<PAGE> 1
Registration Nos. 33-72190
811-8166
As filed with the Securities and Exchange Commission on February 18, 1997
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Post-Effective Amendment No. 7 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 8 X
ESC STRATEGIC FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (800) 662-8417
- --------------------------------------------------------------------------------
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)
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)
X 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, 1996 was filed on May 17, 1996.
<PAGE> 2
ESC STRATEGIC VALUE FUND
a series of
ESC STRATEGIC FUNDS, INC.
CROSS REFERENCE SHEET
(as required by Rule 404(c))
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
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.
<PAGE> 4
Explanatory Note
This Post-Effective Amendment No. 7 ("Amendment") to Registrant's registration
statement on Form N-1A (File No. 33-72190) is filed solely for the purpose of
amending the prospectus and statement of additional information for Registrant's
new series, ESC Strategic Value Fund. The Amendment does not affect any of
Registrant's other currently effective prospectuses or statements of additional
information, each of which is hereby incorporated herein by reference as most
recently filed pursuant to Rule 497 under the Securities Act of 1933.
<PAGE> 5
LOGO
ESC STRATEGIC VALUE FUND
A PORTFOLIO OF
ESC STRATEGIC FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
EQUITABLE SECURITIES CORPORATION -- INVESTMENT ADVISER AND DISTRIBUTOR
BISYS FUND SERVICES -- ADMINISTRATOR, TRANSFER AGENT
AND FUND ACCOUNTING AGENT
- --------------------------------------------------------------------------------
This Prospectus describes ESC Strategic Value Fund (the "Fund"), the
objective of which is long-term capital appreciation. The Fund is one of seven
funds comprising ESC Strategic Funds, Inc. (the "Company"), an open-end
management registered investment company advised by Equitable Securities
Corporation (the "Adviser"). The Fund is a separate portfolio of the Company and
offers two classes of shares. The Fund bears certain expenses related to the
distribution of its shares.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND FUND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN MUTUAL FUNDS, SUCH AS THE FUNDS, INVOLVE RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING IN THE FUND AND SHOULD BE READ AND RETAINED FOR
INFORMATION ABOUT THE FUND.
A Statement of Additional Information (the "SAI"), dated ,
199 , containing additional and more detailed information about the Fund, has
been filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or telephoning the Company at the address and
information numbers printed above.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The Date of this Prospectus is , 199
<PAGE> 6
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights..................................................
Fund Expenses...............................................
Fee Table...................................................
The Fund....................................................
Risks of Investing in the Fund..............................
Management of the Fund......................................
Fund Share Valuation........................................
Pricing of Fund Shares......................................
Minimum Purchase Requirements...............................
Purchase of Fund Shares.....................................
Retirement Plan Accounts....................................
Exchange of Fund Shares.....................................
Redemption of Fund Shares...................................
Dividends, Distributions, and Federal Income Taxation.......
Description of Securities and Investment Practices..........
Investment Restrictions.....................................
Other Information...........................................
Appendix....................................................
</TABLE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
THE FUND
This Prospectus describes ESC Strategic Value Fund (the "Fund"), one of seven
Funds comprising ESC Strategic Funds, Inc. (the "Company"). The Fund's objective
is long-term capital appreciation. The Fund invests primarily in equity
securities of domestic and foreign issuers believed by the Manager to be
undervalued.
SPECIAL RISKS
THE FUND MAY INVEST SUBSTANTIAL PORTIONS OF ITS PORTFOLIO IN INDIVIDUAL ISSUERS
AND, THEREFORE, DOES NOT INTEND TO BE DIVERSIFIED. THE FUND MAY ENGAGE IN
TRANSACTIONS IN OPTIONS AND FUTURES CONTRACTS FOR HEDGING PURPOSES, PROVIDED
THAT NO MORE THAN 5% OF THE FUND'S ASSETS MAY BE PLACED AT RISK BY SUCH
TRANSACTIONS. THE FUND MAY ALSO INVEST IN OTHER DERIVATIVES, "JUNK" BONDS,
SECURITIES OF FOREIGN ISSUERS AND ILLIQUID SECURITIES. IT MAY ALSO ENGAGE IN
SHORT SALES. THESE AND OTHER INVESTMENT PRACTICES OF THE FUND INVOLVE SPECIAL
RISKS. FOR MORE INFORMATION ON THESE PRACTICES AND OTHER INVESTMENTS AND
INVESTMENT RESTRICTIONS AND RISKS, SEE "DESCRIPTION OF SECURITIES AND INVESTMENT
PRACTICES" AND "RISKS OF INVESTING IN THE FUND." THERE CAN BE, OF COURSE, NO
ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. MOREOVER,
INVESTORS SHOULD BE AWARE THAT THE VALUE OF THE FUND'S SHARES WILL FLUCTUATE,
WHICH MAY CAUSE A LOSS IN THE PRINCIPAL VALUE OF THE INVESTMENT.
THE ADVISER AND THE MANAGER
Overall management of the Fund is provided by Equitable Securities Corporation
(the "Adviser"). The Adviser, headquartered in Nashville, Tennessee, is a New
York Stock Exchange member investment banking and securities brokerage firm.
Founded in 1930, the predecessor of the Adviser developed a national clientele
as an investment banking firm dealing in both corporate and municipal
securities. In 1968, the American Express Company acquired the Adviser's
predecessor and in 1972 the firm was reestablished as an independent company
when a group of its employees purchased the firm. Equitable Trust Company, a
wholly-owned subsidiary of the Adviser formed in 1991, provides investment
management, trust, and other fiduciary services to individuals and other
clients. In 1986, the Adviser formed the Investment Consulting division to
provide consulting services to institutional and individual investors employing
outside in-
- --------------------------------------------------------------------------------
2
<PAGE> 7
- --------------------------------------------------------------------------------
vestment management expertise. The primary services of the Investment Consulting
division are strategic investment planning, asset allocation analysis,
investment manager evaluation and performance measurement. The Investment
Consulting division provides primary information within Equitable Securities
Corporation in the latter's role as Adviser of the ESC Strategic Funds. For its
services, the Adviser receives a fee at an annual rate of 1.25% based on the
Fund's average daily net assets. This fee, which is higher than those for most
other investment companies, is used by the Adviser to pay the Manager's fee, at
no additional cost to the Fund.
Portfolio management for the Fund is provided by Equitable Asset Management,
Inc. ("EAM"), an affiliate of the Adviser. See "Management of the Fund."
THE DISTRIBUTOR AND ADMINISTRATOR
Equitable Securities Corporation distributes the Fund's shares and may be
reimbursed for certain of its distribution-related expenses. BISYS Fund Services
Limited Partnership d/b/a BISYS Fund Services ("BISYS Fund Services") acts as
Administrator to the Fund. For its services as Administrator, the Fund pays
BISYS Fund Services a fee at the annual rate of 0.15% of its average daily net
assets. BISYS Fund Services, Inc. ("BISYS") acts as transfer agent and fund
accounting agent to the Fund. BISYS receives separate fees for its services as
transfer agent and fund accounting agent. See "Management of the Fund."
CLASSES OF SHARES
The Fund offers investors a choice of two classes of shares which differ
principally with respect to sales charges and the rate of expenses to which they
are subject. Investors may select the class which better suits their investment
needs. Class A shares are offered with a maximum front-end sales charge of
4.50%, which may be reduced or waived in certain cases. See "Purchase of Fund
Shares." Class A shares are also subject to a Service and Distribution Fee
calculated at an annual rate of up to 0.25% of the average daily net asset value
of Class A shares. Class D shares are offered with a 1.50% front-end sales
charge and are subject to a Service and Distribution Fee at an annual rate of up
to 0.75% based on the average daily net asset value of Class D shares. See
"Management of the Fund -- The Distributor."
In selecting between the classes, a prospective investor should consider the
impact of the sales charge together with the cumulative effect of the Service
and Distribution Fees for each class over the anticipated period of investment,
as well as the effect of any sales charge waivers to which the investor may be
entitled. Investors should be aware that other expenses attributable to each
class may differ slightly due to the allocation to each class of certain "class
specific" expenses, including distribution and marketing expenses and federal
and state securities registration and filing fees. Finally, investors should be
aware that persons selling shares of the Fund may receive different levels of
compensation for sales of Class A and Class D shares.
GUIDE TO INVESTING IN ESC STRATEGIC VALUE FUND
Purchase orders for shares of the Fund received by your broker or Service
Organization in proper order prior to 4:00 p.m., Eastern time, and transmitted
to the Fund prior to 4:00 p.m. Eastern time will become effective that day.
<TABLE>
<S> <C>
- - Minimum initial investment................................ $1,000
- - Minimum initial investment for IRAs and other qualified
retirement plans.......................................... $ 500
- - Minimum subsequent investment............................. $ 50
</TABLE>
Shareholders may exchange shares of a particular class of the Fund for shares of
the same class in another fund of ESC Strategic Funds, Inc. by telephone or
mail.
<TABLE>
<S> <C>
- - Minimum initial exchange.................................. $ 2,000
(No minimum for subsequent exchanges.)
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE> 8
- --------------------------------------------------------------------------------
Shareholders may redeem shares by telephone, mail or wire.
- - The Fund reserves the right to redeem upon not less than 30 days' notice all
shares in an account which has an aggregate value of $500 or less.
All dividends and distributions will be automatically reinvested at net asset
value in additional shares of the same class of the Fund unless cash payment is
requested.
- - Distributions for ESC Strategic Value Fund are paid at least annually.
See "Purchase of Fund Shares" and "Redemption of Fund Shares" for more
information.
FUND EXPENSES
The following expense tables indicate costs and expenses that an investor should
anticipate incurring either directly or indirectly as a shareholder of the Fund
during its fiscal year ending March 31, 1998. The "Other Expenses" numbers
reflect estimated levels of operating expenses based on general industry
experience.
FEE TABLE
<TABLE>
<CAPTION>
ESC STRATEGIC
VALUE FUND
----------------------
CLASS A CLASS D
------- -----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....................... 4.50% 1.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)....................... None None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................. None None
Exchange Fees............................................... None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net assets annualized)
Management Fees........................................... 1.25% 1.25%
12b-1 Fees*............................................... 0.25% 0.75%
Other Expenses** (estimated, after waivers)............... 0.50% 0.50%
---- ----
TOTAL PORTFOLIO OPERATING EXPENSES.......................... 2.00% 2.50%
==== ====
</TABLE>
- ---------------
* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of the Fund, long-term shareholders may pay more sales charges than
the economic equivalent of the maximum front-end sales charge permitted by
rules of the NASD. See "Management of the Fund."
** Amounts shown for "Other Expenses" reflect a reimbursement of certain
expenses by the Adviser. Without these waivers, "Other Expenses" and "Total
Portfolio Operating Expenses," respectively, would be: 0.70% and 2.20% for
Class A and 0.70% and 2.70% for Class D. Out of its Management Fees, the
Adviser pays the fees of the Managers.
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Fund shareholder will bear.
- --------------------------------------------------------------------------------
4
<PAGE> 9
- --------------------------------------------------------------------------------
EXAMPLE:*
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC
VALUE FUND
-----------------
CLASS A CLASS D
------- -------
<S> <C> <C>
1 year...................................................... $ 64 $40
3 years..................................................... $105 $92
</TABLE>
- ------------
* THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES
WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or future
annual return. Actual return may be greater or less than the assumed amount.
- --------------------------------------------------------------------------------
5
<PAGE> 10
- --------------------------------------------------------------------------------
THE FUND
The investment objective of the ESC Strategic Value Fund is long-term capital
appreciation.
The Fund pursues this objective by investing in "value" securities. Value
securities are those whose current market prices, in the view of the Manager,
are low relative to their assets or future earnings potential and that the
Manager believes offer special opportunities for growth. Under normal market
conditions, at least 65% of the Fund's assets will be invested in value
securities. The Manager anticipates the Fund will invest primarily in equity
securities, including common stocks, securities convertible into common stocks
and preferred stocks. In pursuit of its objective, however, the Fund may also
invest in a wide range of other securities, including rights, warrants, secured
and unsecured bonds and notes (including "junk" bonds), mortgage and other
asset-backed securities, real estate investment trusts, derivatives and
repurchase agreements. The Fund may invest in securities of foreign as well as
domestic issuers. It may invest in illiquid securities and engage in short
sales. For cash management purposes, the Fund may invest in U.S. Government
securities, bankers' acceptances, commercial paper, certificates of deposit,
repurchase agreements and corporate debt obligations and may invest temporarily
all its assets in these instruments for defensive purposes. These and other
investments and investment practices are described further below (see
"Description of Securities and Investment Practices") and in the SAI.
The Manager's value investing style is patterned on that originally developed by
Benjamin Graham and David L. Dodd. The Manager believes that value can be found
in companies that are not widely followed or are under-appreciated by the
market, or are in industries or sectors that are currently out of favor. When an
unexpected favorable event is reported, investors may reassess the company's
prospects and cause the company's stock price to increase. Conversely,
disappointing news about a company may not cause a significant decline because
of the lack of favorable expectations. Value may often be found as a result of
general market declines, dividend reductions, earnings reported below
expectations, poor economic conditions, the retirement or death of a major
shareholder or important executive and tax loss selling. The Manager may search
for investments where anticipated or when current positive developments within
the company offer the prospect of capital appreciation. Among these developments
could be new products or services, a management change, possible takeover
interest, acquisition or merger, capitalization change, technological
breakthrough, expansion or competitive realignment in their market, watershed
event in the industry, corporate redirection or restructuring, closing of
inefficient operations or change in the political or regulatory climate. The
Manager may also find value in companies whose securities price may be
temporarily depressed because of special circumstances, such as a cyclical
downturn or earnings decline that is expected to be reversed in the future.
In searching for overlooked investment opportunities the Fund may consider
underfollowed companies, regional companies, companies with limited trading
markets or companies with one or more of the following characteristics: low
levels of institutional holdings, significant management shareholdings,
consistent insider purchases, increasing investment by sophisticated outside
parties or stock repurchase programs. Attractive valuations may also be found in
companies trading well below their peer group and in closed end funds trading at
a discount to their net asset value. The Manager may use a screen to identify
companies that are of interest to strategic or financial buyers.
The Fund may invest up to 25% of its assets in turnaround situations and in
companies involved in mergers, consolidations, liquidations and reorganizations
as well as in companies emerging from bankruptcy protection. The Fund may also
consider purchasing debt obligations of companies that have been depressed
greater than the financial condition merits. Such companies may offer
opportunities for significant capital
- --------------------------------------------------------------------------------
6
<PAGE> 11
- --------------------------------------------------------------------------------
appreciation despite the perceived degree of risk. In addition to reviewing
fundamentals, the Manager may also consider technical indicators when evaluating
companies for purchase.
The Manager may decide to liquidate a portfolio position when: 1) the security
appears fairly valued or overvalued; 2) the political or economic outlook for
the company deteriorates; 3) the earnings power or asset value of the company
deteriorates; 4) a fundamental change causes the Manager to lose confidence in
the company's potential; 5) a reversal pattern or other technical signs of
ebbing strength in the price of the security are observed, or 6) superior
investment opportunities exist in other securities.
The Fund's annual turnover is generally expected to be less than 100 percent.
Although it is expected that the Fund will invest for long-term capital
appreciation, the Manager may liquidate securities without regard to how long
they have been held, if such action is considered appropriate.
The Manager will attempt to manage the Fund's risk, although there can be no
assurance the Manager will be successful in this effort. The Manager seeks to
reduce market risk by owning underfollowed companies with low investor
expectations. The Manager seeks to manage valuation risk by purchasing companies
at prices substantially below their intrinsic or private market value. The
Manager seeks to manage financial risk by investing in businesses with free cash
flow and strong balance sheets. Portfolio risk is managed by holding a number of
securities.
In summary, the Manager believes the ESC Strategic Value Fund is a suitable
investment for investors seeking long-term capital appreciation from purchasing
"value" securities. The Manager expects the average holding period of its
securities normally to be two to five years. The Fund is not appropriate for
investors seeking to capitalize on short-term market fluctuations or for
investors who would be likely to sell shares in the event of short-term declines
in value. There can be no assurance that the Fund will achieve its investment
objective.
The Fund's Manager is EAM. For information regarding the Manager, see
"Management of the Fund."
- --------------------------------------------------------------------------------
RISKS OF INVESTING IN THE FUND
The price per share of each class of the Fund will fluctuate with changes in the
value of the investments held by the Fund. Additionally, an investment in the
Fund may entail special risks because the Fund (a) is not required to be
diversified, and (b) at times, may have substantial investments in small
capitalization stocks. Investments in small companies may involve greater risks
than investments in large companies due to such factors as limited product
lines, markets and financial or managerial resources, and less frequently traded
securities that may be subject to more abrupt price movements than securities of
larger companies. As a non-diversified fund, the Fund is not subject to certain
regulatory limits, including limits on the size of its positions in individual
issuers. To the extent the Fund exceeds these limits, it will be more exposed to
risks of particular issuers than a diversified fund. The Fund will, however,
comply with the diversification requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended.
There is, of course, no assurance that the Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products. As described
under "The Fund" above, the Manager seeks to manage risk in a number of ways.
Other risks raised by the Funds' investments and investment practices are
described below.
Foreign Securities. Investing in the securities of issuers in any foreign
country, including American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and similar instruments, involves special risks and
considerations not typically associated with investing in U.S. companies.
- --------------------------------------------------------------------------------
7
<PAGE> 12
- --------------------------------------------------------------------------------
These include differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio transactions;
the possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including taxes withheld from
payments on those securities. Foreign securities often trade with less frequency
and volume than domestic securities and, therefore, may exhibit greater price
volatility and less liquidity. Additional costs associated with an investment in
foreign securities may include higher custodial fees than apply to domestic
custodial arrangements and transaction costs of foreign currency conversions.
Changes in foreign exchange rates also will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. The Fund's
objectives may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities denominated in such currency, and related ADRs and EDRs, and,
therefore, will cause an overall decline in the Fund's net asset value and any
net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by several factors including the supply and demand for
particular currencies, central bank efforts to support particular currencies,
the movement of interest rates, the pace of business activity in certain other
countries and the United States, and other economic and financial conditions
affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference ("spread") between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to sell that currency
to the dealer.
See the SAI for further information about foreign securities.
Short Sales. The Fund will incur a loss as a result of a short sale (other than
a short sale against the box as defined under "Description of Securities and
Investment Practices") if the price of the security increases between the date
of the short sale and the date on which the Fund replaces the borrowed security.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases of a security can equal only the total amount
invested. To limit these risks, a Fund's short sales (other than short sales
against the box) will be only with respect to securities fully listed on a
national securities exchange and will not at any time exceed a dollar amount
equal to 25% of the Fund's net equity. Further, a Fund's short sales of
securities of a single issuer will not exceed the lesser of 2% of the value of
the Fund's net assets or 2% of the securities of any class of the issuer.
Risks of Lower Rated and Non-Investment Grade Securities. The Fund may invest
in securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Corporation ("S&P"). These securities (and securities deemed
of comparable quality by the Manager) may have speculative characteristics. The
Fund may also invest in securities rated below investment grade (i.e., below Baa
or BBB or the equivalent), commonly known as "junk bonds." These securities may
have greater price volatility and are considered more speculative with respect
to payment of principal and interest than higher rated securities. The prices of
these securities tend to be more sensitive to individual corporate development
and changes in economic conditions than higher rated securities, and their price
- --------------------------------------------------------------------------------
8
<PAGE> 13
- --------------------------------------------------------------------------------
volatility will be reflected in the Fund's share value. These securities
generally also present a higher degree of credit risk. Their issuers are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during sustained periods of rising interest rates may be impaired. Because these
securities are generally unsecured and frequently are subordinated to the prior
payment of senior indebtedness, the risk of loss due to default on these
securities is significantly greater than with investment grade securities.
Further, the secondary market for junk bonds is less liquid than the market for
higher grade securities. (See "Risks of Illiquid Securities," below).
Risks of Illiquid Securities. The Fund may invest up to 15% of its net assets,
measured at the time of investment, in illiquid securities. Illiquid securities
include those on which there are legal restrictions on trading ("restricted
securities") as well as those for which there is a limited trading market. These
securities may be difficult for the Fund to sell and may also be difficult to
value accurately, requiring a greater degree of judgment as to valuation by the
Fund's Board of Directors, with a consequent effect on the Fund's share value.
Securities with a limited trading market may also be more difficult to sell at a
fair price.
Risks of Options Transactions. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying securities at the exercise price. If
a put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price, or in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, the Fund may be
unable to close out a position. If the Fund cannot effect a closing transaction,
it will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
Options transactions involve, additionally, risks similar to those described
below in "Risks of Futures and Related Options Transactions."
Currency Risk. Most of the foreign securities that the Fund invests in will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Fund's assets. The
Fund may, however, engage in foreign currency transactions to protect its
portfolio against fluctuations in currency exchange rates in relation to the
U.S. dollar. Such foreign currency transactions may include forward foreign
currency contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts. (See below.) The Fund cannot assure that these techniques will always
be successful.
Foreign Currency Options. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of the Fund to
reduce foreign currency risk using such options. Over-the-counter options differ
from traded options in that they are two-party contracts with price and other
terms negotiated between buyer
- --------------------------------------------------------------------------------
9
<PAGE> 14
- --------------------------------------------------------------------------------
and seller and generally do not have as much market liquidity as exchange-traded
options. Employing hedging strategies with options on currencies does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Furthermore, such hedging transactions
reduce or preclude the opportunity for gain if the value of the hedged currency
should change relative to the U.S. dollar. The Fund will not speculate in
options on foreign currencies.
There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If the Fund cannot close out an option that
it holds, it would have to exercise its option in order to realize any profit
and would incur transactional costs on the sale of the underlying assets.
Risks of Futures and Related Options Transactions. There are several risks
associated with the use of futures contracts and options on futures contracts.
While the Fund's use of futures contracts and related options for hedging may
protect the Fund against adverse movements in the general level of interest
rates or securities prices, such transactions could also preclude the
opportunity to benefit from favorable movements in the level of interest rates
or securities prices. There can be no guarantee that the Manager's forecasts
about market values, interest rates and other applicable factors will be correct
or that there will be a correlation between price movements in the hedging
vehicle and in the securities being hedged. The skills required to invest
successfully in futures and options may differ from skills required to manage
other assets in the Fund's portfolio. An incorrect forecast or imperfect
correlation could result in a loss on both the hedged securities in the Fund and
the hedging vehicle so that the Fund's return might have been better had hedging
not been attempted.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a futures contract or futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
The Fund will only enter into futures contracts or futures options that are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or are quoted on an automated quotation system. The Fund will
not enter into a futures contract if immediately thereafter the initial margin
deposits for futures contracts held by the Fund plus premiums paid by it for
open futures options positions, less the amount by which any such positions are
"in-the-money," would exceed 5% of the Fund's total assets.
The Fund may trade futures contracts and options on futures contracts on U.S.
domestic markets and also on exchanges located outside of the United States.
Foreign markets may offer advantages such as trading in indices that are not
currently traded in the United States. Foreign markets, however, may have
greater risk potential than domestic markets. Unlike trading on domestic
commodity exchanges, trading on foreign commodity exchanges is not regulated by
the CFTC and may be subject to greater risk than trading on domestic exchanges.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. In addition, any profits that the Fund might
realize in trading could be eliminated by adverse changes in the exchange rate
of the currency that the transaction is denominated in or the Fund could incur
losses as a result of changes in the exchange rate. Transactions on foreign
exchanges may include both commodities that are traded on domestic exchanges or
boards of trade and those that are not.
Risks of Forward Foreign Currency Contracts. The precise matching of forward
- --------------------------------------------------------------------------------
10
<PAGE> 15
- --------------------------------------------------------------------------------
contracts and the value of the securities involved will not generally be
possible since the future value of the securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
Projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
There can be no assurance that new forward contracts or offsets will always be
available to the Fund.
Risks of Real Estate Investment Trusts ("REITS"). The Fund's investments in
REITs may be subject to certain of the same risks associated with the direct
ownership of real estate. These risks include: declines in the value of real
estate; risks related to general and local economic conditions, overbuilding and
competition; increases in property taxes and operating expenses; and variations
in rental income. In addition, REITs may not be diversified. REITs are subject
to the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code and failing to maintain exemption from the 1940
Act. Also, equity REITs may be dependent upon management skill and may be
subject to the risks of obtaining adequate financing for projects on favorable
terms.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Directors are William Howard Cammack, Sr.;
William Howard Cammack, Jr.; J. Bransford Wallace; Brownlee O. Currey, Jr.; and
E. Townes Duncan. Additional information about the Directors, as well as the
Company's executive officers, may be found in the SAI under the heading
"Management -- Directors and Officers." The Adviser continuously monitors the
performance of the Fund and its Manager. Investments and investment management
decisions are made by the Fund's Manager based on the Fund's investment
objective and policies.
THE ADVISER: EQUITABLE SECURITIES CORPORATION
Equitable Securities Corporation, 800 Nashville City Center, 511 Union Street,
Nashville, Tennessee 37219-1743, is a registered investment adviser, a
registered broker-dealer, and a member of the New York Stock Exchange, Inc.
Together with predecessors, the Adviser has been in business since 1930 and has
operated under its present name since 1972. Through its IMES Consulting Group,
the Adviser provides consulting services to clients regarding the strategic
allocation of assets and the selection and monitoring of investment management
firms. The Adviser serves as General Partner of several private, unregistered
limited partnerships. The Company is the Adviser's first registered investment
company client. The Fund's Manager, EAM, is a subsidiary of the Adviser's
subsidiary, Equitable Trust Company, and is, therefore, an affiliate of the
Adviser. The Adviser and its affiliates had approximately $1.3 billion under
management at December 31, 1996.
For the advisory services it provides the Fund, the Adviser receives fees,
payable monthly based on average daily net assets, at an annual rate of 1.25% of
the Fund's average net assets. This fee is higher than that paid by most other
Funds. The Manager's fees are at a maximum annual rate of 0.65% of the Fund's
daily net assets with a declining schedule once assets of the Fund exceed $50
million. The Manager's fees are paid by the Adviser from its fees from the Fund.
The Adviser has agreed to limit the Fund's expenses to the following percentages
of the net assets of each class: 2.00% (Class A) and 2.50% (Class D).
W. Howard Cammack, Jr. has primary responsibility for the Adviser's advice to
the Fund. Mr. Cammack joined the Adviser in 1979. He is presently a Managing
Director, is head of the Adviser's Investment Advisory Group and is a member of
the Board of Directors of the Adviser and of its wholly-owned subsidiary,
Equitable Trust Company. In 1986, Mr. Cammack organized the Ad-
- --------------------------------------------------------------------------------
11
<PAGE> 16
- --------------------------------------------------------------------------------
viser's Investment Consulting division that he oversees. Mr. Cammack received a
Bachelor's degree in history from Tulane University in 1979 and an
Owner/President Management Degree from The Harvard Business School in 1996.
THE MANAGER
Equitable Asset Management, Inc. ("EAM"), 800 Nashville City Center, 511 Union
Street, Nashville, Tennessee 37219-1743, is a subsidiary of Equitable Trust
Company, a single-purpose financial institution chartered under Tennessee
banking statutes and a wholly-owned subsidiary of the Adviser. EAM began
business as an investment adviser in 1988 and at December 31, 1996 managed
approximately $319 million in assets. C. Marks Hinton, Jr. has primary
investment responsibility for management of the ESC Strategic Value Fund. Mr.
Hinton joined Equitable Securities Corporation in August 1993 and as a Managing
Director of the Firm has had primary investment responsibility for "value"
equity management within EAM since January 1997. As a senior security analyst at
the firm, Mr. Hinton's equity research responsibilities included manufactured
housing, non-traditional finance and special situations. Prior to being
associated with Equitable, Mr. Hinton was a Senior Vice President in the
research department of The Principal/Eppler, Guerin & Turner, Inc. for
approximately two years. Previously, as a founder and senior partner of Johnson,
Rice & Company, Mr. Hinton was in charge of research operations from June 1987
until September 1991. While at Johnson, Rice & Company, Mr. Hinton specialized
in "value stocks." He was responsible for publishing ValueQuest, an annual
survey of "undervalued" securities. From 1984 through May 1987, he was a Vice
President and, for a portion of this time, Director of Research at Howard, Weil,
Labouisse & Friedrichs, Inc. specializing in energy securities. In more than
three decades in the securities industry, his equity research coverage has
included, in addition to the industries previously mentioned, airlines, coal,
retailers, lodging, restaurants, publications, beverages and technology.
Mr. Hinton received a BBA in finance from Southern Methodist University in 1963.
He is a long-time member of the Houston Society of Financial Analysts as well as
a NYSE Supervisory Analyst since 1970.
THE DISTRIBUTOR
The Adviser acts as Distributor for the Funds pursuant to a Distribution
Contract.
The Fund has adopted a service and distribution plan ("Plan") with respect to
each class of its shares. The Plan provides that Class A shares will pay the
Distributor a fee up to an annual rate of 0.25% (which may include a 0.25%
Service Fee) of the value of average daily net assets of Class A shares as
reimbursement for its costs incurred for financing certain distribution and
shareholder service activities related to Class A shares. The Plan provides that
Class D shares will pay the Distributor amounts up to an annual rate of 0.75%
(which may include a 0.25% Service Fee) of the average daily net assets of Class
D shares as reimbursement for its costs incurred to finance certain distribution
and shareholder service activities related to Class D Shares. Service Fees are
paid to securities dealers and other financial institutions for maintaining
shareholder accounts and providing related services to shareholders.
Under the Plan, the Fund pays the Distributor and other securities dealers and
other financial institutions and organizations for certain shareholder service
or distribution activities. Selling dealers may be paid amounts, at the end of
each quarter, totaling up to 0.25%, annually, of the average daily net asset
value of Class A shares and 0.75%, annually, of the average daily net asset
value of Class D shares in their clients' accounts. Amounts received by the
Distributor may, additionally, subject to the Plan maximums, be used to cover
certain other costs and expenses related to the distribution of Fund shares and
provision of service to Fund shareholders, including: (a) advertising by radio,
television, newspapers, magazines, brochures, sales literature, direct mail or
any other form of advertising; (b) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses; (c)
costs of printing pro-
- --------------------------------------------------------------------------------
12
<PAGE> 17
- --------------------------------------------------------------------------------
spectuses and other materials to be given or sent to prospective investors; and
(d) such other similar services as the Directors determine to be reasonably
calculated to result in the sale of shares of the Fund. The Fund will pay all
costs and expenses in connection with the preparation, printing and distribution
of the Prospectus to current shareholders and the operation of the Plan,
including related legal and accounting fees. The Fund will not be liable for
distribution expenditures made by the Distributor in any given year in excess of
the maximum amount payable under the Plan in that year.
SERVICE ORGANIZATIONS
Payments may be made by the Fund or by the Adviser to various banks, trust
companies, broker-dealers or other financial organizations (collectively,
"Service Organizations") for providing administrative services for the Fund and
its shareholders, such as maintaining shareholder records, answering shareholder
inquiries and forwarding materials and information to shareholders. The Fund may
pay fees to Service Organizations (which vary depending upon the services
provided) in amounts up to an annual rate of 0.25% of the daily net asset value
of the shares of either class owned by shareholders with whom the Service
Organization has a servicing relationship.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than the Fund's
minimum initial or subsequent investment or charging a direct fee for servicing.
If imposed, these fees would be in addition to any amounts which might be paid
to the Service Organization by the Fund. Each Service Organization has agreed to
transmit to its clients a schedule of any such fees. Shareholders using Service
Organizations are urged to consult with them regarding any such fees or
conditions.
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS Fund
Services"), 3435 Stelzer Road, Columbus, Ohio 43219, acts as the Fund's
Administrator. BISYS Fund Services, Inc. ("BISYS") acts as the Fund's transfer
agent and fund accounting agent. BISYS Fund Services supports more than 5,000
financial institutions and corporate clients through two strategic business
units. BISYS Information Services Group provides image and data processing
outsourcing, and pricing analysis to more than 600 banks nationwide. BISYS
Investment Services Group designs, administers and distributes over 30 families
of proprietary mutual funds consisting of more than 365 portfolios, and provides
401(k) marketing support, administration, and recordkeeping services in
partnership with banking institutions and investment management companies.
Pursuant to an Administration Agreement with the Company, BISYS Fund Services
provides certain management and administrative services necessary for the Fund's
operations including: (a) general supervision of the Fund's operation including
coordination of the services performed by the Adviser, Manager, custodian,
independent accountants and legal counsel; (b) regulatory compliance, including
the compilation of information for documents such as reports to, and filings
with, the SEC and state securities commissions, and preparation of proxy
statements and shareholder reports; (c) general supervision relative to the
compilation of data required for the preparation of periodic reports distributed
to the Fund's officers and Board of Directors; and (d) furnishing office space
and certain facilities required for conducting the Fund's business. For these
services, BISYS Fund Services receives from the Fund a fee, pay-able monthly, at
the annual rate of 0.15% of the Fund's average daily net assets. Pursuant to a
Transfer Agency Agreement between the Company and BISYS, BISYS provides the
Company with transfer services, for which it receives a fee with respect to the
Fund of $15.00 per account per year, subject to a required minimum fee of
$10,000, plus out-of-pocket expenses. Pursuant to a Fund Accounting Agreement
between the Company and BISYS, BISYS assists the Company in calculating net
asset values and provides certain other accounting services for the Fund
described therein, for an annual fee of $30,000, plus out-of-pocket expenses.
- --------------------------------------------------------------------------------
13
<PAGE> 18
- --------------------------------------------------------------------------------
OTHER EXPENSES
The Fund bears all costs of its operations other than expenses specifically
assumed by the Administrator, the Adviser, the Manager or other service
providers. In addition to the fees to service providers described above, the
costs borne by the Fund, some of which may vary between the classes, as noted
above, include: legal and accounting expenses; Directors' fees and expenses;
insurance premiums; custodian and transfer agent fees and expenses; expenses
incurred in acquiring or disposing of the Fund's portfolio securities; expenses
of registering the Fund's shares for sale with the SEC and of complying with
requirements of various state securities commissions; expenses of maintaining
the Fund's legal existence and of shareholders' meetings; and expenses of
preparing and distributing reports, proxy statements and prospectuses to
existing shareholders. Company expenses directly attributable to the Fund or to
a class are charged to the Fund or that class; other expenses are allocated
proportionately among all of the funds (including the Fund) and classes in the
Company in relation to the net assets of each fund and class. The organizational
expenses of the ESC Strategic Value Fund are considered expenses of the Company.
As such, the expenses will be allocated across all the Funds in the Company
based on the relative size of each Fund.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement and Portfolio Management
Agreement, the Manager places orders for the purchase and sale of portfolio
investments for the Fund's account with brokers or dealers it selects in its
discretion.
In effecting purchases and sales of portfolio securities for the account of the
Fund, the Manager will seek the best execution of the Fund's orders. Purchases
and sales of common stocks are generally placed by the Manager with
broker-dealers that, in the judgment of the Manager, provide prompt and reliable
execution at favorable security prices and reasonable commission rates.
Broker-dealers are selected on the basis of a variety of factors such as
reputation, capital strength, size and difficulty of order, sale of Fund shares
and research provided to the Manager. Broker-dealers selected to execute
portfolio transactions for the Fund may include affiliates of the Company, the
Adviser, the Administrator, the Manager or a manager of another fund of the
Company, provided the charge for any such transaction does not exceed usual and
customary levels. Subject to Section 28(e) of the Securities Exchange Act of
1934, the Manager may cause the Fund to pay commissions higher than another
broker-dealer would have charged if the Manager believes the commission paid is
reasonable in relation to the value of the brokerage and research services
received by the Manager. The Fund will not pay higher securities prices or
higher mark-ups or mark-downs, in recognition of the value of research services
provided by a securities dealer, on transactions with a securities dealer where
the dealer sells securities to the Fund or purchases them from the Fund, on a
principal basis. Purchases and sales of any portfolio debt securities for the
Fund are generally placed by the Manager with primary market makers for these
securities on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. The Fund may purchase securities during an underwriting, which
will include an underwriting fee paid to the underwriter. To the extent
permitted by, and subject to conditions of, applicable law and regulations, the
Fund may purchase securities from an underwriting syndicate of which an
affiliate of the Company, the Adviser, the Administrator or a Manager is a
member (but, except in limited circumstances, not directly from such affiliate).
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Manager may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
It is anticipated that the annual portfolio turnover rate for the Fund will not
exceed 100%.
- --------------------------------------------------------------------------------
14
<PAGE> 19
- --------------------------------------------------------------------------------
FUND SHARE VALUATION
The net asset value per share for each class of shares of the Fund is calculated
at 4:00 p.m. (Eastern time), Monday through Friday, on each day the New York
Stock Exchange is open for trading, which excludes the following business
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of each class of shares is computed by dividing the value of net
assets of each class (i.e., the value of the assets less the liabilities) by the
total number of such class's outstanding shares. All expenses, including fees
paid to the Adviser and BISYS, are accrued daily and taken into account for the
purpose of determining the net asset value.
Securities listed on an exchange are valued on the basis of the last sale prior
to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken for the exchange where the security is primarily traded. Portfolio
securities that are primarily traded on foreign exchanges may be valued with the
assistance of a pricing service and are valued at the preceding closing values
of such securities on their respective exchanges, except that when an occurrence
subsequent to the time a foreign security is valued is likely to have changed
such value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. Over-the-counter securities are valued on the basis of the bid price
at the close of business on each business day. Securities that market quotations
are not readily available for are valued at fair value as determined in good
faith by or at the direction of the Board of Directors. Notwithstanding the
above, bonds and other fixed-income securities are valued by using market
quotations and may be valued on the basis of prices provided by a pricing
service approved by the Board of Directors. All assets and liabilities initially
expressed in foreign currencies will be expressed for valuation purposes in U.S.
dollars at the mean between the bid and asked prices of such currencies against
U.S. dollars as last quoted by any major bank.
With respect to options contracts sold by the Fund, the Fund records the premium
received as an asset and equivalent liability, and thereafter adjusts the
liability to the market value of the option determined in accordance with the
preceding paragraph. The premium paid for an option purchased by the Fund is
recorded as an asset and subsequently adjusted to market value. Open futures
contracts are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case such positions will be
valued by or under the direction of the Directors.
- --------------------------------------------------------------------------------
15
<PAGE> 20
- --------------------------------------------------------------------------------
PRICING OF FUND SHARES
Orders for the purchase of shares of each class will be executed at the net
asset value per share of that class plus any applicable sales charge (the
"public offering price") next determined after an order has been received in
proper order by the Fund, or by an authorized broker, investment adviser or
Service Organization and transmitted to the Fund by 4:00 p.m. Eastern Time.
(See "Purchase of Fund Shares"). The sales charge on purchases of each class of
shares of the Fund is as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A AMOUNT OF SALES
PERCENTAGE OF CHARGE REALLOWED
-------------------- TO DEALERS AS A
PUBLIC NET PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
CLASS A SHARES PRICE INVESTED PRICE
-------------- -------- -------- ----------------
<S> <C> <C> <C>
Amount of Investment
Less than $100,000.......................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000............................. 3.50% 3.63% 3.00%
$250,000 but less than $500,000............................. 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000........................... 2.00% 2.04% 1.75%
$1,000,000 and over......................................... None None None
CLASS D SHARES
Amount of Investment
Less than $1,000,000........................................ 1.50% 1.52% 1.25%
$1,000,000 and over......................................... None None None
</TABLE>
The sales charge will not apply to shares of either class purchased by: (a)
trust, investment management and other fiduciary accounts managed by the
Adviser, the Manager or a manager of another fund of the Company pursuant to a
written agreement; (b) any person purchasing shares with the proceeds of a
distribution from a trust, investment management or other fiduciary account
managed by the Adviser, the Manager or a manager of another fund of the Company
pursuant to a written agreement; (c) any person purchasing shares with the
proceeds of a redemption of shares of a mutual fund, other than ESC Strategic
Funds, Inc., that were originally purchased with a sales load; (d) BISYS or any
of its affiliates; (e) Directors or officers of the Fund; (f) directors or
officers of BISYS, the Adviser, the Manager or a manager of another fund of the
Company, or affiliates or bona fide full-time employees of any of the foregoing
who have acted as such for not less than 90 days (including members of their
immediate families and their retirement plans or accounts); or (g) retirement
accounts or plans (or monies from retirement accounts or plans) for which there
is a written service agreement between the Company and the Plan Sponsor, so long
as such shares are purchased through the Distributor; or (h) any person
purchasing shares within an asset allocation or fee based program sponsored by a
financial services organization.
The sales charge also does not apply to shares sold to representatives of
selling brokers and members of their immediate families. In addition, the sales
charge does not apply to sales to bank trust departments, acting on behalf of
one or more clients, of shares having an aggregate value equal to or exceeding
$200,000.
See "Dividends, Distributions and Federal Income Tax," for an explanation of
circumstances in which a sales charge paid to acquire shares of a mutual fund
may not be taken into account in determining gain or loss on the disposition of
those shares.
QUANTITY DISCOUNTS IN THE SALES CHARGES
The following quantity discounts shall be available to: (a) an individual, his
or her spouse, and their children under the age of 21, and any trust, pension,
IRA, spousal IRA, profit sharing or other benefit plan for such persons; (b) a
trustee or other fiduciary of a single trust estate or a single fiduciary
account; (c) a pension, profit-sharing or other employee benefit plan qualified
under Section 401 of the Internal Revenue Code of 1986, and (d) tax-exempt
organizations under Section 501(c)(3) of the Code.
- --------------------------------------------------------------------------------
16
<PAGE> 21
- --------------------------------------------------------------------------------
Right of Accumulation
The Fund permits sales charges on Class A shares to be reduced through rights of
accumulation. For Class A shares, the schedule of reduced sales charges will be
applicable once the accumulated value of the account has reached $100,000. For
this purpose, the dollar amount of the qualifying concurrent or subsequent
purchase of Class A shares of the Fund is added to the net asset value of any
other Class A shares of funds in the Company owned at the time by the investor.
The sales charge imposed on the Class A shares being purchased will then be at
the rate applicable to the aggregate of Class A shares purchased. For example,
if the investor held Class A shares of the Fund and other funds in the Company
valued at $100,000 and purchased an additional $20,000 of shares of the Fund or
of another fund in the Company (totaling an investment of $120,000), the sales
charge for the $20,000 purchase would be at the next lower sales charge on the
schedule (i.e., the sales charge for purchases over $100,000 but less than
$250,000). There can be no assurance that investors will receive the cumulative
discounts that they may be entitled to unless, at the time of placing their
purchase order, the investors or their dealers make a written request for the
discount. The cumulative discount program may be amended or terminated at any
time. This particular privilege does not entitle the investor to any adjustment
in the sales charge paid previously on purchases of shares of the Fund or
another fund in the Company. If the investor knows that he will be making
additional purchases of shares in the future, he may wish to consider executing
a Letter of Intent.
Letter of Intent
The schedule of reduced sales charges is also available to Class A investors who
enter into a written Letter of Intent providing for the purchase, within a
13-month period, of Class A shares of the Fund. Shares of the Fund previously
purchased during a 90-day period prior to the date of receipt by the Fund of the
Letter of Intent that are still owned by the shareholder may also be included in
determining the applicable reduction, provided the shareholder or the dealer
notifies the Fund of such prior purchases.
A Letter of Intent permits an investor to establish a total investment goal for
the Fund to be achieved by any number of investments over a 13-month period.
Each investment made during the period will receive the reduced sales commission
applicable to the amount represented by the goal as if it were a single
investment. A number of shares totaling 5% of the dollar amount of the Letter of
Intent will be held in escrow by the Distributor in the name of the shareholder.
The initial purchase under a Letter of Intent must be equal to at least 5% of
the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, or the Fund to
sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the Letter of Intent provides that a
sufficient number of escrowed shares will be liquidated to reimburse the
Distributor to the extent of the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges actually
paid. If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth under "Right of Accumulation," but there
will be no retroactive reduction of sales charges on previous purchases. At any
time while a Letter of Intent is in effect, a shareholder may, by written notice
to the Fund, increase the amount of the stated goal. In that event, shares
purchased during the previous 90-day period and still owned by the shareholder
will be included in determining the applicable sales charge reduction. The 5%
escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase Fund shares pursuant to a Letter of Intent
should carefully read the application for Letter of Intent that is available
from the Fund.
- --------------------------------------------------------------------------------
17
<PAGE> 22
- --------------------------------------------------------------------------------
MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Fund is $1,000, except that the minimum is
$500 for an IRA or other qualified retirement plan. Any subsequent investments
must be at least $50, including an IRA or qualified retirement plan investment.
All initial investments should be accompanied by a completed Purchase
Application. A Purchase Application accompanies this Prospectus. However, a
separate application is required for IRA and other qualified retirement plan
investments. The Fund reserves the right to reject purchase orders. The officers
of the Fund are authorized to waive the minimum initial and subsequent
investment requirements of the Fund.
- --------------------------------------------------------------------------------
PURCHASE OF FUND SHARES
All funds received by the Fund are invested in full and fractional shares of the
indicated class of the Fund. Certificates for shares are not issued. BISYS
maintains records of each shareholder's holdings of Fund shares, and each
shareholder receives a statement of transactions, holdings and dividends. The
Fund reserves the right to reject any purchase, including an exchange from
another Fund of the Company.
The Fund offers investors a choice of two classes of shares that differ
principally with respect to sales charges and the rate of expenses to which they
are subject. Investors may select the class which better suits their investment
needs.
In selecting between the classes, a prospective investor should consider the
impact of the sales charge together with the cumulative effect of the Service
and Distribution Fees for each class over the anticipated period of investment,
as well as the effect of any sales charge waivers to which the investor may be
entitled. Investors should be aware that other expenses attributable to each
class may differ slightly due to the allocation to each class of certain "class
specific" expenses, including distribution and marketing expenses and federal
and state securities registration fees. Finally, investors should be aware that
persons selling shares of the Fund may receive different levels of compensation
for sales of Class A and Class D shares. See "Purchase of Fund Shares" and
"Management of the Fund -- The Distributor."
An investment may be made using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service
Organization. Shares are available to new and existing shareholders through
authorized brokers, investment advisers and Service Organizations. To make an
investment using this method, a Purchase Application must have been completed
and the customer must notify the broker, investment adviser or Service
Organization of the amount to be invested. The broker will then contact the Fund
to place the order.
Orders received by the broker or Service Organization in proper order prior to
the determination of net asset value and transmitted to the Fund prior to the
close of its business day (which is currently 4:00 p.m., Eastern time), will
become effective that day. Brokers who receive orders are obligated to transmit
them promptly. Written confirmation of an order should be received a few days
after the broker has placed the order.
From the Distributor. Shares may be purchased directly from the Distributor by
sending a completed Purchase Application together with a money order, check or
other negotiable bank draft to ESC Strategic Funds, Inc., P.O. Box 182487,
Columbus, Ohio 43218-2487. No third party or foreign checks will be accepted.
By Wire. Investments may be made directly through the use of wire transfers of
Federal funds. An investor's bank may wire Federal funds to the Fund. In most
cases, the bank will either be a member of the Federal Reserve Banking System or
have a relationship with a bank that is. The bank will normally charge a fee for
handling the transaction. A
- --------------------------------------------------------------------------------
18
<PAGE> 23
- --------------------------------------------------------------------------------
completed Account Application must be overnighted to the Fund at ESC Strategic
Funds, Inc. c/o BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-8021. Notification must be given to the Fund at 1-800-261-FUND (3863)
prior to 4:00 p.m., Eastern time, of the wire date. Federal funds purchases will
be accepted only on a day on which the Funds, the Distributor and the custodian
bank are all open for business. To purchase shares by a Federal funds wire,
investors should first contact the Fund for complete wiring instructions.
Other Purchase Information Requests in "proper order" must include the
following documentation: (a) a letter of instruction, if required, signed by all
registered owners of the shares in the exact names that they are registered in;
(b) any required signature guarantees (see "Signature Guarantees" below); and
(c) other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit sharing
plans and other organizations.
Institutional Accounts. Bank trust departments and other institutional
accounts, not subject to sales charges, may place orders directly with the Fund
by telephone at 1-800-261-FUND(3863).
Automatic Investment Program. An eligible shareholder may also participate in
the ESC Strategic Automatic Investment Program, an investment plan that
automatically debits money from the shareholder's bank account and invests it in
the Fund through the use of electronic funds transfers or automatic bank drafts.
Shareholders may commence their participation in this program with a minimum
initial investment of $1,000 and may elect to make subsequent investments by
transfers of a minimum of $50 on either the fifth or twentieth day of each month
or calendar quarter into their established Fund account. Contact the Fund for
more information about the ESC Strategic Automatic Investment Program.
- --------------------------------------------------------------------------------
RETIREMENT PLAN ACCOUNTS
The Fund may be used as a funding medium for IRAs and other qualified retirement
plans ("Plans"). The minimum initial investment for an IRA or a Plan is $500.
Completion of a special application is required in order to create such an
account. Fund shares may also be purchased for IRAs and Plans established with
other authorized custodians. Contributions to IRAs are subject to prevailing
amount limits set by the Internal Revenue Service. For more information about
IRAs and other Plan accounts, call the Fund at 1-800-261-FUND(3863).
- --------------------------------------------------------------------------------
EXCHANGE OF FUND SHARES
The Fund offers two convenient ways to exchange shares for shares of another
fund in the Company. Shares of a particular class of the Fund may be exchanged
only for shares of that same class in another fund, with no sales charge. Before
engaging in an exchange transaction, a shareholder should obtain and read
carefully a prospectus for the fund into which the exchange will occur. A
shareholder may not exchange Fund shares for shares of another fund that is not
qualified for sale in the state of the shareholder's residence. The minimum
amount for an initial exchange is $2,000. There is no minimum for subsequent
exchanges, and no service fee is imposed for an exchange. The Company may
terminate or amend the terms of the exchange privilege at any time upon 60 days'
notice to shareholders.
An exchange is taxable as a sale of a security and a gain or loss may be
recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction. See "Dividends,
Distributions and Federal Income
- --------------------------------------------------------------------------------
19
<PAGE> 24
- --------------------------------------------------------------------------------
Tax" for an explanation of circumstances where a sales charge paid to acquire
shares of the Fund may not be taken into account in determining gain or loss on
the disposition of those shares.
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the respective net asset values next determined following
receipt of the request by the Fund containing the information described below.
Exchange by Mail. To exchange Fund shares by mail, shareholders should simply
send a letter of instruction to the Fund. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the name of the Fund and of the fund into which the exchange is
to be made; (d) the dollar or share amount to be exchanged; and (e) the
signatures of all registered owners or authorized parties.
Exchange by Telephone. To exchange Fund shares by telephone or to ask any
questions, shareholders may call the Fund at 1-800-261-FUND(3863). Please be
prepared to give the telephone representative the following information: (a) the
account number, social security number and account registration; (b) the class
of shares to be exchanged; (c) the name of the Fund and of the fund into which
the exchange is to be made; and (d) the dollar or share amount to be exchanged.
Telephone exchanges are available only if the shareholder so indicates by
checking the "yes" box on the Purchase Application. The Fund employs procedures,
including recording telephone calls, testing a caller's identity, and sending
written confirmation of telephone transactions, designed to give reasonable
assurance that instructions communicated by telephone are genuine, and to
discourage fraud. To the extent that the Fund does not follow such procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Company
reserves the right to suspend or terminate the privilege of exchanging by mail
or by telephone at any time. Telephone Redemption and Telephone Exchange will be
suspended for a period of 10 days following a telephonic address change.
- --------------------------------------------------------------------------------
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business day.
Shares will be redeemed at the net asset value next determined after a
redemption request in good order has been received by the Fund. See
"Determination of Net Asset Value." A redemption may be a taxable transaction
involving the recognition of a gain or loss.
Where the shares to be redeemed have been purchased by check, the redemption
request will be held until the purchasing check has cleared, which may take up
to 15 days. Shareholders may avoid this delay by investing through wire
transfers of Federal funds. During the period prior to the time the shares are
redeemed, the shareholder will continue to be a record owner of shares for
purposes of receiving any declared dividends and will be entitled to exercise
all other beneficial rights of ownership.
Once the shares are redeemed, the Fund will ordinarily send the proceeds by
check to the shareholder at the address of record on the next business day. The
Fund may, however, take up to three days to make payment, although this will not
be the customary practice. Also, if the New York Stock Exchange is closed (or
when trading is restricted) for any reason other than the customary weekend or
holiday closing or if an emergency condition as determined by the SEC merits
such action, the Fund may suspend redemptions or postpone payment dates.
Redemption Methods. To ensure acceptance of a redemption request, it is
important that shareholders follow the procedures described below. Although the
Fund has no
- --------------------------------------------------------------------------------
20
<PAGE> 25
- --------------------------------------------------------------------------------
present intention to do so, the Fund reserves the right to refuse or to limit
the frequency of any telephone or wire redemptions. Of course, it may be
difficult to place orders by telephone during periods of severe market or
economic change, and a shareholder should consider alternative methods of
communications, such as couriers. The Fund's services and their provisions may
be modified or terminated at any time by the Fund. If the Fund terminates any
particular service, it will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
Requests in "proper order" must include the following documentation: (a) a
letter of instruction, if required, signed by all registered owners of the
shares in the exact names in which they are registered; (b) any required
signature guarantees (see "Signature Guarantees" below); and (c) other
supporting legal documents, if required, in the case of estates, trusts,
guardianships, custodianships, corporations, pension and profit sharing plans
and other organizations.
A shareholder may redeem shares using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service Organization. The
shareholder should contact his or her broker, investment adviser or Service
Organization and provide instructions to redeem shares. These organizations are
responsible for the prompt transmission of orders. The broker will contact the
Fund and place a redemption trade. The broker may charge a fee for this service.
By Mail. Shareholders may redeem shares by sending a letter directly to the
Fund. To be accepted, a letter requesting redemption must include: (a) the name
of the Fund, class of shares and account registration of the shares being
redeemed; (b) the account number; (c) the amount to be redeemed; (d) the
signatures of all registered owners; and (e) if the redemption request is to be
sent to someone other than the registered address, a signature guarantee is
necessary by any eligible guarantor institution including members of national
securities exchanges, commercial banks or trust companies, brokers-dealers,
credit unions and savings associations.
By Telephone. Shareholders may redeem shares by calling the Fund toll free at
1-800-261-FUND(3863). Be prepared to give the telephone representative the
following information: (a) the account number, social security number and
account registration; (b) the name of the Fund and the class of shares being
redeemed; and (c) the amount to be redeemed. Telephone redemptions are available
only if the shareholder so indicates by checking the "yes" box on the Purchase
Application or on the Optional Services Form. The Fund employs procedures,
including recording telephone calls, testing a caller's identity, and sending
written confirmation of telephone transactions, designed to give reasonable
assurance that instructions communicated by telephone are genuine, and to
discourage fraud. To the extent that the Fund does not follow such procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. Telephone
Redemption and Telephone Exchange will be suspended for a period of 10 days
following a telephonic address change.
By Wire. Shareholders may redeem shares by contacting the Fund by mail or
telephone and instructing the Fund to send a wire transmission to the
shareholder's bank.
The shareholder's instructions should include: (a) the account number, social
security number and account registration; (b) the name of the Fund and the class
of shares being redeemed; and (c) the amount to be redeemed. Wire redemptions
can be made only if the "yes" box has been checked on the shareholder's Purchase
Application, and a copy is attached of a void check on an account where proceeds
are to be wired. The bank may charge a fee for receiving a wire payment on
behalf of its customer.
Systematic Withdrawal Plan. An owner of $12,000 or more of shares of the Fund
may elect to have periodic redemptions made from his account to be paid on a
monthly, quarterly, semiannual or annual basis. The maximum payment per year is
12% of the account value at the time of the election. A sufficient number of
shares to make the
- --------------------------------------------------------------------------------
21
<PAGE> 26
- --------------------------------------------------------------------------------
scheduled redemption will normally be redeemed on the date selected by the
shareholder. Depending on the size of the payment requested and fluctuation in
the net asset value, if any, of the shares redeemed, redemptions for the purpose
of making such payments may reduce or even exhaust the account. A shareholder
may request that these payments be sent to a predesignated bank or other
designated party. Capital gains and dividend distributions paid to the account
will automatically be reinvested at net asset value on the distribution payment
date.
Reinstatement Privilege. A shareholder who has redeemed shares on which a sales
charge was paid may reinvest, without a sales charge, up to the full amount of
such redemption at the net asset value determined at the time of the
reinvestment within 30 days of the original redemption. This privilege must be
effected within 30 days of the redemption. The shareholder must reinvest in the
same class of the Fund and the same account from which the shares were redeemed.
A redemption is a taxable transaction and gain may be recognized for Federal
income tax purposes even if the reinstatement privilege is exercised. Any loss
realized upon the redemption will not be recognized as to the number of shares
acquired by reinstatement, except through an adjustment in the tax basis of the
shares so acquired. See "Dividends, Distributions and Federal Income Tax" for an
explanation of circumstances where a sales charge paid to acquire shares of the
Fund may not be taken into account in determining gain or loss on the
disposition of those shares.
Redemption of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Fund reserves the right to redeem, on not less
than 30 days' notice, a Fund account that has been reduced by a shareholder (not
by market action) to $500 or less. However, if during the 30-day notice period
the shareholder purchases sufficient shares to bring the value of the account
above $500, the account will not be redeemed.
Redemption in Kind. All redemptions of Fund shares shall be made in cash,
except that the commitment to redeem shares in cash extends only to redemption
requests made by each shareholder during any 90-day period of up to the lesser
of $250,000 or 1% of the net asset value of the Fund at the beginning of such
period. This commitment is irrevocable without the prior approval of the SEC. In
the case of redemption requests by shareholders in excess of such amounts, the
Board of Directors reserves the right to have the Fund make payment, in whole or
in part, in readily marketable securities or other assets, in case of an
emergency or any time a cash distribution would impair the liquidity of the Fund
to the detriment of the existing shareholders. In this event, the securities
would be valued in the same manner as the securities of the Fund are valued
generally. If the recipient were to sell such securities, he or she would incur
brokerage charges.
Signature Guarantees. To protect shareholder accounts, the Fund and the
Administrator from fraud, signature guarantees are required to enable the Fund
to verify the identity of the person who has authorized a redemption from an
account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) and
the registered address, (2) a redemption of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Fund at 1-800-261-FUND (3863) for further details.
- --------------------------------------------------------------------------------
22
<PAGE> 27
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS, AND
FEDERAL INCOME TAXATION
The Fund intends to qualify annually as a regulated investment company pursuant
to the provisions of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify, the Fund must meet certain income,
distribution and diversification requirements. If the Fund qualifies as a
regulated investment company and timely distributes all of its taxable income,
the Fund generally will not pay any U.S. federal income or excise tax.
The Fund intends to distribute at least annually to its shareholders all of its
investment company taxable income (which includes, among other items, dividends
and interest, less expenses and the excess, if any, of net short-term capital
gains over net long-term capital losses). The Fund also intends to distribute,
at least annually, substantially all net capital gain (the excess of net
long-term capital gains over net short-term capital losses). In determining
amounts of capital gains to be distributed, any capital loss carryovers from
prior years will be applied against current year capital gains.
Distributions will be paid in additional Fund shares of the relevant class based
on the net asset value of that class at the close of business of the payment
date of the distribution, unless the shareholder elects in writing, not less
than five full business days prior to the record date, to receive such
distributions in cash.
Any dividend or other distribution paid by the Fund has the effect of reducing
the net asset value per share on the record date by the amount thereof.
Therefore, a dividend or other distribution paid shortly after a purchase of
shares would represent, in substance, a return of capital to the shareholder (to
the extent it is paid on the shares so purchased), even though subject to income
taxes, as discussed below.
Distributions of investment company taxable income (regardless of whether
derived from dividends, interest or short-term capital gains) will be taxable to
shareholders as ordinary income. If a portion of the Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may qualify for the deduction for dividends received by corporations.
Distributions of net long-term capital gains designated by the Fund as capital
gain dividends will be taxable as long-term capital gains, regardless of how
long a shareholder has held his Fund shares. Distributions are taxable in the
same manner whether received in additional shares or in cash.
A distribution will be treated as paid on December 31 of the calendar year if it
is declared by the Fund during October, November, or December of that year to
shareholders of record in such a month and paid by the Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
Any gain or loss realized by a shareholder upon the sale or other disposition of
shares of the Fund, or upon receipt of a distribution in complete liquidation of
the Fund, generally will be a capital gain or loss that will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.
Under certain circumstances, the sales charge incurred in acquiring shares of
the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies when Fund shares are exchanged
within 90 days after the date they were purchased for shares of another fund
without payment of a sales charge or at a reduced sales charge. In that case,
the gain or loss recognized on the exchange will be determined by excluding from
the tax basis of the shares exchanged all or a portion of the sales charge
incurred in acquiring those shares. This exclusion applies to the extent that
the otherwise applicable sales charge with respect to the newly acquired shares
is reduced as a result
- --------------------------------------------------------------------------------
23
<PAGE> 28
- --------------------------------------------------------------------------------
of having incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge paid for the new shares.
The Fund may be required to withhold Federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where the Fund or a shareholder has been
notified by the Internal Revenue Service that the shareholder is subject to
backup withholding. Corporate shareholders and certain other shareholders
specified in the Code are exempt from backup withholding. Backup withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
Further information relating to tax consequences is contained in the SAI.
Shareholders will be notified annually by the Company as to the federal tax
status of distributions made by the Fund. Depending on the residence of the
shareholder for tax purposes, distributions also may be subject to state and
local taxes, including withholding taxes. Foreign shareholders may, for example,
be subject to special withholding requirements. Special tax treatment, including
a penalty on certain pre-retirement distributions, is accorded to accounts
maintained as IRAs. Shareholders should consult their own tax advisers as to the
federal, state and local tax consequences of ownership of Fund shares in their
particular circumstances.
If you elect to receive distributions in cash and checks (1) are returned and
marked as "undeliverable" or (2) remain uncashed for six months, your cash
election will be changed automatically and your future dividend and capital
gains distributions will be reinvested in the Fund at the per share net asset
value determined as of the date of payment of the distribution. In addition, any
undeliverable check or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation.
- --------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES AND
INVESTMENT PRACTICES
U.S. Government Securities. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. U.S.
Treasury bills, that have a maturity of up to one year, are direct obligations
of the United States and are the most frequently issued marketable U.S.
Government security. The U.S. Treasury also issues securities with longer
maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt securities
issued by U.S. Government-sponsored enterprises and federal agencies. Some
obligations of agencies are supported by the full faith and credit of the United
States or by U.S. Treasury guarantees, such as mortgage-backed certificates
issued by the Government National Mortgage Association; others, such as
obligations of the Federal Home Loan Banks, Federal Farm Credit Bank, Bank for
Cooperatives, Federal Intermediate Credit Banks and the Federal Land Bank, are
guaranteed by the right of the issuer to borrow from the U.S. Treasury; others,
such as obligations of the Federal National Mortgage Association, are supported
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as obligations of
the Student Loan Marketing Association and the Tennessee Valley Authority, are
backed only by the credit of the agency or instrumentality issuing the
obligation. In the case of obligations not backed by the full faith and credit
of the United States, the investor must look principally to the agency issuing
or guaranteeing the obligation for ultimate repayment.
Bank Obligations. These obligations include negotiable certificates of deposit
and bankers' acceptances. The Fund limits its bank investments to
dollar-denominated ob-
- --------------------------------------------------------------------------------
24
<PAGE> 29
- --------------------------------------------------------------------------------
ligations of U.S. or foreign banks that have more than $1 billion in total
assets at the time of investment and, in the case of U.S. banks, are members of
the Federal Reserve System or are examined by the Comptroller of the Currency,
or whose deposits are insured by the Federal Deposit Insurance Corporation.
Commercial Paper. Commercial paper includes short-term unsecured promissory
notes, variable rate demand notes and variable rate master demand notes issued
by domestic and foreign bank holding companies, corporations and financial
institutions, as well as similar instruments issued by government agencies and
instrumentalities. The Fund has established standards of creditworthiness for
issuers of such investments.
Corporate Debt Securities. The Fund's investments in U.S. dollar- or foreign
currency-denominated corporate debt securities of domestic or foreign issuers
are limited to corporate debt securities (convertible and non-convertible bonds,
corporate bonds, debentures, notes and other similar corporate debt instruments)
that meet the previously disclosed minimum ratings criteria established for the
Fund under the direction of the Board of Directors and the Fund's Manager or, if
unrated, are in the Manager's opinion comparable in quality to corporate debt
securities in which the Fund may invest. See "The Fund." The rate of return or
return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Repurchase Agreements. Securities held by the Fund may be subject to repurchase
agreements. A repurchase agreement is a transaction where the seller of a
security commits itself at the time of the sale to repurchase that security from
the buyer at a mutually agreed-upon time and price. These agreements may be
considered to be loans by the purchaser collateralized by the underlying
securities. These agreements will be fully collateralized and the collateral
plus accrued interest will be marked-to-market daily. The Fund will enter into
repurchase agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of the Manager, present minimal credit risks
in accordance with guidelines adopted by the Board of Directors. In the event of
default by the seller under the repurchase agreement, the Fund may have problems
in exercising its rights to the underlying securities and may experience time
delays in connection with the disposition of such securities.
Loans of Portfolio Securities. To increase current income the Fund may lend its
portfolio securities worth up to 5% of the Fund's total assets to brokers,
dealers and financial institutions, provided certain conditions are met,
including the condition that each loan is secured continuously by collateral
maintained on a daily mark-to-market basis in an amount at least equal to the
current market value of the securities loaned. For further information, see the
SAI.
Variable and Floating Rate Obligations and Master Demand Notes. The Fund may,
from time to time, buy variable or floating rate obligations issued by
corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year. These obligations may
have demand features which permit the holder to put the securities to a
remarketing agent or other entity at designated time intervals and on specified
notice. The obligation of the issuer of the put to repurchase the securities may
be backed by a letter of credit or other obligation issued by a financial
institution. The repurchase price is ordinarily par plus accrued and unpaid
interest. Generally, the remarketing agent will adjust the interest rate every
seven days (or at other specified intervals) in order to maintain the interest
rate at the prevailing rate for securities with a seven-day or other designated
maturity. The Fund's investments in demand instruments where the Fund will not
receive the principal note amount within seven days' notice, in combination with
the Fund's other investments in illiquid instruments, will be limited to an
aggregate total of 15% of the Fund's net assets.
The Fund may purchase inverse floating rate obligations with coupon rates that
vary inversely to the market rate of interest of the
- --------------------------------------------------------------------------------
25
<PAGE> 30
- --------------------------------------------------------------------------------
indexed instrument. To the extent the interest rate on the inverse floater
varies more than the variation in the designated index, it may be deemed to be
leveraged. Certain inverse floaters may also be deemed illiquid.
The Fund may also buy variable rate master demand notes. The terms of these
obligations permit the Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Manager will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, the Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the criteria set
forth in this Prospectus for commercial paper obligations.
Foreign Securities. The Fund may purchase foreign securities traded in the
United States or in foreign markets. The Fund may invest directly in foreign
equity securities and in securities represented by EDRs, ADRs and similar
instruments that are developed from time to time. ADRs are dollar-denominated
receipts generally issued by domestic banks, which represent the deposit with
the bank of a security of a foreign issuer, and which are publicly traded on
exchanges or over-the-counter in the United States. EDRs are receipts similar to
ADRs and are issued and traded in Europe.
There are certain risks associated with investments in unsponsored ADR programs.
Because the non-U.S. company does not actively participate in the creation of
the ADR program, the underlying agreement for service and payment will be
between the depository and the shareholders. The company issuing the stock
underlying the ADRs pays nothing to establish the unsponsored facility, as fees
for ADR issuance and cancellation are paid by brokers. Investors directly bear
the expenses associated with certificate transfer, custody and dividend payment.
In addition, in an unsponsored ADR program, there may be several depositories
with no defined legal obligations to the non-U.S. company. The duplicate
depositories may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports.
The Fund may invest directly in both sponsored and unsponsored U.S. dollar- or
foreign currency-denominated corporate securities (including preferred or
preference stock), certificates of deposit and bankers' acceptances issued by
foreign banks, U.S. dollar-denominated bonds sold in the United States ("Yankee
bonds"), other bonds denominated in U.S. dollars or other currencies and sold to
investors outside the United States ("Eurobonds"), obligations of foreign
governments or their subdivisions, agencies and instrumentalities, international
agencies and supranational entities, non-government foreign corporate debt
securities and foreign, mortgage and other, asset-backed securities. There may
be less information available to the Fund concerning unsponsored securities, for
which the paying agent is located outside the United States. See "Risks of
Investing in the Fund."
Forward Foreign Currency Transactions. The Fund may enter into forward foreign
currency exchange contracts in order to protect against uncertainty in the level
of future foreign exchange rates. See the SAI for fur-
- --------------------------------------------------------------------------------
26
<PAGE> 31
- --------------------------------------------------------------------------------
ther information concerning forward foreign currency transactions.
Futures Contracts and Options. The Fund may purchase and sell futures contracts
on securities, currencies, and indices of securities, and write and sell put and
call options on securities, currencies and indices of securities as a hedge
against changes in interest rates, stock prices, currency fluctuations and other
market developments, provided that not more than 5% of the Fund's net assets are
committed to margin deposits on futures contracts and premiums for options. See
the SAI for further information about futures and options. See "Risks of
Investing in the Fund" for a discussion of risks related to investing in futures
and options.
Investments in Real Estate or Interests in Real Estate Investment Trusts. The
Fund may invest in equity or debt real estate investment trusts ("REITs"), real
estate development and real estate operating companies, and other real estate
related businesses. The Fund intends to invest the REIT portion of its portfolio
primarily in equity REITs, which are trusts that sell shares to investors and
use the proceeds to invest in real estate or interest in real estate. A REIT may
focus on particular projects, such as apartment complexes or shopping centers,
or geographic regions, such as the Southeastern United States, or both. Debt
REITs invest in obligations secured by mortgages on real property or interests
in real property. See "Risks of Investing in the Fund" for a discussion of risks
related to REITs.
Short Sales. The Fund may from time to time sell securities short. In a short
sale the Fund sells securities it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. Risks
associated with short sales of securities are described under "Risks of
Investing in the Fund."
To complete a short sale, the Fund must arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by the Fund from
the short sale are retained by the broker until the Fund replaces the borrowed
securities. In borrowing the securities to be delivered to the buyer, the Fund
becomes obligated to replace the securities borrowed at their market price at
the time of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or obligations of the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"). In addition, the Fund will
place in a segregated account with its custodian an amount of cash or U.S.
Government Securities equal to the difference, if any, between (a) the market
value of the securities sold at the time they were sold short, and (b) any cash
or U.S. Government Securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the Fund will maintain the segregated
account daily at a level so that (a) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will equal the current market value of the securities sold short, and (b)
the amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short. A maximum of
25% of the value of the Funds' net assets will be, when added together, (a)
deposited as collateral in short sales and (b) allocated to segregated accounts
in connection with short sales. For further limitations on the Fund's short
sales, see "Risks of Investing in the Fund."
Short Sales Against the Box. The Fund may, in addition to engaging in short
sales as described above, enter into a short sale of common stock where, when
the short position is open, the Fund owns an equal amount of preferred stock or
debt securities, convertible or exchangeable without payment of further
consideration, into an equal number of shares of the common stock sold short.
This kind of short sale, which is described as one "against the box," will be
- --------------------------------------------------------------------------------
27
<PAGE> 32
- --------------------------------------------------------------------------------
entered into by the Fund for the purpose of receiving a portion of the interest
earned by the executing broker from the proceeds of the sale. The proceeds of
the sale will be held by the broker until the settlement date, when the Fund
delivers the convertible securities to close out its short position. Although,
prior to delivery, the Fund will have to pay an amount equal to any dividends
paid on the common stock sold short, the Fund will receive the dividends from
the preferred stock or interest from the debt securities convertible into the
stock sold short, plus a portion of the interest earned from the proceeds of the
short sale. The Fund will deposit, in a segregated account with its custodian,
convertible preferred stocks or convertible debt securities in connection with
short sales against the box.
Other: The SAI contains information on other investments and investment
practices authorized for the Fund, each of which is currently expected to affect
less than 5% of the Fund's assets. These investments and practices include:
investing on a when-issued or delayed delivery basis; warrants; rights;
investment companies and investment funds; mortgage-related securities and other
asset-backed securities; structured securities; swaps; zero coupon and deferred
interest obligations; pay-in-kind securities; custodial receipts, trade claims,
loan participations, equity-linked securities, sovereign debt obligations,
arbitrage, foreign index-linked instruments, venture capital and leveraged
buy-outs.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The following restrictions are applicable to the Fund.
(1) The Fund may not purchase securities or instruments which would cause 25% or
more of the market value of its total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is no
limit with respect to investments in the U.S. Government, its agencies and
instrumentalities.
(2) The Fund may not borrow money, except that the Fund may borrow from banks up
to 10% of the current value of its total net assets for temporary or emergency
purposes. The Fund will make no purchases if its outstanding borrowings exceed
5% of its total assets.
(3) The Fund may not make loans, except that the Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements with respect to its portfolio
securities, and (c) purchase the types of debt instruments described in this
Prospectus or the SAI.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of the Fund that may be changed only when permitted by
law and approved by the holders of a majority of the Fund's outstanding voting
securities as described under "Other Information -- Voting."
Additionally, as a non-fundamental policy, the Fund may not invest more than 15%
of the value of its net assets in investments which are illiquid, or not readily
marketable (including repurchase agreements having maturities of more than seven
calendar days and variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount within seven days' notice).
Except for limits on borrowing and on investments in illiquid securities, if a
percentage restriction on investment policies or the investment or use of assets
set forth in this Prospectus are adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not be
considered a violation.
- --------------------------------------------------------------------------------
28
<PAGE> 33
- --------------------------------------------------------------------------------
OTHER INFORMATION
CAPITALIZATION
ESC Strategic Funds, Inc. was organized as a Maryland corporation on November
24, 1993, and currently consists of seven separately managed portfolios,
including the Fund. (The Company has one additional portfolio that is currently
inactive.) The Board of Directors may establish additional portfolios in the
future. The capitalization of the Company consists solely of 650 million shares
of common stock with a par value of $0.001 per share. When issued, shares of the
Fund are fully paid, non-assessable and freely transferable.
VOTING
Shareholders have the right to vote in the election of Directors and on any and
all matters that, by law or under the provisions of the Articles of
Incorporation, they may be entitled to vote on. The Company is not required to
hold regular annual meetings of the Fund's shareholders and does not intend to
do so. The Fund's shareholders vote separately on matters affecting only that
Fund and shareholders of each class vote separately on matters affecting only
that class, such as the service and distribution plan for that class.
The Company has received an order of exemption from the Securities and Exchange
Commission that permits it to retain new Managers that are unaffiliated with the
Adviser without obtaining shareholder approval.
The Articles of Incorporation provide that the holders of not less than a
majority of the outstanding shares of the Company may remove a person serving as
Director. The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Other Information -- Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate voting
for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of the Fund, a class or the Company, as
applicable, means the vote of the lesser of: (1) 67% of the shares of the Fund
(a class or the Company) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2) more than 50%
of the outstanding shares of the Fund (a class or the Company).
PERFORMANCE INFORMATION
The Fund may, from time to time, include the yield and total return for shares
(including each class) in advertisements or reports to shareholders or
prospective investors. The methods used to calculate the yield and total return
of the Fund are mandated by the SEC.
Quotations of "yield" will be based on the investment income per share during a
particular 30-day (or one month) period (including dividends and interest), less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the maximum public offering price
per share for each class on the last day of the period.
Quotations of yield reflect the Fund's (and its classes') performance only
during the particular period on which the calculations are based. Yields will
vary based on changes in market conditions, the level of interest rates and the
level of the Fund's and each class's expenses, including class-specific
expenses, and no reported performance figure should be considered an indication
of performance that may be expected in the future. Quotations of average annual
total return will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in shares of the Fund (or class) over
periods of 1, 5 and 10 years (up to the life of the Fund), reflect the deduction
of a proportional share of Fund (and class-specific expenses) on an annual
basis, and assume that all dividends and distributions are reinvested when paid.
Performance information for the Fund may be compared to various unmanaged
indices,
- --------------------------------------------------------------------------------
29
<PAGE> 34
- --------------------------------------------------------------------------------
such as the Standard & Poor's 500 Stock Index, the Dow Jones Industrial Average,
indices prepared by Lipper Analytical Services, and other entities or
organizations which track the performance of investment companies. Any
performance information should be considered in light of the Fund's investment
objectives and policies, characteristics and quality of the Fund and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Fund, see the SAI.
ACCOUNT SERVICES
All transactions in shares of the Fund will be reflected in a statement for each
shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Fund has been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
BISYS, an affiliate of the Company's Administrator, provides fund accounting
functions for the Fund, and provides personnel and facilities to perform
shareholder servicing and transfer agency-related services for the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to ESC Strategic Funds Inc., P.O.
Box 182487, Columbus, Ohio 43218-2487.
General and Account Information:
(800) 261-FUND(3863).
- --------------------------------------------------------------------------------
30
<PAGE> 35
- --------------------------------------------------------------------------------
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as follows:
AAA -- judged to be the best quality and they carry the smallest degree of
investment risk; AA -- judged to be of high quality by all standards -- together
with the Aaa group, they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured --
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; BA -- judged to have speculative
elements, their future cannot be considered as well assured; B -- generally lack
characteristics of the desirable investment; CAA -- are of poor standing -- such
issues may be in default or there may be present elements of danger with respect
to principal or interest; CA -- speculative in a high degree, often in default;
C -- lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security meets all of the criteria for a
particular rating and is at the high end of its rating category; the modifier 2
indicates a mid-range ranking; and modifier 3 indicates a ranking toward the
lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- has an adequate
capacity to pay interest and repay principal; whereas issues normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. This
group is the lowest which qualifies for commercial bank investment. BB, B, CCC,
CC, C -- have significant speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with terms of the obligations;
BB indicates the highest grade and C the lowest within the speculative rating
categories. D -- in payment default -- the "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
difference between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
- --------------------------------------------------------------------------------
31
<PAGE> 36
- --------------------------------------------------------------------------------
broad-based access to the market for refinancing; MIG 2/VMIG 2 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 -- denotes favorable quality, all security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades; MIG 4/VMIG 4 -- denotes adequate quality, protection commonly
regarded as required of an investment security is present, but there is specific
risk; SQ -- denotes speculative quality, instruments in this category lack
margins of protection.
DESCRIPTION OF MOODY'S COMMERCIAL
PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows:
PRIME-1 -- issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; PRIME-2 -- issuers (or
supporting institutions) have a strong ability for repayment of senior short-
term promissory obligations; PRIME-3 -- issuers (or supporting institutions)
have an acceptable ability for repayment of senior short-term promissory
obligations; NOT PRIME -- issuers rated Not Prime do not fall within any of the
Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR
CORPORATE AND MUNICIPAL BONDS:
INVESTMENT GRADE RATINGS: AAA -- the highest rating assigned by S&P -- capacity
to pay interest and repay principal is extremely strong; AA -- has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A -- has strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories; BBB -- has an adequate capacity to pay interest and repay
principal -- whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATINGS: BB, B, CCC, CC, C -- debt rated in these categories
is regarded as having significant speculative characteristics with respect to
capacity to pay interest and repay principal -while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI -- reserved for
income bonds on which no interest is being paid; D -- in default, and payment of
interest and/or repayment of principal is in arrears. PLUS (+) OR MINUS
(-) -- the ratings from "AA" to "CCC" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
DESCRIPTION OF S&P'S RATING FOR
MUNICIPAL NOTES AND SHORT-TERM
MUNICIPAL DEMAND OBLIGATIONS
Rating categories are as follows: SP-1 -- has a strong capacity to pay principal
and interest -- those issues determined to possess very strong safety
characteristics will be given a plus (+) designation; SP-2 -- has a satisfactory
capacity to pay principal and interest, with vulnerability to adverse economic
conditions; SP-3 -- has a speculative capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR
SHORT-TERM CORPORATE DEMAND
OBLIGATIONS AND COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 -- the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- satisfactory capacity for timely
payment on issues with this designation -- however, the relative degree of
safety is not as high as for issues designated "A-1;" A-3 -- has adequate
capacity for timely payment -- however, is more vulnerable to the adverse
effects of changing economic circumstances than obligations carrying the higher
designa-
- --------------------------------------------------------------------------------
32
<PAGE> 37
- --------------------------------------------------------------------------------
tions; B -- has significant speculative characteristics regarding capacity for
timely payment; C -- doubtful capacity for payment; D -- in payment
default -- the "D" rating category is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period.
- --------------------------------------------------------------------------------
33
<PAGE> 38
- --------------------------------------------------------------------------------
ADDRESS FOR:
[LOGO] ESC STRATEGIC VALUE FUND
A PORTFOLIO OF
ESC STRATEGIC FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
INVESTMENT ADVISER AND DISTRIBUTOR
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219-1743
ADMINISTRATOR
BISYS FUND SERVICES
125 West 55th Street
New York, New York 10019
CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
<PAGE> 39
ESC STRATEGIC VALUE FUND
A PORTFOLIO OF
ESC STRATEGIC FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION: (800) 261-3863
EQUITABLE SECURITIES CORPORATION --
INVESTMENT ADVISER AND DISTRIBUTOR
BISYS FUND SERVICES -
ADMINISTRATOR, TRANSFER AGENT AND FUND ACCOUNTING AGENT
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes ESC Strategic
Value Fund (the "Fund"), one of seven funds offered by ESC Strategic Funds,
Inc. (the "Company"). The Fund is advised by Equitable Securities Corporation
(the "Adviser"). Its portfolio manager is Equitable Asset Management (the
"Manager"), an affiliate of the Adviser. See "Management." Shares of the Fund
are sold to the public by the Distributor as an investment vehicle for
individuals, institutions, corporations and fiduciaries, including customers of
the Adviser or its affiliates.
The Company is offering an indefinite number of shares of each class of
the Fund.
This SAI is not a prospectus and is authorized for distribution only when
preceded or accompanied by the prospectus for the Fund dated _______________,
199_ (the "Prospectus"). This SAI contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus. The Prospectus may be obtained without charge
by writing or calling the Fund at the address and information numbers printed
above.
____________, 199_
1
<PAGE> 40
TABLE OF CONTENTS
PAGE NO.
<TABLE>
<S> <C>
INVESTMENT POLICIES ...................................................... 4
Bank Obligations ................................................... 4
Commercial Paper ................................................... 4
Corporate Debt Securities .......................................... 4
Repurchase Agreements .............................................. 5
Variable and Floating Rate Demand and Master Demand Notes. ......... 5
Inverse Floaters ................................................... 5
Loans of Portfolio Securities ...................................... 6
Foreign Securities ................................................. 6
Forward Foreign Currency Exchange Contracts ........................ 6
Stock Index Futures Contracts ...................................... 7
Option Writing and Purchasing ...................................... 7
Options on Futures Contracts ....................................... 8
Risks of Futures and Options Investments ........................... 9
Limitations on Futures Contracts and Options on Futures Contracts .. 9
Warrants and Rights ................................................ 9
Investment Companies and Investment Funds .......................... 9
Forward Commitments and When-Issued Securities ..................... 10
Mortgage-Related Securities ........................................ 10
Mortgage-Backed Security Rolls ..................................... 12
Other Asset-Backed Securities ...................................... 12
Custodial Receipts ................................................. 15
Loan Participations ................................................ 16
Pay-in-Kind Bonds .................................................. 16
Trade Claims ....................................................... 16
Equity-Linked Securities ........................................... 16
PERCS .............................................................. 17
ELKS ............................................................... 17
LYONs .............................................................. 17
Sovereign Debt Obligations ......................................... 18
Brady Bonds ........................................................ 19
Arbitrage .......................................................... 19
Foreign Index-Linked Instruments ................................... 19
Venture Capital .................................................... 19
Leveraged Buyouts .................................................. 20
INVESTMENT RESTRICTIONS .................................................. 21
MANAGEMENT ............................................................... 23
Directors and Officers ............................................. 23
Investment Adviser ................................................. 24
The Manager ........................................................ 25
Distribution of Fund Shares ........................................ 25
Administrative Services ............................................ 26
Service Organizations .............................................. 26
</TABLE>
2
<PAGE> 41
<TABLE>
<S> <C>
DETERMINATION OF NET ASSET VALUE ......................................... 27
PORTFOLIO TRANSACTIONS ................................................... 27
Portfolio Turnover ................................................. 28
TAXATION ................................................................. 29
OTHER INFORMATION ........................................................ 34
Capitalization ..................................................... 34
Voting Rights ...................................................... 34
Custodian, Transfer Agent and Dividend Disbursing Agent ............ 35
Yield and Performance Information .................................. 35
Independent Accountants ............................................ 36
Counsel ............................................................ 36
Registration Statement ............................................. 36
</TABLE>
3
<PAGE> 42
INVESTMENT POLICIES
The Prospectus discusses the investment objective of the Fund and the
policies to be employed to achieve that objective. This section contains
supplemental information concerning certain types of securities and other
instruments that the Fund may invest in, the investment policies and portfolio
strategies that the Fund may utilize, and certain risks attendant to such
investments, policies and strategies.
Bank Obligations. These obligations include negotiable certificates of
deposit and bankers' acceptances. A description of the bank obligations that
the Fund may purchase are set forth in the Prospectus. A certificate of deposit
is a short-term, interest-bearing negotiable certificate issued by a commercial
bank against funds deposited in the bank. A bankers' acceptance is a short-term
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date.
Commercial Paper. Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by the Fund must
meet the Fund's minimum rating criteria.
Corporate Debt Securities. Fund investments in these securities are
limited to corporate debt securities (convertible and non-convertible corporate
bonds, debentures, notes and similar corporate debt instruments) that meet the
Fund's rating criteria. 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 the Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require a sale of such security by the Fund. However, the Manager
will consider such event in its determination of whether the Fund should
continue to hold the security. To the extent the ratings given by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") or
another rating agency may change as a result of changes in such organizations
or their rating systems, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the Prospectus and in this SAI.
4
<PAGE> 43
Repurchase Agreements. The Fund may invest in securities subject to
repurchase agreements with U.S. banks or broker-dealers. Such agreements may be
considered to be loans by the Fund 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. The Manager will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to insure that the value of the security always equals or
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Fund may have problems in exercising its rights to
the underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities.
Variable and Floating Rate Demand and Master Demand Notes. The Fund may,
from time to time, buy variable rate demand notes issued by corporations, bank
holding companies and financial institutions and similar instruments issued by
government agencies and instrumentalities. These securities will typically have
a maturity in the 5 to 20 year range but carry with them the right of the
holder to put the securities to a remarketing agent or other entity on short
notice, typically seven days or less. The obligation of the issuer of the put
to repurchase the securities is backed up by a letter of credit or other
obligation issued by a financial institution. The purchase price is ordinarily
par plus accrued and unpaid interest. Ordinarily, the remarketing agent will
adjust the interest rate every seven days (or at other intervals corresponding
to the notice period for the put), in order to maintain the interest rate at
the prevailing rate for securities with a seven-day maturity.
The Fund may also buy variable rate master demand notes. The terms of
these obligations permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. They permit weekly, and in some instances, daily,
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may prepay up to the
full amount of the note without penalty. The notes may or may not be backed by
bank letters of credit. Because the notes are direct lending arrangements
between the lender and the borrower, it is not generally contemplated that they
will be traded, and there is no secondary market for them, although they are
redeemable (and thus, immediately repayable by the borrower) at principal
amount, plus accrued interest, at any time. The Fund has no limitations on the
type of issuer from whom the notes will be purchased. However, in connection
with such purchase and on an ongoing basis, the Manager will consider the
earning power, cash flow and other liquidity ratios of the issuer, and its
ability to pay principal and interest on demand, including a situation where
all holders of such notes make demand simultaneously. While master demand
notes, as such, are not typically rated by credit rating agencies, if not so
rated, the Fund may, under its minimum rating standards, invest in them only if
at the time of an investment the issuer meets the criteria set forth in the
Prospectus for other comparable debt obligations.
Floating rate demand and master demand notes are similar to variable rate
instruments except that their interest rates vary with a designated market
index or market rate, such as the coupon equivalent of the U.S. Treasury bill
rate.
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
5
<PAGE> 44
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. The Fund may lend its portfolio securities
to brokers, dealers and financial institutions, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities or
cash or letters of credit maintained on a daily mark-to-market basis in an
amount at least equal to the current market value of the securities loaned; (2)
the Fund may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) the Fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed 5% of the total assets of the
Fund.
The Fund will earn income for lending its securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Fund may pay reasonable
finders, administrative and custodial fees. Loans of securities involve a risk
that the borrower may fail to return the securities or may fail to provide
additional collateral.
Foreign Securities. As described in the Prospectus, changes in foreign
exchange rates will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
Since the Fund may invest in securities denominated in currencies other
than the U.S. dollar, and since the Fund may, for various periods pending
investment for non speculative purposes, hold funds in bank deposits or other
money market investments denominated in foreign currencies, the Fund may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. Changes in foreign
currency exchange rates will influence values of securities in the Fund's
portfolio, from the perspective of U.S. investors. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities, and net investment income
and gains, if any, to be distributed to shareholders by the Fund. The rate of
exchange between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation and other factors.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted between currency traders (usually large commercial banks) and their
customers. Forward foreign currency exchange contracts may be bought or sold to
protect the Fund against a possible loss resulting from an adverse change in
the relationship between foreign currencies and the U.S. dollar, or between
foreign currencies. Although such contracts are intended to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result should the value of
such currency increase.
6
<PAGE> 45
Stock Index Futures Contracts. The Fund may enter into stock index futures
contracts in order to protect the value of its common stock investments. A
stock index futures contract is an agreement where 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
where 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 Fund intends to utilize stock index futures contracts only for the
purpose of attempting to protect the value of its common stock portfolio in the
event of a decline in stock prices and, therefore, usually will be a seller of
stock index futures contracts. This risk management strategy is an alternative
to selling securities in the portfolio and investing in money market
instruments. Also, stock index futures contracts may be purchased to protect
the Fund against an increase in prices of stocks which the Fund intends to
purchase. If the Fund is unable to invest its cash (or cash equivalents) in
stock in an orderly fashion, the Fund could purchase a stock index futures
contract that may be used to offset any increase in the price of the stock.
However, it is possible that the market may decline instead, resulting in a
loss on the stock index futures contract. If the Fund then concludes not to
invest in stock at that time, or if the price of the securities to be purchased
remains constant or increases, the Fund will realize a loss on the stock index
futures contract that is not offset by a reduction in the price of securities
purchased. The Fund also may buy or sell stock index futures contracts to close
out existing futures positions.
Option Writing and Purchasing. The Fund may write (or sell) put and call
options on the securities that the Fund is authorized to buy or already holds
in its portfolio. These option contracts may be listed for trading on a
national securities exchange or traded over-the-counter. The Fund may also
purchase put and call options. The Fund will not write covered calls on more
than 5% of its portfolio, and the Fund will not write covered calls with strike
prices lower than the underlying securities' cost basis on more than 5% of its
total portfolio. The Fund may not invest more than 5% of its total assets in
option purchases.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
7
<PAGE> 46
The Fund may sell "covered" put and call options as a means of hedging the
price risk of securities in the Fund's portfolio. The sale of a call option
against an amount of cash equal to the put's potential liability constitutes a
"covered put." When a Fund sells an option, if the underlying securities do not
increase (in the case of a call option) or decrease (in the case of a put
option) to a price level that would make the exercise of the option profitable
to the holder of the option, the option will generally expire without being
exercised and the Fund will realize as profit the premium paid for such option.
When a call option of which the Fund is the writer is exercised, the option
holder purchases the underlying security at the strike price and the Fund does
not participate in any increase in the price of such securities above the
strike price. When a put option of which the Fund is the writer is exercised,
the Fund will be required to purchase the underlying securities at the strike
price, which may be in excess of the market value of such securities.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation. There is also a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than exchange- traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market marker. This information is
carefully monitored by the Manager and verified in appropriate cases. OTC
options transactions will be made by the Fund only with recognized U.S.
Government securities dealers.
It may be the Fund's policy, in order to avoid the exercise of an option
sold by it, to cancel its obligation under the option by entering into a
closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of canceling the Fund's position
as a seller. The premium that the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying security at
the time of each transaction. To the extent options sold by the Fund are
exercised and the Fund either delivers portfolio securities to the holder of a
call option or liquidates securities in its portfolio as a source of funds to
purchase securities put to the Fund, the Fund's portfolio turnover rate may
increase, resulting in a possible increase in short-term capital gains and a
possible decrease in long-term capital gains.
Options on Futures Contracts. The Fund may purchase and write put and call
options on futures contracts that are traded on a U.S. exchange or board of
trade and enter into related closing transactions to attempt to gain additional
protection against the effects of equity market fluctuations. There can be no
assurance that such closing transactions will be available at all times. In
return for the premium paid, such an option gives the purchaser the right to
assume a position in a futures contract at any time during the option period
for a specified exercise price.
The Fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, the sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
8
<PAGE> 47
The purchase of call options on futures contracts is intended to serve the
same purpose as the actual purchase of the futures contracts. The Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
The Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, that would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, the
Fund would pay more than the market price for the underlying securities or
index units. The net cost to the Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Risks of Futures and Options Investments. The Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while the Fund may benefit from
the use of futures contracts and related options, unanticipated changes in
interest rates may result in a poorer overall performance for the Fund than if
it had not entered into any such contracts. Additionally, the skills required
to invest successfully in futures and options may differ from skills required
for managing other assets in the Fund's portfolio. Further, although the
Manager may engage in transactions with respect to index-based futures
contracts if the Manager believes a correlation exists between price movements
in the index and in the Fund's portfolio securities, such a correlation is not
likely to be perfect because the Fund's portfolio is not likely to duplicate
the index, making the futures contract an imperfect hedge.
Limitations on Futures Contracts and Options on Futures Contracts. The
Fund will use financial futures contracts and related options only for "bona
fide hedging" purposes, as such term is defined in applicable regulations of
the CFTC, or, with respect to positions in financial futures and related
options that do not qualify as "bona fide hedging" positions, will enter such
non-hedging positions only to the extent that aggregate initial margin deposits
plus premiums paid by it for open futures option positions, less the amount
that any such positions are "in-the-money," would not exceed 5% of the Fund's
total assets.
Warrants and Rights. 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. The 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 the 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 the 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 or having the same Adviser or Manager from acquiring in the aggregate
more than 10% of the outstanding voting shares of any registered closed-end
investment company.
9
<PAGE> 48
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.
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.
Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and make contracts to purchase securities for a fixed
price at a future date beyond customary settlement time if the Fund holds, and
maintains until the settlement date in a segregated account cash, or liquid
securities in an amount sufficient to meet the purchase price, or if the Fund
enters into offsetting contracts for the forward sale of other securities it
owns. Purchasing securities on a when-issued basis and forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in value of the Fund's other assets. No income accrues on securities purchased
on a when-issued basis prior to the time delivery of the securities is made,
although the Fund may earn interest on securities it has deposited in the
segregated account because it does not pay for the when-issued securities until
they are delivered. Although the Fund would generally purchase securities on a
when-issued basis or enter into forward commitments with the intention of
actually acquiring securities, the Fund may dispose of a when-issued security
or forward commitment prior to settlement if the Manager deems it appropriate
to do so. The Fund may realize short-term profits or losses upon such sales.
Mortgage-Related Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages where payments of
both interest and principal on the securities are made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
residential mortgage loans that underlie the securities (net of fees paid to
the issuer or guarantor of the securities). Early repayment of principal on
mortgage pass-through securities (arising from prepayments of principal due to
sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise,
the value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with
prepayment features may not increase as much as other fixed-income securities.
In recognition of this prepayment risk to investors, the Public Securities
Association (the "PSA") has standardized the method of measuring the rate of
mortgage loan principal prepayments. The PSA formula, the Constant Prepayment
Rate ("CPR"), or other similar models that are standard in the industry will be
used by the Fund in calculating maturity for purposes of its investment in
mortgage-related securities. Because the average life of mortgage-related
securities may lengthen with increases in interest rates, the
portfolio-weighted average life of the securities that the Fund is invested in
at times lengthen due to this effect. Under
10
<PAGE> 49
these circumstances, the Manager may, but is not required to, sell securities
in order to maintain an appropriate portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (such as securities guaranteed
by the Government National Mortgage Association ("GNMA"); or guaranteed by
agencies or instrumentalities of the U.S. Government (such as securities
guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"), that are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance, and letters of
credit, that may be issued by governmental entities, private insurers or the
mortgage poolers.
The Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
CMO's may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class; investors holding longer maturity classes receive principal
only after the first class has been retired. CMOs may be issued by government
and non-governmental entities. Some CMOs are debt obligations of FHLMC issued
in multiple classes with different maturity dates secured by the pledge of a
pool of conventional mortgages purchased by FHLMC. Other types of CMOs are
issued by corporate issuers in several series, with the proceeds used to
purchase mortgages or mortgage pass-through certificates. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios. To the
extent a particular CMO is issued by an investment company, the Fund's ability
to invest in such CMOs will be limited. See "Investment Restrictions" in the
SAI.
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
11
<PAGE> 50
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.
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
12
<PAGE> 51
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.
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 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
13
<PAGE> 52
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.
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
14
<PAGE> 53
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
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.
15
<PAGE> 54
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.
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
16
<PAGE> 55
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 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.
17
<PAGE> 56
Sovereign Debt Obligations. The Fund may invest in debt obligations of
foreign governments. Investing in sovereign debt securities will expose the
Fund to the direct or indirect consequences of political, social or economic
changes in the developing and emerging countries that issue the securities.
The ability and willingness of sovereign obligors in developing and emerging
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Certain
countries in which the Fund may invest have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rates and trade difficulties and extreme poverty and unemployment. Many of
these countries are also characterized by political uncertainty or instability.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, and its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few
commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt,
it may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, that may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
that are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant
government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor
to obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
18
<PAGE> 57
debt obligations, which led to default on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds (see below) and
obtaining new credit to finance interest payments. Holders of certain foreign
sovereign debt securities may be requested to participate in the restructuring
of such obligations and to extend further loans to their issuers. There can be
no assurance that the Brady Bonds and other foreign sovereign debt securities
that the Fund may invest in will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect the
Fund's holdings. Furthermore, certain participants in the secondary market for
such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to
other market participants.
Brady Bonds. The Fund may invest in Brady Bonds which are securities
created through the exchange of existing commercial bank loans to sovereign
entities for new obligations in connection with debt restructurings under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas P. Brady. Brady Bonds have been issued only recently, and for that
reason do not have a long payment history. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (but primarily the U.S.
dollar), and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government securities. 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
in countries issuing Brady Bonds, investments in Brady Bonds may be viewed as
speculative. There can be no assurance that Brady Bonds acquired by the Fund
will not be subject to restructuring arrangements or to requests for new
credit, which may cause the Fund to suffer a loss of interest or principal on
any of its holdings
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 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
19
<PAGE> 58
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 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.
20
<PAGE> 59
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 the Fund, and
except as otherwise indicated, may not be changed without the approval of a
majority of the outstanding voting securities of the Fund which, as defined in
the Investment Company Act of 1940 ("1940 Act"), means the lesser of (1) 67% of
the shares of the Fund present at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy, or (2)
more than 50% of the outstanding voting shares of the Fund.
The Fund may not:
(1) Borrow money except that the Fund may borrow from banks up to
10% of the current value of its total net assets for temporary or
emergency purposes, provided that the Fund may make no purchases if its
outstanding borrowings exceed 5% of its total assets;
(2) Invest in real estate, provided that the Fund may invest in
readily marketable securities (except limited partnership interests) of
issuers that deal in real estate and securities secured by real estate or
interests therein and the Fund may hold and sell real estate (a) used
principally for its own office space or (b) acquired as a result of the
Fund's ownership of securities;
(3) Engage in the business of underwriting securities of other
issuers, except to the extent that the purchase of securities directly
from the issuer (either alone or as one of a group of bidders) or the
disposal of an investment position may technically cause it to be
considered an underwriter as that term is defined under the Securities
Act of 1933;
(4) Make loans, except that the Fund may (a) lend its portfolio
securities, up to 5% (b) enter into repurchase agreements and (c)
purchase the types of debt instruments described in the Prospectus or
the SAI;
(5) Purchase securities or instruments which would cause 25% or more
of the market value of the Fund's total assets at the time of such
purchase to be invested in securities or instruments of one or more
issuers having their principal business activities in the same industry,
provided that there is no limit with respect to investments in the U.S.
Government, its agencies and instrumentalities;
21
<PAGE> 60
(6) Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that collateral
arrangements with respect to forward contracts, futures contracts or
options, including deposits of initial and variation margin, are not
considered to be the issuance of a senior security for purposes of this
restriction; or
(7) Purchase or sell commodity contracts, except that the Fund may
invest in futures contracts and in options related to such contracts (for
purposes of this restriction, forward foreign currency exchange contracts
are not deemed to be commodities).
For purposes of investment restriction number 5 public utilities are not
deemed to be a single industry but are separated by industrial categories, such
as telephone or gas utilities.
The following policies of the Fund are non-fundamental and may be changed
by the Board of Directors without shareholder approval. These policies provide
that the Fund, except as otherwise specified, may not:
(a) Invest in companies for the purpose of exercising control or
management;
(b) Knowingly purchase securities of other investment companies, except
(i) in connection with a merger, consolidation, acquisition, or reorganization;
and (ii) the Fund may invest up to 10% of its total assets in shares of other
investment companies;
(c) Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(d) Mortgage, pledge, or hypothecate any of its assets, except that the
Fund may pledge not more than 15% of the current value of its total net assets;
(e) Purchase or retain the securities of any issuer, if those individual
officers and Directors of the Company, the Adviser, the Manager, the
Administrator, or the Distributor, each owning beneficially more than 1/2 of 1%
of the securities of such issuer, together own more than 5% of the securities
of such issuer;
(f) Invest more than 5% of its net assets in warrants which are unattached
to securities; included within that amount, no more than 2% of the value of the
Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges;
(g) Write, purchase or sell puts, calls or combinations thereof, except as
described in the Prospectus or SAI;
(h) Invest more than 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
22
<PAGE> 61
(i) Invest in oil, gas or other mineral exploration or development
programs, although it may invest in issuers that own or invest in such
programs.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of the
Company for the past five years are listed below. The address of each, unless
otherwise indicated, is 230 Park Avenue, New York, New York 10169. Directors
deemed to be "interested persons" of the Company for purposes of the 1940 Act
are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH PRINCIPAL OCCUPATION
- --------------------- --------------------- --------------------
COMPANY
-------
<S> <C> <C>
William Howard Cammack, Director and Equitable Securities Corporation
Sr. President Chairman and Managing Director.
800 Nashville
City Center
511 Union Street
Nashville, TN 37219-1743
Age: 65
William Howard Cammack, Director and Equitable Securities Corporation -
Jr. Treasurer Managing Director
800 Nashville
City Center
511 Union Street
Nashville, TN 37219-1743
Age: 39
J. Bransford Wallace Director Willis Coroon Corporations
26 Century Boulevard (insurance) - Vice Chairman
Nashville, TN 37214 (1994); Chairman (1992-93);
Age: 64 various positions since prior to
1989.
Brownlee O. Currey, Jr. Director Osborn Communications, Inc. -
1100 Broadway Chairman; Nashville Banner
Nashville, TN 37203 Publishing Company - President.
Age: 68
E. Townes Duncan Director Comptronix Corporation (contract
Three Maryland Farms manufacturing) - Chairman and
Suite 140 Chief Executive Officer (1993-
Brentwood, TN 37027 present); Massey Burch Investment
Age: 43 Group (venture capital) -
Carrie Zuckerman Secretary Manager Legal Services,
Age: 29 BISYS Fund Services since January,
1997. Prior thereto, Associate
Director, Furman Selz LLC
John McAllister Assistant Equitable Securities Corporation-
Age: Secretary Senior Vice President (1990-present).
Copyright Management, Inc. -
Analyst (1988-1989).
Alaina Metz Assistant Chief Administrative
Age: 29 Secretary Officer, BISYS Fund Services since
</TABLE>
23
<PAGE> 62
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH PRINCIPAL OCCUPATION
- --------------------- --------------------- --------------------
COMPANY
-------
<S> <C> <C>
September 1995. Prior thereto,
Supervisor of Blue Sky Department
at Alliance Capital Management
from May 1989 to June 1995.
Bruce Treff Assistant Counsel, BISYS Fund Services since
Age: 30 Treasurer September 1995. Priorthereto,
Supervisor of Blue Sky Department
at Alliance Capital Management
from May 1989 to June 1995.
Sean Kelly Assistant [TO BE PROVIDED]
Age: Treasurer
</TABLE>
(1) William Howard Cammack, Sr. and William Howard Cammack, Jr. are father
and son.
Directors of the Company not affiliated with the Adviser, the Manager, a
manager of another fund of the Company, or the Administrator receive from the
Company an annual retainer of $2,000 and a fee of $250 for each Board of
Directors and Board committee meeting of the Company attended and are
reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Directors who are affiliated with the Adviser, the Manager, another
manager of a fund of the Company, or the Administrator do not receive
compensation from the Company.
DIRECTOR COMPENSATION
(FOR FISCAL YEAR ENDED MARCH 31, 1996)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM
AGGREGATE BENEFITS ANNUAL REGISTRANT
COMPENSATION ACCRUED BENEFITS AND FUND
FROM AS PART OF UPON COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT FUND EXPENSES RETIREMENT TO DIRECTORS
- ------------------------ ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
J. Bransford Wallace $6,000 0 N/A $6,000
Brownlee O. Currey, Jr. $7,000 0 N/A $7,000
E. Townes Duncan $7,000 0 N/A $7,000
</TABLE>
INVESTMENT ADVISER
Equitable Securities Corporation (the "Adviser") 511 Union Street,
Nashville, Tennessee 37219-1743, serves as investment adviser to the Fund,
providing overall supervision of the Manager. For these services, the Adviser
receives from the Fund a fee at an annual rate of 1.25% of the Fund's average
daily net assets. Out of these fees, the Adviser pays fees of the Manager.
Under the terms of the Investment Advisory Agreement between the Company
and the Adviser ("Agreement"), the investment advisory services of the Adviser
to the Fund are not exclusive. The Adviser is free to, and does, render
investment advisory services to others.
The Agreement was approved with respect to the Fund 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
January 14, 1997, and by the sole shareholder of the Fund on January 14, 1997.
The Agreement will continue in effect with respect to the Fund for a period of
24
<PAGE> 63
more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of the Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Agreement may be terminated at any time without penalty by vote of
the Directors (with respect to the Company or the Fund) or, with respect to the
Fund, by vote of the Directors or the shareholders of the Fund, or by the
Adviser, on 60 days written notice by either party to the Agreement and will
terminate automatically if assigned.
THE MANAGER
The Adviser has entered into a Portfolio Management Agreement for the Fund
with Equitable Asset Management (the "Manager"), a division of the Adviser's
subsidiary, Equitable Trust Company.
For more information on the Manager, see the Prospectus. The Manager's
fee, which is paid by the Adviser, is at an annual rate of 0.65% on the first
$50 million of the Fund's average daily net assets, 0.60% on the next $50
million of such assets, 0.55% on the next $100 million of such assets, and
0.50% on such assets in excess of $200 million.
The Portfolio Management Agreement provides that the Manager's services to
the Fund are not exclusive. The Manager is free to and does provide investment
advisory services to others.
The Portfolio Management Agreement for the Fund was initially approved by
the Board of Directors, including a majority of the Directors who are not
parties to the Portfolio Management Agreement or interested persons of any such
party, at a meeting held on January 14, 1997, and by the sole shareholder of
the Fund on January 14, 1997. The Portfolio Management Agreement provides that
it will continue in effect for a period beyond two years from the date of its
execution only so long as such continuance is approved at least annually by (i)
the Directors or by vote of the holders of a majority of the Fund's outstanding
voting securities and (ii) by a majority of the Directors who are not parties
to the Portfolio Management Agreement or interested persons of any such party.
The Portfolio Management Agreement may be terminated at any time without
penalty (a) by the Adviser, by the Fund upon vote of a majority of the
Directors, or by vote of a majority of the Fund's outstanding voting
securities, each upon sixty days' written notice to the Manager; or (b) by the
Manager upon sixty days' notice to the Company or the Adviser. The Portfolio
Management Agreement will also terminate automatically in the event of its
assignment.
DISTRIBUTION OF FUND SHARES
Equitable Securities Corporation(the "Distributor") serves as principal
underwriter for the shares of the Fund pursuant to a Distribution Contract. The
Distribution Contract provides that the Distributor will use its best efforts
to maintain a broad distribution of the Fund's shares among bona fide investors
and may enter into selling group agreements with responsible dealers and dealer
managers as well as sell the Fund's shares to individual investors. The
Distributor is not obligated to sell any specific amount of shares.
The Fund has adopted a service and distribution plan (the "Plan"). The
Plan provides for the different rates of fee payment with respect to each class
of shares, as described in the Prospectus. Pursuant to the Plan, the Fund may
pay directly or reimburse the Distributor monthly in amounts described in the
Prospectus for costs and expenses of marketing the shares, or classes of
shares, of the Fund. The Board of Directors has concluded that
25
<PAGE> 64
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
The Plan provides that it may not be amended to increase materially the
costs which the Fund or a class of shares may bear pursuant to the Plan without
shareholder approval and that other material amendments of the Plan must be
approved by the Board of Directors, and by the Directors who are neither
"interested persons" (as defined in the 1940 Act) of the Company nor have any
direct or indirect financial interest in the operation of the Plan or
any related agreement, by vote cast in person at a meeting called for the
purpose of considering such amendments. The selection and nomination of the
Directors of the Company have been committed to the discretion of the Directors
who are not "interested persons" of the Company. The Plan was approved for the
Fund by the Board of Directors and by the Directors who are neither "interested
persons" nor have any direct or indirect financial interest in the operation of
the Plan ("Plan Director"), by vote cast in person at an a January 14, 1997
meeting called for the purpose of voting on the Plan. The continuance of the
Plan is subject to similar annual approval by the Directors and the Plan
Directors. The Plan is terminable with respect to a class of shares of the Fund
at any time by a vote of a majority of the Plan Directors or by vote of the
holders of a majority of the shares of the class.
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services (the
"Administrator") provides administrative services necessary for the operation of
the Fund, including among other things, (i) preparation of shareholder reports
and communications, (ii) regulatory compliance, such as reports to and filings
with the Securities and Exchange Commission ("SEC") and state securities
commissions and (iii) general supervision of the operation of the Fund,
including coordination of the services performed by the Adviser, Manager,
Distributor, custodians, independent accountants, legal counsel and others. In
addition, BISYS Fund Services furnishes office space and facilities required for
conducting the business of the Fund and pays the compensation of the Fund's
officers, employees and Directors affiliated with BISYS. For these services,
BISYS Fund Services receives from the Fund a fee, payable monthly, at the annual
rate of 0.15% of the Fund's average daily net assets.
The Board of Directors, including a majority of the Directors who are not
parties to the agreements or interested persons of such parties, approved the
Administration Agreement on behalf of the Company at their July 16, 1996 Board
of Directors Meeting. BISYS Fund Services is a wholly-owned subsidiary of The
BISYS Group, Inc. which is headquartered in Little Falls, New Jersey and
supports more than 5,000 financial institutions and corporate clients through
two strategic business units. BISYS Information Services Group designs,
administers and distributes over 30 families of proprietary mutual funds
consisting of more than 365 portfolios, and provides 401(k) marketing support,
administration, and recordkeeping services in partnership with 18 of the
nation's leading bank and investment management companies.
The Administration Agreement will continue until December 31, 1997 and
will automatically continue for successive one-year periods unless either party
notifies the other in writing of non-renewal at least 90 days prior to the
expiration of the then-current term.
SERVICE ORGANIZATIONS
The Company may also contract with banks, trust companies, broker-dealers
(other than BISYS Fund Services) or other financial organizations ("Service
Organizations") to provide certain administrative services for the Fund.
Services provided by Service Organizations may include among other things:
providing necessary personnel and facilities to establish and maintain certain
26
<PAGE> 65
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
Fund to clients; and providing such other services as the Fund or a client
reasonably may request, to the extent permitted by applicable statute, rule or
regulation. Neither BISYS Fund Services, the Adviser nor the Manager will be a
Service Organization or receive fees for servicing.
Some Service Organizations may impose additional or different conditions
on their clients, such as requiring their clients to invest more than the
minimum initial or subsequent investments specified by the Fund or charging a
direct fee for servicing. If imposed, these fees would be in addition to any
amounts that might be paid to the Service Organization by the Fund. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult them
regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law. If a bank were prohibited from so acting, its
shareholder clients would be permitted to remain shareholders of the Fund and
alternative means for continuing the servicing of such shareholders would be
sought. In that event, changes in the operation of the Fund might occur and a
shareholder serviced by such a bank might no longer be able to avail itself of
any services then being provided by the bank. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
DETERMINATION OF NET ASSET VALUE
The Fund values its portfolio securities in accordance with the procedures
described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Fund and for the other investment advisory
clients of the Manager are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
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
27
<PAGE> 66
to price and allocated between such clients in a manner which in the Manager's
opinion is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, the Manager is primarily
responsible for portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Fund to obtain the best results
taking into account the broker-dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities. While the Manager generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Purchases and sales of securities will often be principal transactions in
the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of the Fund. Debt securities normally will be purchased or sold from or to
issuers directly or to dealers serving as market makers for the securities at a
net price. Generally, money market securities are traded on a net basis and do
not involve brokerage commissions. Under the 1940 Act, persons affiliated with
the Fund, the Adviser, the Manager or BISYS Fund Services are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the SEC.
The Manager may, in circumstances in which two or more broker-dealers are
in a position to offer comparable results, give preference to a dealer that has
provided statistical or other research services to the Manager. By allocating
transactions in this manner, the Manager is able to supplement its research and
analysis with the views and information of securities firms. These items, which
in some cases may also be purchased for cash, include such matters as general
economic and securities market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Manager in advising
various of its clients (including the Fund), although not all of these services
are necessarily useful and of value in managing the Funds. The management fee
paid by the Fund is not reduced because the Manager and its affiliates receive
such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), the Manager may cause the Fund to pay a broker-dealer that provides
"brokerage and research services" (as defined in the Act) to the Manager an
amount of disclosed commission for effecting a securities transaction for the
Fund in excess of the commission which another broker-dealer would have charged
for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Manager may consider sales of shares of the Fund as a factor in the selection
of broker-dealers to execute portfolio transactions for the Fund.
PORTFOLIO TURNOVER
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Fund whenever such changes are believed to be
28
<PAGE> 67
in the best interests of the Fund and its shareholders. It is anticipated that
the annual portfolio turnover rate for the Fund normally will not exceed 100%,
although it may be higher under some circumstances. The portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of portfolio
securities by the average monthly value of the Fund's portfolio securities. For
purposes of this calculation, portfolio securities exclude all securities
having a maturity when purchased of one year or less.
TAXATION
The Fund intends to qualify annually as regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To
qualify as a regulated investment company, the Fund must (a) distribute to
shareholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, taxable interest less expenses and the
excess of net short-term capital gains over net long-term capital losses); (b)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (c) derive less than 30% of its gross income from the sale or other
disposition of certain assets (namely, in the case of the Fund, (i) stock or
securities; (ii) options, futures, and forward contracts (other than those on
foreign currencies), and (iii) foreign currencies (including options, futures,
and forward contracts on such currencies) not directly related to the Fund's
principal business of investing in stock or securities (or options and futures
with respect to stocks or securities)) held less than 3 months; and (d)
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash and cash items (including receivables), U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and not greater than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers that the Fund controls and that are determined to be engaged in the
same business or similar or related businesses. By meeting these requirements,
the Fund generally will not be subject to Federal income tax on its investment
company taxable income and net capital gains which are distributed to
shareholders. If the Fund does not meet all of these Code requirements, it will
be taxed as an ordinary corporation.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must distribute for each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such
year, and (3) all ordinary income and capital gain net income (adjusted for
certain ordinary losses) for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund during October, November or December of that
year to shareholders of record on a date in such a month and paid by the Fund
during January of the 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.
29
<PAGE> 68
Distributions of investment company taxable income generally are taxable
to shareholders as ordinary income. Distributions from the Fund may be eligible
for the dividends-received deduction available to corporations. Distributions
of net capital gains, if any, designated by the Fund as capital gain dividends
are taxable to shareholders as long-term capital gain, regardless of the length
of time the Fund shares have been held by a shareholder. All distributions are
taxable to the shareholder in the same manner whether reinvested in additional
shares or received in cash.
Shareholders will be notified annually as to the Federal tax status of
distributions.
Distributions by the Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a stockholder's cost
basis, such distribution, nevertheless, would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
will nevertheless generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares of
the Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands. Such gain or loss
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on a disposition will be disallowed to the
extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to
the net asset value of a Fund share on the reinvestment date.
Under certain circumstances, the sales charge incurred in acquiring Fund
shares may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of the Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Fund are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred the sales charge
initially. Instead, the portion of the sales charge affected by this rule will
be treated as a sales charge paid for the new shares.
The taxation of equity options is governed by the Code section 1234.
Pursuant to Code section 1234, the premium received by the Fund for selling a
put or call option is not included in income at the time of receipt. If the
option expires, the premium is short-term capital gain to the Fund. If the Fund
enters into a closing transaction, the difference between the amount paid to
close out its position and the premium received is short-term capital gain or
loss. If a call option written by the Fund is exercised, thereby requiring the
Fund to sell the underlying security, the premium will increase the amount
30
<PAGE> 69
realized upon the sale of such security and any resulting gain or loss will be
a capital gain or loss, and will be long-term or short-term depending upon the
holding period of the security. With respect to a put or call option that is
purchased by the Fund, if the option is sold, any resulting gain or loss will
be a capital gain or loss, and will be long-term or short-term, depending upon
the holding period of the option. If the option expires, the resulting loss is
a capital loss and is long-term or short-term, depending upon the holding
period of the option. If the option is exercised, the cost of the option, in
the case of a call option, is added to the basis of the purchased security and,
in the case of a put option, reduces the amount realized on the underlying
security in determining gain or loss.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts that the Fund may invest in are so-called "section 1256
contracts." With certain exceptions, gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of
each taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on a position that is part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. Hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to stockholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The Fund will not realize gain or loss on a short sale of a security until
it closes the transaction by delivering the borrowed security to the lender.
All or a portion of any gain arising from a short sale may be treated as
short-term capital gain, regardless of the period for which the Fund held the
security used to close the short sale. In addition, the Fund's holding period
of any security which is substantially identical to that which is sold short
may be reduced or eliminated as a result of the short sale.
Certain requirements that must be met under the Code in order for the Fund
to qualify as a regulated investment company may limit the extent to which the
Fund will be able to engage in short sales and transactions in options,
futures, and forward contracts.
31
<PAGE> 70
Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security having market
discount will be treated as ordinary income to the extent it does not exceed
the accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at
a constant rate over the time remaining to the debt security's maturity or, at
the election of the Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency, and
the time the Fund actually collects such receivables or pays such liabilities,
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain options and forward and futures contracts, gains or
losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or losses, may increase, decrease, or
eliminate the amount of the Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC under the Code if at least one-half of
its assets constitutes investment-type assets or 75% or more of its gross
income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock. The
Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve
marking to market the Fund's PFIC shares at the end of each taxable year (and
on certain other dates prescribed in the Code), with the result that unrealized
gains are treated as though they were realized. If this election were made, tax
at the Fund level under the PFIC rules would generally be eliminated, but the
Fund could, in limited circumstances, incur nondeductible
32
<PAGE> 71
interest charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC stock.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to treat such foreign taxes paid by the
Fund that qualify as income or similar taxes under U.S. income tax principles
as paid by its shareholders. Pursuant to this election, a shareholder would be
required to include in gross income (in addition to taxable dividends actually
received) his pro rata share of the foreign taxes paid by the Fund, and would
be entitled either to deduct his pro rata share of foreign taxes in computing
his taxable income or to use it as a foreign tax credit against his U.S.
Federal income tax liability, subject to limitations. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions, but such
a shareholder may be eligible to claim the foreign tax credit (see below). Each
shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by a Fund will "pass-through" for
that year and, if so, such notification will designate (a) the shareholder's
portion of the foreign taxes paid to each such country and (b) the portion of
the dividend which represents income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his total foreign
source taxable income. For this purpose, if the Fund makes the election
described in the preceding paragraph, the source of the Fund's income flows
through to its shareholders. With respect to the Fund, gains from the sale of
securities will be treated as derived from U.S. sources and certain currency
fluctuations gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be treated
as ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as defined for
purposes of the foreign tax credit) including foreign source passive income of
the Fund. The foreign tax credit may offset only 90% of the alternative minimum
tax imposed on corporations and individuals, and foreign taxes generally may
not be deducted in computing alternative minimum taxable income.
The Fund is required to report to the Internal Revenue Service ("IRS") all
distributions except in the case of certain exempt shareholders. All such
distributions generally are subject to withholding of Federal income tax at a
rate of 31% ("backup withholding") in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Fund with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions, whether
reinvested in additional shares or taken in cash, will be reduced by the
amounts required to be withheld. Backup withholding is not an additional tax.
Any amount withheld may be credited against the shareholder's U.S. Federal
income tax liability. Investors may wish to consult their tax advisors about
the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
33
<PAGE> 72
Distributions of the 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 Fund including the likelihood that distributions to them would be subject
to withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
Changes in the tax law frequently come under consideration. Since the Fund
does not undertake to furnish tax advice, it is important for shareholders to
consult their tax advisers regularly about the tax consequences to them of
investing in the Fund.
OTHER INFORMATION
CAPITALIZATION
The Company is a Maryland corporation established under Articles of
Incorporation dated November 24, 1993 and currently consists of seven
separately managed portfolios ("funds"). (The Company has one other portfolio
which is currently inactive.) Six of the funds currently being offered,
including the Fund, offer two classes of shares. The capitalization of the
Company consists solely of 650 million shares of common stock with a par value
of $0.001 per share. The Board of Directors may establish additional funds
(with different investment objectives and fundamental policies), or additional
classes of shares, at any time in the future. Establishment and offering of
additional funds or classes will not alter the rights of the Company's
shareholders. When issued, shares are fully paid, non-assessable, redeemable
and freely transferable. Shares do not have preemptive rights or subscription
rights. In any liquidation of the Fund or class, each shareholder is entitled
to receive his pro rata share of the net assets of the Fund or class.
Expenses incurred in connection with the Fund's organization were $______.
These costs are considered expenses of the Company and will be allocated across
all Funds in the Company based on the relative size of each Fund.
VOTING RIGHTS
Under the Articles of Incorporation, the Company is not required to hold
annual meetings of the Fund's or the Company's shareholders to elect Directors
or for other purposes. It is not anticipated that the Company will hold
shareholders' meetings unless required by law or the Articles of Incorporation.
In this regard, the retention of a new investment adviser for the Company, or a
new Manager affiliated with the Adviser with respect to the Fund, requires
approval both by a majority of the Company's directors, including a majority of
its directors who are not parties to such contract or "interested persons" (as
defined in the Investment Company Act of 1940) of any such party, and by a vote
of a majority of the outstanding voting securities of the Company or Fund, as
applicable. For this purpose, the "vote of a majority of the outstanding voting
securities" of the Company or the Fund, as applicable, means the vote of the
lesser of (1) 67% of the shares of the Company or Fund, as applicable, if the
holders of more than 50% of the outstanding shares of the Company or Fund, as
applicable, are present in person or by proxy; or (2) more than 50% of the
outstanding shares of the Company or Fund, as applicable. The Company has
received an order from the Securities and Exchange Commission that permits it
to retain new Managers that are not affiliated with the Adviser without
obtaining shareholder approval. Additionally, the Company will be required to
hold a meeting to elect Directors to fill any existing vacancies on the Board
if, at any time, fewer
34
<PAGE> 73
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
Fund.
BISYS serves as the Company's transfer agent and fund accounting agent
pursuant to a Transfer Agency Agreement and an Fund Accounting Agreement.
YIELD AND PERFORMANCE INFORMATION
The Fund may, from time to time, include its yield, effective yield and
average annual total return in advertisements or reports to shareholders or
prospective investors.
Quotations of yield for each class of shares will be based on the
investment income per share earned during a particular 30-day period, less
expenses accrued with respect to that class during a period ("net investment
income"), and will be computed by dividing net investment income for the class
by the maximum offering price per share of that class on the last day of the
period, according to the following formula:
YIELD = 2[(a-b + 1)6-1]
----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the
last day of the period.
Quotations of average annual total return will be expressed in terms of
the average annual compounded rate of return of a hypothetical investment in
each class of shares of the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula:
P (1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return for the class, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect the deduction of the maximum
sales charge and a proportional share of Fund and class-specific expenses (net
of certain reimbursed expenses) on an annual basis, and will assume that all
dividends and distributions are reinvested when paid.
Quotations of yield and total return will reflect only the performance of
a hypothetical investment in a class of shares of the Fund during the
particular time period shown. Yield and total return for the Fund will vary
based on changes in the market conditions and the level of the Fund's (and
35
<PAGE> 74
classes') expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
In connection with communicating its yields or total return to current or
prospective unit holders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow
Jones Industrial Average, or other unmanaged indices so that investors may
compare the Fund's results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Fund.
Investors who purchase and redeem shares of the Fund through a customer
account maintained at a Service Organization may be charged one or more of the
following types of fees as agreed upon by the Service Organization and the
investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid
on those assets). Such fees will have the effect of reducing the yield and
average annual total return of the Fund for those investors.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the
Company. Price Waterhouse LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of SEC filings.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C., 20005,
passes upon certain legal matters in connection with the shares offered by the
Company and also acts as Counsel to the Company.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in
the Company's Registration Statement filed with the SEC under the Securities
Act of 1933 with respect to the securities offered hereby, certain portions of
which have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
36
<PAGE> 75
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Incorporated by reference into the Prospectus:
(1) Financial Highlights for the periods ended March
31, 1996 and March 31, 1995 (both audited) and September 30,
1996 (unaudited)
Incorporated by reference into Statement of Additional Information:
(1) Portfolio of Investments at March 31, 1996 (audited) and
September 30, 1996 (unaudited).
(2) Statement of Assets and Liabilities dated March 31, 1996.
(3) Statement of Operations for the fiscal year ended March 31,
1996 (audited) and September 30, 1996 (unaudited).
(4) Statement of Changes in Net Assets for the fiscal periods
ended March 31, 1996 and March 31, 1995 (audited) and
September 30, 1996 (unaudited).
(5) Notes to Financial Statements at March 31, 1996 (audited) and
September 30, 1996 (unaudited).
(6) Selected Per Share Data for the fiscal periods ended March 31,
1996 and March 31, 1995 (audited) and September 30, 1996
(unaudited).
(7) Report of Independent Accountants.
(b) Exhibits:
(1) (a) Articles of Incorporation of Registrant. (*)
(b) Certificate of Correction. (*)
(c) Articles of Amendment. (Growth)
(d) Articles of Amendment. (Value)
(2) By-laws of Registrant. (*)
(3) Not applicable.
(4) Specimen certificates of shares of common stock of
Registrant.(*)
(5) (a) Investment Advisory Agreement.
(b) Portfolio Management Agreement for ESC Strategic Growth
Fund. (****)
(c) Portfolio Management Agreement for other Funds of
Registrant.(**)
(d) Portfolio Management Agreement with Cincinnati Asset
Management, Inc. (**)
(e) Portfolio Management Agreement for ESC Strategic Value
Fund.
(6) (a) Master Distribution Contract. (**)
(b) Distribution Contract Supplements for ESC Strategic
Growth Fund. (****)
(c) Distribution Contract Supplements for other Funds of
Registrant. (**)
37
<PAGE> 76
(d) Distribution Contract Supplements for ESC Strategic
Value Fund.
(e) Form of Dealer and Selling Group Agreement. (*)
(f) Form of Escrow Agreement. (*)
(7) Not applicable.
(8) Custody Agreement. (**)
(9) (a) Administrative Services Contract.
(b) Transfer Agency Agreement.
(c) Sub-Transfer Agency Agreement. (**)
(d) Accounting Agent Contract.
(e) Form of Services Agreement. (*)
(10) Opinion of Counsel. (*)
(11) Consent of Independent Accountants.
(12) Not applicable.
(13) (a) Purchase Agreement. (**)
(b) Purchase Agreement for ESC Strategic Growth Fund
(c) Purchase Agreement for ESC Strategic Value Fund
(14) Not applicable.
(15) (a) Form of Master Distribution Plan. (*)
(b) Distribution Plan Supplements for ESC Strategic Growth
Fund (****)
(c) Forms of Distribution Plan Supplement. (*)
(d) Distribution Plan Supplements for ESC Strategic Value
Fund
(16) Schedules for Computation. (***)
(17) Not applicable.
(18) Multi-Class Plan, as amended January 14, 1997
(27) Financial Data Schedules
* Filed with Pre-Effective Amendment No. 3, April 5, 1994, and are
incorporated herein by reference.
** Filed with Post-Effective Amendment No. 2, July 28, 1995, and are
incorporated herein by reference.
*** Filed with Post-Effective Amendment No. 3, July 26, 1996, and are
incorporated herein by reference.
**** Filed with Post-Effective Amendment No. 6, December 5, 1996.
38
<PAGE> 77
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of January 17, 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 325
Class D 113
ESC Strategic Global Equity Fund
Class A 308
Class D 95
ESC Strategic Small Cap Fund
Class A 2,483
Class D 627
ESC Strategic Income Fund
Class A 152
Class D 47
ESC Strategic Growth Fund
Class A 1
Class D 0
ESC Strategic Asset Preservation Fund 28
</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> 78
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> 79
<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.
Frank D. Inman Managing Director Position with
Equitable
Securities
Corporation,
1989 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.
</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> 80
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
Frank D. Inman Managing Director None
William P. Johnston Chief Executive None
Officer, Managing
Director and Director
Hershel L. Smith, Jr. Chief Financial None
Officer, Chief
Operations Officer
and Managing Director
</TABLE>
42
<PAGE> 81
<TABLE>
<S> <C> <C>
Tom R. Steele Managing Director and None
Director
W. Howard Cammack, Jr. Managing Director and Director and Treasurer
Director
</TABLE>
(1) The address of all directors and officers is 800 Nashville City
Center, 511 Union Street, Nashville, Tennessee 37219-1743.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940, and the Rules thereunder will be maintained at the offices of
BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment
using financial statements for ESC Strategic Value Fund which need
not be certified, within four to six months following the latter of
the effective date of this amendment to Registrant's registration
statement or the date that shares of ESC Strategic Value Fund are
publicly offered. Such financial statements will be as of and for
the time period ended on a date reasonably close or as soon as
practicable to the date of the filing of the amendment.
(c) 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> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this Post-Effective Amendment No. 7 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 13th day of February, 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. 7 to Registrant's Registration Statement has
been signed by the following persons in the capacities indicated on the 13th
day of February, 1997.
SIGNATURE TITLE
- --------- -----
*
William H. Cammack, Sr. Director and President
*
William H. Cammack, Jr. Director and Treasurer
*
J. Bransford Wallace Director
*
Brownlee O. Currey, Jr. Director
*
E. Townes Duncan Director
/s/ Assistant Treasurer
*By: /s/
---------------------------
Jeffrey L. Steele
Attorney-in-Fact
44
<PAGE> 83
ESC STRATEGIC FUNDS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
Exhibit 1(c) Articles of Amendment (Growth)
Exhibit 1(d) Articles of Amendment (Value)
Exhibit 5(a) Investment Advisory Agreement
Exhibit 5(b) Portfolio Management Agreement for ESC Strategic Value Fund
Exhibit 6(d) Distribution Contract Supplements for ESC Strategic Value Fund
Exhibit 9(a) Administration Agreement
Exhibit 9(b) Transfer Agency Agreement
Exhibit 9(d) Fund Accounting Agreement
Exhibit 11 Consent of Independent Accountants
Exhibit 13(b) Purchase Agreement for ESC Strategic Growth Fund
Exhibit 13(c) Purchase Agreement for ESC Strategic Value Fund
Exhibit 15(d) Distribution Plan Supplements for ESC Strategic Value Fund
Exhibit 18 Multi-Class Plan, as amended January 14, 1997
Exhibit 27 Financial Data Schedules (for SEC use only)
</TABLE>
45
<PAGE> 1
EXHIBIT 1(c)
ESC STRATEGIC FUNDS, INC.
ARTICLES OF AMENDMENT
ESC Strategic Funds, Inc., a Maryland corporation having its principal
office in Maryland, in Baltimore City, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended, in order to
change the name of one series of the Corporation's authorized common shares, by
striking out Article 5.4 of the Articles of Incorporation and inserting in lieu
thereof the following:
5.4 Power to Classify. The Board of Directors of the Corporation may
classify and reclassify any unissued shares of capital stock into one or more
additional or other classes or series as may be established from time to time by
setting or changing in any one or more respects the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of stock, or shares of any existing class or series of stock.
Except as otherwise provided herein, all references herein to capital stock
shall apply without discrimination to the shares of each class or series of
stock. Pursuant to such power, the Board of Directors has initially designated
650,000,000 shares of its capital stock into seven series of shares of capital
stock of the Corporation, each such series (except ESC Strategic Asset
Preservation Fund) to have two classes of shares to be designated Class A and
Class D. The names of each series and the number of shares allocated to each,
class therein, are as follows:
<TABLE>
<CAPTION>
Number of Shares Initially
Name of Series Allocated
- -------------- --------------------------
Class A Class D
---------- ----------
<S> <C> <C>
ESC Strategic Appreciation Fund 50,000,000 50,000,000
ESC Strategic Global Equity Fund 50,000,000 50,000,000
ESC Strategic Growth Fund 50,000,000 50,000,000
ESC Strategic Small Cap Fund 50,000,000 50,000,000
ESC Strategic Income Fund 50,000,000 50,000,000
</TABLE>
<PAGE> 2
ESC Strategic Tennessee
Tax-Exempt Fund 50,000,000 50,000,000
ESC Strategic Asset
Preservation Fund 50,000,000 (no class
designation)
SECOND: The foregoing amendment to the charter of the
Corporation was approved by a majority of the entire Board of Directors of the
Corporation; the charter amendment is limited to changes expressly permitted by
Section 2-605 of Title 2 of Subtitle 6 of the Maryland General Corporation Law
to be made without action by the stockholders (i.e., a change in name or
designation of a class with no change in the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of the class), and the
Corporation is registered as an open-end company under the Investment Company
Act of 1940.
The undersigned President of the Corporation
acknowledges these Articles of Amendment to be the corporate act of the
Corporation and states to the best of his knowledge, information and belief
that the matters and facts set forth in these Articles with respect to
authorization and approval are true in all material respects and that this
statement is made under the penalties of perjury.
IN WITNESS WHEREOF, ESC Strategic Funds, Inc. has
caused this instrument to be signed in its name and on its behalf by its
President, William Howard Cammack, Sr. and attested by its Assistant
Secretary, John L. McAllister, on the day of , 1996.
--- --------------------
ATTEST ESC STRATEGIC FUNDS, INC.
By: (SEAL)
- --------------------------- --------------------------
John L. McAllister William Howard Cammack, Sr.
Senior Vice President Senior Vice President
and Secretary
-2-
<PAGE> 1
Exhibit 1(d)
ESC STRATEGIC FUNDS, INC.
ARTICLES OF AMENDMENT
ESC Strategic Funds, Inc., a Maryland corporation having its
principal office in Maryland, in Baltimore City, Maryland (hereinafter called
the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended, in order to
change the name of one series of the Corporation's authorized common shares, by
striking out Article 5.4 of the Articles of Incorporation and inserting in lieu
thereof the following:
5.4 Power to Classify. The Board of Directors of the Corporation may
classify and reclassify any unissued shares of capital stock into one
or more additional or other classes or series as may be established
from time to time by setting or changing in any one or more respects
the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or
terms of such shares of stock and pursuant to such classification or
reclassification to increase or decrease the number of authorized
shares of stock, or shares of any existing class or series of stock.
Except as otherwise provided herein, all references herein to capital
stock shall apply without discrimination to the shares of each class or
series of stock. Pursuant to such power, the Board of Directors has
initially designated 650,000,000 shares of its capital stock into seven
series of shares of capital stock of the Corporation, each such series
(except ESC Strategic Asset Preservation Fund) to have two classes of
shares to be designated Class A and Class D. The names of each series
and the number of shares allocated to each, and to each class therein,
are as follows:
<TABLE>
<CAPTION>
Number of Shares Initially
Name of Series Allocated
-------------- ---------------------------
Class A Class D
---------- ----------
<S> <C> <C>
ESC Strategic Appreciation Fund 50,000,000 50,000,000
ESC Strategic Global Equity Fund 50,000,000 50,000,000
ESC Strategic Growth Fund 50,000,000 50,000,000
ESC Strategic Small Cap Fund 50,000,000 50,000,000
ESC Strategic Income Fund 50,000,000 50,000,000
ESC Strategic Value Fund 50,000,000 50,000,000
ESC Strategic Asset
Preservation Fund 50,000,000 (no class
designation)
</TABLE>
<PAGE> 2
SECOND: The foregoing amendment to the charter of the Corporation was
approved by a majority of the entire Board of Directors of the Corporation; the
charter amendment is limited to changes expressly permitted by Section 2-605 of
Title 2 of Subtitle 6 of the Maryland General Corporation Law to be made without
action by the stockholders (i.e., a change in name or designation of a class
with no change in the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of the class), and the Corporation is registered as an
open-end company under the Investment Company Act of 1940.
The undersigned President of the Corporation acknowledges
these Articles of Amendment to be the corporate act of the Corporation and
states to the best of his knowledge, information and belief that the matters and
facts set forth in these Articles with respect to authorization and approval are
true in all material respects and that this statement is made under the
penalties of perjury.
IN WITNESS WHEREOF, ESC Strategic Funds, Inc. has caused this
instrument to be signed in its name and on its behalf by its President, William
Howard Cammack, Sr. and attested by its Assistant Secretary, John L. McAllister,
on the _____ day of ________________, 1997.
ATTEST: ESC STRATEGIC FUNDS, INC.
_______________________ By: ________________________(SEAL)
John L. McAllister William Howard Cammack, Sr.
Senior Vice President Senior Vice President
and Secretary
-2-
<PAGE> 1
Exhibit 5(a)
ESC STRATEGIC FUNDS, INC.
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, effective commencing on ________________, 1994, between
Equitable Securities Corporation (the "Adviser") and ESC Strategic Funds, Inc.
(the "Company").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Company wishes to retain the Adviser to render investment
advisory services to the Company with respect to each of its present and future
series ("Funds"), unless otherwise specifically indicated by the Company, and
the Adviser is willing to furnish such services to the Company;
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Company and the Adviser as follows:
1. Appointment. The Company hereby appoints the Adviser to act as
investment adviser for the Funds for the periods and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth, for the compensation herein provided.
2. Investment Advisory Duties. Subject to the supervision of the
Directors of the Company, the Adviser will have the sole and exclusive
responsibility for providing, or arranging for others to provide, (a) the
management for the Funds' assets in accordance with each Fund's investment
objectives, policies and limitations as stated in its prospectus and Statement
of Additional Information included as part of the Company's Registration
Statement filed with the Securities and Exchange Commission, as they may be
amended from time to time, copies of which shall be provided to the Adviser by
the Company; and (b) the placement of orders to purchase and sell securities for
the Funds. The Adviser, subject to approval in each case by the Directors of the
Company, shall be authorized to retain one or more subadvisers (the "Portfolio
Managers") for each of the Funds, and to direct that such Portfolio Managers
shall exercise full discretion in furnishing investment advice to the Funds and
arranging for the execution of portfolio transactions for the Funds, subject
only to general oversight by the Adviser. The Adviser shall be responsible for
monitoring, or arranging for others to monitor, compliance by the Portfolio
Managers with the
<PAGE> 2
investment policies and restrictions of the respective Funds and with such other
limitations or directions as the Board of Directors of the Company may from time
to time prescribe. The Adviser shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Adviser and Portfolio Managers to the investment policies of
the Funds.
The Adviser further agrees that, in performing its duties hereunder, it
will directly, or assure that the Portfolio Managers will,:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Funds so that they will each
qualify, and continue to qualify, as regulated investment companies under
Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investments of the Funds directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to each Fund and in accordance with applicable legal requirements;
(d) furnish to the Company whatever statistical information the Company
may reasonably request with respect to the Funds' assets or contemplated
investments; keep the Company and the Directors informed of developments
materially affecting the Funds' portfolios; and, on the Adviser's or Portfolio
Managers' own initiative, furnish to the Company from time to time whatever
information the Adviser or Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator, Furman Selz
Incorporated (the "Administrator"), and the Company, promptly upon their
request, such copies of its investment records and ledgers with respect to the
Funds as may be required to assist the Administrator and the Company in their
compliance with applicable laws and regulations. The Adviser will furnish the
Directors with such periodic and special reports regarding the Funds as they may
reasonably request;
(f) immediately notify the Company in the event that the Adviser or any
of its affiliates: (1) becomes aware that it is
- 2 -
<PAGE> 3
subject to a statutory disqualification that prevents the Adviser from serving
as investment adviser pursuant to this Agreement; or (2) becomes aware that it
is the subject of an administrative proceeding or enforcement action by the
Securities and Exchange Commission ("SEC") or other regulatory authority. The
Adviser further agrees to notify the Company immediately of any material fact
known to the Adviser respecting or relating to the Adviser that is not contained
in the Company's Registration Statement regarding the Funds, or any amendment or
supplement thereto, but that is required to be disclosed therein, and of any
statement contained therein that becomes untrue in any material respect;
(g) in making investment decisions with respect to the Funds, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Adviser seek to obtain any such information.
3. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 3, the Adviser shall pay the compensation and expenses
of all its directors, officers and employees who serve as directors, officers
and executive employees of the Company (including the Company's share of payroll
taxes) and shall pay all fees payable pursuant to portfolio management
agreements with any Portfolio Managers it may retain. The Adviser shall make
available, without expense to the Funds, the services of its directors, officers
and employees who may be duly elected officers or directors of the Company,
subject to their individual consent to serve and to any limitations imposed by
law.
The Adviser shall not be required to pay any expenses of the Company or
the Funds other than those specifically allocated to the Adviser in this section
3. In particular, but without limiting the generality of the foregoing, the
Adviser shall not be responsible, except to the extent of the reasonable
compensation of such of the Company's employees as are officers or employees of
the Adviser whose services may be involved, for the following expenses of the
Company or the Funds: organization and certain offering expenses of the Company
and the Funds (including out-of-pocket expenses, but not including the Adviser's
overhead and employee costs); fees payable to the Adviser; legal expenses;
auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Funds in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Funds; payments for portfolio pricing or valuation
services to pricing agents, accountants, bankers and other specialists, if any;
expenses of preparing and printing share
- 3 -
<PAGE> 4
certificates; other expenses in connection with the issuance, offering,
distribution, redemption or sale of securities issued by the Funds; expenses
relating to investor and public relations; expenses of registering and
qualifying shares of the Funds for sale; freight, insurance and other charges in
connection with the shipment of the Funds' portfolio securities; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
or other assets of the Funds, or of entering into other transactions or engaging
in any investment practices with respect to the Funds; expenses of printing and
distributing prospectuses, Statements of Additional Information, reports,
notices and dividends to stockholders; costs of preparing, printing and filing
documents with regulatory agencies; costs of stationery and other office
supplies; any litigation or other extraordinary expenses; costs of stockholders'
and other meetings; the compensation and all expenses (specifically including
travel expenses relating to the business of the Company or a Fund) of officers,
directors and employees of the Company who are not interested persons of the
Adviser; and travel expenses (or an appropriate portion thereof) of officers or
directors of the Company who are officers, directors or employees of the Adviser
to the extent that such expenses relate to attendance at meetings of the Board
of Directors of the Company, or any committees thereof or advisory group thereto
or other business of the Company or the Funds.
4. Compensation. As compensation for the services provided and expenses
assumed by the Adviser under this Agreement, the Company will arrange for the
Funds to pay the Adviser at the end of each calendar month an investment
advisory fee computed daily at an annual rate equal to the percentage of each
Fund's average daily net assets specified in Schedule A hereto. The "average
daily net assets" of a Fund shall mean the average of the values placed on the
Fund's net assets as of 4:15 p.m. (Eastern time) on each day on which the net
asset value of the Fund is determined consistent with the provisions of Rule
22c-1 under the 1940 Act or, if the Fund lawfully determines the value of its
net assets as of some other time on each business day, as of such other time.
The value of net assets of the Fund shall always be determined pursuant to the
applicable provisions of the Articles and the Registration Statement. If,
pursuant to such provisions, the determination of net asset value for a Fund is
suspended for any particular business day, then for the purposes of this section
4, the value of the net assets of the Fund as last determined shall be deemed to
be the value of its net assets as of the close of the New York Stock Exchange,
or as of such other time as the value of the net assets of the Fund's portfolio
may lawfully be determined, on that day. If the determination of the net asset
value of the shares of a Fund has been so suspended for a period including any
month end when the Adviser's compensation is payable pursuant to this section,
then the Adviser's compensation payable at the end of such month shall
- 4 -
<PAGE> 5
be computed on the basis of the value of the net assets of the Fund as last
determined (whether during or prior to such month). If a Fund determines the
value of the net assets of its portfolio more than once on any day, then the
last such determination thereof on that day shall be deemed to be the sole
determination thereof on that day for the purposes of this section 4.
In the event that the Adviser's gross compensation hereunder shall,
when added to the other expenses of a Fund, cause the aggregate expenses of the
Fund to exceed the maximum expenses permitted under the lowest applicable
expense limitation established pursuant to the statutes or regulations of any
jurisdiction in which the shares of the Fund may be qualified for offer or sale,
the total compensation paid or payable to the Adviser shall be reduced (but not
below zero) to the extent necessary to cause the Fund not to exceed such expense
limitation. Except to the extent that such reduction has been reflected in lower
monthly payments to the Adviser, the Adviser shall refund to a Fund the amount
by which the total payments received by the Adviser are in excess of such
expense limitation as promptly as practicable after the end of such fiscal year,
provided that the Adviser shall not be required to pay a Fund an amount greater
than the fee otherwise payable to the Adviser by that Fund in respect of such
year. As used in this Section 4, "expenses" shall mean those expenses included
in the applicable expense limitation having the broadest specifications thereof,
and "expense limitation" shall mean a limitation on the maximum annual expenses
which may be incurred by an investment company as determined by applicable law.
The words "lowest applicable expense limitation" shall be deemed to be that
which results in the largest reduction of the Adviser's compensation for any
fiscal year of a Fund; provided, however, that nothing in this Agreement shall
limit the Adviser's fees if not required by an applicable statute or regulation
referred to above in this Section 4.
5. Books and Records. The Adviser agrees to maintain such books and
records with respect to its services to the Company and the Funds as are
required by Section 31 under the 1940 Act, and rules adopted thereunder, and by
other applicable legal provisions, and to preserve such records for the periods
and in the manner required by that Section, and those rules and legal
provisions. The Adviser also agrees that records it maintains and preserves
pursuant to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection
with its services hereunder are the property of the Company and will be
surrendered promptly to the Company upon its request. And the Adviser further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations
- 5 -
<PAGE> 6
of the Company and the Funds are being conducted in accordance with applicable
laws and regulations.
6. Standard of Care and Limitation of Liability. The Adviser shall
exercise its best judgment in rendering the services provided by it under this
Agreement. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Company or a Fund or the holders of a
Fund's shares in connection with the matters to which this Agreement relates,
provided that nothing in this Agreement shall be deemed to protect or purport to
protect the Adviser against any liability to the Company, a Fund or to holders
of a Fund's shares to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Adviser's reckless disregard of
its obligations and duties under this Agreement. As used in this Section 6, the
term "Adviser" shall include any officers, directors, employees or other
affiliates of the Adviser performing services with respect to the Company or a
Fund.
7. Services Not Exclusive. It is understood that the services of the
Adviser are not exclusive, and that nothing in this Agreement shall prevent the
Adviser from providing similar services to other investment companies or to
other series of investment companies (whether or not their investment objectives
and policies are similar to those of a Fund) or from engaging in other
activities, provided such other services and activities do not, during the term
of this Agreement, interfere in a material manner with the Adviser's ability to
meet its obligations to the Company and the Funds hereunder. When the Adviser
recommends the purchase or sale of a security for other investment companies and
other clients, and at the same time the Adviser recommends the purchase or sale
of the same security for a Fund, it is understood that in light of its fiduciary
duty to the Fund, such transactions will be executed on a basis that is fair and
equitable to the Fund. In connection with purchases or sales of portfolio
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees shall act as a principal or agent or receive
any commission. If the Adviser provides any advice to its clients concerning the
shares of the Funds, the Adviser shall act solely as investment counsel
for such clients and not in any way on behalf of the Company or a Fund.
8. Duration and Termination. This Agreement shall continue until
__________________, 199__, and thereafter shall continue automatically, with
respect to all or fewer than all the Funds, as applicable, for successive annual
periods, provided such continuance is specifically approved at least annually by
(i) the Directors or, (ii) with respect to each Fund, by vote of a "majority"
(as defined in the 1940 Act) of the Fund's outstanding
- 6 -
<PAGE> 7
voting securities (as defined in the 1940 Act), provided that in either event
the continuance is also approved by a majority of the Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. Notwithstanding the foregoing, this
Agreement may be terminated: (a) at any time without penalty by the Company or a
Fund upon the vote of a majority of the Directors (with respect to the Company
or a Fund) or, with respect to a Fund, by vote of the majority of the Fund's
outstanding voting securities, upon sixty (60) days' written notice to the
Adviser or (b) by the Adviser at any time without penalty, upon sixty (60) days'
written notice to the Company. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act).
9. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
with respect to a Fund until approved by an affirmative vote of (i) a majority
of the outstanding voting securities of the Fund, and (ii) a majority of the
Directors, including a majority of Directors who are not interested persons of
any party to this Agreement, cast in person at a meeting called for the purpose
of voting on such approval, if such approval is required by applicable law.
10. Proxies. Unless the Company gives written instructions to the
contrary, the Adviser shall vote all proxies solicited by or with respect to the
issuers of securities in which assets of the Funds may be invested, provided,
that the Adviser may delegate this responsibility with respect to one or more
Funds to Portfolio Managers pursuant to a portfolio management agreement. The
Adviser (or Portfolio Manager) shall use its best good faith judgment to vote
such proxies in a manner which best serves the interests of the particular
Fund's shareholders.
11. Name Reservation. The Company acknowledges and agrees that the
Adviser has property rights relating to the use of the term "ESC Strategic" and
has permitted the use of such term by the Company and its Funds. The Company
agrees that: (i) it will use the term "ESC Strategic" only as a component of the
names of the Company and the Funds and for no other purposes; (ii) it will not
purport to grant to any third party any rights in such term; (iii) at the
request of the Adviser, the Company will take such action as may be required to
provide its consent to use of the term by the Adviser, or any affiliate of the
Adviser to whom the Adviser shall have granted the right to such use; and (iv)
the Adviser may use or grant to others the right to use the term as all or a
portion
- 7 -
<PAGE> 8
of a corporate or business name or for any commercial purpose, including
a grant of such right to any other investment company. Upon termination of this
Agreement as to the Company or any Fund, the Company shall, upon request of the
Adviser, cease to use the term "ESC Strategic" as part of the name of the
Company and its Funds, or of any Fund as to which the Agreement is terminated,
as applicable. In the event of any such request by the Adviser that use of the
term "ESC Strategic" shall cease, the Company shall cause its officers,
directors and stockholders to take any and all such actions which the Adviser
may request to effect such request and to reconvey to the Adviser any and all
rights to the term "ESC Strategic."
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Adviser as an
agent of the Company or any Fund.
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of ______________, 199___.
ESC STRATEGIC FUNDS, INC.
By ______________________________
President
EQUITABLE SECURITIES CORPORATION
By ______________________________
President
- 9 -
<PAGE> 10
SCHEDULE A
Fees payable to the Adviser pursuant to paragraph 4 hereof shall be at
the following annual rates for each Fund:
<TABLE>
<S> <C>
ESC Strategic Appreciation Fund 1.00%
ESC Strategic Global Equity Fund 1.00%
ESC Strategic Small Cap Fund 1.00%
ESC Strategic Growth Fund 1.25%
ESC Strategic Income Fund 1.00%
ESC Strategic Asset Preservation Fund 0.50%
ESC Strategic Value Fund 1.25%
</TABLE>
- 10 -
<PAGE> 1
Exhibit 5(b)
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on ________________, 199__, among
Equitable Securities Corporation (the "Adviser"), ESC Strategic Funds, Inc. (the
"Company") and Equitable Asset Management, Inc. ("Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated , 1996 ("Investment Advisory Agreement"), to
act as investment adviser to the Company with respect to each of its present and
future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic Value
Fund (the "Fund") and the Portfolio Manager is willing to furnish such services
to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion for (a) the management of the Fund's
assets ("Assets") in accordance with the Fund's investment objectives, policies
and limitations as stated in its prospectus and Statement of Additional
Information included as part of the Company's registration statement filed with
the Securities and Exchange Commission ("SEC"), as they may be amended from time
to time, ("Registration
<PAGE> 2
Statement") copies of which shall be provided to the Portfolio Manager by the
Adviser; and (b) the placement of orders to purchase and sell securities for the
Fund. At the request of the Directors or the Adviser, the Portfolio Manager
shall report to the Board of Directors of the Company regularly at such times
and in such detail as the Board may from time to time determine to be
appropriate, in order to permit the Board to determine the adherence of the
Portfolio Manager to the investment policies of the Fund.
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser so that the Fund will qualify, and continue to
qualify, as a regulated investment company under Subchapter M of the Code and
regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company and the Adviser whatever statistical
information the Company or the Adviser may reasonably request with respect to
the Assets or contemplated investments; and keep the Adviser and the Directors
informed of developments materially affecting the Fund's portfolio;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement
- 2 -
<PAGE> 3
action by the SEC or other regulatory authority. The Portfolio Manager further
agrees to review information in the Company's Registration Statement describing
the Portfolio Manager and to notify the Company and the Adviser if the
information becomes incorrect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom the Fund will authorize to act
upon instructions from properly authorized representatives of the Portfolio
Manager, in connection with its services hereunder, directing the Custodian(s)
to pay, deliver or receive cash and securities in settlement of transactions
authorized by the Portfolio Manager on the Fund's behalf. The Fund's
agreement(s) with such Custodian(s) will require the Custodian(s) to settle all
transactions directed by the Portfolio Manager on the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs);
- 3 -
<PAGE> 4
fees payable to or expenses of consultants; legal expenses; auditing and
accounting expenses; interest expenses; telephone, telex, facsimile, postage and
other communications expenses; taxes and governmental fees; fees, dues and
expenses incurred by or with respect to the Company or the Fund in connection
with membership in investment company trade organizations; costs of insurance;
fees and expenses of the Company's Administrator or of any custodian,
subcustodian, transfer agent, registrar, or dividend disbursing agent of the
Company or the Fund; payments for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing and printing share certificates; other expenses in connection with the
issuance, offering, distribution, redemption or sale of securities issued by the
Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and
expenses assumed by the Portfolio Manager under this Agreement, the Adviser, out
of its fees from the Fund pursuant to the Investment Advisory Agreement, will
pay the Portfolio Manager at the end of each calendar month an investment
management fee computed daily at an annual rate equal to 0.65% on the first $50
million of the Fund's average daily net assets, 0.60% on the next $50 million
of such assts, 0.55% on the next $100 million of such assets, and 0.50% on such
assets in excess of $200 million. The "average daily net value of the Assets"
shall mean the average of the values placed on the net Assets as of 4:15 p.m.
(Eastern time) on each day on which the net asset value of the Fund is
determined consistent with the provisions of Rule 22c-1 under the 1940 Act or,
if the Fund lawfully determines the value of its net assets as of some other
time on each business day, as of such other time. The value of the net Assets,
and of the net assets of the Fund, shall always be
- 4 -
<PAGE> 5
determined pursuant to the applicable provisions of the Articles and the
Registration Statement. If, pursuant to such provisions, the determination of
net asset value for a Fund is suspended for any particular business day, then
for the purposes of this section 5, the value of the net Assets as last
determined shall be deemed to be the value of the net Assets as of the close of
the New York Stock Exchange, or as of such other time as the value of the net
assets of the Fund's portfolio may lawfully be determined, on that day. If the
determination of the net asset value of the shares of the Fund has been so
suspended for a period including any month end when the Portfolio Manager's
compensation is payable pursuant to this section, then the Portfolio Manager's
compensation payable at the end of such month shall be computed on the basis of
the value of the net Assets as last determined (whether during or prior to such
month). If the Fund determines the value of the net assets of its portfolio more
than once on any day, then the last such determination thereof with respect to
the net Assets on that day shall be deemed to be the sole determination thereof
on that day with respect to the net Assets for the purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard
- 5 -
<PAGE> 6
of its obligations and duties under this Agreement. As used in this Section 7,
the term "Portfolio Manager" shall include any officers, directors, employees or
other affiliates of the Portfolio Manager performing services with respect to
the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the purchase or sale of a security for other
Portfolios of the Company, other investment companies or other clients, and at
the same time the Portfolio Manager recommends the purchase or sale of the same
security for the Fund, it is understood that in light of its fiduciary duty to
the Fund, such transactions will be executed on a basis that is fair and
equitable to the Fund. In connection with purchases or sales of portfolio
securities for the account of the Fund, neither the Portfolio Manager nor any of
its directors, officers or employees shall act as a principal or agent or
receive any commission. If the Portfolio Manager provides any advice to its
clients concerning the shares of the Fund or other funds of the Company, the
Portfolio Manager shall act solely as investment counsel for such clients and
not in any way on behalf of the Company, the Fund or another fund of the
Company.
9. Duration and Termination. This Agreement shall continue until
__________________, 199___, and thereafter shall continue automatically for
successive annual periods, provided such continuance is specifically approved at
least annually by (i) the Directors or (ii) by vote of a "majority" (as defined
in the 1940 Act) of the Fund's outstanding voting securities (as defined in the
1940 Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any time
without penalty (i) by the Adviser, (ii) by the Company upon the vote of a
majority of the Directors or (iii) by vote of the majority of the Fund's
outstanding voting securities, each upon sixty
- 6 -
<PAGE> 7
(60) days' written notice to the Portfolio Manager; or (b) by the Portfolio
Manager at any time without penalty, upon sixty (60) days' written notice to the
Company or the Adviser. This Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of ______________, 199___.
- 7 -
<PAGE> 8
EQUITABLE SECURITIES CORPORATION
By ______________________________
President
EQUITABLE ASSET MANAGEMENT, INC.
By ______________________________
Title: _______________________
- 8 -
<PAGE> 1
Exhibit 6(d)
ESC STRATEGIC FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
January 14, 1997
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
Re: ESC Strategic Value Fund - Class A Shares
Dear Sirs:
This will confirm the agreement between the undersigned (the "Company")
and you (the "Distributor") as follows:
1. The Company is an open-end management investment company organized
as a Maryland corporation and consists of such separate investment portfolios as
have been or may be established by the Directors of the Company from time to
time. A separate series of shares of common stock of the Company is offered to
investors with respect to each investment portfolio. ESC Strategic Value Fund
(the "Fund") is a separate investment portfolio of the Company and has two
classes of shares, including the Class A Shares covered by this Supplement.
2. The Company and the Distributor have entered into a Master
Distribution Contract ("Master Agreement") pursuant to which the Distributor has
agreed to be the distributor of shares of the Company.
3. As provided in paragraph 1 of the Master Agreement, the Company
hereby adopts the Master Agreement with respect to Class A Shares of the Fund,
and the Distributor hereby acknowledges that the Master Agreement shall pertain
to Class A Shares of the Fund, the terms and conditions of such Master Agreement
being hereby incorporated herein by reference.
4. The term "Fund", "Funds", "Class" and "Classes", as used in the
Master Agreement shall, for purposes of this Supplement, pertain to the Fund and
to its Class A Shares, respectively, as the context requires.
5. This Supplement and the Master Agreement (together, the "contract")
shall become effective with respect to the Company and Class A Shares of the
Fund on January 14, 1997, and shall continue in effect until such time as there
shall remain no unsold balance of Class A Shares registered under the 1933 Act
provided that this contract shall continue in effect for a period of more than
two years from the effective date of this Supplement only so long as such
continuance is specifically approved at least annually by (a) the Company's
Board of Directors or by the vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Company, the Fund or Class A, as
required by applicable legal provisions and (b) by the vote, cast in person at a
meeting called for the purpose, of a majority of the Company's Directors who are
not parties to this contract or "interested persons" (as defined in the 1940
<PAGE> 2
Act) of any such party. This contract shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). This contract may, in any event,
be terminated at any time, without the payment of any penalty, by the Company
upon 60 days written notice to the Distributor and by the Distributor upon 60
days written notice to the Company.
If the foregoing correctly sets forth the agreement between the Company
and the Distributor, please so indicate by signing and returning to the Company
the enclosed copy hereof.
Very truly yours,
ESC STRATEGIC FUNDS, INC.
By:___________________________
Name: Carrie Zuckerman
Title: Secretary
ACCEPTED:
EQUITABLE SECURITIES CORPORATION
By:___________________________
Name:
Title:
<PAGE> 3
Exhibit 6(d)
DISTRIBUTION CONTRACT SUPPLEMENT
ESC STRATEGIC FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
January 14, 1997
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
Re: ESC Strategic Value Fund - Class D Shares
Dear Sirs:
This will confirm the agreement between the undersigned (the "Company")
and you (the "Distributor") as follows:
1. The Company is an open-end management investment company organized
as a Maryland corporation and consists of such separate investment portfolios as
have been or may be established by the Directors of the Company from time to
time. A separate series of shares of common stock of the Company is offered to
investors with respect to each investment portfolio. ESC Strategic Value Fund
(the "Fund") is a separate investment portfolio of the Company and has two
classes of shares, including the Class D Shares covered by this Supplement.
2. The Company and the Distributor have entered into a Master
Distribution Contract ("Master Agreement") pursuant to which the Distributor has
agreed to be the distributor of shares of the Company.
3. As provided in paragraph 1 of the Master Agreement, the Company
hereby adopts the Master Agreement with respect to Class D Shares of the Fund,
and the Distributor hereby acknowledges that the Master Agreement shall pertain
to Class A Shares of the Fund, the terms and conditions of such Master Agreement
being hereby incorporated herein by reference.
4. The term "Fund", "Funds", "Class" and "Classes", as used in the
Master Agreement shall, for purposes of this Supplement, pertain to the Fund and
to its Class A Shares, respectively, as the context requires.
5. This Supplement and the Master Agreement (together, the "contract")
shall become effective with respect to the Company and Class D Shares of the
Fund on January 14, 1997, and shall continue in effect until such time as there
shall remain no unsold balance of Class D Shares registered under the 1933 Act
provided that this contract shall continue in effect for a period of more than
two years from the effective date of this Supplement only so long as such
continuance is specifically approved at least annually by (a) the Company's
Board of Directors or by the vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Company, the Fund or Class D, as
required by applicable legal provisions and (b) by the vote, cast in person at a
meeting called for the purpose, of a majority of the Company's Directors who are
not parties to this contract or "interested persons" (as defined in the 1940
<PAGE> 4
Act) of any such party. This contract shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). This contract may, in any event,
be terminated at any time, without the payment of any penalty, by the Company
upon 60 days written notice to the Distributor and by the Distributor upon 60
days written notice to the Company.
If the foregoing correctly sets forth the agreement between the Company
and the Distributor, please so indicate by signing and returning to the Company
the enclosed copy hereof.
Very truly yours,
ESC STRATEGIC FUNDS, INC.
By:___________________________
Name: Carrie Zuckerman
Title: Secretary
ACCEPTED:
EQUITABLE SECURITIES CORPORATION
By:___________________________
Name:
Title:
<PAGE> 1
Exhibit 9(a)
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of this 1st day of October, 1996, by and between
ESC STRATEGIC FUNDS, INC., a Maryland corporation (the "Company"), and BISYS
FUND SERVICES LIMITED PARTNERSHIP, d/b/a BISYS FUND SERVICES (the
"Administrator"), an Ohio limited partnership.
WHEREAS, the Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of several series of shares of common stock ("Shares"); and
WHEREAS, the Company desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such series of the Company as the Company and the Administrator may agree on
("Portfolios") and as listed on Schedule A attached hereto and made a part of
this Agreement, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Company and the Administrator hereby agree as
follows:
ARTICLE 1. Retention of the Administrator; Conversion to the Services. The
Company hereby engages the Administrator to act as the administrator of the
Portfolios and to furnish the Portfolios with the management and administrative
services as set forth in Article 2 below (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to the Administrator's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with the Administrator to
provide the Administrator with all necessary information and assistance required
to successfully convert to the BISYS System. The Administrator shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." The Administrator hereby accepts such engagement and agrees
to perform the Services commencing, with respect to each individual Service, on
the date that the conversion of such Service to the BISYS System has been
completed. The Administrator shall determine in accordance with its normal
acceptance procedures when the applicable Service has been successfully
converted.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Company in any way and shall
not be deemed an agent of the Company.
ARTICLE 2. Administrative Services. The Administrator shall perform or
supervise the performance by others of other administrative services in
connection with the operations of the Portfolios, and, on behalf of the Company,
will investigate, assist in the selection of and conduct
<PAGE> 2
relations with custodians, depositories, accountants, legal counsel,
underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and
persons in any other capacity deemed to be necessary or desirable for the
Portfolios' operations. The Administrator shall provide the Directors of the
Company with such reports regarding investment performance as they may
reasonably request but shall have no responsibility for supervising the
performance by any investment adviser or sub-adviser of its responsibilities.
The Administrator shall provide the Company with regulatory reporting, all
necessary office space, equipment, personnel, compensation and facilities
(including facilities for meetings of shareholders ("Shareholders") and
directors of the Company) for handling the affairs of the Portfolios and such
other services as the Administrator shall, from time to time, determine to be
necessary to perform its obligations under this Agreement. In addition, at the
request of the Board of Directors, the Administrator shall make reports to the
Company's Directors concerning the performance of its obligations hereunder.
Without limiting the generality of the foregoing, the Administrator shall:
(a) calculate contractual Company expenses and control all disbursements
for the Company, and as appropriate compute the Company's yields,
total return, expense ratios, portfolio turnover rate and, if
required, portfolio average dollar-weighted maturity;
(b) assist Company counsel with the preparation of prospectuses,
statements of additional information, registration statements and
proxy materials;
(c) prepare such reports, applications and documents (including reports
regarding the sale and redemption of Shares as may be required in
order to comply with Federal and state corporate and securities law)
as may be necessary or desirable to register the Company's Shares with
state and securities authorities, monitor the sale of Company Shares
for compliance with state corporate and securities laws, and file with
the appropriate state securities authorities the registration
statements and reports for the Company and the Company's Shares and
all amendments thereto, as may be necessary or convenient to register
and keep effective the Company and the Company's Shares with state
securities authorities to enable the Company to make a continuous
offering of its Shares;
(d) develop and prepare, with the assistance of the Company's investment
adviser, communications to Shareholders, including the annual report
to Shareholders, coordinate the mailing of prospectuses, notices,
proxy statements, proxies and other reports to Shareholders, and
supervise and facilitate the proxy solicitation process for all
shareholder meetings, including the tabulation of shareholder votes;
2
<PAGE> 3
(e) administer contracts on behalf of the Company with, among others, the
Company's investment adviser, distributor, custodian, transfer agent
and fund accountant;
(f) supervise the Company's transfer agent with respect to the payment of
dividends and other distributions to Shareholders;
(g) calculate performance data of the Portfolios for dissemination to
information services covering the investment company industry;
(h) coordinate and supervise the preparation and filing of the Company's
tax returns;
(i) examine and review the operations and performance of the various
organizations providing services to the Company or any Portfolio of
the Company, including, without limitation, the Company's investment
adviser, distributor, custodian, fund accountant, transfer agent,
outside legal counsel and independent public accountants, and at the
request of the Board of Directors, report to the Board on the
performance of organizations;
(j) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and printing of the
Company's semi-annual and annual reports to Shareholders;
(k) assist with the design, development, and operation of the Portfolios,
including new classes, investment objectives, policies and structure;
(l) provide individuals reasonably acceptable to the Company's Board of
Directors to serve as officers of the Company, who will be responsible
for the management of certain of the Company's affairs as determined
by the Company's Board of Directors;
(m) advise the Company and its Board of Directors on matters concerning
the Company and its affairs;
(n) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Company in
accordance with the requirements of Rules 17g-1 and 17d-1(7) under the
1940 Act as such bonds and policies are approved by the Company's
Board of Directors;
(o) monitor and advise the Company and its Portfolios on their registered
investment company status under the Internal Revenue Code of 1986, as
amended;
(p) perform all administrative services and functions of the Company and
each Portfolio to the extent administrative services and functions are
not provided to the Company or such Portfolio pursuant to the
Company's or such Portfolio's investment advisory
3
<PAGE> 4
agreement, distribution agreement, custodian agreement, transfer agent
agreement and fund accounting agreement;
(q) furnish advice and recommendations with respect to other aspects of
the business and affairs of the Portfolios as the Company and the
Administrator shall determine desirable; and
(r) prepare and file with the SEC the semi-annual report for the Company
on Form N-SAR and all required notices pursuant to Rule 24f-2.
The Administrator shall perform such other services for the Company that
are mutually agreed upon by the parties from time to time. Such services may
include performing internal audit examinations; mailing the annual reports of
the Portfolios; preparing an annual list of Shareholders; and mailing notices of
Shareholders' meetings, proxies and proxy statements, for all of which the
Company will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. Allocation of Charges and Expenses.
(A) The Administrator. The Administrator shall furnish at its own expense
the executive, supervisory and clerical personnel necessary to perform its
obligations under this Agreement. The Administrator shall also provide the items
which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Company as well as all Directors of the
Company who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Company retained by the Directors of the
Company to perform services on behalf of the Company.
(B) The Company. The Company assumes and shall pay or cause to be paid all
other expenses of the Company not otherwise allocated herein, including, without
limitation, organization costs, taxes, expenses for legal and auditing services,
the expenses of preparing (including typesetting), printing and mailing reports,
prospectuses, statements of additional information, proxy solicitation material
and notices to existing Shareholders, all expenses incurred in connection with
issuing and redeeming Shares, the costs of custodial services, the cost of
initial and ongoing registration of the Shares under Federal and state
securities laws, fees and out-of-pocket expenses of Directors who are not
affiliated persons of the Administrator or the Investment Adviser to the Company
or any affiliated corporation of the Administrator or the Investment Adviser,
insurance, interest, brokerage costs, litigation and other extraordinary or
nonrecurring expenses, and all fees and charges of investment advisers to the
Company.
ARTICLE 4. Compensation of the Administrator.
(A) Administration Fee. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Company shall pay to the
4
<PAGE> 5
Administrator compensation at an annual rate specified in Schedule A attached
hereto. Such compensation shall be calculated and accrued daily, and paid to the
Administrator monthly.
If the Conversion Date occurs subsequent to the first day of a month or
termination of this Agreement occurs before the last day of a month, the
Administrator's compensation for that part of the month in which this Agreement
is in effect shall be prorated in a manner consistent with the calculation of
the fees as set forth above. Payment of the Administrator's compensation for the
preceding month shall be made promptly.
(B) Survival of Compensation Rights. All rights of compensation under this
Agreement for services performed as of the termination date shall survive the
termination of this Agreement.
ARTICLE 5. Limitation of Liability of the Administrator. The duties of the
Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or modified
hereby. (As used in this Article 5, the term "Administrator" shall include
partners, officers, employees and other agents of the Administrator as well as
the Administrator itself.)
So long as the Administrator acts in good faith and with due diligence and
without negligence, the Company assumes full responsibility and shall indemnify
the Administrator and hold it harmless from and against any and all actions,
suits and claims, whether groundless or otherwise, and from and against any and
all losses, damages, costs, charges, reasonable counsel fees and disbursements,
payments, expenses and liabilities (including reasonable investigation expenses)
arising directly or indirectly out of the Administrator's actions taken or
nonactions with respect to the performance of services hereunder. The indemnity
and defense provisions set forth herein shall indefinitely survive the
termination of this Agreement.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case the Company may be asked to indemnify or hold the
Administrator harmless, the Company shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Administrator will use all reasonable care to identify and
notify the Company promptly concerning any situation which presents or appears
likely to present the probability of such a claim for indemnification against
the Company, but failure to do so in good faith shall not affect the rights
hereunder.
The Company shall be entitled to participate at its own expense or, if it
so elects, to assume the defense of any suit brought to enforce any claims
subject to this indemnity provision. If the
5
<PAGE> 6
Company elects to assume the defense of any such claim, the defense shall be
conducted by counsel chosen by the Company and satisfactory to the
Administrator, whose approval shall not be unreasonably withheld. In the event
that the Company elects to assume the defense of any suit and retain counsel,
the Administrator shall bear the fees and expenses of any additional counsel
retained by it. If the Company does not elect to assume the defense of a suit,
it will reimburse the Administrator for the reasonable fees and expenses of any
counsel retained by the Administrator.
The Administrator may apply to the Company at any time for instructions and
may consult counsel for the Company or its own counsel and with accountants and
other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with such
instruction or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. The Administrator will not be held to have
notice of any change of authority of any officers, employees or agents of the
Company until receipt of written notice thereof from the Company.
ARTICLE 6. Activities of the Administrator. The services of the
Administrator rendered to the Company are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that directors, officers, employees
and Shareholders are or may be or become interested in the Administrator, as
officers, employees or otherwise and that partners, officers and employees of
the Administrator and its counsel are or may be or become similarly interested
in the Company, and that the Administrator may be or become interested in the
Company as a Shareholder or otherwise.
ARTICLE 7. Duration of this Agreement. The Term of this Agreement shall be
as specified in Schedule A hereto.
ARTICLE 8. Assignment. This Agreement shall not be assignable by either
party without the written consent of the other party; provided, however, that
the Administrator may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder. The
Administrator shall not, however, be relieved of any of its obligations under
this Agreement by the appointment of such subcontractor and provided further,
that the Administrator shall be responsible, to the extent provided in Article 5
hereof, for all acts of such subcontractor as if such acts were its own. This
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
ARTICLE 9. Amendments. This Agreement may be amended by the parties hereto
only if such amendment is specifically approved (i) by the vote of a majority of
the Directors of the Company, and (ii) by the vote of a majority of the
Directors of the Company who are not parties to this Agreement or interested
persons of any such party, cast in person at a Board of Directors meeting called
for the purpose of voting on such approval.
6
<PAGE> 7
For special cases, the parties hereto may amend such procedures set forth
herein as may be appropriate or practical under the circumstances, and the
Administrator may conclusively assume that any special procedure which has been
approved by the Company does not conflict with or violate any requirements of
its Articles of Incorporation, Bylaws or then current prospectuses, or any rule,
regulation or requirement of any regulatory body.
ARTICLE 10. Certain Records. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Company shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Company and will be made
available to or surrendered promptly to the Company on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Company and follow the
Company's instructions as to permitting or refusing such inspection; provided
that the Administrator may exhibit such records to any person in any case where
it is advised by its counsel that it may be held liable for failure to do so,
unless (in cases involving potential exposure only to civil liability) the
Company has agreed to indemnify the Administrator against such liability.
ARTICLE 11. Definitions of Certain Terms. The terms "interested person" and
"affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 12. Notice. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient if sent by registered or certified
mail, postage prepaid, addressed by the party giving notice to the other party
at the following address or such other address that may subsequently be
furnished: if to the Company, at 800 Nashville City Center, Nashville, Tennessee
37219-1743, Attn: John McAllister, Equitable Securities Corporation; and if to
BISYS at 3435 Stelzer Road, Columbus, Ohio 43219.
ARTICLE 13. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Ohio and the applicable provisions of the 1940
Act. To the extent that the applicable laws of the State of Ohio, or any of the
provisions herein, conflict with the applicable provisions of the 1940 Act, the
latter shall control.
ARTICLE 14. Multiple Originals. This Agreement may be executed in two or
more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ESC STRATEGIC FUNDS, INC.
By:_____________________________
Attest:_________________________
BISYS FUND SERVICES LIMITED
PARTNERSHIP
BY: BISYS FUND SERVICES,
GENERAL PARTNER
By:_____________________________
Attest:_________________________
8
<PAGE> 9
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
DATED AS OF OCTOBER 1, 1996
BETWEEN ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
Portfolios: This Agreement shall apply to all Portfolios of the
Company, either now or hereafter created (collectively, the
"Portfolios"). The current Portfolios of the Company are set
forth below:
ESC Strategic Appreciation Fund;
ESC Strategic Small Cap Fund;
ESC Strategic Asset Preservation Fund;
ESC Strategic Income Fund; and
ESC Strategic Global Equity Fund.
Fees: Pursuant to Article 4, in consideration of services rendered and
expenses assumed pursuant to this Agreement, the Company will pay
the Administrator on the first business day of each month, or at
such time(s) as the Administrator shall request and the parties
hereto shall agree, a fee computed daily at the annual rate of:
.15% of each Portfolio's average daily net assets
The fee for the period from the day of the month upon which
the Conversion Date occurs until the end of that month shall
be prorated according to the proportion which such period
bears to the full monthly period. Upon any termination of this
Agreement before the end of any month, the fee for such part
of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
For purposes of determining the fees payable to the
Administrator, the value of the net assets of a particular
Portfolio shall be computed in the manner described in the
Company's Articles of Incorporation or in the Prospectus or
Statement of Additional Information respecting that Portfolio
as from time to time is in effect for the computation of the
value of such net assets in connection with the determination
of the liquidating value of the shares of such Portfolio.
The parties hereby confirm that the fees payable hereunder
shall be applied to each Portfolio as a whole, and not to
separate classes of shares within the Portfolios.
A-1
<PAGE> 10
Term: The initial term of this Agreement (the "Initial Term") shall be
for a period commencing on the date this Agreement is executed by
both parties and ending on the date that is twelve (12) months
after the Conversion Date. This Agreement shall be renewed
automatically for successive periods of one year after the
Initial Term, unless written notice of nonrenewal is provided by
either party not less than 90 days prior to the end of the
then-current term. In the event of a material breach of this
Agreement by either party, the non-breaching party shall notify
the breaching party in writing of such breach and upon receipt of
such notice, the breaching party shall have 45 days to remedy the
breach. In the event the breach is not remedied within such time
period, the nonbreaching party may immediately terminate this
Agreement.
Notwithstanding the foregoing, after such termination for so long
as the Administrator, with the written consent of the Company, in
fact continues to perform any one or more of the services
contemplated by this Agreement or any schedule or exhibit hereto,
the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in
full force and effect. Compensation due the Administrator and
unpaid by the Company upon such termination shall be immediately
due and payable upon and notwithstanding such termination. The
Administrator shall be entitled to collect from the Company, in
addition to the compensation described in this Schedule A, the
amount of all of the Administrator's cash disbursements for
services in connection with the Administrator's activities in
effecting such termination, including without limitation, the
delivery to the Company and/or its designees of the Company's
property, records, instruments and documents, or any copies
thereof. Subsequent to such termination, for a reasonable fee,
the Administrator will provide the Company with reasonable access
to any Company documents or records remaining in its possession.
If, for any reason, other than a material breach of this
Agreement, the Administrator is replaced as fund manager and
administrator, or if a third party is added to perform all or
a part of the services provided by the Administrator under
this Agreement (excluding any sub-administrator appointed by
the Administrator as provided in Article 7 hereof), then the
Company shall make a one-time cash payment, as liquidated
damages, to the Administrator equal to the balance due the
Administrator for the remainder of the term of this Agreement,
assuming for purposes of calculation of the payment that the
asset level of the Company on the date the Administrator is
replaced, or a third party is added, will remain constant for
the balance of the contract term.
A-2
<PAGE> 1
Exhibit 9(b)
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between ESC STRATEGIC FUNDS,
INC. (the "Company"), a Maryland corporation, and BISYS FUND SERVICES, INC.
("BISYS"), a Delaware corporation.
WHEREAS, the Company desires that BISYS perform certain services for each
series of the Company (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Retention of BISYS; Conversion to the Services.
The Company hereby engages BISYS to act as the transfer agent for the
Funds to perform (i) the transfer agent services set forth in Schedule A hereto
(the "Initial Services"), (ii) such special services (the "Special Services")
incidental to the performance of such services as may be agreed to by the
parties from time to time (for such fees as the parties may agree as aforesaid)
and (iii) such additional services (collectively with the Initial Services and
the Special Services, the "Services"), as may be agreed to by the parties from
time to time and set forth in an amendment to said Schedule A (for such fees as
the parties may agree as aforesaid), and, in connection therewith, the Company
agrees to convert to BISYS' data processing systems and software (the "BISYS
System") as necessary in order to receive the Services. The Company shall
cooperate with BISYS to provide BISYS with all necessary information and
assistance required to successfully convert to the BISYS System. BISYS shall
provide the Company with a schedule relating to such conversion and the parties
agree that the conversion may progress in stages. The date upon which all
Initial Services shall have been converted to the BISYS System shall be referred
to herein as the "Conversion Date." BISYS hereby accepts such engagement and
agrees to perform the Services commencing, with respect to each individual
Service, on the date that the conversion of such Service to the BISYS System has
been completed. BISYS shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
BISYS may, in its discretion, appoint in writing other parties qualified to
perform transfer agency services reasonably acceptable to the Company
(individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the
Company or such Fund, and that BISYS shall be fully responsible for the acts of
such Sub-transfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Sub-transfer Agent.
<PAGE> 2
2. Fees.
The Company shall pay BISYS for the services to be provided by BISYS
under this Agreement in accordance with, and in the manner set forth in,
Schedule B hereto. Fees for any additional services to be provided by BISYS
pursuant to an amendment to Schedule A hereto shall be subject to mutual
agreement at the time such amendment to Schedule A is proposed.
3. Reimbursement of Expenses.
In addition to paying BISYS the fees described in Section 2 hereof, the
Company agrees to reimburse BISYS for BISYS' out-of-pocket expenses in providing
services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges incurred by
BISYS in delivering materials to and from the Company and in
delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by BISYS in
communication with the Company, the Company's investment adviser
or custodian, dealers, shareholders or others as required for
BISYS to perform the services to be provided hereunder;
(c) Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms, proxies,
notices or other form of printed material which shall be required
by BISYS for the performance of the services to be provided
hereunder;
(d) The cost of microfilm or microfiche of records or other
materials; and
(e) Any expenses BISYS shall incur at the written direction of an
officer of the Company thereunto duly authorized.
4. Effective Date.
This Agreement shall become effective as of the date first written above
(the "Effective Date").
5. Term.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the date this Agreement is executed by both parties and
ending on the date that is twelve (12) months after the Conversion Date.
Thereafter, it shall be renewed automatically for successive one-year terms
unless written notice not to renew is given by the non-renewing party to
2
<PAGE> 3
the other party at least 60 days prior to the expiration of the then-current
term; provided, however, that after such termination, for so long as BISYS, with
the written consent of the Company, in fact continues to perform any one or more
of the services contemplated by this Agreement or any Schedule or exhibit
hereto, the provisions of this Agreement, including without limitation the
provisions dealing with indemnification, shall continue in full force and
effect. Fees and out-of-pocket expenses incurred by BISYS but unpaid by the
Company upon such termination shall be immediately due and payable upon and
notwithstanding such termination. BISYS shall be entitled to collect from the
Company, in addition to the fees and disbursements provided by Sections 2 and 3
hereof, the amount of all of BISYS' costs in connection with BISYS' activities
in effecting such termination, including without limitation, the delivery to the
Company and/or its distributor or investment adviser and/or other parties, of
the Company's property, records, instruments and documents, or any copies
thereof. To the extent that BISYS may retain in its possession copies of any
Company documents or records subsequent to such termination which copies had not
been requested by or on behalf of the Company in connection with the termination
process described above, BISYS will provide the Company with reasonable access
to such copies; provided, however, that, in exchange therefor, the Company will
reimburse BISYS for all costs reasonably incurred in connection therewith.
In the event of a material breach of this Agreement by either party, the
non-breaching party shall notify the breaching party in writing of such breach
and, upon receipt of such notice, the breaching party shall have 45 days to
remedy the breach. In the event the breach is not remedied within such time
period, the nonbreaching party may immediately terminate this Agreement.
If, for any reason, other than a material breach of this Agreement, BISYS
is replaced as transfer agent, or if a third party is added to perform all or a
part of the services provided by BISYS under this Agreement (excluding any
sub-transfer agent appointed by BISYS as provided in Section 1 hereof), then the
Company shall make a one-time cash payment, as liquidated damages to, BISYS
equal to the balance due BISYS for the remainder of the term of this Agreement,
assuming for purposes of calculation of the payment that the asset level of the
Company on the date BISYS is replaced, or a third party is added, will remain
constant for the balance of the contract term.
6. Maintenance of Systems and Equipment; Uncontrollable Events.
BISYS shall maintain adequate and reliable computer and other equipment
necessary or appropriate to carry out its obligations under this Agreement. In
the event of computer or other equipment failures beyond its reasonable control,
BISYS shall use its best efforts to minimize service interruptions. BISYS
represents and warrants that the various procedures and systems which it has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the records, data, equipment, facilities and other
property used in the performance of its obligations hereunder are adequate and
that it will make such changes therein from time to time as are required for the
secure performance of its obligations hereunder. Notwithstanding the
3
<PAGE> 4
foregoing, BISYS assumes no responsibility hereunder, and shall not be liable
for any damage, loss of data, delay or any other loss whatsoever caused by
events beyond its reasonable control.
7. Legal Advice.
BISYS shall notify the Company at any time BISYS believes that it is in
need of the advice of counsel (other than counsel in the regular employ of BISYS
or any affiliated companies) with regard to BISYS' responsibilities and duties
pursuant to this Agreement; and after so notifying the Company, BISYS, at its
discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Company or
Funds unless relating to a matter involving BISYS' willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and BISYS shall in no event be liable to
the Company or any Fund or any shareholder or beneficial owner of the Company
for any action reasonably taken pursuant to such advice.
8. Instructions.
Whenever BISYS is requested or authorized to take action hereunder
pursuant to instructions from a shareholder, or a properly authorized agent of a
shareholder ("shareholder's agent"), concerning an account in a Fund, BISYS
shall be entitled to rely upon any certificate, letter or other instrument or
communication, believed by BISYS to be genuine and to have been properly made,
signed or authorized by an officer or other authorized agent of the Company or
by the shareholder or shareholder's agent, as the case may be, and shall be
entitled to receive as conclusive proof of any fact or matter required to be
ascertained by it hereunder a certificate signed by an officer of the Company or
any other person authorized by the Company's Board of Directors or by the
shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely conclusively
upon the terms of the Prospectuses and Statement of Additional Information of
the Company relating to the Funds to the extent that such services are described
therein unless BISYS receives written instructions to the contrary in a timely
manner from the Company.
9. Standard of Care; Reliance on Records and Instructions; Indemnification.
BISYS shall use its best efforts to ensure the accuracy of all services
performed under this Agreement, but shall not be liable to the Company for any
action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information,
4
<PAGE> 5
records, instructions or requests given or made to BISYS by the Company, the
investment adviser and on any records provided by any fund accountant or
custodian thereof; provided that this indemnification shall not apply to actions
or omissions of BISYS in cases of its own bad faith, willful misfeasance,
negligence or from reckless disregard by it of its obligations and duties; and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, BISYS shall give the Company written notice of
and reasonable opportunity to defend against said claim in its own name or in
the name of BISYS.
10. Record Retention and Confidentiality.
BISYS shall keep and maintain on behalf of the Company all books and
records which the Company or BISYS is, or may be, required to keep and maintain
pursuant to any applicable statutes, rules and regulations, including without
limitation Rules 31a-1 and 31a-2 under the Investment Company Act of 1940, as
amended (the "1940 Act"), relating to the maintenance of books and records in
connection with the services to be provided hereunder. BISYS further agrees that
all such books and records shall be the property of the Company and to make such
books and records available for inspection by the Company or by the Securities
and Exchange Commission (the "Commission") at reasonable times and otherwise to
keep confidential all books and records and other information relative to the
Company and its shareholders, except when requested to divulge such information
by duly-constituted authorities or court process, or requested by a shareholder
or shareholder's agent with respect to information concerning an account as to
which such shareholder has either a legal or beneficial interest or when
requested by the Company, the shareholder, or shareholder's agent, or the dealer
of record as to such account.
11. Reports.
BISYS will furnish to the Company and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Company in writing,
such reports at such times as are prescribed in Schedule C attached hereto, or
as subsequently agreed upon by the parties pursuant to an amendment to Schedule
C. The Company agrees to examine each such report or copy promptly and will
report or cause to be reported any errors or discrepancies therein not later
than three business days from the receipt thereof. In the event that errors or
discrepancies, except such errors and discrepancies as may not reasonably be
expected to be discovered by the recipient within three days after conducting a
diligent examination, are not so reported within the aforesaid period of time, a
report will for all purposes be accepted by and be binding upon the Company and
any other recipient, and BISYS shall have no liability for errors or
discrepancies therein and shall have no further responsibility with respect to
such report except to perform reasonable corrections of such errors and
discrepancies within a reasonable time after requested to do so by the Company.
5
<PAGE> 6
12. Rights of Ownership.
All computer programs and procedures developed to perform services
required to be provided by BISYS under this Agreement are the property of BISYS.
All records and other data except such computer programs and procedures are the
exclusive property of the Company and all such other records and data will be
furnished to the Company in appropriate form as soon as practicable after
termination of this Agreement for any reason.
13. Return of Records.
BISYS may at its option at any time, and shall promptly upon the
Company's demand, turn over to the Company and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longer needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Company, such documents and
records will be retained by BISYS for six years from the year of creation. At
the end of such six-year period, such records and documents will be turned over
to the Company unless the Company authorizes in writing the destruction of such
records and documents.
14. Bank Accounts.
The Company and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Company, as are
necessary in order that BISYS may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
BISYS directly to disburse amounts for payment of dividends, redemption proceeds
or other purposes, the Company and Funds shall provide such bank or banks with
all instructions and authorizations necessary for BISYS to effect such
disbursements.
15. Representations of the Company.
The Company certifies to BISYS that this Agreement has been duly
authorized by the Company and, when executed and delivered by the Company, will
constitute a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
16. Representations of BISYS.
BISYS represents and warrants that: (a) BISYS has been in, and shall
continue to be in, substantial compliance with all provisions of law, including
Section 17A(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), required in connection with the performance of its duties under this
Agreement; and (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Company and BISYS' records,
6
<PAGE> 7
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder.
17. Insurance.
BISYS shall notify the Company should its insurance coverage with
respect to professional liability or errors and omissions coverage be canceled
or reduced. Such notification shall include the date of change and the reasons
therefor. BISYS shall notify the Company of any material claims against it with
respect to services performed under this Agreement, whether or not they may be
covered by insurance, and shall notify the Company from time to time as may be
appropriate of the total outstanding claims made by BISYS under its insurance
coverage.
18. Information to be Furnished by the Company and Funds.
The Company has furnished to BISYS the following:
(a) Copies of the Articles of Incorporation of the Company and of any
amendments thereto, certified by the proper official of the state
in which such Declaration has been filed.
(b) Copies of the following documents:
1. The Company's By-Laws and any amendments thereto.
2. Certified copies of resolutions of the Board of Directors
covering the following matters:
A. Approval of this Agreement and authorization of a
specified officer of the Company to execute and deliver
this Agreement and authorization for specified officers
of the Company to instruct BISYS hereunder; and
B. Authorization of BISYS to act as Transfer Agent for the
Company on behalf of the Funds.
(c) A list of all officers of the Company, together with specimen
signatures of those officers, who are authorized to instruct
BISYS in all matters.
(d) Two copies of the following (if such documents are employed by
the Company):
1. Prospectuses and Statement of Additional Information;
7
<PAGE> 8
2. Distribution Agreement; and
3. All other forms commonly used by the Company or its
Distributor with regard to their relationships and
transactions with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the Company
authorized, issued, and outstanding as of the Effective Date of
BISYS' appointment as Transfer Agent (or as of the date on which
BISYS' services are commenced, whichever is the later date) and
as to receipt of full consideration by the Company for all shares
outstanding, such statement to be certified by the Treasurer of
the Company.
19. Information Furnished by BISYS.
BISYS has furnished to the Company the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' By-Laws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the following
matters:
1. Approval of this Agreement, and authorization of a specified
officer of BISYS to execute and deliver this Agreement;
2. Authorization of BISYS to act as Transfer Agent for the
Company.
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed with the
Commission pursuant to Rule 17Ad-13 under the Exchange Act.
20. Amendments to Documents.
The Company shall furnish BISYS written copies of any amendments to,
or changes in, any of the items referred to in Section 18 hereof forthwith upon
such amendments or changes becoming effective. In addition, the Company agrees
that no amendments will be made to the Prospectuses or Statement of Additional
Information of the Company which might have the effect of changing the
procedures employed by BISYS in providing the services agreed to hereunder or
which amendment might affect the duties of BISYS hereunder unless the Company
first obtains BISYS' approval of such amendments or changes.
8
<PAGE> 9
21. Reliance on Amendments.
BISYS may rely on any amendments to or changes in any of the documents
and other items to be provided by the Company pursuant to Sections 18 and 20 of
this Agreement and the Company hereby indemnifies and holds harmless BISYS from
and against any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses of every nature
and character which may result from actions or omissions on the part of BISYS in
reasonable reliance upon such amendments and/or changes. Although BISYS is
authorized to rely on the above-mentioned amendments to and changes in the
documents and other items to be provided pursuant to Sections 18 and 20 hereof,
BISYS shall be under no duty to comply with or take any action as a result of
any of such amendments or changes unless the Company first obtains BISYS'
written consent to and approval of such amendments or changes.
22. Compliance with Law.
Except for the obligations of BISYS set forth in Section 10 hereof, the
Company assumes full responsibility for the preparation, contents, and
distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of the Company's shares. The Company
represents and warrants that no shares of the Company will be offered to the
public until the Company's registration statement under the 1933 Act and the
1940 Act has been declared or becomes effective.
23. Notices.
Any notice required or permitted to be given by either party to the
other shall be deemed sufficient if sent by registered or certified mail,
postage prepaid, addressed by the party giving notice to the other party at the
following address or such other address that may subsequently be furnished: if
to the Company, at 800 Nashville City Center, Nashville, Tennessee 37219-1743,
Attn: John McAllister, Equitable Securities Corporation; and if to BISYS at 3435
Stelzer Road, Columbus, Ohio 43219.
24. Headings.
Paragraph headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
25. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way affect
BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1
9
<PAGE> 10
hereof. This Agreement shall be binding upon, and shall inure to the benefit of,
the parties hereto and their respective successors and permitted assigns.
26. Governing Law.
This Agreement shall be governed by and provisions shall be construed
in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ESC STRATEGIC FUNDS, INC.
By:________________________________
Attest:____________________________
BISYS FUND SERVICES, INC.
By:________________________________
Attest:____________________________
10
<PAGE> 11
Dated: October 1, 1996
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENCY SERVICES
1. Shareholder Transactions
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10b-10 under the
Securities Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares,
through dividend reimbursement.
2. Shareholder Information Services
a. Provide toll-free lines for direct shareholder use and customer
liaison staff with on-line inquiry capacity.
b. Make information available to shareholder servicing unit and other
remote access units regarding trade date, share price, current
holdings, yields, and dividend information.
c. Produce detailed history of transactions through duplicate or special
order statements upon request.
d. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to current
shareholders.
A-1
<PAGE> 12
3. Compliance Reporting
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in which the
Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service forms for
corresponding Fund and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
a. Provide reports for tracking rights of accumulation and purchases made
under a Letter of Intent.
b. Account for separation of shareholder investments from transaction
sale charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and marketing
expenses.
d. Track sales and commission statistics by dealer and provide for
payment of commissions on direct shareholder purchases in a load Fund.
5. Shareholder Account Maintenance
a. Maintain all shareholder records for each account in the Company.
b. Issue customer statements on scheduled cycle, providing duplicate
second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
A-2
<PAGE> 13
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENT FEES
Effective as of the Conversion Date, the Transfer Agent shall receive an
account maintenance fee of $15.00 per year for each account which is in
existence at any time during the month for which payment is made, such fee to be
paid in equal monthly installments, plus out-of-pocket expenses, provided that
the minimum annual fee to be paid by each Fund is $10,000.00. The Transfer Agent
shall be entitled to this account maintenance fee on all accounts maintained in
its records during the year, including those accounts which have a zero balance
during any portion of the year.
Additional Services:
Additional services such as IRA processing, development of interface
capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps
between DDAs and mutual fund accounts and coordination of the printing and
distribution of prospectuses, annual reports and semi-annual reports are subject
to additional fees which will be quoted upon request. Programming costs or
database management fees for special reports or specialized processing will be
quoted upon request.
Out-of-pocket Expenses:
BISYS shall be entitled to be reimbursed for all reasonable out-of-pocket
expenses including, but not limited to, the expenses set forth in Section 3 of
the Transfer Agency Agreement to which this Schedule B is attached.
B-1
<PAGE> 14
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC.
REPORTS
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Reports
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed with
the Securities and Exchange Commission pursuant to Rule 17Ad-13 of the
Securities Exchange Act of 1934, as amended.
C-1
<PAGE> 1
Exhibit 9(d)
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 1st day of October, 1996, between ESC STRATEGIC FUNDS,
INC. (the "Company"), a Maryland corporation, and BISYS FUND SERVICES, INC.
("Fund Accountant"), a corporation organized under the laws of the State of
Delaware.
WHEREAS, the Company desires that Fund Accountant perform certain fund
accounting services for each investment portfolio of the Company, all as now or
hereafter may be established from time to time (individually referred to herein
as the "Fund" and collectively as the "Funds"); and
WHEREAS, Fund Accountant is willing to perform such services on the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Fund Accountant; Conversion to Services.
The Company hereby engages Fund Accountant to perform fund accounting
services as set forth in this Section 1 (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to Fund Accountant's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with Fund Accountant to
provide Fund Accountant with all necessary information and assistance required
to successfully convert to the BISYS System. Fund Accountant shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." Fund Accountant hereby accepts such engagement and agrees to
perform the Services commencing, with respect to each individual Service, on the
date that the conversion of such Service to the BISYS System has been completed.
Fund Accountant shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
(a) Maintenance of Books and Records. Fund Accountant will keep and
maintain the following books and records of each Fund pursuant to Rule
31a-1 under the Investment Company Act of 1940 (the "Rule"):
(i) Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements
of cash and all other debits and credits, as required by
subsection (b)(1) of the Rule;
<PAGE> 2
(ii) General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest
accrued and interest received, as required by subsection
(b)(2)(I) of the Rule;
(iii) Separate ledger accounts required by subsection (b)(2)(ii) and
(iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of the
Rule.
(b) Performance of Daily Accounting Services. In addition to the
maintenance of the books and records specified above, Fund Accountant
shall perform the following accounting services daily for each Fund:
(i) Calculate the net asset value per share utilizing prices obtained
from the sources described in subsection 1(b)(ii) below;
(ii) Obtain security prices from independent pricing services, or if
such quotes are unavailable, then obtain such prices from each
Fund's investment adviser or its designee, as approved by the
Company's Board of Directors;
(iii) Verify and reconcile with the Fund's custodian all daily trade
activity;
(iv) Compute, as appropriate, each Fund's net income and capital
gains, dividend payables, dividend factors, 7-day yields, 7-day
effective yields, 30-day yields, and weighted average portfolio
maturity;
(v) Review daily the net asset value calculation and dividend factor
(if any) for each Fund prior to release to shareholders, check
and confirm the net asset values and dividend factors for
reasonableness and deviations, and distribute net asset values
and yields to NASDAQ;
(vi) Report to the Company the daily market pricing of securities in
any money market Funds, with the comparison to the amortized cost
basis;
(vii) Determine unrealized appreciation and depreciation on securities
held in variable net asset value Funds;
(viii) Amortize premiums and accrete discounts on securities purchased
at a price other than face value, if requested by the Company;
2
<PAGE> 3
(ix) Update fund accounting system to reflect rate changes, as
received from a Fund's investment adviser, on variable interest
rate instruments;
(x) Post Fund transactions to appropriate categories;
(xi) Accrue expenses of each Fund according to instructions received
from the Company's Administrator;
(xii) Determine the outstanding receivables and payables for all (1)
security trades, (2) Fund share transactions and (3) income and
expense accounts;
(xiii) Provide accounting reports in connection with the Company's
regular annual audit and other audits and examinations by
regulatory agencies; and
(xiv) Provide such periodic reports as the parties shall agree upon,
as set forth in a separate schedule.
(c) Special Reports and Services.
(i) Fund Accountant may provide additional special reports upon the
request of the Company or a Fund's investment adviser, which may
result in an additional charge, the amount of which shall be
agreed upon between the parties.
(ii) Fund Accountant may provide such other similar services with
respect to a Fund as may be reasonably requested by the Company,
which may result in an additional charge, the amount of which
shall be agreed upon between the parties.
(d) Additional Accounting Services. Fund Accountant shall also perform the
following additional accounting services for each Fund:
(i) Provide monthly a download (and hard copy thereof) of the
financial statements described below, upon request of the
Company. The download will include the following items:
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
3
<PAGE> 4
(ii) Provide accounting information for the following:
(A) federal and state income tax returns and federal excise tax
returns;
(B) the Company's semi-annual reports with the Securities and
Exchange Commission ("SEC") on Form N-SAR;
(C) the Company's annual, semi-annual and quarterly (if any)
shareholder reports;
(D) registration statements on Form N-1A and other filings
relating to the registration of Shares;
(E) the Administrator's monitoring of the Company's status as a
regulated investment company under Subchapter M of the
Internal Revenue Code, as amended;
(F) annual audit by the Company's auditors; and
(G) examinations performed by the SEC.
2. Subcontracting.
Fund Accountant may, at its expense, subcontract with any entity or
person concerning the provision of the services contemplated hereunder;
provided, however, that Fund Accountant shall not be relieved of any of its
obligations under this Agreement by the appointment of such subcontractor and
provided further, that Fund Accountant shall be responsible, to the extent
provided in Section 6 hereof, for all acts of such subcontractor as if such acts
were its own.
3. Compensation.
The Company shall pay Fund Accountant for the services to be provided by
Fund Accountant under this Agreement in accordance with, and in the manner set
forth in, Schedule A hereto, as such Schedule may be amended from time to time.
4. Reimbursement of Expenses.
In addition to paying Fund Accountant the fees described in Section 3
hereof, the Company agrees to reimburse Fund Accountant for its out-of-pocket
expenses in providing services hereunder, including without limitation the
following:
4
<PAGE> 5
(a) All freight and other delivery and bonding charges incurred by Fund
Accountant in delivering materials to and from the Company;
(b) All direct telephone, telephone transmission and telecopy or other
electronic transmission expenses incurred by Fund Accountant in
communication with the Company, the Company's investment advisor or
custodian, dealers or others as required for Fund Accountant to
perform the services to be provided hereunder;
(c) The cost of obtaining security market quotes pursuant to Section
l(b)(ii) above;
(d) The cost of microfilm or microfiche of records or other materials;
(e) Any expenses Fund Accountant shall incur at the written direction of
an officer of the Company thereunto duly authorized; and
(f) Any additional expenses reasonably incurred by Fund Accountant, as
agreed upon by the parties, in the performance of its duties and
obligations under this Agreement.
5. Effective Date.
This Agreement shall become effective with respect to a Fund as of the
date first written above.
6. Term.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the date this Agreement is executed by both parties and
ending on the date that is twelve (12) months after the Conversion Date. This
Agreement shall be renewed automatically for successive one-year terms unless
written notice not to renew is given by the non-renewing party to the other
party at least 60 days prior to the expiration of the then-current term;
provided, however, that after such termination for so long as Fund Accountant,
with the written consent of the Company, in fact continues to perform any one or
more of the services contemplated by this Agreement or any schedule or exhibit
hereto, the provisions of this Agreement, including without limitation the
provisions dealing with indemnification, shall continue in full force and
effect. Compensation due Fund Accountant and unpaid by the Company upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. Fund Accountant shall be entitled to collect from the Company, in
addition to the compensation described under Section 3 hereof, the amount of all
of Fund Accountant's cash disbursements for services in connection with Fund
Accountant's activities in effecting such termination, including without
limitation, the delivery to the Company and/or its designees of the Company's
property, records, instruments and documents, or any copies thereof. Subsequent
to such termination, for a reasonable fee, Fund Accountant will provide the
Company with reasonable access to any Company documents or records remaining in
its possession.
5
<PAGE> 6
In the event of a material breach of this Agreement by either party, the
non-breaching party shall notify the breaching party in writing of such breach
and, upon receipt of such notice, the breaching party shall have 45 days to
remedy the breach. In the event the breach is not remedied within such time
period, the nonbreaching party may immediately terminate this Agreement.
If, for any reason, other than a material breach of this Agreement, Fund
Accountant is replaced as Fund Accountant, or if a third party is added to
perform all or a part of the services provided by Fund Accountant under this
Agreement (excluding any sub-accountant appointed by Fund Accountant as provided
in Section 2 hereof), then the Company shall make a one-time cash payment, as
liquidated damages, to Fund Accountant equal to the balance due Fund Accountant
for the remainder of the term of this Agreement, assuming for purposes of
calculation of the payment that the asset level of the Company on the date Fund
Accountant is replaced, or a third party is added, will remain constant for the
balance of the contract term.
7. Standard of Care; Reliance on Records and Instructions; Indemnification.
Fund Accountant shall use its best efforts to insure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by Fund Accountant in the absence of bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties. A Fund agrees to indemnify and hold harmless Fund
Accountant, its employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Fund Accountant's actions
taken or nonactions with respect to the performance of services under this
Agreement with respect to such Fund or based, if applicable, upon reasonable
reliance on information, records, instructions or requests with respect to such
Fund given or made to Fund Accountant by a duly authorized representative of the
Company other than a representative who is also an affiliated person of Fund
Accountant or its affiliates; provided that this indemnification shall not apply
to actions or omissions of Fund Accountant in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties, and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, Fund Accountant
shall give the Company written notice of and reasonable opportunity to defend
against said claim in its own name or in the name of Fund Accountant.
8. Record Retention and Confidentiality.
Fund Accountant shall keep and maintain on behalf of the Company all
books and records which the Company and Fund Accountant is, or may be, required
to keep and maintain pursuant to any applicable statutes, rules and regulations,
including without limitation Rules 31a-1 and 31a-2 under the Investment Company
Act of 1940, as amended (the "1940 Act"), relating to the maintenance of books
and records in connection with the services to be provided hereunder. Fund
Accountant further agrees that all such books and records shall be the property
of the Company and
6
<PAGE> 7
to make such books and records available for inspection by the Company or by the
Securities and Exchange Commission at reasonable times and otherwise to keep
confidential all books and records and other information relative to the Company
and its shareholders; except when requested to divulge such information by
duly-constituted authorities or court process.
9. Maintenance of Systems and Equipment; Uncontrollable Events.
Fund Accountant shall maintain adequate and reliable computer and other
equipment necessary or appropriate to carry out its obligations under this
Agreement. In the event of computer or other equipment failures beyond its
reasonable control, Fund Accountant shall use its best efforts to minimize
service interruptions. Fund Accountant represents and warrants that the various
procedures and systems which it has implemented with regard to safekeeping from
loss or damage attributable to fire, theft or any other cause of the records,
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder. Notwithstanding the foregoing, Fund Accountant assumes no
responsibility hereunder, and shall not be liable for any damage, loss of data,
delay or any other loss whatsoever caused by events beyond its reasonable
control.
10. Reports.
Fund Accountant will furnish to the Company and to its properly
authorized auditors, investment advisers, examiners, distributors, dealers,
underwriters, salesmen, insurance companies and others designated by the Company
in writing, such reports and at such times as are prescribed pursuant to the
terms and the conditions of this Agreement to be provided or completed by Fund
Accountant, or as subsequently agreed upon by the parties pursuant to an
amendment hereto. The Company agrees to examine each such report or copy
promptly and will report or cause to be reported any errors or discrepancies
therein no later than three business days from the receipt thereof. In the event
that errors or discrepancies, except such errors and discrepancies as may not
reasonably be expected to be discovered by the recipient within ten days after
conducting a diligent examination, are not so reported within the aforesaid
period of time, a report will for all purposes be accepted by and binding upon
the Company and any other recipient, and, except as provided in Section 6
hereof, Fund Accountant shall have no liability for errors or discrepancies
therein and shall have no further responsibility with respect to such report
except to perform reasonable corrections of such errors and discrepancies within
a reasonable time after requested to do so by the Company.
11. Rights of Ownership.
All computer programs and procedures developed to perform services
required to be provided by Fund Accountant under this Agreement are the property
of Fund Accountant. All records and other data except such computer programs and
procedures are the exclusive property of the Company and all such other records
and data will be furnished to the Company in appropriate form as soon as
practicable after termination of this Agreement for any reason.
7
<PAGE> 8
12. Return of Records.
Fund Accountant may at its option at any time, and shall promptly upon
the Company's demand, turn over to the Company and cease to retain Fund
Accountant's files, records and documents created and maintained by Fund
Accountant pursuant to this Agreement which are no longer needed by Fund
Accountant in the performance of its services or for its legal protection. If
not so turned over to the Company, such documents and records will be retained
by Fund Accountant for six years from the year of creation. At the end of such
six-year period, such records and documents will be turned over to the Company
unless the Company authorizes in writing the destruction of such records and
documents.
13. Representations of the Company.
The Company certifies to Fund Accountant that this Agreement has been
duly authorized by the Company and, when executed and delivered by the Company,
will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
14. Representations of Fund Accountant.
Fund Accountant represents and warrants that: (1) the various
procedures and systems which Fund Accountant has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
the records, and other data of the Company and Fund Accountant's records, data,
equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder, and (2) this Agreement has been duly authorized by Fund Accountant
and, when executed and delivered by Fund Accountant, will constitute a legal,
valid and binding obligation of Fund Accountant, enforceable against Fund
Accountant in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
15. Insurance.
Fund Accountant shall notify the Company should any of its insurance
coverage be canceled or reduced. Such notification shall include the date of
change and the reasons therefor. Fund Accountant shall notify the Company of any
material claims against it with respect to services performed under this
Agreement, whether or not they may be covered by insurance, and shall notify the
Company from time to time as may be appropriate of the total outstanding claims
made by Fund Accountant under its insurance coverage.
8
<PAGE> 9
16. Information to be Furnished by the Company and Funds.
The Company has furnished to Fund Accountant the following:
(a) Copies of the Articles of Incorporation of the Company and of any
amendments thereto, certified by the proper official of the state in
which such document has been filed.
(b) Copies of the following documents:
(i) The Company's Bylaws and any amendments thereto; and
(ii) Certified copies of resolutions of the Board of Directors
covering the approval of this Agreement, authorization of a
specified officer of the Company to execute and deliver this
Agreement and authorization for specified officers of the Company
to instruct Fund Accountant thereunder.
(c) A list of all the officers of the Company, together with specimen
signatures of those officers who are authorized to instruct Fund
Accountant in all matters.
(d) Two copies of the Prospectuses and Statements of Additional
Information for each Fund.
17. Information Furnished by Fund Accountant.
(a) Fund Accountant has furnished to the Company the following:
(i) Fund Accountant's Articles of Incorporation; and
(ii) Fund Accountant's Bylaws and any amendments thereto.
(b) Fund Accountant shall, upon request, furnish certified copies of
corporate actions covering the following matters:
(i) Approval of this Agreement, and authorization of a specified
officer of Fund Accountant to execute and deliver this Agreement;
and
(ii) Authorization of Fund Accountant to act as fund accountant for
the Company and to provide accounting services for the Company.
9
<PAGE> 10
18. Amendments to Documents.
The Company shall furnish Fund Accountant written copies of
any amendments to, or changes in, any of the items referred to in Section 16
hereof forthwith upon such amendments or changes becoming effective. In
addition, the Company agrees that no amendments will be made to the Prospectuses
or Statements of Additional Information of the Company which might have the
effect of changing the procedures employed by Fund Accountant in providing the
services agreed to hereunder or which amendment might affect the duties of Fund
Accountant hereunder unless the Company first obtains Fund Accountant's approval
of such amendments or changes.
19. Compliance with Law.
Except for the obligations of Fund Accountant set forth in
Section 8 hereof, the Company assumes full responsibility for the preparation,
contents and distribution of each prospectus of the Company as to compliance
with all applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the 1940 Act and any other laws, rules and regulations of
governmental authorities having jurisdiction. Fund Accountant shall have no
obligation to take cognizance of any laws relating to the sale of the Company's
Shares. The Company represents and warrants that no Shares of the Company will
be offered to the public until the Company's registration statement under the
Securities Act and the 1940 Act has been declared or becomes effective.
20. Notices.
Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or certified mail,
postage prepaid, addressed by the party giving notice to the other party at the
following address or such other address that may subsequently be furnished: if
to the Company, at 800 Nashville City Center, Nashville, Tennessee 37219-1743,
Attn: John McAllister, Equitable Securities Corporation; and if to Fund
Accountant at 3435 Stelzer Road, Columbus, Ohio 43219.
21. Headings.
Paragraph headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
22. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to a Fund by either of the parties hereto except by
the specific written consent of the other party. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
10
<PAGE> 11
23. Governing Law.
This Agreement shall be governed by and provisions shall be construed
in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ESC STRATEGIC FUNDS, INC.
By:_______________________________
Attest:___________________________
BISYS FUND SERVICES, INC.
By:_______________________________
Attest:___________________________
11
<PAGE> 12
Dated: October 1, 1996
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC..
FEES
Effective as of the Conversion Date, Fund Accountant shall be entitled to
receive a fee from each Fund in accordance with the following schedule:
$30,000 annually plus out-of-pocket expenses, as described in
Section 4
ESC STRATEGIC FUNDS, INC. BISYS FUND SERVICES, INC.
By:_________________________ By:_____________________________
A-1
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information which
have been incorporated by reference in this Post-Effective Amendment No. 7 to
the registration statement on Form N-1A (the "Registration Statement"), of
our report dated May 16, 1996, relating to the financial statements and
financial highlights of ESC Strategic Asset Preservation Fund, ESC Strategic
Income Fund, ESC Global Equity Fund, ESC Strategic Small Cap Fund and ESC
Strategic Appreciation Fund (five of the seven portfolios constituting ESC
Strategic Funds, Inc.), which report appears in such Statements of Additional
Information. We also consent to the incorporation by reference of our report
into the Prospectuses which have been incorporated by reference into this
Registration Statement and to the references to us under the heading
"Independent Accountants" in the Statement of Additional Information
constituting part of the Registration Statement.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 12, 1997
<PAGE> 1
Exhibit 13(b)
PURCHASE AGREEMENT
The ESC Strategic Funds, Inc., a Maryland corporation (the "Company"), and
Equitable Securities Corporation, a Tennessee corporation (the "Distributor"),
hereby agree as follows:
1. The Company hereby offers the Distributor and the Distributor hereby
purchases 1 share (par value $.001 per share) of the Company, representing 1
Class A share in ESC Strategic Growth Fund and 1 share (par value $.001 per
share) of the Company, representing 1 Class D share in ESC Strategic Growth Fund
at $[current net asset value], (the "Shares"). The Distributor hereby
acknowledges receipt of a purchase confirmation reflecting the purchase of the
Shares, and the Company hereby acknowledges receipt from the Distributor of
funds in the amount of $_____________ in full payment for the Shares.
2. The Distributor represents and warrants to the Company that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. The Distributor agrees that if it or any direct or indirect transferee
of the Shares redeems the Shares prior to the fifth anniversary of the date the
Fund begins its respective investment activities, the Distributor will pay to
the Company an amount equal to the number resulting from multiplying the Fund's
total unamortized organizational expenses by a fraction, the numerator of which
is equal to the number of Shares redeemed by the Distributor or such transferee
and the denominator of which is equal to the number of Shares of the Fund
outstanding as of the date of such redemption, as long as the administrative
position of the staff of the Securities and Exchange Commission requires such
reimbursement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day of October, 1996.
ESC Strategic Funds, Inc.
Attest:
______________________________ By:______________________________
Name: Name:
Title:
Attest: Equitable Securities Corporation
______________________________ By:______________________________
Name: Name:
Title:
<PAGE> 1
Exhibit 13(c)
PURCHASE AGREEMENT
The ESC Strategic Funds, Inc., a Maryland corporation (the "Company"), and
Equitable Securities Corporation, a Tennessee corporation (the "Distributor"),
hereby agree as follows:
1. The Company hereby offers the Distributor and the Distributor hereby
purchases 1 share (par value $.001 per share) of the Company, representing 1
Class A share in ESC Strategic Value Fund and 1 share (par value $.001 per
share) of the Company, representing 1 Class D share in ESC Strategic Value Fund
at $[current net asset value], (the "Shares"). The Distributor hereby
acknowledges receipt of a purchase confirmation reflecting the purchase of the
Shares, and the Company hereby acknowledges receipt from the Distributor of
funds in the amount of $_____________ in full payment for the Shares.
2. The Distributor represents and warrants to the Company that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. The Distributor agrees that if it or any direct or indirect transferee
of the Shares redeems the Shares prior to the fifth anniversary of the date the
Fund begins its respective investment activities, the Distributor will pay to
the Company an amount equal to the number resulting from multiplying the Fund's
total unamortized organizational expenses by a fraction, the numerator of which
is equal to the number of Shares redeemed by the Distributor or such transferee
and the denominator of which is equal to the number of Shares of the Fund
outstanding as of the date of such redemption, as long as the administrative
position of the staff of the Securities and Exchange Commission requires such
reimbursement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day of January, 1997
ESC Strategic Funds, Inc.
Attest:
______________________________ By:______________________________
Name: Name:
Title:
Attest: Equitable Securities Corporation
______________________________ By:______________________________
Name: Name:
Title:
<PAGE> 1
Exhibit 15(d)
ESC STRATEGIC FUNDS, INC.
Distribution Plan Supplement
ESC Strategic Value Fund
Class A Shares
January 14, 1997
WHEREAS, ESC Strategic Funds, Inc. (The "Company") is an open-end
investment company organized as a Maryland Corporation and consists of one or
more separate investment portfolios, as may be established and designated by the
Directors from time to time;
WHEREAS, a separate series of shares of common stock of the Company is
offered to investors with respect to each investment portfolio; and
WHEREAS, each investment portfolio offers one or more classes of
shares;
WHEREAS, the Company has adopted a Mater Distribution Plan ("Plan")
which provides that it shall pertain to such investment portfolios and classes
of shares as shall be designated from time to time by the Directors of the
Company in any Supplement to the Plan; and
WHEREAS, ESC Strategic Value Fund (the "Fund") is a separate investment
portfolio of the Company and offers two classes of shares ("Classes"), including
the Class A shares covered by this Supplement:
NOW, THEREFORE, the Directors of the Company hereby take the following
actions, subject to the conditions set forth:
1. As provided in paragraph 1 of the Plan, the Company hereby
adopts the Plan on behalf of the Fund and its Class A shares,
the terms and conditions of such Plan being hereby
incorporated herein by reference;
2. The terms "Fund" or "Funds" and "Class" or "Classes" as used
in the Plan shall refer to the Fund and its Classes,
respectively; and
3. As provided in paragraph 2 of the Plan, reimbursements by the
Fund shall be subject to the following annual limits: 0.25% of
the average daily net assets attributable to Class A shares,
provided that up to 0.25% of such average daily net assets may
be designated out of such reimbursements as a "service fee,"
as defined in rules and policy statements of the National
Association of Securities Dealers.
<PAGE> 2
Exhibit 15(d)
Distribution Plan Supplement
ESC Strategic Value Fund
Class D Shares
January 14, 1997
WHEREAS, ESC Strategic Funds, Inc. (The "Company") is an open-end
investment company organized as a Maryland Corporation and consists of one or
more separate investment portfolios, as may be established and designated by the
Directors from time to time;
WHEREAS, a separate series of shares of common stock of the Company is
offered to investors with respect to each investment portfolio; and
WHEREAS, each investment portfolio offers one or more classes of
shares;
WHEREAS, the Company has adopted a Mater Distribution Plan ("Plan")
which provides that it shall pertain to such investment portfolios and classes
of shares as shall be designated from time to time by the Directors of the
Company in any Supplement to the Plan; and
WHEREAS, ESC Strategic Value Fund (the "Fund") is a separate investment
portfolio of the Company and offers two classes of shares ("Classes"), including
the Class D shares covered by this Supplement:
NOW, THEREFORE, the Directors of the Company hereby take the following
actions, subject to the conditions set forth:
1. As provided in paragraph 1 of the Plan, the Company hereby
adopts the Plan on behalf of the Fund and its Class D shares,
the terms and conditions of such Plan being hereby
incorporated herein by reference;
2. The terms "Fund" or "Funds" and "Class" or "Classes" as used
in the Plan shall refer to the Fund and its Classes,
respectively; and
3. As provided in paragraph 2 of the Plan, reimbursements by the
Fund shall be subject to the following annual limits: 0.75% of
the average daily net assets attributable to Class D shares,
provided that up to 0.25% of such average daily net assets may
be designated out of such reimbursements as a "service fee,"
as defined in rules and policy statements of the National
Association of Securities Dealers. as defined in rules and
policy statements of the National Association of Securities
Dealers.
<PAGE> 1
EXHIBIT 18
ESC STRATEGIC FUNDS, INC.
(the "Company")
under the
INVESTMENT COMPANY ACT OF 1940
(as amended January 14, 1997)
The Plan
I. Introduction
As required by Rule 18f-3 under the Investment Company Act of 1940, as
amended ("1940 Act"), this Plan describes the multi-class system for the
Company, including the separate class arrangements for shareholder services
and/or distribution of shares, the method for allocating expenses to classes
and any related conversion features or exchange privileges applicable to the
classes.
Since the initial effective date of this Plan, July 18, 1995, the
Company has elected to offer multiple classes of shares, as described herein,
pursuant to Rule 18f-3 and this Plan. The Plan, including this Amendment, does
not make material changes to the multi-class arrangements, including expense
allocations, previously approved by the Board and in effect for the Company
pursuant to an exemptive order issued to Furman Selz Incorporated, the
Company's administrator ("Administrator") on July 20, 1993.
II. The Multi-Class System
The series of the Company indicated in Schedule A hereto shall offer two
classes of shares, Class A and Class B ("Multi-Class Funds"). Shares of each
class of a Multi-Class Fund shall represent an equal pro rata interest in that
Fund and, generally, shall have identical voting, dividend, liquidation, and
other rights, preferences, powers, restrictions, limitations, qualifications and
terms and conditions, except that: (a) each class shall have a different
designation; (b) each class of shares shall bear any Class Expenses, as defined
in Section C, below; (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement; and (d) each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class. In addition, Class A and Class B shares shall have
the features described in Sections A, B, C and D, below.
<PAGE> 2
A. Sales Charge Structure
1. Class A Shares. Class A shares of each Multi-Class Fund
shall be offered at the then-current net asset value plus a front-end sales
charge in such amount as is disclosed in the current prospectus for that Fund,
including any prospectus supplements, and shall be subject to such reductions
and waivers as are determined or approved by the Company's Board of Directors.
Class A shares shall generally not be subject to a contingent deferred sales
charge provided, however, that such a charge may be imposed in such cases as
the Board may approve and as disclosed in a future prospectus or prospectus
supplement for a Fund. Class A shares shall be distinguished from Class B
shares by the relative rates of front-end sales charge and fees under the
Service and Distribution Plans (see below) applicable to each class.
2. Class B Shares. Class B shares of each Multi-Class Fund shall
be offered at the then-current net asset value plus a front-end sales charge in
such amount as is disclosed in the current prospectus for that Fund, including
any prospectus supplements, and shall be subject to such reductions and waivers
as are determined or approved by the Company's Board of Directors. Class B
shares shall generally not be subject to a contingent deferred sales charge
provided, however, that such a charge may be imposed in such cases as the Board
may approve and as disclosed in a future prospectus or prospectus supplement for
a Fund. Class B shares shall be distinguished from Class A shares by the
relative rates of front-end sales charge and fees under the Service and
Distribution Plans (see below) applicable to each class.
B. Service and Distribution Plans
The Company has adopted a Master Distribution Plan pursuant to
Rule 12b-1 under which Supplements were approved with respect to each class of
shares of each Multi-Class Fund, containing the following terms:
1. Class A Shares. Class A shares of each Fund shall reimburse
the Distributor for costs and expenses incurred in connection with distribution
and marketing of shares of the Company, as provided in the Master Distribution
Plan and Supplements thereto, subject to an annual limit of 0.25% of the
average daily net assets of a Fund attributable to its Class A shares, provided
that up to 0.25% of such average daily net assets may be designated out of such
reimbursements as a "service
<PAGE> 3
fee," as defined in rules and policy statements of the National Association of
Securities Dealers.
2. Class B Shares. Class B shares of each Fund shall reimburse the
Distributor for costs and expenses incurred in connection with distribution and
marketing of shares of the Company, as provided in the Master Distribution Plan
and Supplements thereto, subject to an annual limit of 0.75% of the average
daily net assets of a Fund attributable to its Class B shares, provided that up
to 0.25% of such average daily net assets may be designated out of such
reimbursements as a "service fee," as defined in rules and policy statements of
the National Association of Securities Dealers.
C. Allocation of Income and Expenses
1. General
a. Daily Dividend Funds
Funds that declare distributions of net investment income daily
and that maintain the same net asset value per share in each class ("Daily
Dividend Funds") will allocate gross income, realized and unrealized capital
gains and losses and expenses (other than Class Expenses, as defined below) to
each class on the basis of relative net assets (settled shares). "Relative net
assets (settled shares)," for this purpose, are net assets valued in accordance
with generally accepted accounting principles but excluding the value of
subscriptions receivable, in relation to the net assets of the particular Daily
Dividend Fund. Expenses to be so allocated also include expenses of the Company
that are allocated to a Fund and are not attributable to a particular Fund or
class of a Fund ("Company Expenses") and expenses of the particular Fund that
are not attributable to a particular class of the Fund ("Fund Expenses").
Company Expenses include, but are not limited to, Directors' fees, insurance
costs and certain legal fees. Fund Expenses include, but are not limited to,
certain registration fees, advisory fees, custodial fees, and other expenses
relating to the management of the Fund's assets.
b. Non-Daily Dividend Funds
The gross income, realized and unrealized capital gains and
losses and expenses (other than Class Expenses, as defined below) of each Fund,
other than the Daily Dividend Funds, shall be allocated to each class on the
basis of its net asset value relative to the net asset value of the Fund.
<PAGE> 4
Expenses to be so allocated also include expenses of the Company that are
allocated to a Fund and are not attributable to a particular Fund or class of a
Fund ("Company Expenses") and expenses of the particular Fund that are not
attributable to a particular class of the Fund ("Fund Expenses"). Company
Expenses include, but are not limited to, Directors' fees, insurance costs and
certain legal fees. Fund Expenses include, but are not limited to, certain
registration fees, advisory fees, custodial fees, and other expenses relating
to the management of the Fund's assets.
2. Class Expenses
--------------
Expenses attributable to a particular class ("Class Expenses")
shall be limited to: (a) payments pursuant to the Master Distribution Plan and
Supplement by that class; (b) transfer agent fees attributable to that class;
(c) printing and postage expenses related to preparing and distributing
material such as shareholder reports, prospectuses and proxy materials to
current shareholders of that class; (d) registration fees for shares of that
class; (e) the expense of administrative personnel and services as required to
support the shareholders of that class; (f) litigation or other legal expenses
relating solely to that class; and (g) Directors' fees incurred as a result of
issues relating to that class. Expenses described in (a) of this paragraph must
be allocated to the class for which they are incurred. All other expenses
described in this paragraph may be allocated as Class Expenses, but only if the
Company's President and Treasurer have determined, subject to Board approval or
ratification, which of such categories of expenses will be treated as Class
Expenses, consistent with applicable legal principles under the 1940 Act and
the Internal Revenue Code of 1986, as amended ("Code").
In the event a particular expense is no longer reasonably
allocable by class or to a particular class, it shall be treated as a Company
Expense or Fund Expense, and in the event a Company Expense or Fund Expense
becomes allocable at a different level, including as a Class Expense, it shall
be so allocated, subject to compliance with Rule 18f-3 and to approval or
ratification by the Board of Directors.
The initial determination of expenses that will be allocated as
Class Expenses and any subsequent changes thereto shall be reviewed by the
Board of Directors and approved by such Board and by a majority of the
Directors who are not "interested persons" of the Company, as defined in the
1940 Act.
<PAGE> 5
3. Waivers or Reimbursements of Expenses
-------------------------------------
Expenses may be waived or reimbursed by the Adviser, a Manager,
the Distributor or any other provider of services to a Fund or the Company
without the prior approval of the Board of Directors.
D. Exchange and Conversion Privileges
----------------------------------
Shareholders of a Multi-Class Fund may exchange shares of a particular
class for shares of the same class in another Multi-Class Fund, or for shares of
Asset Preservation Fund, at relative net asset value and with no sales charge,
provided the shares to be acquired in the exchange are qualified for sale in the
shareholder's state of residence and subject to the applicable requirements as
to minimum amount. Shareholders of Asset Preservation Fund may exchange their
shares for shares of a Multi-Class Fund at relative net asset value plus any
applicable sales charge.
There are currently no conversion privileges.
E. Board Review
------------
1. Approval of Amended Plan
------------------------
The Board of Directors, including a majority of the Directors who
are not interested persons (as defined in the 1940 Act) of the Company or a Fund
("Independent Directors"), at a meeting held January 14, 1997, approved the
Amended Plan based on a determination that the Plan, including the expense
allocation, is in the best interests of each class and Fund individually and of
the Company. Their determination was based on their review of information
furnished to them which they deemed reasonably necessary and sufficient to
evaluate the Plan.
2. Approval of Further Amendments
------------------------------
This Amended Plan may not be further amended materially unless the
Board of Directors, including a majority of the Independent Directors, have
found that the proposed amendment, including any proposed related expense
allocation, is in the best interests of each class and Fund individually and of
the Company. Such finding shall be based on information requested by the Board
and furnished to them which the Board deems reasonably necessary to evaluate the
proposed amendment.
<PAGE> 6
3. Periodic Review
The Board shall review reports of expense allocations and
such other information as they request at such times, or pursuant to such
schedule, as they may determine consistent with applicable legal requirements.
F. Contracts
Any agreement related to the Multi-Class System shall require the
parties thereto to furnish to the Board of Directors, upon their request, such
information as is reasonably necessary to permit the Directors to evaluate the
Plan or any proposed amendment.
G. Effective Date
This Amended Plan, having been reviewed and approved by the Board of
Directors and by a majority of the Independent Directors as indicated in
Section E1 of the Plan, shall take effect as of January 14, 1997.
<PAGE> 7
SCHEDULE A
The following are Multi-Class Funds under this Plan, as amended January
14, 1997:
ESC Strategic Appreciation Fund
ESC Strategic Global Equity Fund
ESC Strategic Small Cap Fund
ESC Strategic Income Fund
ESC Strategic Growth Fund
ESC Strategic Value Fund\
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> ESC STRATEGIC ASSET PRESERVATION FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 13,094
<INVESTMENTS-AT-VALUE> 13,151
<RECEIVABLES> 222
<ASSETS-OTHER> 392
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,765
<PAYABLE-FOR-SECURITIES> 489
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35
<TOTAL-LIABILITIES> 524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,195
<SHARES-COMMON-STOCK> 1,324
<SHARES-COMMON-PRIOR> 1,206
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 56
<NET-ASSETS> 13,241
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 821
<OTHER-INCOME> 0
<EXPENSES-NET> 115
<NET-INVESTMENT-INCOME> 706
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 128
<NET-CHANGE-FROM-OPS> 835
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 706
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104
<NUMBER-OF-SHARES-REDEEMED> 56
<SHARES-REINVESTED> 70
<NET-CHANGE-IN-ASSETS> 1,317
<ACCUMULATED-NII-PRIOR> 1
<ACCUMULATED-GAINS-PRIOR> (20)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 202
<AVERAGE-NET-ASSETS> 12,765
<PER-SHARE-NAV-BEGIN> 9.89
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> ESC STRATEGIC GLOBAL EQUITY FUND - CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 16,490
<INVESTMENTS-AT-VALUE> 17,849
<RECEIVABLES> 242
<ASSETS-OTHER> 589
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,680
<PAYABLE-FOR-SECURITIES> 289
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68
<TOTAL-LIABILITIES> 358
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,786
<SHARES-COMMON-STOCK> 1,321
<SHARES-COMMON-PRIOR> 931
<ACCUMULATED-NII-CURRENT> 84
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,359
<NET-ASSETS> 18,322
<DIVIDEND-INCOME> 228
<INTEREST-INCOME> 89
<OTHER-INCOME> 0
<EXPENSES-NET> 393
<NET-INVESTMENT-INCOME> (66)
<REALIZED-GAINS-CURRENT> 900
<APPREC-INCREASE-CURRENT> 1,134
<NET-CHANGE-FROM-OPS> 1,967
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 283
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 393
<NUMBER-OF-SHARES-REDEEMED> 22
<SHARES-REINVESTED> 20
<NET-CHANGE-IN-ASSETS> 5,787
<ACCUMULATED-NII-PRIOR> (8)
<ACCUMULATED-GAINS-PRIOR> (295)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 157
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 393
<AVERAGE-NET-ASSETS> 12,098
<PER-SHARE-NAV-BEGIN> 9.90
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 1.46
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.24
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.08
<EXPENSE-RATIO> 2.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> ESC STRATEGIC GLOBAL EQUITY FUND - CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 16,490
<INVESTMENTS-AT-VALUE> 17,849
<RECEIVABLES> 242
<ASSETS-OTHER> 589
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,680
<PAYABLE-FOR-SECURITIES> 289
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68
<TOTAL-LIABILITIES> 358
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,786
<SHARES-COMMON-STOCK> 337
<SHARES-COMMON-PRIOR> 338
<ACCUMULATED-NII-CURRENT> 84
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,359
<NET-ASSETS> 18,322
<DIVIDEND-INCOME> 228
<INTEREST-INCOME> 89
<OTHER-INCOME> 0
<EXPENSES-NET> 393
<NET-INVESTMENT-INCOME> (66)
<REALIZED-GAINS-CURRENT> 900
<APPREC-INCREASE-CURRENT> 1,134
<NET-CHANGE-FROM-OPS> 1,967
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 76
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39
<NUMBER-OF-SHARES-REDEEMED> 48
<SHARES-REINVESTED> 7
<NET-CHANGE-IN-ASSETS> 5,787
<ACCUMULATED-NII-PRIOR> (8)
<ACCUMULATED-GAINS-PRIOR> (295)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 157
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 393
<AVERAGE-NET-ASSETS> 3,586
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 1.46
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .24
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.95
<EXPENSE-RATIO> 2.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> ESC STRATEGIC INCOME FUND - CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 33,259
<INVESTMENTS-AT-VALUE> 32,943
<RECEIVABLES> 817
<ASSETS-OTHER> 4,679
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,439
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102
<TOTAL-LIABILITIES> 102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,516
<SHARES-COMMON-STOCK> 3,730
<SHARES-COMMON-PRIOR> 3,256
<ACCUMULATED-NII-CURRENT> 509
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (373)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (315)
<NET-ASSETS> 38,337
<DIVIDEND-INCOME> 43
<INTEREST-INCOME> 2,792
<OTHER-INCOME> 0
<EXPENSES-NET> 657
<NET-INVESTMENT-INCOME> 2,179
<REALIZED-GAINS-CURRENT> 742
<APPREC-INCREASE-CURRENT> (286)
<NET-CHANGE-FROM-OPS> 2,635
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,105
<DISTRIBUTIONS-OF-GAINS> 742
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 422
<NUMBER-OF-SHARES-REDEEMED> 207
<SHARES-REINVESTED> 259
<NET-CHANGE-IN-ASSETS> 4,723
<ACCUMULATED-NII-PRIOR> 149
<ACCUMULATED-GAINS-PRIOR> 12
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 373
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 673
<AVERAGE-NET-ASSETS> 35,846
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.16
<PER-SHARE-DIVIDEND> 0.59
<PER-SHARE-DISTRIBUTIONS> 0.21
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> ESC STRATEGIC INCOME FUND - CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 33,259
<INVESTMENTS-AT-VALUE> 32,943
<RECEIVABLES> 817
<ASSETS-OTHER> 4,679
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,439
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102
<TOTAL-LIABILITIES> 102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,516
<SHARES-COMMON-STOCK> 146
<SHARES-COMMON-PRIOR> 125
<ACCUMULATED-NII-CURRENT> 509
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (373)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (315)
<NET-ASSETS> 38,337
<DIVIDEND-INCOME> 43
<INTEREST-INCOME> 2,792
<OTHER-INCOME> 0
<EXPENSES-NET> 657
<NET-INVESTMENT-INCOME> 2,179
<REALIZED-GAINS-CURRENT> 742
<APPREC-INCREASE-CURRENT> (286)
<NET-CHANGE-FROM-OPS> 2,635
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 74
<DISTRIBUTIONS-OF-GAINS> 29
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39
<NUMBER-OF-SHARES-REDEEMED> 48
<SHARES-REINVESTED> 7
<NET-CHANGE-IN-ASSETS> 4,723
<ACCUMULATED-NII-PRIOR> 149
<ACCUMULATED-GAINS-PRIOR> 12
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 373
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 673
<AVERAGE-NET-ASSETS> 1,378
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.16
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.21
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> 2.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> ESC STRATEGIC SMALL CAP FUND - CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 22,769
<INVESTMENTS-AT-VALUE> 29,661
<RECEIVABLES> 822
<ASSETS-OTHER> 7,490
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 37,973
<PAYABLE-FOR-SECURITIES> 106
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129
<TOTAL-LIABILITIES> 235
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,415
<SHARES-COMMON-STOCK> 1,816
<SHARES-COMMON-PRIOR> 781
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,808
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,892
<NET-ASSETS> 37,737
<DIVIDEND-INCOME> 81
<INTEREST-INCOME> 192
<OTHER-INCOME> 0
<EXPENSES-NET> 480
<NET-INVESTMENT-INCOME> (207)
<REALIZED-GAINS-CURRENT> 2,358
<APPREC-INCREASE-CURRENT> 6,354
<NET-CHANGE-FROM-OPS> 8,505
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 649
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,060
<NUMBER-OF-SHARES-REDEEMED> 63
<SHARES-REINVESTED> 39
<NET-CHANGE-IN-ASSETS> 25,585
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 487
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 225
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 524
<AVERAGE-NET-ASSETS> 17,494
<PER-SHARE-NAV-BEGIN> 11.25
<PER-SHARE-NII> (0.08)
<PER-SHARE-GAIN-APPREC> 5.19
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.48
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.88
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> ESC STRATEGIC SMALL CAP FUND - CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 22,769
<INVESTMENTS-AT-VALUE> 29,661
<RECEIVABLES> 822
<ASSETS-OTHER> 7,490
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 37,973
<PAYABLE-FOR-SECURITIES> 106
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129
<TOTAL-LIABILITIES> 235
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,415
<SHARES-COMMON-STOCK> 564
<SHARES-COMMON-PRIOR> 300
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,808
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,892
<NET-ASSETS> 37,737
<DIVIDEND-INCOME> 81
<INTEREST-INCOME> 192
<OTHER-INCOME> 0
<EXPENSES-NET> 480
<NET-INVESTMENT-INCOME> (207)
<REALIZED-GAINS-CURRENT> 2,358
<APPREC-INCREASE-CURRENT> 6,354
<NET-CHANGE-FROM-OPS> 8,505
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 189
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 280
<NUMBER-OF-SHARES-REDEEMED> 29
<SHARES-REINVESTED> 13
<NET-CHANGE-IN-ASSETS> 25,585
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 487
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 225
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 524
<AVERAGE-NET-ASSETS> 5,223
<PER-SHARE-NAV-BEGIN> 11.22
<PER-SHARE-NII> (0.16)
<PER-SHARE-GAIN-APPREC> 5.18
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.48
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.76
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> ESC STRATEGIC APPRECIATION FUND - CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 22,698
<INVESTMENTS-AT-VALUE> 26,855
<RECEIVABLES> 49
<ASSETS-OTHER> 1,270
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,174
<PAYABLE-FOR-SECURITIES> 54
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77
<TOTAL-LIABILITIES> 131
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,852
<SHARES-COMMON-STOCK> 1,964
<SHARES-COMMON-PRIOR> 1,418
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,033
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,157
<NET-ASSETS> 28,043
<DIVIDEND-INCOME> 296
<INTEREST-INCOME> 85
<OTHER-INCOME> 0
<EXPENSES-NET> 482
<NET-INVESTMENT-INCOME> (101)
<REALIZED-GAINS-CURRENT> 1,696
<APPREC-INCREASE-CURRENT> 3,346
<NET-CHANGE-FROM-OPS> 4,941
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 573
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 670
<NUMBER-OF-SHARES-REDEEMED> 165
<SHARES-REINVESTED> 40
<NET-CHANGE-IN-ASSETS> 11,224
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 507
<AVERAGE-NET-ASSETS> 21,584
<PER-SHARE-NAV-BEGIN> 10.67
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 2.71
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.31
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.02
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> ESC STRATEGIC APPRECIATION FUND - CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 22,698
<INVESTMENTS-AT-VALUE> 26,855
<RECEIVABLES> 49
<ASSETS-OTHER> 1,270
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,174
<PAYABLE-FOR-SECURITIES> 54
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77
<TOTAL-LIABILITIES> 131
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,852
<SHARES-COMMON-STOCK> 192
<SHARES-COMMON-PRIOR> 159
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,033
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,157
<NET-ASSETS> 28,043
<DIVIDEND-INCOME> 296
<INTEREST-INCOME> 85
<OTHER-INCOME> 0
<EXPENSES-NET> 482
<NET-INVESTMENT-INCOME> (101)
<REALIZED-GAINS-CURRENT> 1,696
<APPREC-INCREASE-CURRENT> 3,346
<NET-CHANGE-FROM-OPS> 4,941
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 51
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55
<NUMBER-OF-SHARES-REDEEMED> 27
<SHARES-REINVESTED> 4
<NET-CHANGE-IN-ASSETS> 11,224
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 507
<AVERAGE-NET-ASSETS> 2,055
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 2.68
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.31
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.91
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
