 1994, May 12, 1994, June 8, 1994, July 6, 1994, and January 28, 1997
(commencement of operations) respectively through March 31, 1997, the average
annual
52
<PAGE> 56
total returns for Class D shares were as follows: 5.24% for the Income
Fund, 6.82% for the Global Equity Fund, 25.83% for the Small Cap Fund, 16.41%
for the Appreciation Fund, and (5.14)% (aggregate) for the Growth Fund. For
the period May 7, 1997 (commencement of operations) through September 30, 1997,
the average annual total returns for Class A shares and Class D shares of the
Value Fund were 12.40% and 12.20%, respectively.
For the fiscal year ended March 31, 1997, the average annual total
returns for Class A shares were as follows: 4.12% for the Asset Preservation
Fund, (0.77)% for the Income Fund, 3.56% for the Global Equity Fund, 9.81% for
the Small Cap Fund, 9.14% for the Appreciation Fund and (7.94)% (aggregate) for
the Growth Fund. For the same period, the average annual total returns for Class
D shares were as follows: 1.85% for the Income Fund, 6.37% for the Global Equity
Fund, 12.87% for the Small Cap Fund, 12.08% for the Appreciation Fund, and
(5.14)% (aggregate) for the Growth 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 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.
53
<PAGE> 57
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.
FINANCIAL STATEMENTS
The Report of Independent Accountants and audited financial statements
of the Funds included in their Annual Report for the period ended March 31, 1997
(the "Annual Report") are incorporated herein by reference to such Annual
Report. Copies of such Annual Report are available without charge upon request
by writing to ESC Strategic Funds, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-8006 or telephoning (800) 261-3863. The unaudited financial statements for
the ESC Strategic Value Fund for the period ended September 30, 1997 are
included herein.
The financial statements incorporated by reference into this Statement
of Additional Information have been audited by Price Waterhouse LLP, independent
accountants, and have been so included and incorporated by reference in reliance
upon the report of said firm, which report is given upon their authority as
experts in auditing and accounting.
54
<PAGE> 58
ESC STRATEGIC FUNDS, INC.
ESC Strategic Value
Portfolio of Investments- September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Security Description Cost Market Value
---------- ----------------------------------------- -------- ------------
<S> <C> <C> <C>
COMMON STOCKS (69.4%):
APPLIANCES & HOUSEHOLD PRODUCTS (2.9%):
20,000 The Rival Co. $311,375 $320,000
-------- --------
AUTO RELATED (2.9%):
18,500 Alrenco Inc. 244,863 330,688
-------- --------
BREWERY (1.9%):
43,000 Pete's Brewing Co. 261,648 217,688
-------- --------
BUILDING MATERIALS (0.1%):
1,000 Dravo Group Corp. 10,695 11,875
-------- --------
CONSTRUCTION (3.8%):
41,800 Schuff Steel Co. 356,399 428,450
-------- --------
ENTERTAINMENT (3.6%):
35,000 Jackpot Enterprises, Inc. 393,822 402,500
-------- --------
FINANCIAL SERVICES (3.8%):
50,500 First Investors Financial Services 390,033 429,250
-------- --------
FOOD (3.0%):
30,000 Bridgford Foods Corp. 285,063 341,250
-------- --------
FOREST PRODUCTS & PAPERS (3.2%):
11,100 Deltic Timber Corp. 306,020 362,831
-------- --------
HOME FURNISHINGS (2.9%):
26,750 Flexsteel Industries 319,423 327,688
-------- --------
HOUSEHOLD PRODUCTS (3.7%):
14,500 Bassett Furniture Industries, Inc. 407,000 413,250
-------- --------
INSURANCE (3.7%):
12,000 Leucadia National Corp. 399,009 412,500
-------- --------
MACHINERY & EQUIPMENT (1.4%):
7,000 Alamo Group, Inc. 126,786 162,313
-------- --------
MATERIALS (0.1%):
1,000 Green AP Industries, Inc. 10,195 14,000
-------- --------
METALS & MINING (2.5%):
165,000 MK Gold Co. 274,687 278,438
-------- --------
OFFICE EQUIPMENT & SERVICES (3.5%):
27,500 Falcon Products, Inc. 383,341 390,156
-------- --------
PIPELINES (3.9%):
16,300 Northwest Pipe Co. 308,336 440,100
-------- --------
RECREATION (1.7%):
13,000 Rockshox 177,148 185,250
-------- --------
RESTAURANTS (7.1%):
21,400 Brinker International, Inc. 307,935 381,188
15,100 Outback Steakhouse 347,155 417,138
-------- --------
655,090 798,326
-------- --------
RETAIL - SPECIALTY LINE (7.4%):
53,000 Bombay Co., Inc. 287,267 407,438
1,000 Brookstone, Inc. 8,883 11,875
62,100 Natural Wonders, Inc. 257,173 411,413
</TABLE>
See accompanying notes to financial statements
<PAGE> 59
ESC STRATEGIC FUNDS, INC.
ESC Strategic Value
Portfolio of Investments- September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
---------- -----------
553,323 830,726
---------- -----------
TEXTILES & APPAREL (3.5%):
28,100 Burlington Industry, Inc. 365,769 393,400
---------- -----------
TRANSPORTATION (2.8%):
1,000 Greyhound Lines, Inc. 4,883 3,875
17,500 International Shipbuilding 297,226 311,715
---------- -----------
302,109 315,590
---------- -----------
TOTAL INVESTMENTS - 69.4% $6,842,134 7,806,269
========== ===========
Cash and other assets, net of liabilities - 30.6% 4,399,474
-----------
NET ASSETS - 100 % $11,241,608
===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 60
ESC STRATEGIC FUNDS, INC.
Statement of Assets and Liabilities
September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Value
<S> <C>
Assets:
Investments at value (cost $6,842,134) $ 7,806,269
Cash 3,516,615
Dividends and interest receivable 52,753
Other assets 35,859
-----------
Total Assets 11,411,496
-----------
Liabilities:
Payable for securities purchased 142,460
Advisory fee payable 11,066
Administration fee payable 1,617
Transfer agent fee payable 0
12b-1 Distribution fee payable 2,506
Other accrued expenses 12,241
-----------
Total Liabilities 169,890
Net Assets $11,241,606
===========
Net Assets consist of:
Capital Stock 1,000
Additional paid-in capital 10,253,125
Accumulated undistributed net investment income/(loss) on investments 15,066
Accumulated undistributed realized gain/(loss) on investments and
foreign currency transactions 8,281
Net unrealized appreciation/(depreciation) on investments and foreign
currency translations 964,134
-----------
Net Assets $11,241,606
===========
Shares of Beneficial Interest
Class A:
Shares outstanding 839,209
Net asset value per share outstanding $ 11.24
Maximum offering price per share ($11.24/.955) $ 11.77
Class D:
Shares outstanding 160,950
Net asset value per share outstanding $ 11.22
Maximum offering price per share ($11.22/.985) $ 11.39
</TABLE>
- --------------------
See Accompanying Notes to Financial Statements.
<PAGE> 61
ESC STRATEGIC FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Value(a)
---------
<S> <C>
INVESTMENT INCOME
Interest $ 4,133
Dividend 58,349
---------
Total income 62,482
---------
EXPENSES
Advisory 33,488
Administration 4,018
Fund accounting 11,927
Legal 2,177
Reports to shareholders 766
Audit 5,216
Registration 11,224
Custodian 1,936
Directors 1,560
Transfer agent fees and expenses 2,104
12b-1 Distribution fees-Class A 5,802
12b-1 Distribution fees-Class B 2,687
Insurance 64
Amortization of organizational expenses --
Miscellaneous 9,843
---------
Total expenses before waivers 92,812
Less: expenses waived/reimbursed (45,396)
Less: expenses paid by third parties --
---------
Net expenses 47,416
---------
Net investment income/(loss) 15,066
---------
Realized gain/(loss) on investments 8,281
Net change in unrealized appreciation/
(depreciation) on investments 964,134
Net realized and unrealized gain/(loss) 972,415
---------
Net increase/(decrease) in net assets resulting
from operations $ 987,481
=========
</TABLE>
(a) For the period from May 7, 1997 (commencement of operations) through
September 30, 1997.
See accompanying notes to financial statements
<PAGE> 62
ESC STRATEGIC FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
Value
-------------------
May 7, 1997
(commencement of
operations) through
September 30,
1997
-------------------
<S> <C>
OPERATIONS:
Net investment income/(loss) $ 15,066
Net realized gain/(loss) on investments 8,281
Net unrealized appreciation/(depreciation) on
investments 964,134
------------
Net increase in net assets resulting from operations 987,481
------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A --
Class D --
------------
--
------------
From net realized gains
Class A --
Class D --
------------
--
------------
Change in net assets resulting from dividends and
distributions to shareholders --
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares
Class A 8,584,946
Class D 1,669,774
------------
10,254,720
------------
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A --
Class D --
------------
--
------------
Net asset value of shares redeemed:
Class A (220)
Class D (375)
------------
(595)
------------
Change in net assets from capital share
transactions 10,254,125
------------
Total change in net assets 11,241,606
NET ASSETS:
Beginning of Period --
------------
End of Period $ 11,241,606
============
</TABLE>
See accompanying notes to financial statements
<PAGE> 63
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- September 30, 1997
(unaudited)
1. DESCRIPTION. ESC Strategic Funds, Inc. (The "Company") was
incorporated in Maryland on November 24, 1993. The Company currently comprises
six portfolios, ESC Strategic Income Fund (commencement date May 4, 1994), ESC
Strategic Global Equity Fund (commencement date May 12, 1994), ESC Strategic
Small Cap Fund (commencement date June 8, 1994), ESC Strategic Appreciation Fund
(commencement date July 6, 1994), ESC Strategic Growth Fund (commencement date
January 28, 1997), and ESC Strategic Value Fund (commencement date May 7,
1997)(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 ESC Strategic Small Cap
Fund, and Esc Strategic Value Fund, operates as a diversified fund. ESC
Strategic Small Cap Fund, and Esc Strategic Value 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. 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. The Company's Board of Directors may, in the
future, authorize the issuance of additional classes of capital stock for the
Funds.
The Funds' investment objectives are as follows:
ESC Strategic Income Fund -- a high level of current
income, with a secondary objective of total return.
ESC Strategic Global Equity Fund -- long-term capital
appreciation.
ESC Strategic Small Cap Fund -- high level of capital
appreciation.
ESC Strategic Appreciation Fund -- long-term capital
appreciation.
ESC Strategic Growth Fund -- high level of capital
appreciation.
ESC Strategic Value Fund -- long-term capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
<PAGE> 64
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 considered
either 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.
<PAGE> 65
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, with the
exception of the Growth Fund and Value Fund have been deferred and are
being amortized on a straight-line 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 of the Company are allocated proportionately among
the Funds 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 Funds 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.
<PAGE> 66
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 at period end. 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 arise from changes in the
value of the assets and liabilities, other than investments in
securities at period end, resulting from changes in the foreign
exchange rate.
H. FORWARD FOREIGN EXCHANGE CONTRACTS. A forward foreign
exchange contract is a commitment to buy or 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 of original contracts and the
amount realized upon the closing of such contracts is included in net
realized gains on foreign exchange transactions.
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 in
accordance with generally accepted accounting principles. Changes in
the economic environment, financial markets and any other parameters
used in determing these estimates could cause actual results to differ
from these amounts.
3. INVESTMENT ADVISORY AND ADMINISTRATION CONTRACTS AND DISTRIBUTION
AGREEMENT. The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with Equitable Securities Corporation ("ESC")
or (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 1.25% of such
<PAGE> 67
average daily net assets for ESC Strategic Growth Fund, and Esc Strategic Value
Fund, and 1.00% of such net assets for each of the other Funds. The Adviser
provides portfolio management supervision and certain administrative, clerical
and bookkeeping services for the Company. The Adviser has entered into
agreements with various portfolio managers (the "Managers") to provide portfolio
management services for the Funds. Equitable Asset Management, a wholly-owned
subsidiary of the Adviser, provides portfolio management services for Small Cap,
Growth Funds, and Value Funds and approximately one-third of the assets of the
Appreciation Fund. The Adviser has retained various other Managers to advise the
Global Equity Fund, Income Fund and the remaining assets of the Appreciation
Fund. Any fees payable under these agreements with the Managers are paid by the
Adviser. For the period from May 7,1997 (commencement of operations) through
September 30, 1997, the Adviser voluntarily waived fees of $13,029 for the Value
Fund.
BISYS Fund Services, Inc ("BISYS") provided the funds with
administrative, fund accounting, dividend and capital gain distribution
disbursing and transfer agency services. All services were subject to the
supervision of the Company's Board of Directors and officers pursuant to the
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement included 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, Bisys is entitled to a monthly fee for its services at the annual
rate of 0.15% of the average daily net assets of the Funds and was accrued
daily.
Pursuant to a Transfer Agent Agreement between the Funds and BISYS,
BISYS provided the Funds with transfer and dividend and capital gain disbursing
agent services, for which it received 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 BISYS,
BISYS assisted the Funds in calculating net asset values and provided certain
other account services for each Fund for an annual fee of $30,000 per Fund plus
out-of-pocket expenses.
For the period from May 7, 1997 (commencement of operations) through
September 30, 1997, BISYS was entitled to the following fees excluding
out-of-pocket expenses:
<TABLE>
<CAPTION>
Transfer Fund
Administration Agency Accounting
-------------- -------- ----------
<S> <C> <C> <C>
Value $ 4,018 $ 2,104 $ 11,927
</TABLE>
<PAGE> 68
For the period ended September 30, 1997, BISYS voluntarily waived
administration fees of $1,808 for the Value Fund.
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 -- 2.00% (Class A), 2.50% (Class D), Growth -- 2.00% (Class A), 2.50%
(Class D), and Value -- 2.00% (Class A), 2.50% (Class D). Accordingly, no
reimbursements were necessary for the Appreciation, Global Equity, Small Cap,
Income, Growth, or Value Funds.
The Company has 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. 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 period
ended September 30, 1997, the actual rates incurred by the Value Fund's Class A
shares was 0.14%. 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 period ended September 30,
1997, the actual rates incurred by Value Fund's Class D shares was 0.14%.
During the period ended September 30, 1997,the Value Fund paid
brokerage commissions of $21,375, to Equitable Securities, a subsidiary of the
Adviser's subsidiary, Equitable Trust Company.
4. SECURITIES TRANSACTIONS.
A. PURCHASE AND SALES TRANSACTIONS. The aggregate amount of purchases
and sales of investment securities, other than short-term securities,
were $ 7,110,399 and $276,446, respectively.
5. CAPITAL SHARE TRANSACTIONS.
The company is authorized to issue 650 million shares of capital stock
with a par value of $.001 each. Transactions in shares of the Value Fund for the
period ended September 30, 1997:
<PAGE> 69
CLASS A
Begining Balance 0
-
Shares Sold 839,229
Shares issued in reinvestment of dividends 0
Shares redeemed (20)
----
Net increase in shares 839,209
-------
Ending Balance 839,209
CLASS D
Begining Balance 0
-
Shares Sold 160,985
Shares issued in reinvestment of dividends 0
Shares redeemed (35)
----
Net increase in shares 160,950
-------
Ending Balance 160,950
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 Manager's, or recommend to the
Company that it employ or terminate particular Manager's, to the extent the
Adviser deems appropriate to achieve the overall objectives of the particular
Fund.
The Managers are as follows:
ESC Strategic Income Fund - Llama Asset Management Company, L.P.;
Cincinnati Assert Management, Inc. and Murray Johnstone
International Limited.
ESC Strategic Global Equity Fund - GlobeFlex Capital, L.P. and
Murray Johnstone International Limited.
<PAGE> 70
ESC Strategic Small Cap Fund - Equitable Asset Management, Inc.
ESC Strategic Appreciation Fund - GlobeFlex Capital, L.P.; Brandes
Investment Partners, Inc., Scott & Stringfellow Capital
Management, Inc. And Equitable Asset Management, Inc.
ESC Strategic Growth Fund - Equitable Asset Management, Inc.
ESC Strategic Value Fund - Equitable Asset Management, Inc.
Equitable Asset Management, Inc. Is an affiliate of the Adviser.
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 foreign currency contracts. During the period the forward
contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" such contract on a daily basis
to reflect the market value of the contract at the end of the day's trading.
When the forward contract is closed, the Fund records a realized gain or loss
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund's enter into such contracts for the purpose of
hedging exposure to change in foreign currency exchange rates on their portfolio
holdings. A lack of correlation between the price of the security and the
underlying contract could result in a loss to the Funds.
<PAGE> 71
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, 1997
Included in the Statement of Additional Information:
(1) Portfolio of Investments at March 31, 1997.*
(2) Statements of Assets and Liabilities dated March 31, 1997.*
(3) Statements of Operations for the fiscal year ended March 31,
1997 (audited).*
(4) Statements of Changes in Net Assets for the fiscal periods
ended March 31, 1997 and March 31, 1996 (audited).*
(5) Notes to Financial Statements at March 31, 1997 (audited).*
(6) Financial Highlights for the fiscal periods ended March 31,
1997. (audited)*
(7) Report of Independent Accountants.*
(8) Portfolio of Investments for the ESC Strategic Value Fund dated
September 30, 1997 (unaudited).
(9) Statements of Assets and Liabilities for the ESC Strategic
Value Fund dated September 30, 1997 (unaudited).
(10) Statements of Operations for the ESC Strategic Value Fund
dated September 30, 1997 (unaudited).
(11) Statements of Changes in Net Assets for the ESC Strategic
Value Fund dated September 30, 1997 (unaudited).
(12) Notes to Financial Statements dated September 30, 1997
(unaudited).
(b) Exhibits:
(1) (a) Articles of Incorporation of Registrant. (1)
(b) Certificate of Correction. (1)
(c) Articles of Amendment. (Growth) (5)
(d) Articles of Amendment. (Value) (5)
(2) By-laws of Registrant. (1)
(3) Not applicable.
(4) Specimen certificates of shares of common stock of
Registrant. (1)
(5) (a) Investment Advisory Agreement. (6)
(b) Portfolio Management Agreement for ESC Strategic Growth
Fund. (4)
(c) Portfolio Management Agreement for other Funds of
Registrant. (2)
(d) Portfolio Management Agreement with Cincinnati Asset
Management, Inc. (2)
(e) Portfolio Management Agreement for ESC Strategic Value
Fund. (5)
(6) (a) Master Distribution Contract. (2)
(b) Distribution Contract Supplements for ESC Strategic
Growth Fund. (4)
(c) Distribution Contract Supplements for other Funds of
Registrant. (2)
37
<PAGE> 72
(d) Distribution Contract Supplements for ESC Strategic
Value Fund. (5)
(e) Form of Dealer and Selling Group Agreement. (1)
(f) Form of Escrow Agreement. (1)
(7) Not applicable.
(8) Custody Agreement. (2)
(9) (a) Administrative Services Contract. (5)
(b) Transfer Agency Agreement. (5)
(c) Sub-Transfer Agency Agreement. (2)
(d) Accounting Agent Contract. (5)
(e) Form of Services Agreement. (1)
(10) Opinion of Counsel. (1)
(11) Consent of Independent Accountants filed herewith.
(12) Financial Statements in the Registrant's Annual Report for
the fiscal year ended March 31, 1997 as filed with the
Commission on June 5, 1997 are incorporated herein by
reference.
(13) (a) Purchase Agreement. (2)
(b) Purchase Agreement for ESC Strategic Growth Fund (5)
(c) Purchase Agreement for ESC Strategic Value Fund (5)
(14) Not applicable.
(15) (a) Form of Master Distribution Plan. (1)
(b) Distribution Plan Supplements for ESC Strategic Growth
Fund (4)
(c) Forms of Distribution Plan Supplement. (1)
(d) Distribution Plan Supplements for ESC Strategic Value
Fund (4)
(16) (a) Schedules for Computation.
(b) Schedules for Computation.
(17) Financial Data Schedules
(18) Multi-Class Plan, as amended January 14, 1997 (5)
(19) Power of Attorney in favor of Jeffrey L. Steele (1)
* Incorporated by reference to the Registrant's Annual Report filed with
the Securities and Exchange Commission on May 5, 1997.
(1) Filed with Pre-Effective Amendment No. 3, April 5, 1994, and are
incorporated herein by reference.
(2) Filed with Post-Effective Amendment No. 2, July 28, 1995, and are
incorporated herein by reference.
(3) Filed with Post-Effective Amendment No. 3, July 26, 1996, and are
incorporated herein by reference.
(4) Filed with Post-Effective Amendment No. 6, December 5, 1996 and are
incorporated herein by reference.
(5) Filed with Post-Effective Amendment No. 7, February 18, 1997 and are
incorporated herein by reference.
(6) Filed with Post-Effective Amendment No. 8, July 29, 1997 and are
incorporated herein by reference.
38
<PAGE> 73
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of October 9, 1997, 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 438
Class D 200
ESC Strategic Global Equity Fund
Class A 290
Class D 85
ESC Strategic Small Cap Fund
Class A 3,832
Class D 1,123
ESC Strategic Income Fund
Class A 113
Class D 30
ESC Strategic Growth Fund
Class A 603
Class D 230
ESC Strategic Asset Preservation Fund 0
ESC Strategic Value Fund
Class A 340
Class D 75
</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.
39
<PAGE> 74
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)
40
<PAGE> 75
<TABLE>
<CAPTION>
BUSINESS AND
NAME TITLE OTHER CONNECTIONS
- ---- ----- -----------------
<S> <C> <C>
William H. Cammack, Sr. Chairman, Managing Position with
Director and Director Equitable
Securities
Corporation, 1972
to present;
Director and President ESC Strategic
Funds, Inc.,
1994 to present.
Katie H. Gambill President, Head of Position with
Equity Capital Equitable
Markets, Managing Securities
Director and Director Corporation,
1972 to present.
William P. Johnston Chief Executive Position with
Officer, Managing Equitable
Director and Director Securities
Corporation,
1987 to present.
Hershel L. Smith, Jr. Chief Financial Position with
Officer, Chief Equitable
Operations Officer Securities
and Managing Director Corporation,
1986 to present.
Tom R. Steele Managing Director and Position with
Director Equitable
Securities
Corporation,
1988 to present.
W. Howard Cammack, Jr. Managing Director and Position with
Director Equitable
Securities
Corporation,
1979 to present;
Director and ESC Strategic
Treasurer, Funds, Inc.,
1994 to present.
Raymond H. Pirtle, Jr. Managing Director Position with
Equitable
Securities
Corporation,
1989 to present
Stephen S. Riven Managing Director Position with
Equitable
Securities
Corporation,
1989 to present
Roger T. Briggs, Jr. Managing Director Position with
Equitable
Securities
Corporation,
1995 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.
41
<PAGE> 76
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
Director President
Katie H. Gambill President, Head of None
Equity Capital
Markets, Managing
Director and Director
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
Tom R. Steele Managing Director None
W. Howard Cammak, Jr. Managing Director None
Raymond H. Pirtle, Jr. Managing Director None
Stephen S. Riven Managing Director None
Roger T. Briggs, Jr. Managing Director None
</TABLE>
42
<PAGE> 77
<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
(1) Equitable Securities Corporation, 800 Nashville City Center, 511
Union Street, Nashville, Tennessee 37219-1743 (records relating to
its functions as investment adviser and distribution - all
portfolios).
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as administrator).
(3) ESC Strategic Funds, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as transfer agent and Fund
accountant).
(4) Drinker Biddle & Reath, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496 (Registrant's Agreement and Declaration of
Trust, and Code of Regulations).
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
43
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that
it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended,
and has duly caused this Post-Effective Amendment No. 9 to Registrant's
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Washington, D.C. on the 29th day of October,
1997.
ESC STRATEGIC FUNDS, INC. ESC STRATEGIC FUNDS, INC.
By: /s/ *
* -------------------------------
William H. Cammack, Sr. Wm. H. Cammack, Jr.
President Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 9 to Registrant's Registration Statement has
been signed by the following persons in the capacities indicated on the 29th
day of October, 1997.
SIGNATURE TITLE
- --------- -----
/s/ *
- -----------------------
William H. Cammack, Sr. Director and President
/s/ *
- -----------------------
William H. Cammack, Jr. Director and Treasurer
/s/ *
- -----------------------
J. Bransford Wallace Director
/s/ *
- -----------------------
Brownlee O. Currey, Jr. Director
/s/ *
- -----------------------
E. Townes Duncan Director
/s/ Assistant Treasurer
*By: /s/
---------------------------
Jeffrey L. Steele
Attorney-in-Fact
44
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
11 -- Consent of Price Waterhouse LLP
16 -- Schedule for Computation of Performance Quotations
17 -- Financial Data Schedules for fiscal year ended March 31,
1997 and for the ESC Strategic Value Fund dated September
30, 1997
</TABLE>
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 9 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated May 16, 1997, relating to the financial
statements and financial highlights appearing in the March 31, 1997 Annual
Report to Shareholders of ESC Strategic Funds, Inc., which is also incorporated
by reference into the Registration Statement. We also consent to the references
to us under the headings "Independent Accountants" and "Financial Statements"
in such Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 30, 1997
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
STRATEGIC VALUE FUND
EXHIBIT 16
TOTAL RETURN
DATE AS OF: 09/30/97
CLASS D
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 1.50%
- --------------------------
T= (ERV/P) - 1
WHERE: T= TOTAL RETURN
ERV= REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P= A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: ( 05/07/97 TO 09/30/97 ):
( 1,122.00 /1,000) -1 = 12.20%
QUARTERLY: ( 06/30/97 TO 09/30/97 ):
( 1,107.60 /1,000) -1 = 10.76%
MONTHLY: ( 08/31/97 TO 09/30/97 ):
( 1,059.49 /1,000) -1 = 5.95%
CLASS A
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 4.50%
- --------------------------
T= (ERV/P) - 1
WHERE: T= TOTAL RETURN
ERV= REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P= A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: ( 05/07/97 TO 09/30/97 ):
( 1,124.0 /1,000) -1 = 12.40%
QUARTERLY: ( 06/30/97 TO 09/30/97 ):
( 1,108.48 /1,000) -1 = 10.85%
MONTHLY: ( 08/31/97 TO 09/30/97 ):
( 1,059.38 /1,000) -1 = 5.94%
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 21
<NAME> ESC STRATEGIC FUNDS, GLOBAL EQUITY FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 20,356
<INVESTMENTS-AT-VALUE> 22,043
<RECEIVABLES> 54
<ASSETS-OTHER> 472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,569
<PAYABLE-FOR-SECURITIES> 22
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61
<TOTAL-LIABILITIES> 83
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,924
<SHARES-COMMON-STOCK> 1,569
<SHARES-COMMON-PRIOR> 1,321
<ACCUMULATED-NII-CURRENT> (2)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 877
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,687
<NET-ASSETS> 22,486
<DIVIDEND-INCOME> 318
<INTEREST-INCOME> 66
<OTHER-INCOME> 0
<EXPENSES-NET> 488
<NET-INVESTMENT-INCOME> (104)
<REALIZED-GAINS-CURRENT> 1,451
<APPREC-INCREASE-CURRENT> 329
<NET-CHANGE-FROM-OPS> 1,676
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 538
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 258
<NUMBER-OF-SHARES-REDEEMED> 48
<SHARES-REINVESTED> 37
<NET-CHANGE-IN-ASSETS> 4,164
<ACCUMULATED-NII-PRIOR> 84
<ACCUMULATED-GAINS-PRIOR> 94
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 490
<AVERAGE-NET-ASSETS> 20,554
<PER-SHARE-NAV-BEGIN> 11.08
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 0.97
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .35
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> .009
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> ESC STRATEGIC FUNDS, GLOBAL EQUITY FUND, CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 20,356
<INVESTMENTS-AT-VALUE> 22,043
<RECEIVABLES> 54
<ASSETS-OTHER> 472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,569
<PAYABLE-FOR-SECURITIES> 22
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61
<TOTAL-LIABILITIES> 83
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,924
<SHARES-COMMON-STOCK> 367
<SHARES-COMMON-PRIOR> 337
<ACCUMULATED-NII-CURRENT> (2)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 877
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,687
<NET-ASSETS> 22,486
<DIVIDEND-INCOME> 318
<INTEREST-INCOME> 66
<OTHER-INCOME> 0
<EXPENSES-NET> 488
<NET-INVESTMENT-INCOME> (104)
<REALIZED-GAINS-CURRENT> 1,451
<APPREC-INCREASE-CURRENT> 329
<NET-CHANGE-FROM-OPS> 1,676
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 125
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28
<NUMBER-OF-SHARES-REDEEMED> 9
<SHARES-REINVESTED> 11
<NET-CHANGE-IN-ASSETS> 4,164
<ACCUMULATED-NII-PRIOR> 84
<ACCUMULATED-GAINS-PRIOR> 94
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 490
<AVERAGE-NET-ASSETS> 20,554
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> .97
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .35
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.47
<EXPENSE-RATIO> .003
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> ESC STRATEGIC FUNDS, INCOME FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 27,100
<INVESTMENTS-AT-VALUE> 26,789
<RECEIVABLES> 742
<ASSETS-OTHER> 6,659
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,190
<PAYABLE-FOR-SECURITIES> 191
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 73
<TOTAL-LIABILITIES> 264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,622
<SHARES-COMMON-STOCK> 3,339
<SHARES-COMMON-PRIOR> 3,730
<ACCUMULATED-NII-CURRENT> 398
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (780)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (314)
<NET-ASSETS> 33,926
<DIVIDEND-INCOME> 58
<INTEREST-INCOME> 2,655
<OTHER-INCOME> 0
<EXPENSES-NET> 636
<NET-INVESTMENT-INCOME> 2,077
<REALIZED-GAINS-CURRENT> (537)
<APPREC-INCREASE-CURRENT> 1
<NET-CHANGE-FROM-OPS> 1,541
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,004
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 676
<NUMBER-OF-SHARES-REDEEMED> 1,251
<SHARES-REINVESTED> 184
<NET-CHANGE-IN-ASSETS> (4,411)
<ACCUMULATED-NII-PRIOR> 509
<ACCUMULATED-GAINS-PRIOR> (373)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 652
<AVERAGE-NET-ASSETS> 38,027
<PER-SHARE-NAV-BEGIN> 9.89
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> (.16)
<PER-SHARE-DIVIDEND> .60
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> .017
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> ESC STRATEGIC FUNDS, INCOME FUND, CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 27,100
<INVESTMENTS-AT-VALUE> 26,789
<RECEIVABLES> 742
<ASSETS-OTHER> 6,659
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,190
<PAYABLE-FOR-SECURITIES> 191
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 73
<TOTAL-LIABILITIES> 264
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,622
<SHARES-COMMON-STOCK> 146
<SHARES-COMMON-PRIOR> 146
<ACCUMULATED-NII-CURRENT> 398
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (780)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (314)
<NET-ASSETS> 33,926
<DIVIDEND-INCOME> 58
<INTEREST-INCOME> 2,655
<OTHER-INCOME> 0
<EXPENSES-NET> 636
<NET-INVESTMENT-INCOME> 2,077
<REALIZED-GAINS-CURRENT> (537)
<APPREC-INCREASE-CURRENT> 1
<NET-CHANGE-FROM-OPS> 1,541
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 73
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8
<NUMBER-OF-SHARES-REDEEMED> 15
<SHARES-REINVESTED> 7
<NET-CHANGE-IN-ASSETS> (4,411)
<ACCUMULATED-NII-PRIOR> 509
<ACCUMULATED-GAINS-PRIOR> (373)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 652
<AVERAGE-NET-ASSETS> 38,027
<PER-SHARE-NAV-BEGIN> 9.89
<PER-SHARE-NII> .50
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> .50
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> .022
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> ESC STRATEGIC FUNDS, SMALL CAP FUND, CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 52,204
<INVESTMENTS-AT-VALUE> 60,788
<RECEIVABLES> 373
<ASSETS-OTHER> 34,192
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95,353
<PAYABLE-FOR-SECURITIES> 79
<SENIOR-LONG-TERM-DEBT> 394
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 473
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,373
<SHARES-COMMON-STOCK> 1,291
<SHARES-COMMON-PRIOR> 564
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,924
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,583
<NET-ASSETS> 94,880
<DIVIDEND-INCOME> 435
<INTEREST-INCOME> 367
<OTHER-INCOME> 0
<EXPENSES-NET> 1,166
<NET-INVESTMENT-INCOME> (364)
<REALIZED-GAINS-CURRENT> 3,282
<APPREC-INCREASE-CURRENT> 1,691
<NET-CHANGE-FROM-OPS> 4,609
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 589
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 762
<NUMBER-OF-SHARES-REDEEMED> 68
<SHARES-REINVESTED> 33
<NET-CHANGE-IN-ASSETS> 57,143
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,808
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 653
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,216
<AVERAGE-NET-ASSETS> 63,240
<PER-SHARE-NAV-BEGIN> 15.76
<PER-SHARE-NII> (.11)
<PER-SHARE-GAIN-APPREC> 2.44
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .74
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.35
<EXPENSE-RATIO> .022
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> ESC STRATEGIC FUNDS, SMALL CAP FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 52,204
<INVESTMENTS-AT-VALUE> 60,788
<RECEIVABLES> 373
<ASSETS-OTHER> 34,192
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95,353
<PAYABLE-FOR-SECURITIES> 79
<SENIOR-LONG-TERM-DEBT> 394
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 473
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,373
<SHARES-COMMON-STOCK> 4,160
<SHARES-COMMON-PRIOR> 1,816
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,926
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,583
<NET-ASSETS> 94,880
<DIVIDEND-INCOME> 435
<INTEREST-INCOME> 367
<OTHER-INCOME> 0
<EXPENSES-NET> 1,166
<NET-INVESTMENT-INCOME> (364)
<REALIZED-GAINS-CURRENT> 3,282
<APPREC-INCREASE-CURRENT> 1,691
<NET-CHANGE-FROM-OPS> 4,609
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,245
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,460
<NUMBER-OF-SHARES-REDEEMED> 256
<SHARES-REINVESTED> 110
<NET-CHANGE-IN-ASSETS> 57,143
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,808
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 653
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,216
<AVERAGE-NET-ASSETS> 63,240
<PER-SHARE-NAV-BEGIN> 15.88
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 2.46
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .74
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.55
<EXPENSE-RATIO> .017
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> ESC STRATEGIC FUNDS, APPRECIATION FUNDS, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 40,845
<INVESTMENTS-AT-VALUE> 45,753
<RECEIVABLES> 35
<ASSETS-OTHER> 3,139
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,927
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106
<TOTAL-LIABILITIES> 106
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,835
<SHARES-COMMON-STOCK> 3,191
<SHARES-COMMON-PRIOR> 1,694
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,078
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,908
<NET-ASSETS> 48,821
<DIVIDEND-INCOME> 540
<INTEREST-INCOME> 97
<OTHER-INCOME> 0
<EXPENSES-NET> 780
<NET-INVESTMENT-INCOME> (143)
<REALIZED-GAINS-CURRENT> 3,760
<APPREC-INCREASE-CURRENT> 752
<NET-CHANGE-FROM-OPS> 4,369
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,410
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,249
<NUMBER-OF-SHARES-REDEEMED> 177
<SHARES-REINVESTED> 155
<NET-CHANGE-IN-ASSETS> 20,779
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,696
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 419
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 789
<AVERAGE-NET-ASSETS> 40,936
<PER-SHARE-NAV-BEGIN> 13.02
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 1.92
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .87
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.03
<EXPENSE-RATIO> 0.018
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> ESC STRATEGIC FUNDS, APPRECIATION FUNDS, CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 40,845
<INVESTMENTS-AT-VALUE> 45,753
<RECEIVABLES> 35
<ASSETS-OTHER> 3,139
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,927
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106
<TOTAL-LIABILITIES> 106
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,835
<SHARES-COMMON-STOCK> 293
<SHARES-COMMON-PRIOR> 192
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,078
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,908
<NET-ASSETS> 48,821
<DIVIDEND-INCOME> 540
<INTEREST-INCOME> 97
<OTHER-INCOME> 0
<EXPENSES-NET> 780
<NET-INVESTMENT-INCOME> (143)
<REALIZED-GAINS-CURRENT> 3,760
<APPREC-INCREASE-CURRENT> 752
<NET-CHANGE-FROM-OPS> 4,369
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 183
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 102
<NUMBER-OF-SHARES-REDEEMED> 14
<SHARES-REINVESTED> 13
<NET-CHANGE-IN-ASSETS> 20,779
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,696
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 419
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 789
<AVERAGE-NET-ASSETS> 40,936
<PER-SHARE-NAV-BEGIN> 12.91
<PER-SHARE-NII> (0.08)
<PER-SHARE-GAIN-APPREC> 1.89
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .87
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.85
<EXPENSE-RATIO> 0.023
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<SERIES>
<NUMBER> 061
<NAME> ESC STRATEGIC VALUE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> APR-01-1997
<INVESTMENTS-AT-COST> 6,842,134
<INVESTMENTS-AT-VALUE> 7,806,269
<RECEIVABLES> 53,753
<ASSETS-OTHER> 35,859
<OTHER-ITEMS-ASSETS> 3,516,615
<TOTAL-ASSETS> 11,411,496
<PAYABLE-FOR-SECURITIES> 142,460
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27,430
<TOTAL-LIABILITIES> 169,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,254,125
<SHARES-COMMON-STOCK> 839,209<F1>
<SHARES-COMMON-PRIOR> 0<F1>
<ACCUMULATED-NII-CURRENT> 15,066
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,281
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 964,314
<NET-ASSETS> 11,241,606
<DIVIDEND-INCOME> 58,349
<INTEREST-INCOME> 4,133
<OTHER-INCOME> 0
<EXPENSES-NET> 47,416
<NET-INVESTMENT-INCOME> 15,066
<REALIZED-GAINS-CURRENT> 8,281
<APPREC-INCREASE-CURRENT> 964,134
<NET-CHANGE-FROM-OPS> 987,481
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,000,214
<NUMBER-OF-SHARES-REDEEMED> 55
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,241,606
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,066
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 47,416
<AVERAGE-NET-ASSETS> 8,646,648<F1>
<PER-SHARE-NAV-BEGIN> 10<F1>
<PER-SHARE-NII> .02<F1>
<PER-SHARE-GAIN-APPREC> 1.22<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 11.24<F1>
<EXPENSE-RATIO> 1.14<F1>
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>Class A
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<SERIES>
<NUMBER> 062
<NAME> ESC STRATEGIC VALUE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> APR-01-1997
<INVESTMENTS-AT-COST> 6,842,134
<INVESTMENTS-AT-VALUE> 7,806,269
<RECEIVABLES> 52,753
<ASSETS-OTHER> 35,859
<OTHER-ITEMS-ASSETS> 3,516,615
<TOTAL-ASSETS> 11,411,496
<PAYABLE-FOR-SECURITIES> 142,460
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27,430
<TOTAL-LIABILITIES> 169,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,254,125
<SHARES-COMMON-STOCK> 160,950<F2>
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 15,066
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,281
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 964,134
<NET-ASSETS> 0
<DIVIDEND-INCOME> 58,349
<INTEREST-INCOME> 4,133
<OTHER-INCOME> 0
<EXPENSES-NET> 47,416
<NET-INVESTMENT-INCOME> 15,066
<REALIZED-GAINS-CURRENT> 8,281
<APPREC-INCREASE-CURRENT> 964,134
<NET-CHANGE-FROM-OPS> 987,481
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F2>
<DISTRIBUTIONS-OF-GAINS> 0<F2>
<DISTRIBUTIONS-OTHER> 0<F2>
<NUMBER-OF-SHARES-SOLD> 1,000,214
<NUMBER-OF-SHARES-REDEEMED> 55
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,241,606
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,066
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 47,416
<AVERAGE-NET-ASSETS> 1,465,411
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 1.22
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.22
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F2>Class D
</FN>
</TABLE>
