<PAGE> 1
Registration Nos. 33-72190
811-8166
As filed with the Securities and Exchange Commission on July 29, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Post-Effective Amendment No. 8 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 9 X
ESC STRATEGIC FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (800) 662-8417
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W. Howard Cammack, Jr.
Equitable Securities Corporation
800 Nashville City Center
511 Union Street
Nashville, Tennessee 37219-1743
(Name and Address of Agent for Service)
Copies to:
Jeffrey L. Steele, Esq. George O. Martinez, Esq.
Dechert Price & Rhoads BISYS Fund Services
1500 K Street, N.W. 3435 Stelzer Road
Washington, D.C. 20005 Columbus, Ohio 43219-3035
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective: (check appropriate box)
X immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of rule 485.
DECLARATION PURSUANT TO RULE 24f-2
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has previously filed a declaration of registration of an indefinite number of
shares of Common Stock, $.001 par value per share, of all series of the
Registrant, now existing or hereafter created. Registrant's 24f-2 Notice for
the fiscal year ended March 31, 1997 was filed on May 29, 1997.
<PAGE> 2
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
[ESC STRATEGIC FUNDS LOGO]
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
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This Prospectus describes the seven funds (the "Funds") comprising ESC
Strategic Funds, Inc. (the "Company"), an open-end management registered
investment company advised by Equitable Securities Corporation (the "Adviser").
Certain of the Funds follow a "Multiple Manager Strategy" whereby the Adviser
seeks to enhance performance and reduce market risk by allocating the respective
Fund's assets among multiple "specialist" Managers. See "Management Strategies."
The Funds described in this prospectus are:
ESC Strategic Appreciation Fund
ESC Strategic Global Equity Fund
ESC Strategic Small Cap Fund*
ESC Strategic Income Fund
ESC Strategic Asset Preservation Fund
ESC Strategic Growth Fund
ESC Strategic Value Fund
Each of the Funds offers two classes of shares, except ESC Strategic Asset
Preservation Fund, which offers only one class of shares. The Funds bear certain
expenses related to the distribution of their shares.*
ESC STRATEGIC INCOME FUND MAY INVEST UP TO 40% OF ITS ASSETS IN DEBT
SECURITIES OF U.S. AND FOREIGN ISSUERS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS OF UNTIMELY PAYMENT OF
PRINCIPAL AND INTEREST, AS WELL AS DEFAULT AND OTHER RISKS, THAN HIGHER RATED
SECURITIES. INVESTORS SHOULD CONSIDER THESE RISKS CAREFULLY BEFORE INVESTING IN
THIS FUND. SEE "RISKS OF INVESTING IN THE FUNDS" HEREIN.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND FUND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN MUTUAL FUNDS, SUCH AS THE FUNDS, INVOLVE RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING IN ANY OF THE FUNDS AND SHOULD BE READ AND RETAINED
FOR INFORMATION ABOUT EACH FUND.
A Statement of Additional Information (the "SAI"), dated July 29, 1997,
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or telephoning the Company at the address and
information numbers printed above.
- - ---------------
* Currently, shares of the Small Cap Fund are not being offered to the public.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The Date of this Prospectus is July 29, 1997
<PAGE> 5
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Highlights..................................................
Fund Expenses...............................................
Fee Table...................................................
Financial Highlights........................................
The Funds...................................................
Risks of Investing in the Funds.............................
Management Strategies.......................................
Management of the Funds.....................................
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>
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HIGHLIGHTS
THE FUNDS, THEIR ADVISER AND MANAGERS
This Prospectus describes the seven Funds comprising ESC Strategic Funds, Inc.
(the "Company"). Each Fund has a distinct investment objective and policies.
Overall management of the Funds is provided by Equitable Securities Corporation
(the "Adviser"). The Adviser, headquartered in Nashville, Tennessee, is a New
York Stock Exchange member investment banking and securities brokerage firm.
Founded in 1930, the Adviser's predecessor developed a national clientele as an
investment banking firm dealing in both corporate and municipal securities. In
1968, the American Express Company acquired the Adviser's predecessor and in
1972 the firm was reestablished as an independent company when a group of its
employees purchased the firm. Equitable Trust Company, the Adviser's
wholly-owned subsidiary formed in 1991, provides investment management, trust,
and other fiduciary services to individuals and other clients. Equitable Asset
Management, Inc., an investment adviser, is a wholly-owned subsidiary of
Equitable Trust Company. In 1986, the Adviser formed the IMES Consulting Group
to provide consulting services to institutional and individual investors
employing outside investment management expertise. The primary services of the
IMES Consulting Group are strategic investment planning, asset allocation
analysis, investment manager evaluation and performance measurement. The IMES
Consulting Group provides primary information within Equitable Securities
Corporation in the latter's role as Adviser of the ESC Strategic Funds.
For several of the Funds, the Adviser seeks to enhance performance and reduce
market risk by allocating the respective Fund's assets among multiple
"specialist" Managers (the "Multiple Manager Strategy"). For its services as
Adviser, Equitable Securities Corporation receives from each Fund a fee at an
annual rate based on the Fund's average daily net assets. This fee is at an
annual rate of 0.50% for ESC Strategic Asset Preservation Fund; 1.00% for ESC
Strategic Appreciation Fund, ESC Strategic Global Equity Fund, ESC Strategic
Small Cap Fund and ESC Strategic Income Fund; and 1.25% for ESC Strategic Growth
Fund and ESC Strategic Value Fund. These fees (except those for ESC Strategic
Asset Preservation Fund) are higher than those for most other investment compa-
- - --------------------------------------------------------------------------------
2
<PAGE> 6
- - --------------------------------------------------------------------------------
nies and are used by the Adviser to pay Managers' fees, at no additional cost to
the Funds. See "Management of the Funds." The Funds and their Managers are as
follows:
- - -ESC Strategic Appreciation Fund -- This Fund's objective is long-term capital
appreciation. It invests in a diversified portfolio comprised mainly of
publicly traded common stocks and securities convertible into or exchangeable
for common stock, primarily of U.S.-based companies. The Fund uses the Multiple
Manager Strategy. Its Managers currently are GlobeFlex Capital, L.P., Brandes
Investment Partners, Inc., Equitable Asset Management, Inc. ("EAM") and Scott &
Stringfellow Capital Management Inc.
- - -ESC Strategic Global Equity Fund -- This Fund's objective is long-term capital
appreciation. It invests primarily in a diversified portfolio of publicly
traded common stocks and securities convertible into or exchangeable for common
stock. In addition to the use of the Multiple Manager Strategy, the Fund
diversifies its investments across domestic and international markets. The
Fund's Managers currently are GlobeFlex Capital, L.P., and Murray Johnstone
International Limited.
- - -ESC Strategic Small Cap Fund -- This Fund's objective is a high level of
capital appreciation. The Fund invests primarily in equity securities of
domestic and foreign issuers with market capitalization of generally no more
than $800 million at the time of purchase. THE FUND MAY INVEST SUBSTANTIAL
PORTIONS OF ITS PORTFOLIO IN INDIVIDUAL ISSUERS AND THEREFORE DOES NOT INTEND
TO BE DIVERSIFIED. The Fund's Manager is EAM.
- - -ESC Strategic Income Fund -- This Fund's primary objective is a high level of
current income, with a secondary objective of total return. It invests
primarily in a diversified portfolio of corporate, government and other debt
instruments of U.S. issuers, although up to 35% of its assets may be invested
in such securities of non-U.S. issuers. THIS FUND HAS NO REQUIREMENTS AS TO
MINIMUM RATING, AND UP TO 40% OF ITS ASSETS MAY BE INVESTED IN "JUNK BONDS".
The Fund uses the Multiple Manager Strategy. Its Managers currently are Llama
Asset Management Company, L.P., Cincinnati Asset Management, Inc. and Murray
Johnstone International Limited.
- - -ESC Strategic Asset Preservation Fund -- This Fund's objective is as high a
level of current income as is consistent with limiting the risk of potential
loss. It invests in domestic investment grade debt securities with a maximum
maturity of five years and a maximum dollar-weighted average portfolio maturity
of three years. The Fund's Manager is EAM.
- - -ESC Strategic Growth Fund -- This Fund's objective is a high level of capital
appreciation. It invests primarily in equity securities of domestic and foreign
issuers believed by its Manager to offer superior opportunities for growth. The
Fund's Manager is EAM.
- - -ESC Strategic Value Fund -- This Fund's objective is long-term capital
appreciation. It invests primarily in equity securities of domestic and foreign
issuers believed by the Manager to be undervalued. THE FUND MAY INVEST
SUBSTANTIAL AMOUNTS IN A LIMITED NUMBER OF ISSUERS AND THEREFORE DOES NOT
INTEND TO BE DIVERSIFIED. The Fund's Manager is EAM.
SPECIAL RISKS
In addition to the risks highlighted above, investments by the Funds in foreign
equity and debt (including sovereign debt and securities of issuers in emerging
markets) involve currency and other risks that are different from domestic
investments. Each of the Funds may engage in options and futures transactions
for hedging purposes, provided that no more than 5% of a Fund's assets may be
placed at risk by such transactions. The Value Fund may also invest in other
derivatives, "junk" bonds and illiquid securities. These and other investment
practices of the Funds, including short sales, involve special risks. For more
information, see "Description of Securities and Investment Practices" and "Risks
of Investing in the Funds." There can be, of course, no assurance that a Fund
will achieve its investment objective. Moreover, investors should be aware that
the value of each Fund's shares will fluctuate, which may cause a loss in the
principal value of the investment.
- - --------------------------------------------------------------------------------
3
<PAGE> 7
- - --------------------------------------------------------------------------------
THE DISTRIBUTOR AND ADMINISTRATOR
Equitable Securities Corporation distributes the Funds' shares and may be
reimbursed for certain of its distribution-related expenses. BISYS Fund Services
Limited Partnership d/b/a BISYS Fund Services ("BISYS") serves as Administrator
to the Funds. BISYS Fund Services, Inc., a subsidiary of The BISYS Group, Inc.
("BFSI") serves as the Funds' transfer agent and the Funds' fund accounting
agent. For its services as Administrator, each Fund pays BISYS a fee at the
annual rate of 0.15% of its average daily net assets. BFSI receives separate
fees for its services as transfer agent and fund accounting agent. See
"Management of the Funds."
CLASSES OF SHARES
Each Fund, except ESC Strategic Asset Preservation Fund, offers investors a
choice of two classes of shares which differ principally with respect to sales
charges and the rate of expenses to which they are subject. Investors may select
the class which better suits their investment needs. Class A shares are offered
with a maximum front-end sales charge of 4.50%, which may be reduced or waived
in certain cases. See "Purchase of Fund Shares." Class A shares are also subject
to a Service and Distribution Fee calculated at an annual rate of up to 0.25% of
the average daily net asset value of Class A shares. Class D* shares are offered
with a 1.50% front-end sales charge and are subject to a Service and
Distribution Fee at an annual rate of up to 0.75% based on the average daily net
asset value of Class D shares. ESC Strategic Asset Preservation Fund offers only
one class of shares with no front-end sales charge and a Service and
Distribution Fee calculated at an annual rate of up to 0.25% of the average
daily value of its net assets. See "Management of the Funds -- The Distributor."
For Funds offering two classes of shares, a prospective investor, in selecting
between the classes, should consider the impact of the sales charge together
with the cumulative effect of the Service and Distribution Fees for each class
over the anticipated period of investment, as well as the effect of any sales
charge waivers to which the investor may be entitled. Investors should be aware
that other expenses attributable to each class may differ slightly due to the
allocation to each class of certain "class specific" expenses, including
distribution and marketing expenses and federal and state securities
registration fees. Finally, investors should be aware that persons selling
shares of the Funds may receive different levels of compensation for sales of
Class A and Class D shares.
GUIDE TO INVESTING IN THE ESC STRATEGIC FUNDS, INC.
Purchase orders for the Funds received by your broker or Service Organization in
proper order prior to 4:00 p.m., Eastern time, and transmitted to the Funds
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 in one Fund for shares of
the same class in another Fund (or for shares of ESC Strategic Asset
Preservation Fund) by telephone or mail.
<TABLE>
<S> <C>
- - -Minimum initial exchange................................... $2,000
(No minimum for subsequent exchanges.)
</TABLE>
Shareholders may redeem shares by telephone, mail or wire.
- - -The Funds reserve the right to redeem upon not less than 30 days' notice all
shares in a Fund's account which have an aggregate value of $500 or less.
- - ---------------
* Class D shares were formerly designated as Class B shares.
- - --------------------------------------------------------------------------------
4
<PAGE> 8
- - --------------------------------------------------------------------------------
All dividends and distributions will be automatically reinvested at net asset
value in additional shares of the same class of the applicable Fund unless cash
payment is requested.
- - -Dividends for ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund are paid monthly.
- - -Distributions for ESC Strategic Appreciation Fund, ESC Strategic Global Equity
Fund, ESC Strategic Small Cap Fund, ESC Strategic Growth Fund and 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 a Fund
during its fiscal year ending March 31, 1998. The numbers reflect estimated
levels of operating expenses based on general industry experience.
FEE TABLE
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
APPRECIATION GLOBAL ESC STRATEGIC
FUND EQUITY FUND SMALL CAP FUND
----------------- ----------------- -----------------
CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)...................... 4.50% 1.50% 4.50% 1.50% 4.50% 1.50%
Maximum Sales Charge Imposed on
Reinvested Dividends (as a percentage
of offering price)................... None None None None None None
Deferred Sales Charge (as a percentage
of redemption proceeds).............. None None None None None None
Exchange Fees.......................... None None None None None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net
assets annualized)
Management Fees...................... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
12b-1 Fees*.......................... 0.25% 0.75% 0.25% 0.75% 0.25% 0.75%
Other Expenses....................... 0.57% 0.59% 1.00% 1.03% 0.41% 0.44%
---- ---- ---- ---- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES..... 1.82% 2.34% 2.25% 2.78% 1.66% 2.19%
==== ==== ==== ==== ==== ====
</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 a Fund, long-term shareholders may pay more initial sales charges
than the economic equivalent of the maximum front-end sales charge permitted
by rules of the NASD. See "Management of the Funds."
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a shareholder in the Funds will bear.
- - --------------------------------------------------------------------------------
5
<PAGE> 9
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<TABLE>
<CAPTION>
ESC
ESC STRATEGIC STRATEGIC
INCOME FUND** ASSET
------------------- PRESERVATION
CLASS A CLASS D FUND**
------- --------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)........................................ 4.50% 1.50% None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)............................. None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................. None None None
Exchange Fees............................................... None None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net assets annualized)
Management Fees**......................................... 1.00% 1.00% 0.25%
12b-1 Fees*............................................... 0.25% 0.75% 0.25%
Other Expenses**.......................................... 0.40% 0.40% 0.42%
---- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES.......................... 1.65% 2.15% 0.92%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
GROWTH FUND** VALUE FUND**
----------------- -----------------
CLASS A CLASS D CLASS A CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)........................................ 4.50% 1.50% 4.50% 1.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)............................. None None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................. None None None None
Exchange Fees............................................... None None None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net assets annualized)
Management Fees**......................................... 0.00% 0.00% 0.00% 0.00%
12b-1 Fees*............................................... 0.25% 0.75% 0.25% 0.75%
Other Expenses**.......................................... 1.75% 1.75% 1.75% 1.75%
---- ---- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES.......................... 2.00% 2.50% 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 a Fund, long-term shareholders may pay more initial sales charges
than the economic equivalent of the maximum front-end sales charge permitted
by rules of the NASD. See "Management of the Funds."
** Amounts shown for "Management Fees" reflect waivers of a portion of the fees
payable to the Adviser for the ESC Strategic Asset Preservation, ESC
Strategic Growth Fund and ESC Strategic Value Fund. Amounts shown for "Other
Expenses" reflect a reimbursement of certain expenses for the Asset
Preservation, Growth and Value Funds by the Adviser. Without these waivers
and reimbursements, the Funds' estimated Management Fees would be 0.50%,
1.25% and 1.25% for the Asset Preservation, Growth and Value Funds,
respectively. "Other Expenses" and "Total Portfolio Operating Expenses,"
respectively, would be: 1.02% and 1.77% for the Asset Preservation Fund;
4.01% and 5.51% for Class A shares of the Growth Fund and 4.91% and 6.91% for
Class D shares of the Growth Fund; 4.34% and 5.84% for Class A shares of the
Value Fund and 4.34% and 6.34% for Class D shares of the Value Fund. Out of
its Management Fees, the Adviser pays the fees of the Managers.
The Purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a shareholder in the Funds will bear.
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6
<PAGE> 10
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EXAMPLE:(1)
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
APPRECIATION GLOBAL EQUITY ESC STRATEGIC
FUND FUND SMALL CAP FUND
----------------- ----------------- -----------------
CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1 year...................................... $ 63 $ 38 $ 67 $ 43 $ 61 $ 37
3 years..................................... $100 $ 87 $112 $100 $ 95 $ 82
5 years..................................... $139 $138 $160 $160 $131 $131
10 years.................................... $249 $279 $292 $321 $233 $264
</TABLE>
<TABLE>
<CAPTION>
ESC
ESC STRATEGIC STRATEGIC
INCOME FUND ASSET
------------------ PRESERVATION
CLASS A CLASS D FUND
------- ------- ------------
<S> <C> <C> <C>
1 year......................................... $ 61 $ 36 $ 9
3 years........................................ $ 95 $ 81 $ 29
5 years........................................ $131 $129 $ 51
10 years....................................... $232 $260 $113
</TABLE>
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
GROWTH FUND VALUE FUND
------------------ ------------------
CLASS A CLASS D CLASS A CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
1 year.................................... $ 64 $40 $ 64 $40
3 years................................... $105 $92 $105 $92
5 years................................... n/a n/a n/a n/a
10 years.................................. n/a n/a n/a n/a
</TABLE>
- - ---------------
(1) 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.
- - --------------------------------------------------------------------------------
7
<PAGE> 11
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following tables present per share financial information for the periods
listed for each Fund. Each of the financial highlights, with the exception of
those for ESC Strategic Value Fund, have been audited by the Funds' independent
accountants. (ESC Strategic Value Fund had not commenced operations as of March
31, 1997.) These financial highlights should be read in conjunction with,
audited financial statements for the same periods which are contained in the
Statement of Additional Information.
<TABLE>
<CAPTION>
APPRECIATION
-------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------- --------------------------------------
JULY 6, 1994 JULY 6, 1994
YEAR YEAR (COMMENCEMENT YEAR YEAR (COMMENCEMENT
ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS)
MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH
1997 1996 MARCH 31, 1995 1997 1996 MARCH 31, 1995
--------- --------- -------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 13.02 $ 10.67 $ 10.00 $ 12.91 $ 10.63 $ 10.00
------- ------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment loss........... (0.04) (0.05) (0.00) (0.08) (0.09) (0.03)
Net realized and unrealized
gains on investments........ 1.92 2.71 0.73 1.89 2.68 0.72
------- ------- ------- ------- ------- -------
Total from investment
operations.................. 1.88 2.66 0.73 1.81 2.59 0.69
------- ------- ------- ------- ------- -------
Less Dividends and
Distributions:
From net investment income.... (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
From realized gains........... (0.87) (0.31) (0.06) (0.87) (0.31) (0.06)
------- ------- ------- ------- ------- -------
Total distributions............. (0.87) (0.31) (0.06) (0.87) (0.31) (0.06)
------- ------- ------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 14.03 $ 13.02 $ 10.67 $ 13.85 $ 12.91 $ 10.63
======= ======= ======= ======= ======= =======
Total Return (excludes sales
charge)....................... 14.25% 25.07% 7.32% 13.81% 24.50% 6.92%
Net Assets End of Period (in
thousands).................... $44,767 $25,561 $15,126 $ 4,054 $ 2,482 $ 1,693
Ratios to Average Net Assets of:
Net investment loss........... (0.30)% (0.39)% (0.04)%* (0.78)% (0.86)% (0.56)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 1.82% 2.00% 2.00%* 2.34% 2.50% 2.50%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 1.84% 2.10% 2.88%* 2.36% 2.64% 3.40%*
Portfolio Turnover Rate......... 71% 78% 58% 71% 78% 58%
Average Commission per Share.... $0.0599 -- -- $0.0599 -- --
</TABLE>
- - ---------------
* Annualized.
- - --------------------------------------------------------------------------------
8
<PAGE> 12
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY
-------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------- --------------------------------------
MAY 12, 1994 MAY 12, 1994
YEAR YEAR (COMMENCEMENT YEAR YEAR (COMMENCEMENT
ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS)
MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH
1997 1996 MARCH 31, 1995 1997 1996 MARCH 31, 1995
--------- --------- -------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 11.08 $ 9.90 $ 10.00 $ 10.95 $ 9.82 $ 10.00
------- ------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment loss.......... (0.04) (0.04) (0.05) (0.10) (0.09) (0.07)
Net realized and unrealized
gain/(loss) on investments
and foreign currency
transactions............... 0.97 1.46 (0.03) 0.97 1.46 (0.10)
------- ------- ------- ------- ------- -------
Total from investment
operations................. 0.93 1.42 (0.08) 0.87 1.37 (0.17)
------- ------- ------- ------- ------- -------
Less Dividends and
Distributions:
From net investment income... 0.00 0.00 0.00 0.00 0.00 0.00
From realized gains.......... (0.35) (0.24) (0.02)** (0.35) (0.24) (0.01)**
------- ------- ------- ------- ------- -------
Total distributions............ (0.35) (0.24) (0.02) (0.35) (0.24) (0.01)
------- ------- ------- ------- ------- -------
Net Asset Value, End of
Period....................... $ 11.66 $ 11.08 $ 9.90 $ 11.47 $ 10.95 $ 9.82
======= ======= ======= ======= ======= =======
Total Return (excludes sales
charge)...................... 8.44% 14.41% (0.84)% 7.99% 14.01% (1.72)%
Net Assets End of Period (in
thousands)................... $18,282 $14,597 $ 9,213 $ 4,204 $ 3,725 $ 3,322
Ratios to Average Net Assets
of:
Net investment loss.......... (0.40)% (0.36)% (0.65)%* (0.90)% (0.83)% (1.51)%*
Expenses net of
waivers/reimbursements and
expenses paid by third
parties.................... 2.25% 2.37% 2.50%* 2.78% 2.87% 2.98%*
Expenses before waivers/
reimbursements and expenses
paid by third parties...... 2.25% 2.43% 3.22%* 2.79% 2.96% 3.69%*
Portfolio Turnover Rate........ 94% 92% 76% 94% 92% 76%
Average Commission per Share... $0.0201 -- -- $0.0201 -- --
</TABLE>
- - ---------------
* Annualized.
** Represents distribution in excess of net investment income.
- - --------------------------------------------------------------------------------
9
<PAGE> 13
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
-------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------- --------------------------------------
JUNE 6, 1994 JUNE 6, 1994
YEAR YEAR (COMMENCEMENT YEAR YEAR (COMMENCEMENT
ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS)
MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH
1997 1996 MARCH 31, 1995 1997 1996 MARCH 31, 1995
--------- --------- -------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 15.88 $ 11.25 $10.00 $ 15.76 $11.22 $10.00
------- ------- ------ ------- ------ ------
Income from Investment
Operations:
Net investment loss........... (0.05) (0.08) (0.03) (0.11) (0.16) (0.05)
Net realized and unrealized
gains on investments........ 2.46 5.19 1.52 2.44 5.18 1.51
------- ------- ------ ------- ------ ------
Total from investment
operations.................. 2.41 5.11 1.49 2.33 5.02 1.46
------- ------- ------ ------- ------ ------
Less Dividends and
Distributions:
From net investment income.... 0.00 0.00 (0.24) 0.00 0.00 (0.24)
From realized gains........... (0.74) (0.48) 0.00 (0.74) (0.48) 0.00
------- ------- ------ ------- ------ ------
Total distributions............. (0.74) (0.48) (0.24) (0.74) (0.48) (0.24)
------- ------- ------ ------- ------ ------
Net Asset Value, End of
Period........................ $ 17.55 $ 15.88 $11.25 $ 17.35 $15.76 $11.22
======= ======= ====== ======= ====== ======
Total Return (excludes sales
charge)....................... 14.99% 45.88% 15.03% 14.59% 45.19% 14.72%
Net Assets End of Period (in
thousands).................... $72,488 $28,840 $8,785 $22,392 $8,897 $3,367
Ratios to Average Net Assets of:
Net investment loss........... (0.44)% (0.80)% (0.43)%* (0.96)% (1.30)% (0.93)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 1.66% 2.00% 2.00%* 2.19% 2.50% 2.50%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 1.74% 2.18% 3.28%* 2.29% 2.74% 3.68%*
Portfolio Turnover Rate......... 65% 102% 151% 65% 102% 151%
Average Commission per Share.... $0.0634 -- -- $0.0634 -- --
</TABLE>
- - ---------------
* Annualized.
- - --------------------------------------------------------------------------------
10
<PAGE> 14
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME
-------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------- --------------------------------------
MAY 4, 1994 MAY 4, 1994
YEAR YEAR (COMMENCEMENT YEAR YEAR (COMMENCEMENT
ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS)
MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH
1997 1996 MARCH 31, 1995 1997 1996 MARCH 31, 1995
--------- --------- -------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 9.89 $ 9.94 $ 10.00 $ 9.89 $ 9.94 $10.00
------- ------- ------- ------ ------ ------
Income from Investment
Operations:
Net investment income........ 0.60 0.59 0.55 0.50 0.54 0.50
Net realized and unrealized
gain/(loss) on investments
and foreign currency
transactions............... (0.16) 0.16 (0.05) (0.16) 0.16 (0.05)
------- ------- ------- ------ ------ ------
Total from investment
operations................. 0.44 0.75 0.50 0.34 0.70 0.45
------- ------- ------- ------ ------ ------
Less Dividends and
Distributions:
From net investment income... (0.60) (0.59) (0.01) (0.50) (0.54) (0.01)
From realized gains.......... 0.00 (0.21) (0.55) 0.00 (0.21) (0.50)
------- ------- ------- ------ ------ ------
Total distributions............ (0.60) (0.80) (0.56) (0.50) (0.75) (0.51)
------- ------- ------- ------ ------ ------
Net Asset Value, End of
Period....................... $ 9.73 $ 9.89 $ 9.94 $ 9.73 $ 9.89 $ 9.94
======= ======= ======= ====== ====== ======
Total Return (excludes sales
charge)...................... 3.91% 7.67% 5.30% 3.39% 7.11% 4.74%*
Net Assets End of Period (in
thousands)................... $32,506 $36,891 $32,373 $1,420 $1,446 $1,241
Ratios to Average Net Assets
of:
Net investment income........ 5.49% 9.87% 6.29%* 4.99% 5.37% 5.73%*
Expenses net of
waivers/reimbursements and
expenses paid by third
parties.................... 1.65% 1.70% 1.85%* 2.15% 2.20% 2.29%*
Expenses before waivers/
reimbursements and expenses
paid by third parties...... 1.70% 1.75% 1.86%* 2.21% 2.25% 2.31%*
Portfolio Turnover Rate........ 123% 138% 92% 123% 138% 92%
</TABLE>
- - ---------------
* Annualized.
- - --------------------------------------------------------------------------------
11
<PAGE> 15
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSET PRESERVATION
----------------------------------------
APRIL 25, 1994
(COMMENCEMENT
YEAR YEAR OF OPERATIONS)
ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31,
1997 1996 1995
--------- --------- --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 10.00 $ 9.89 $ 10.00
------- ------- -------
Income from Investment Operations:
Net investment income........................ 0.49 0.56 0.47
Net realized and unrealized gain/(loss) on
investments............................... (0.11) 0.11 (0.11)
------- ------- -------
Total from investment operations............. 0.38 0.67 0.36
------- ------- -------
Less Dividends and Distributions:
From net investment income................... (0.49) (0.56) 0.00
From realized gains.......................... 0.00 0.00 (0.47)
------- ------- -------
Total distributions............................ (0.49) (0.56) (0.47)
------- ------- -------
Net Asset Value, End of Period................. $ 9.89 $ 10.00 $ 9.89
======= ======= =======
Total Return................................... 4.12% $ 6.85% 3.75%
Net Assets End of Period (in thousands)........ $12,688 $13,241 $11,924
Ratios to Average Net Assets of:
Net investment income........................ 5.15% 5.53% 5.15%*
Expenses net of waivers/reimbursements and
expenses paid by third parties............ 0.92% 0.90% 1.00%*
Expenses before waivers/reimbursements and
expenses paid by third parties............ 1.77% 1.58% 2.12%*
Portfolio Turnover Rate........................ 41% 40% 30%
</TABLE>
- - ---------------
* Annualized.
- - --------------------------------------------------------------------------------
12
<PAGE> 16
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
-----------------------------------
CLASS A CLASS D
---------------- ----------------
JANUARY 28, 1997 JANUARY 28, 1997
(COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) OF OPERATIONS)
THROUGH THROUGH
MARCH 31, 1997 MARCH 31, 1997
---------------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period.................... $ 10.00 $ 10.00
------- -------
Income from Investment Operations:
Net investment income................................. 0.00 0.00
Net realized and unrealized (loss) on investments..... (0.36) (0.37)
------- -------
Total from investment operations.............. (0.36) (0.37)
------- -------
Less Dividends and Distributions:
From net investment income............................ 0.00 0.00
From realized gains................................... 0.00 0.00
------- -------
Total distributions..................................... 0.00 0.00
------- -------
Net Asset Value, End of Period.......................... $ 9.64 $ 9.63
======= =======
Total Return (excludes sales charge).................... (3.60)% (3.70)%
Net Assets End of Period (in thousands)................. $ 2,852 $ 1,304
Ratios to Average Net Assets of:
Net investment income................................. 0.25%* (0.23)%
Expenses net of waivers/reimbursements and expenses
paid by third parties.............................. 2.00%* 2.50%*
Expenses before waivers/reimbursements and expenses
paid by third parties.............................. 5.51%* 6.91%*
Portfolio Turnover Rate................................. 14% 14%
Average Commission per Share............................ $0.0681 $0.0681
</TABLE>
- - ---------------
* Annualized.
- - --------------------------------------------------------------------------------
THE FUNDS
Each Fund is a separate investment fund or portfolio, commonly known as a mutual
fund. The Funds are portfolios of the Company, which was organized under the
laws of the State of Maryland on November 24, 1993 as an open-end management
investment company. The Company's Board of Directors oversees the overall
management of the Funds and elects the Funds' officers. The Adviser continuously
monitors the performance of each Fund and its Managers and determines proper
allocations of assets in each Fund's portfolio and among Managers for Funds
using the Multiple Manager Strategy. See "Management Strategies." Investments
and investment management decisions are made by the respective Manager(s) for
each Fund based on the investment objective and policies of that Fund. For
information regarding the Managers, see "Management of the Funds." There can be
no assurance that a Fund will achieve its investment objective.
ESC Strategic Appreciation Fund. Investors seeking long-term growth of capital
and for whom current income is not an objective should consider investing in ESC
Strategic Appreciation Fund.
The investment objective of ESC Strategic Appreciation Fund is long-term capital
appreciation. The Fund invests in publicly traded common stocks and securities
convertible into or exchangeable for common stock, primarily of U.S.-based
companies. The Fund's investment policies reflect the Adviser's analysis
indicating that (a) an equity orientation is attractive because, as measured by
broad market indices, equities have historically out-performed fixed income
securities and inflation over longer periods but with greater short-term risk of
volatility, and
- - --------------------------------------------------------------------------------
13
<PAGE> 17
- - --------------------------------------------------------------------------------
(b) the short-term market risk of price volatility associated with equity
investments may be reduced by using the Multiple Manager Strategy. See
"Management Strategies." Although the Fund's portfolio consists primarily of
equity securities, the Fund may invest in debt instruments to the extent
consistent with its investment objective and for temporary defensive purposes.
These debt obligations may include U.S. Government securities, certificates of
deposit, bankers' acceptances, commercial paper, repurchase agreements and debt
obligations of corporations (corporate bonds, debentures, notes and other
similar corporate debt instruments) which are rated investment grade or better
by Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"), or deemed of comparable quality by the Managers. The Fund's
Managers are GlobeFlex Capital, L.P., Brandes Investment Partners, Inc., Scott &
Stringfellow Capital Management, Inc. and EAM.
ESC Strategic Global Equity Fund. Investors seeking long-term growth of capital
and who wish to diversify their investments internationally should consider
investing in ESC Strategic Global Equity Fund.
The investment objective of ESC Strategic Global Equity Fund is long-term
capital appreciation. The Fund invests in publicly traded common stocks and
securities convertible into or exchangeable for common stock. Like ESC Strategic
Appreciation Fund, the Fund seeks to increase prospects for appreciation and to
reduce market risk by using an equity orientation and by employing the Multiple
Manager Strategy. The Fund also uses the Emerging Market Strategy (see
"Management Strategies" and "Risks of Investing in the Funds"). The Fund
diversifies its investments across markets (domestic and international) that
have exhibited divergent return characteristics. Particular emphasis is placed
on investing in (a) smaller companies believed by the Fund's Managers to have
potential for above-average growth rates when investing in "mature" securities
markets and (b) equity securities of companies in countries having "emerging"
securities markets. The weighting of U.S. equity securities relative to
securities of other equity asset categories in the Fund's portfolio will be
determined through use of the Adviser's Domestic/International Equity Allocation
Model. See "Management Strategies." Based on this Model, the Fund's portfolio is
initially anticipated to have about 33% of its investments in U.S. securities.
Its non-U.S. investments may include up to 35% in emerging market securities.
Under normal market conditions, a fundamental policy of the Fund is to have at
least 65% of its assets invested in issuers of at least three different
countries, as determined by the location of their headquarters or principal
business operations. Under appropriate market conditions, the Fund may invest in
debt instruments and other asset classes that appear to offer opportunities for
capital appreciation and that are rated investment grade or better by S&P or
Moody's or, if unrated, are deemed of comparable quality by the Fund's Manager.
In such event, the Fund may retain one or more Managers specializing in such
other asset classes. The Fund may also invest in debt securities for defensive
and cash management purposes. Permitted debt investments are comparable to those
for ESC Strategic Appreciation Fund. The Fund's Managers currently are GlobeFlex
Capital, L.P., and Murray Johnstone International Limited.
ESC Strategic Small Cap Fund. Investors seeking long-term capital appreciation
and who believe that smaller companies may offer special opportunities for
growth over the long term should consider investing in ESC Strategic Small Cap
Fund.
The investment objective of ESC Strategic Small Cap Fund is a high level of
capital appreciation. Under normal circumstances, at least 65% of the value of
the Fund's total assets will be invested in equity securities of issuers with
market capitalization of $1 billion or less, and as a matter of operating
policy, the Fund will invest primarily in companies with market capitalization
of $800 million or less at the time of investment. The Fund's portfolio will
include equity securities of companies believed by the Manager to show superior
prospects for growth due, for example, to promising new products, new
distribution strategies, new manufacturing technologies or new management teams
or management philosophy. In
- - --------------------------------------------------------------------------------
14
<PAGE> 18
- - --------------------------------------------------------------------------------
the Manager's view, such companies tend to be responsible for technological
breakthroughs and/or unique solutions to market needs. By focusing on internal
rather than external factors, the Fund attempts to minimize the risk associated
with macro-economic forces such as changes in commodity prices, currency
exchange rates and interest rates.
In selecting portfolio companies, the Manager considers the growth rate in
earnings, financial performance, management strengths and weaknesses, and
current market valuation relative to earnings growth as well as historic and
comparable company valuations. The Manager also analyzes the level and nature of
the company's debt, cash flow, working capital and the quality of the company's
assets. Typically, companies included in the Fund's portfolio will show earnings
growth exceeding 20% compared to the previous year's comparable period.
Companies with excessive levels of debt will generally be avoided.
By developing and maintaining contacts with management, customers, competitors
and suppliers of current and potential portfolio companies, the Manager attempts
to invest in those companies that are not well followed generally by securities
analysts and the financial press. Because such securities tend not to be
efficiently priced, the Manager believes they offer potentially superior
investment opportunities. The Manager favors portfolio companies whose price
when purchased is between five and fifteen times projected earnings for the
coming year.
Although the Fund's portfolio securities are generally acquired for the long
term, they may be sold under any of the following circumstances: (a) the
anticipated price appreciation has been achieved or is no longer probable; (b)
the Manager's analysis indicates that the company's fundamentals may be
deteriorating; (c) general market expectations regarding the company's future
performance exceed those of the Manager; or (d) alternative investments, in the
Manager's view, offer superior potential for appreciation.
The Fund's portfolio will consist primarily of common stocks, but may also
include convertible preferred, participating preferred and preferred stocks. Its
equity investments will be traded on domestic or foreign securities exchanges or
in over-the-counter markets. For temporary defensive and liquidity purposes,
however, it may invest in U.S. Government securities, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements and debt
obligations of corporations (corporate bonds, debentures, notes and other
similar corporate debt instruments) rated high grade or better or, if unrated,
determined to be of comparable quality by the Fund's Manager.
Investing in companies that are undergoing internal change may involve special
risks due to the unknown effects of change. Additionally, the Fund will not be a
"diversified" investment company and may therefore invest substantial portions
of its assets in securities of individual issuers. Thus, the Fund will not have
the same diversification of investment risk as a diversified fund. (A
"diversified" investment company must, with respect to at least 75% of its
assets, invest no more than 5% of its total assets in the securities of a single
issuer, and own no more than 10% of the outstanding voting securities of a
single issuer, except for cash, cash items, U.S. Government securities, and
securities of other investment companies.) The Fund intends, however, to meet
the diversification requirements under the Internal Revenue Code of 1986 to
qualify for tax treatment as a regulated investment company. The Fund's Manager
is EAM.
ESC Strategic Income Fund. Investors seeking a high level of current income
together with total return should consider investing in ESC Strategic Income
Fund. The longer-term securities in which the Fund normally invests generally
have higher yields, but higher risks and greater price fluctuation, than
shorter-term securities. See "Risks of Investing in the Funds -- Interest Rate
Risk".
The primary investment objective of ESC Strategic Income Fund is a high level of
current income, with a secondary objective of total return. The Fund invests
primarily in corporate, government and other debt instruments of U.S. and
non-U.S. issuers and, under normal circumstances, will have at
- - --------------------------------------------------------------------------------
15
<PAGE> 19
- - --------------------------------------------------------------------------------
least 65% of the value of its total assets invested in income producing
securities. In selecting debt securities for ESC Strategic Income Fund, the
Managers seek those instruments that appear best calculated to achieve the
Fund's investment objective. To provide the Managers with maximum flexibility
and to accommodate their differing management styles, the Fund has not adopted
quality restrictions with respect to obligations in which its assets may be
invested. Thus, the Fund's investments generally will include securities that
are unrated, and up to 40% of the Fund's assets may be invested in securities
that are rated below investment grade and unrated securities deemed by a Manager
to be of comparable quality (commonly known as "junk bonds"), which entail
special risks. See "Risks of Lower Rated Securities."
The Fund follows the Multiple Manager Strategy and the Emerging Market Strategy
(see "Management Strategies" and "Risks of Investing in the Funds"). The Fund
may invest in securities issued by the U.S. Government and its agencies and
instrumentalities. It may also invest in securities issued by foreign
governments or their agencies or instrumentalities ("sovereign debt"), by
international agencies and by U.S. and foreign corporate issuers, including
notes, bonds, convertible and preferred securities, mortgage-backed securities,
commercial paper, bankers' acceptances, certificates of deposit, Yankee bonds
and Eurobonds. Investments in foreign securities (including sovereign debt) will
be limited to 35% of its assets. For more information on special risks of
investing in foreign securities and sovereign debt, see "Risks of Investing in
the Funds."
The Fund's Managers currently are Llama Asset Management Company, L.P.,
Cincinnati Asset Management, Inc. and Murray Johnstone International Limited.
ESC Strategic Asset Preservation Fund. Investors seeking higher returns than
are generally available from money market instruments and certificates of
deposit, with low risk of significant share price volatility, should consider
investing in ESC Strategic Asset Preservation Fund. The Fund is not insured by
the Federal Deposit Insurance Corporation.
The investment objective of ESC Strategic Asset Preservation Fund is as high a
level of current income as is consistent with limiting the risk of potential
loss. The Fund invests primarily in domestic investment grade debt obligations
with a maximum maturity of five years, with a maximum dollar-weighted average
portfolio maturity of three years. Securities held by the Fund will include U.S.
Government securities, corporate debt securities, mortgage- and other
asset-backed securities, certificates of deposit, bankers' acceptances and other
debt instruments that meet the Fund's quality criteria. The Fund's yield will
tend to vary with changes in short-term interest rates. See "Risks of Investing
in the Funds."
The Manager selects investments for the Fund that appear best suited to
achieving the Fund's investment objective within the credit and risk tolerances
established for the Fund. In accordance with these policies, the Fund may
purchase corporate debt securities rated Baa or better by Moody's or BBB or
better by S&P (securities with these ratings have speculative characteristics),
mortgage-and asset-backed securities rated A or better by Moody's or S&P,
commercial paper rated Prime 1/42 or better by Moody's or A 1/42 or better by
S&P and other debt instruments that are either given equivalent ratings by at
least two other nationally-recognized rating agencies ("NRSROs") or deemed by
the Manager to be of comparable quality. Securities downgraded below these
ratings will normally be sold unless the Manager believes the sale would be
disadvantageous to the Fund. In no event will over 15% of the Fund's total
assets consist of such downgraded securities. Assumptions generally accepted by
the financial industry concerning the probability of early payment may be used
in the calculation of maturities for debt securities that contain put or call
provisions or that are subject to pre-refunding, sometimes resulting in a
calculated maturity different from the stated maturity of the security. The
Fund's Manager is EAM.
ESC Strategic Growth Fund. Investors seeking long-term capital appreciation
should consider investing in ESC Strategic Growth Fund.
- - --------------------------------------------------------------------------------
16
<PAGE> 20
- - --------------------------------------------------------------------------------
The investment objective of the Fund is a high level of capital appreciation.
Under normal circumstances, at least 65% of the value of the Funds' total assets
will be invested in equity securities of companies believed by the Manager to
show superior prospects for growth due to, for example, promising new products,
new distribution strategies, new manufacturing technologies or new management
teams or management philosophy. In the Manager's view, such companies tend to be
responsible for technological breakthroughs and/or unique solutions to market
needs. By focusing on internal rather than external factors, the Fund attempts
to minimize the risk associated with macro-economic forces such as changes in
commodity prices, currency exchange rates and interest rates. The Manager
intends to invest in equity securities of all market capitalizations. For
example, the Manager may find that small capitalization stocks provide the most
compelling growth characteristics with the most attractive valuations and,
therefore, at times the Fund's investments may be weighted toward small cap
stocks.
In selecting portfolio companies, the Manager considers the growth rate in
earnings, financial performance, management strengths and weaknesses, and
current market valuation relative to earnings and earnings growth as well as
historic and comparable company valuations. The Manager also analyzes the level
and nature of the company's debt, cash flow, working capital and the quality of
the company's assets. Typically, companies included in the Fund's portfolio will
show earnings growth exceeding 15% compared to the previous year's comparable
period. Companies with excessive levels of debt will generally be avoided.
By developing and maintaining contacts with managements, customers, competitors
and suppliers of current and potential portfolio companies, the Manager
typically attempts to invest in those companies that are not widely followed by
securities analysts and the financial press or where the Manager believes the
company offers an investment opportunity that is not seen or is misunderstood by
the investment community. Because such securities tend not be efficiently
priced, the Manager believes they offer potentially superior investment
opportunities. The Manager favors common stocks of companies whose prices at the
time of purchase are between five and fifteen times projected earnings for the
coming year.
Although the Fund's portfolio securities are generally acquired for the long
term, they may be sold under any of the following circumstances: (a) the
anticipated price appreciation has been achieved or is no longer probable; (b)
the Manager's analysis indicates that the company's fundamentals may be
deteriorating; (c) general market expectations regarding the company's future
performance exceed those of the Manager; or (d) alternative investments, in the
Manager's view, offer superior potential for appreciation.
The Fund's diversified portfolio will consist primarily of common stocks, but
may also include convertible preferred, participating preferred and preferred
stocks. Its equity investments will be traded on domestic or foreign securities
exchanges or in over-the-counter markets. For liquidity purposes, however, it
may invest up to 35% of its assets in debt securities rated at least A by
Moody's Investors Service, Inc. or A by Standard & Poor's or, if unrated,
determined to be of comparable quality by the Fund's Manager. Such debt
securities may include U.S. Government securities, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements and debt
obligations of corporations (corporate bonds, debentures, notes and other
similar corporate debt instruments). The Fund may invest up to 100% of its
assets in such debt securities for temporary defensive purposes.
Investing in companies that are undergoing internal change may involve special
risks due to the unknown effects of change. The Fund's Manager is EAM. For
information regarding the Manager, see "Management of the Funds".
ESC Strategic Value 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
- - --------------------------------------------------------------------------------
17
<PAGE> 21
- - --------------------------------------------------------------------------------
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 temporary 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 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 confi
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dence 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 there 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 shortterm market fluctuations or for
investors who would be likely to sell shares in the event of short-term declines
in value.
The Fund's Manager is EAM. For information regarding the Manager, see
"Management of the Fund."
- - --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES OF THE FUNDS
In addition to the investment policies and practices described above, the Funds
may engage in transactions in options and futures contracts for hedging
purposes, provided that no more than 5% of a Fund's assets may be placed at risk
by such transactions. (See "Risks of Investing in the Funds"). For additional
information on these and other investments and investment restrictions, see
"Description of Securities and Investment Practices," "Investment Restrictions,"
and the SAI.
RISKS OF INVESTING IN THE FUNDS
Shareholders of a Fund should expect the value of their shares to fluctuate with
changes in the value of the securities owned by that Fund. Additionally, an
investment in ESC Strategic Small Cap Fund and ESC Strategic Value Fund may
entail special risks because the Funds are not required to be diversified. As
non-diversified funds, the Funds are not subject to certain regulatory limits,
including limits on the size of their positions in individual issuers. To the
extent the Funds exceed these limits, they will be more exposed to risks of
particular issuers than a diversified fund. The Funds will, however, comply with
the diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended. Also, investment in ESC Strategic Small Cap Fund and ESC
Strategic Value Fund may entail other special risks because they may (or will in
the case of ESC Strategic Small Cap Fund) 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.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products. In order to
attempt to minimize that risk, the Adviser and Managers monitor developments in
the economy, the securities markets, and with each particular issuer. Also, as
noted earlier, each diversified Fund is managed within certain limitations that
restrict
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the amount of that respective Fund's investment in any single issuer.
Foreign Securities (All Funds except ESC Strategic Asset Preservation Fund).
Investing in the securities of issuers in any foreign country, including ADRs,
EDRs, and similar instruments, involves special risks and considerations not
typically associated with investing in U.S. companies. These include differences
in accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility and less
liquidity. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial arrangements
and transaction costs of foreign currency conversions. Changes in foreign
exchange rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. A Fund's objectives may be affected
either unfavorably or favorably by fluctuations in the relative rates of
exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments. A decline in
the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of a Fund's holdings of securities denominated
in such currency, and 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 Funds value their assets daily in terms of U.S. dollars, the Funds
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis, and a Fund may from time to time have foreign currency
holdings pending investment. When a Fund converts its foreign currency holdings,
it will incur costs. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference ("spread") between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to sell that currency
to the dealer.
Through a Fund's flexible policies, Managers endeavor to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places a Fund's investments. See the SAI
for further information about foreign securities.
Special Considerations Concerning Emerging Markets: Investment in emerging
market countries presents risk in greater degree than, and in addition to, those
presented by investment in foreign issuers in general. A number of emerging
market countries restrict, to varying degrees, foreign investment in stocks.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some emerging
market countries. A number of the currencies of developing countries have
experienced significant declines against the U.S. dollar in recent years, and
devaluation may occur subsequent to investments in these currencies by the Fund.
Inflation and rapid fluctuations in inflation rates have had and may continue to
have negative effects on the economies and securities markets of certain
emerging market countries. Many of the emerging securities markets are
relatively small, have low trading volumes, suffer periods of relative
illiquidity, and are character-
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ized by significant price volatility. There is a risk in emerging market
countries that a future economic or political crisis could lead to price
controls, forced mergers of companies, expropriation or confiscatory taxation,
seizure, nationalization, or creation of government monopolies, any of which may
have a detrimental effect on the Funds' investments.
Interest Rate Risk. Changes in interest rates affect the value of securities in
a variety of ways, not all of which are predictable. The most direct effect of
interest rate changes, however, is on fixed income securities. Generally, the
current market value of fixed income securities falls as interest rates rise and
rises as interest rates fall. The effect of interest rate changes on the market
value of a security is typically greater the longer the remaining term of the
security. Changes in interest rates on short and/or longer term securities also
affect the yield on fixed income securities of particular maturities which can
be purchased by a Fund. Each of the Funds may invest in fixed income securities,
and ESC Strategic Income Fund and ESC Strategic Asset Preservation Fund will
generally be substantially invested in such securities. ESC Strategic Income
Fund, because of the longer-term securities in which it generally invests, will
typically be more vulnerable to the effects of interest rate risk on the market
value of its portfolio securities than ESC Strategic Asset Preservation Fund,
which invests in shorter term instruments. The yield to maturity on particular
securities will vary depending on prevailing interest rates for such securities
at the time of the investment. Because of its shorter term investments, the
yield from ESC Strategic Asset Preservation Fund will tend to be more quickly
affected by interest rate changes than will that of ESC Strategic Income Fund.
Risks of Lower Rated and Non-Investment Grade Securities and Sovereign Debt
Obligations. ESC Strategic Income Fund, ESC Strategic Asset Preservation Fund
and ESC Strategic Value Fund may invest in securities rated Baa by Moody's
and/or BBB by S&P if, in the opinion of the Manager(s), the yield is
commensurate with the risk involved. These securities (and securities deemed of
comparable quality by a Manager) have speculative characteristics. A description
of the characteristics of ratings of securities in which a Fund may invest is
attached as an Appendix.
ESC Strategic Income Fund and ESC Strategic Value Fund may invest in securities
rated below Baa by Moody's or BBB by S&P. Securities rated below investment
grade and comparable unrated securities (commonly known as "junk bonds") offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which ESC Strategic Income Fund and ESC
Strategic Value Fund may invest may have, or be considered comparable to
securities having, the lowest ratings for non-subordinated debt instruments
assigned by Moody's, S&P or other NRSROs (i.e., rated C by Moody's or CCC or
lower by S&P). These securities are considered to have extremely poor prospects
of ever attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal. Such securities are considered speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of its respective shares.
Therefore, an investment in a Fund that invests in securities of this type
should not be considered as a complete investment program for all investors.
The secondary markets for high yield corporate and sovereign debt securities are
not as liquid as the secondary markets for higher rated securities. The
secondary markets for
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high yield debt securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield debt securities is generally lower
than that for higher-rated securities and the secondary markets could contract
under adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on a Fund's ability to dispose of particular portfolio
investments and may limit its ability to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value. If a Fund is not
able to obtain precise or accurate market quotations for a particular security,
it will become more difficult for the Company's Board of Directors to value its
portfolio securities and the Company's Directors may have to use a greater
degree of judgment in making such valuations. Less liquid secondary markets may
also affect a Fund's ability to sell securities at their fair value. In
addition, a Fund may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield debt securities are
affected by adverse economic conditions, the proportion of the Fund's assets
invested in illiquid securities may increase.
In the case of corporate debt securities, while the market values of securities
rated below investment grade and comparable unrated securities tend to react
less to fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. Price volatility in these securities
will be reflected in a Fund's share value. In addition, such securities
generally present a higher degree of credit risk. Issuers of these securities
are often highly leveraged and may not have more traditional methods of
financing available to them, so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The recent economic recession has resulted in
default levels in excess of historic averages.
Investing in sovereign debt securities will expose a Fund to the direct or
indirect consequences of political, social or economic changes in the developing
and emerging countries that issue the securities. The ability and willingness of
sovereign obligors in developing and emerging countries or the governmental
authorities that control repayment of their external debt to pay principal and
interest on such debt when due may depend on general economic and political
conditions within the relevant country. Countries such as those in which several
of the Funds may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate and
trade difficulties and extreme poverty and unemployment. Many of these countries
are also characterized by political uncertainty or instability. Additional
factors which may influence the ability or willingness to service debt include,
but are not limited to, a country's cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
its debt service burden to the economy as a whole, and its government's policy
towards the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies
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other than dollars, its ability to make debt payments denominated in dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds,
which may further impair the obligor's ability or willingness to timely service
its debts. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates, because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign exchange to service its external
debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to default on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds (see below), and obtaining new credit to finance
interest payments. Holders of certain foreign sovereign debt securities may be
requested to participate in the restructuring of such obligations and to extend
further loans to their issuers. There can be no assurance that the Brady Bonds
and other foreign sovereign debt securities in which a Fund may invest will not
be subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
In addition to high yield foreign sovereign debt securities, the Funds may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities," above.
Zero coupon bonds (which do not pay interest until maturity) and pay-in-kind
securities (which pay interest in the form of additional securities) may be more
speculative than securities which pay income periodically and in cash. In
addition, although a Fund receives no periodic cash payments from such
investments, applicable tax rules require the Fund to accrue on an effective
yield basis for original issue discount and pay out its income from such
securities annually as income dividends and require stockholders to pay tax on
such dividends.
In an effort to reduce credit risk, the ESC Strategic Income Fund diversifies
its holdings among many issuers. As of March 31, 1997, the ESC Strategic Income
Fund held securities of 57 issuers.
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The chart below shows, on a dollar-weighted basis, the credit quality
characteristics of the Strategic Income Fund. The chart reflects average
percentages of the Strategic Income Fund's assets invested in bonds having the
ratings shown below, based upon the Strategic Income Fund's portfolio holdings
at March 31, 1997.
<TABLE>
<CAPTION>
PERCENT OF
RATINGS ASSETS
- - ------- ----------
<S> <C>
Cash & Equivalents.......................................... 0.69%
Aaa/AAA..................................................... 34.80
Aa/AA....................................................... 11.88
A/A......................................................... 5.53
Baa/BBB..................................................... 0.00
Ba/BB....................................................... 6.43
B/B......................................................... 39.27
Caa/CCC..................................................... 0.00
Ca/CC....................................................... 0.00
Lower.......................................................
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
UNRATED, BUT EQUIVALENT TO ASSETS
- - -------------------------- ----------
<S> <C>
B/B......................................................... 1.40%
</TABLE>
The above chart is intended solely to provide disclosure about the ESC Strategic
Income Fund's asset composition at March 31, 1997. The asset composition after
this time may or may not be approximately the same as shown above. The chart
reflects ratings by Moody's where they were available, and ratings assigned by
Moody's may not be consistent with ratings assigned by S&P or other credit
rating services, and the Investment Adviser may not necessarily agree with a
rating assigned by Moody's, S&P or another credit rating agency.
Municipal Lease Obligations. Municipal lease obligations have special risks not
normally associated with municipal bonds. These obligations frequently contain
"non-appropriation" clauses that provide that the governmental issuer of the
obligation has no obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the legislative body on a
yearly or other periodic basis. For more information on risks of municipal lease
investments, see the SAI.
Short Sales. A Fund will incur a loss as a result of a short sale (other than a
short sale against the box) if the price of the security increases between the
date of the short sale and the date on which the Fund replaces the borrowed
security. Possible losses from such short sales differ from losses that could be
incurred from a purchase of a security, because losses from such short sales may
be unlimited, whereas losses from purchases of a security can equal only the
total amount invested. To limit these risks, a Fund's short sales (other than
short sales against the box) will be only with respect to securities fully
listed on a national securities exchange and will not at any time exceed a
dollar amount equal to 25% of the Fund's net equity. Further, a Fund's short
sales of securities of a 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 Illiquid Securities. A Fund may invest up to 15% of their 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 a 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
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underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by a Fund is not sold when it has remaining value,
and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price, or in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, a Fund may be
unable to close out a position. If a Fund cannot effect a closing transaction,
it will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
Options transactions involve, additionally, risks similar to those described
below in "Risks of Futures and Related Options Transactions."
Currency Risk. Most of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Funds' assets. The
Funds may, however, engage in foreign currency transactions to protect their
portfolios against fluctuations in currency exchange rates in relation to the
U.S. dollar. Such foreign currency transactions may include forward foreign
currency contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts. (See below.) The Funds cannot assure that these techniques will
always be successful.
Foreign Currency Options. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of a Fund to
reduce foreign currency risk using such options. Over-the-counter options differ
from traded options in that they are two-party contracts with price and other
terms negotiated between buyer and seller and generally do not have as much
market liquidity as exchange-traded options. Employing hedging strategies with
options on currencies does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline.
Furthermore, such hedging transactions reduce or preclude the opportunity for
gain if the value of the hedged currency should change relative to the U.S.
dollar. A Fund will not speculate in options on foreign currencies.
There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If a Fund cannot close out an option which
it holds, it would have to exercise its option in order to realize any profit
and would incur transactional costs on the sale of the underlying assets.
Risks of Futures and Related Options Transactions. There are several risks
associated with the use of futures contracts and options on futures contracts.
While a Fund's use of futures contracts and related options for hedging may
protect a Fund against adverse movements in the general level of interest rates
or securities prices, such transactions could also preclude the opportunity to
benefit from favorable movements in the level of interest rates or securities
prices. There can be no guarantee that a Manager's forecasts about market
values, interest rates and other applicable factors will be correct or that
there will be a correlation between price movements in the hedging vehicle and
in
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the securities being hedged. The skills required to invest successfully in
futures and options may differ from skills required to manage other assets in a
Fund's portfolio. An incorrect forecast or imperfect correlation could result in
a loss on both the hedged securities in a Fund and the hedging vehicle so that
the Fund's return might have been better had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
A Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or are quoted on an automated quotation system. A Fund will not
enter into a futures contract if immediately thereafter the initial margin
deposits for futures contracts held by the Fund plus premiums paid by it for
open futures options positions, less the amount by which any such positions are
"in-the-money," would exceed 5% of the Fund's total assets.
The Funds may trade futures contracts and options on futures contracts on U.S.
domestic markets and, except for ESC Strategic Asset Preservation Fund, also on
exchanges located outside of the United States. Foreign markets may offer
advantages such as trading in indices that are not currently traded in the
United States. Foreign markets, however, may have greater risk potential than
domestic markets. Unlike trading on domestic commodity exchanges, trading on
foreign commodity exchanges is not regulated by the Commodity Futures Trading
Commission ("CFTC") and may be subject to greater risk than trading on domestic
exchanges. For example, some foreign exchanges are principal markets so that no
common clearing facility exists and a trader may look only to the broker for
performance of the contract. In addition, any profits that a Fund might realize
in trading could be eliminated by adverse changes in the exchange rate of the
currency in which the transaction is denominated, or the Fund could incur losses
as a result of changes in the exchange rate. Transactions on foreign exchanges
may include both commodities that are traded on domestic exchanges or boards of
trade and those that are not.
Risks of Forward Foreign Currency Contracts. The precise matching of forward
contracts and the value of the securities involved will not generally be
possible since the future value of the securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
Projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
There can be no assurance that new forward contracts or offsets will always be
available to a Fund.
Risks of Real Estate Investment Trusts ("REITs"). ESC Strategic Value 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,
over-building 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.
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MANAGEMENT STRATEGIES
The Adviser uses various strategies intended to increase the return of the Funds
and to lower their volatility, to the extent consistent with the objectives of
each Fund, by (a) strategically allocating assets to specific categories,
markets and Managers, (b) identifying and retaining Managers who have achieved
superior records and have appropriately divergent management styles, and (c)
monitoring Managers' performance and adherence to stated styles.
Multiple Manager Strategy. The Adviser expects to use the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance of both the total Fund portfolio and of each
Manager and will reallocate Fund assets among individual Managers, or recommend
to the Company that it employ or terminate particular Managers, to the extent
the Adviser deems appropriate to achieve the overall objectives of the
particular Fund. The Adviser intends to recommend reallocations if, under the
Adviser's strategic analysis, a Manager's allocation becomes over-weighted as a
result of extended appreciation and in order that undervalued securities and
management styles receive additional allocations. Under certain circumstances,
when deemed in the best interests of a Fund and its shareholders, the Adviser
may recommend that a Manager's allocation be set temporarily at zero.
The Multiple Manager Strategy is based on analysis of performance of investment
managers which indicates that even highly successful investment managers
experience variations in performance which may be caused by factors or
conditions that affect the particular universe of securities emphasized by that
investment manager or otherwise impact his particular investment style. By
recognizing the effect of these factors on particular Managers, the Adviser can
reallocate or rebalance the assets of a Fund among Managers from time to time to
provide a more favorable risk/reward relationship. As a result of this strategy,
the Adviser hopes both to increase the prospects for investment return and to
reduce market risk.
To the extent the Adviser is successful in (a) identifying and retaining
Managers who have achieved superior investment records and have appropriately
divergent investment styles, (b) monitoring Managers' performance and adherence
to stated styles, and (c) strategically allocating Fund assets among multiple
Managers, over time the Adviser believes the Funds with multiple Managers may
achieve a better rate of return with lower volatility than would typically be
expected of any one management style.
The Adviser selects Managers based on the continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to specific investment styles. While superior performance is regarded
as the ultimate goal, short-term performance by itself is not a significant
factor in selecting or terminating Managers, and the Adviser does not anticipate
frequent changes in Managers. Criteria for employment of Managers include, but
are not limited to, the following:
(1) Managers must display discipline and thoroughness in pursuit of stated
investment objectives.
(2) Managers must maintain over time consistently above-average performance.
Most importantly, Managers must display an ability to conserve values in down
markets.
(3) Managers must demonstrate a high level of service and responsibility to
clients. The Adviser monitors continually the performance of Managers as well as
management firm staffs and organizations to assess overall competence.
The Company has received an exemptive order (the "Order") from the Securities
and Exchange Commission that will permit, subject to certain conditions, the
Adviser to retain new Managers (except a Manager affiliated with the Adviser)
without shareholder approval of the contracts with those Managers. Within 60
days of such retention of a new Manager, shareholders of any affected Fund will
receive information similar to what would have been provided in a proxy
statement, except for fees to be paid to the
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Manager. The Order relieves the Company from requirements to disclose fees paid
to individual Managers (except Managers affiliated with the Adviser, such as
EAM) in the prospectus and other documents. Aggregate advisory fees paid by each
Fund, aggregate fees paid to Managers of each Fund, fees retained by the Adviser
with respect to each Fund and fees paid to Managers affiliated with the Adviser
will be disclosed.
From time to time, the Adviser may recommend that the services of a Manager be
terminated. The criteria for termination include, but are not limited to, the
following:
(1) Departure of key personnel from the Manager's firm.
(2) Acquisition of the Manager by a third party.
(3) Change in or departure from investment style.
(4) Inadequate investment process which could result in inconsistent security
selection.
Multiple Asset Strategy. In the Adviser's view, approximately 94% of return
variability among investment portfolios is attributable to asset allocation.
Therefore, short-term risk of price volatility associated with equity
investments should be reduced by broad representation in asset groups that
historically have lower market risk than equities -- principally fixed income
securities.
Multiple Market Strategy. For certain Funds, the Adviser will seek to reduce
market risk through exposure to international markets which, as a group, have
exhibited counter-cyclical characteristics compared to U.S. markets. The U.S.
equity market capitalization currently represents approximately 43% of global
equity market capitalization. Additional return benefits may be achieved by the
broader security selection available in international markets.
Emerging Company/Mature Market Strategy. When a Fund invests in mature markets,
the Adviser will seek above-average return by allocating assets to Managers that
invest in companies (a) with earnings growth that exceeds that of the economy,
(b) that have a market capitalization less than the average for that market, and
(c) that are under-recognized by investors. The Adviser's analysis indicates
that, over time, such stocks tend to outperform larger capitalization indices
and are less subject to macro-economic, cyclical forces.
Emerging Market Strategy. The Adviser will seek to enhance investment return
for ESC Strategic Global Equity Fund and ESC Strategic Income Fund through
investing in emerging markets that are exhibiting or are in the early stages of
exhibiting very high economic growth rates relative to countries in the
Organization for European Community Development ("OECD"). An emerging market may
be defined as any country considered to be emerging or developing by the World
Bank or the United Nations. Currently, the Adviser anticipates emphasis, for
Funds using this strategy, in Latin America (Argentina, Brazil, Chile, Columbia,
Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela)
and Asia (China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines,
Singapore, Sri Lanka, Taiwan, and Thailand). It is anticipated that countries in
Southern and Eastern Europe, the Mid-East and Africa will be added to this list.
For special risks of investing in emerging markets, see "Risks of Investing in
the Funds."
Domestic/International Equity Allocation Model (DIEA Model). For the ESC
Strategic Global Equity Fund, the Adviser will determine the weighting in the
Fund's portfolio between U.S. and international markets by using the DIEA Model.
This model considers (a) U.S. Gross National Product ("GNP") as a percentage of
the world economy, based on calculations by the World Bank, and (b) the trend of
U.S. Gross Domestic Product ("GDP") growth relative to other international
developed market and emerging market categories of equity assets represented in
the Fund's portfolio. The World Bank currently estimates that the GNP of the
United States comprises 34% of the world economy. This percentage has declined
from 47% in 1970 and is expected to decline further given 2% expected growth in
developed OECD markets as compared to 6.5% expected growth in emerging markets.
Ac-
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cordingly, the initial allocation to U.S. equities is expected to be no greater
than 33%. Emerging markets will generally comprise between 40% to 60% of the
international component or about 35% of the total investment assets. From time
to time, the Adviser may allocate Fund assets to fixed income or other
securities when these allocations are expected to provide returns comparable to
those normally associated with equity securities.
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MANAGEMENT OF THE FUNDS
The business and affairs of each Fund are managed under the direction of the
Board of Directors. The Directors are William Howard Cammack, Sr.; William
Howard Cammack, Jr.; J. Bransford Wallace; Brownlee O. Curry, Jr.; and E. Townes
Duncan. Additional information about the Directors, as well as the Company's
executive officers, may be found in the SAI under the heading
"Management -- Directors and Officers."
THE ADVISER: EQUITABLE SECURITIES CORPORATION
Equitable Securities Corporation, 800 Nashville City Center, 511 Union Street,
Nashville, Tennessee 37219-1743, is a registered investment adviser, a
registered broker-dealer, and a member of the New York Stock Exchange, Inc.
Together with predecessors, the Adviser has been in business since 1930. Through
its IMES Consulting Group, the Adviser provides consulting services to clients
regarding the strategic allocation of assets and the selection and monitoring of
investment management firms. The Adviser serves as General Partner of several
private, unregistered limited partnerships. The Company is the Adviser's first
registered investment company client. One of the Managers, EAM, is a subsidiary
of the Adviser's subsidiary, Equitable Trust Company, and is, therefore, an
affiliate of the Adviser. The Adviser and its affiliates had approximately $1.3
billion under management at December 31, 1996.
For the advisory services it provides the Funds, the Adviser receives from each
Fund fees, payable monthly based on average daily net assets, at an annual rate
based on the Fund's average net assets. Fees are 0.50% for ESC Strategic Asset
Preservation Fund; 1.00% for ESC Strategic Appreciation Fund, ESC Strategic
Global Equity Fund, ESC Strategic Small Cap Fund, and ESC Strategic Income Fund;
and 1.25% for ESC Strategic Growth Fund and ESC Strategic Value Fund. These fees
(except for ESC Asset Preservation Fund) are higher rates than advisory fees
paid by most other investment companies and are used by the Adviser to pay fees
to the Managers. Fees paid to Equitable Asset Management, Inc. for the fiscal
year ended March 31, 1997 were .16% with respect to ESC Strategic Appreciation
Fund, .73% with respect to ESC Strategic Small Cap Fund, .03% with respect to
ESC Strategic Asset Preservation Fund and .12% with respect to ESC Strategic
Growth Fund, as a percentage of each Fund's assets. Aggregate fees paid by each
Fund to the Adviser, aggregate fees paid by the Adviser to the Managers of each
Fund, and fees retained by the Adviser with respect to each of the Funds for the
fiscal year ended March 31, 1997, expressed as a percentage of the assets of
each Fund, were as follows: ESC Strategic Appreciation Fund, .99%, .64% and
.35%; ESC Strategic Global Equity Fund, .99%, .50% and .49%; ESC Strategic Small
Cap Fund, .95%, .73% and.22%; ESC Strategic Income Fund, 1.00%, .25% and .75%;
ESC Strategic Asset Preservation Fund, .25%, .03% and .22%; and ESC Strategic
Growth Fund, 0%, .12% and 0%. Pursuant to an exemptive order received from the
Securities and Exchange Commission, the Funds are not required to disclose fee
rates or fees paid to individual Managers that are not affiliated with the
Adviser. The Adviser has agreed to limit the expenses of the Funds to the
following percentages of each Fund's net asset value: ESC Strategic Appreciation
Fund -- 2.00% (Class A) and 2.50% (Class D); ESC Strategic Global Equity
Fund -- 2.50% (Class A) and 3.00% (Class D); ESC Strategic Small Cap
Fund -- 2.00% (Class A) and 2.50% (Class D); ESC Strategic Income Fund -- 2.00%
(Class A) and 2.50%
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(Class D); ESC Strategic Asset Preservation Fund -- 1.00%; ESC Strategic Growth
Fund -- 2.00% (Class A) and 2.50% (Class D); and ESC Strategic Value Fund 2.00%
(Class A) and 2.50% (Class D). For the period ended March 31, 1997, pursuant to
an agreement to limit Fund expenses, the Adviser waived fees of $30,428 and
$7,185 for the Asset Preservation Fund and the Growth Fund, respectively. No
reimbursements were necessary for the Appreciation, Global Equity, Small Cap, or
Income Funds. Absent this waiver agreement, Advisory fees would have been
$60,856 and $7,185 for the Asset Preservation and Growth Funds, respectively.
The Adviser received fees of 419,329, $207,116, $652,644 and $380,147 from the
Appreciation, Global Equity, Small Cap, and Income Funds, respectively, for the
period ended March 31, 1997. The Value Fund had not yet commenced operations as
of March 31, 1997.
W. Howard Cammack, Jr. has primary responsibility for the Adviser's advice to
the Funds. Mr. Cammack joined the Adviser in 1979. He is presently a Managing
Director, is head of the Adviser's Investment Management and Fiduciary Services
Group, and is a member of the Board of Directors of the Adviser, Equitable Trust
Company, and EAM. In 1986, Mr. Cammack organized the Adviser's IMES Consulting
Group, which he oversees. Mr. Cammack received a Bachelor's degree in history
from Tulane University in 1979.
THE MANAGERS
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 740, San Diego, California
92121, was newly formed in 1994 by a group of seven individuals previously
associated with other investment advisory firms and collectively having
approximately 60 years' investment management experience. The firm specializes
in management of domestic and international equity securities. As of March 31,
1997 the firm had approximately $639 million of assets under management.
Llama Asset Management Company, L.P., One McIlroy Plaza, Suite 302,
Fayetteville, Arkansas 72701 organized in 1988, is an investment advisory firm
that specializes in fixed income investments. The firm provides investment
management to pension plans, insurance companies, hospitals, and other
institutional investors and individuals. As of March 31, 1997 the firm had
approximately $196 million of assets under management.
Cincinnati Asset Management, Inc., 11300 Cornell Park Drive, Cincinnati, Ohio
45242 is an investment advisory firm specializing in high-yield debt securities,
also known as junk bonds. The firm, organized in 1989 and majority owned by its
chief executive officer, William S. Sloneker and family members, provides
services to insurance companies, pension plans, other institutional investors
and individuals. As of March 31, 1997 the firm had approximately $220 million of
assets under management.
Murray Johnstone International Limited, 11 West Nile Street, Glasgow, Scotland
G1 2PX, was organized in 1989 and manages $1.4 billion in assets for clients in
North America, including other mutual funds. The firm is a wholly-owned
subsidiary of the Murray Johnstone Group, whose origin goes back to 1907. The
Group had approximately $1.4 billion of assets under management as of March 31,
1997. Murray Johnstone Group, in turn, is owned by United Asset Management
Corporation, a New York Stock Exchange-traded company based in Boston.
Brandes Investment Partners, Inc., 12750 High Bluff Drive, San Diego, California
92130, has been providing investment advisory services since 1974 (including
predecessors). Brandes Investment Partners, Inc. manages approximately $10.5
billion for individual, corporate, pension plan and other clients as of March
31, 1997.
Scott & Stringellow Capital Management, Inc., 909 East Main Street, Richmond,
Virginia 23219, organized in 1982, is a registered investment adviser whose
services focus on investment in small capitalization growth stocks. As of March
31, 1997, the firm has $447 million of assets under management.
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-
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owned subsidiary of the Adviser. EAM began business as an investment adviser in
1988 and at March 31, 1997 managed approximately $356 million in assets. Frank
D. Inman has primary investment responsibility for equity management at EAM,
including EAM's services to ESC Strategic Appreciation Fund, ESC Strategic Small
Cap Fund and ESC Strategic Growth Fund. Mr. Inman joined Equitable Securities
Corporation in May of 1988 where he is a Managing Director. Prior to that date,
Mr. Inman was Director of Institutional Equity Sales at Interstate Securities in
Charlotte, North Carolina. Mr. Inman received a Bachelors degree in English from
the University of Georgia in 1973 and a Masters degree in Business
Administration from Georgia State University in 1979.
Primary investment responsibility for fixed income investments at EAM, including
EAM's services to ESC Strategic Asset Preservation Fund, resides with Gary F.
Poling, First Vice President and Investment Officer of Equitable Trust Company
and First Vice President of EAM. Prior to joining Equitable Trust Company, Mr.
Poling was First Vice President and Senior Portfolio Manager of Sovran
Bank/Tennessee's Trust Division. Previously, he was an investment representative
with Merrill Lynch, Pierce, Fenner and Smith, Inc. Mr. Poling received a
Bachelor of Science degree in Finance from East Tennessee State University in
1972. He is also a Certified Financial Planner, a Registered Financial Planner,
a Certified Trust and Financial Adviser, and a Certified Financial Relationship
Counselor.
Primary investment responsibility for management of the ESC Strategic Value Fund
resides with C. Markes Hinton, Jr. Mr. Hinton joined Equitable Securities
Corporation in August 1993 and as a Managing Director of 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 Securities
Corporation, 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 &
Freidrichs, 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 Bachelor of Business Administration 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.
Each of the Funds offering two classes of shares has adopted a service and
distribution plan ("Plan") with respect to each class of its shares. The Plans
provide that Class A shares will pay the Distributor a fee up to an annual rate
of 0.25% (which may include a 0.25% Service Fee) of the value of average daily
net assets of Class A shares as reimbursement for its costs incurred for
financing certain distribution and shareholder service activities related to
Class A shares. For the period ended March 31, 1997, the Distributor received
$42,069 $24,898, $127,326, $96,480 and $570 for the Income, Global Equity, Small
Cap, Appreciation and Growth Funds, respectively pursuant to Class A Plans. The
Plans provide that Class D shares will pay the Distributor amounts up to an
annual rate of 0.75% (which may include a 0.25% Service Fee) of the average
daily net assets of Class D shares as reimbursement for its costs incurred to
finance certain distribution and shareholder service activities related to Class
D Shares. For the period ended March 31, 1997, the Distributor re-
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ceived $10,963, $30,169, $108,542, $23,480 and $279 for the Income, Global
Equity, Small Cap, Appreciation and Growth Funds, respectively pursuant to Class
D Plans. ESC Strategic Asset Preservation Fund, which has only one class of
shares, has adopted a Plan substantially the same as that for Class A shares of
the other Funds. For the period ended March 31, 1997 the Distributor received
$17,770 pursuant to the Plan for ESC Strategic Asset Preservation Fund. Service
Fees are paid to securities dealers and other financial institutions for
maintaining shareholder accounts and providing related services to shareholders.
The Value Fund had not commenced operations as of March 31, 1997.
Under each of the Plans, each Fund pays the Distributor and other securities
dealers and other financial institutions and organizations for certain
shareholder service or distribution activities. Selling dealers may be paid
amounts, at the end of each year, totaling up to 0.25% of the average daily net
asset value of Class A shares and for the sole class of shares of Asset
Preservation Fund, and 0.75% of the average daily net asset value of Class D
shares in their clients' accounts. Amounts received by the Distributor may,
additionally, subject to the Plan maximums, be used to cover certain other costs
and expenses related to the distribution of Fund shares and provision of service
to Fund shareholders, including: (a) advertising by radio, television,
newspapers, magazines, brochures, sales literature, direct mail or any other
form of advertising; (b) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses; (c)
costs of printing prospectuses and other materials to be given or sent to
prospective investors; and (d) such other similar services as the Directors
determine to be reasonably calculated to result in the sale of shares of the
Funds. Each Fund will pay all costs and expenses in connection with the
preparation, printing and distribution of the Prospectus to current shareholders
and the operation of its Plan(s), including related legal and accounting fees. A
Fund will not be liable for distribution expenditures made by the Distributor in
any given year in excess of the maximum amount payable under a Plan for that
Fund in that year.
SERVICE ORGANIZATIONS
Payments may be made by the Funds or by the Adviser to various banks, trust
companies, broker-dealers or other financial organizations (collectively,
"Service Organizations") for providing administrative services for the Funds and
their shareholders, such as maintaining shareholder records, answering
shareholder inquiries and forwarding materials and information to shareholders.
The Funds may pay fees to Service Organizations (which vary depending upon the
services provided) in amounts up to an annual rate of 0.25% of the daily net
asset value of the shares of either class (and of the sole class of Asset
Preservation Fund) owned by shareholders with whom the Service Organization has
a servicing relationship.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than a Fund's
minimum initial or subsequent investments or charging a direct fee for
servicing. If imposed, these fees would be in addition to any amounts which
might be paid to the Service Organization by the Funds. Each Service
Organization has agreed to transmit to its clients a schedule of any such fees.
Shareholders using Service Organizations are urged to consult with them
regarding any such fees or conditions.
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
serves as Administrator of the Funds. BISYS Fund Services, Inc., also a
subsidiary of The BISYS Group, Inc. ("BFSI") serves as Transfer Agent and Fund
Accountant to the Funds.
Pursuant to an Administration Agreement with the Company, BISYS provides
management and administrative services necessary for the Funds', including,
among other things: (i) preparation of shareholder reports and communications;
(ii) regulatory compliance, such as reports to and filings with the SEC and
state securities commissions; and (iii) general supervision of the operation of
the Funds, including coordination of the services performed by the Adviser, the
Distributor, transfer agent,
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custodian, independent accountants, legal counsel and others. In addition, BISYS
furnishes office space and facilities required for the conducting the business
of the Funds and pays the compensation of the Funds' officers and employees
affiliated with BISYS. For these services, BISYS receives from each Fund a fee,
payable monthly, at the annual rate of 0.15% of each Fund's average daily net
assets.
For the period ended March 31, 1997, the former Administrator, Furman Selz LLC,
was entitled to and received fees in the amount of $13,579; $43,472; $22,578;
$63,535 and $44,387 from the Asset Preservation, Income, Global Equity, Small
Cap and Appreciation Funds, respectively. Furman Selz LLC voluntarily waived
administration fees of $6,790 for the Asset Preservation Fund. BISYS as
successor Administrator was entitled to and received fees in the amount of
$4,678; $13,550; $8,489; $33,009, $18,512 and $862 from the Asset Preservation,
Income, Global Equity, Small Cap Appreciation Funds and Growth, respectively.
BISYS voluntarily waived fees of $2,338 and $862 for the Asset Preservation and
Growth Funds. The Value Fund had not commenced operations as of March 31, 1997.
Pursuant to a Transfer Agency Agreement between the Company and BFSI, BFSI
provides the Company with transfer and dividend disbursing agent services, for
which it receives a fee of $15.00 per account per year subject to a required
minimum fee of $10,000 for each Fund, plus out-of-pocket expenses. For the
period ended March 31, 1997, Furman Selz LLC, as former transfer agent, was
entitled to and received fees in the amount of $7,500 for each of the Asset
Preservation, Income, Global Equity and Appreciation Funds, respectively as well
as fees in the amount of $20,812 for the Small Cap Fund. BFSI, as Transfer
Agent, was entitled to and received fees in the amount of $2,500 for each of the
Asset Preservation, Income, Global Equity and Appreciation Funds, respectively
as well as fees in the amount of $12,470 and $1,774 for the Small Cap and Growth
Funds, respectively. The Value Fund had not commenced operations as of March 31,
1997.
Pursuant to a Fund Accounting Agreement between the Company and BFSI assists the
Company in calculating net asset values and provides certain other accounting
services for each Fund described therein, for an annual fee of $30,000 per Fund
plus out-of-pocket expenses. For the period ended March 31, 1997, the former
Fund Accountant, Furman Selz LLC, earned for fund accounting services excluding
out-of-pocket expenses $22,500 for each of the Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds, respectively. BFSI, as
successor Fund Accountant, earned for fund accounting services excluding out-of-
pocket expenses $7,500 for each of the Asset Preservation, Income, Global
Equity, Small Cap and Appreciation Funds; and $5,323 for the Growth Fund. The
Value Fund had not commenced operations as of March 31, 1997.
OTHER EXPENSES
Each Fund bears all costs of its operations other than expenses specifically
assumed by the Administrator, the Adviser, the Managers or other service
providers. In addition to the fees to service providers, described above, the
costs borne by the Funds, some of which may vary between the classes for Funds
with two classes, as noted above, include: legal and accounting expenses;
Directors' fees and expenses; insurance premiums; custodian and transfer agent
fees and expenses; expenses incurred in acquiring or disposing of the Funds'
portfolio securities; expenses of registering and qualifying the Funds' shares
for sale with the SEC and with various state securities commissions; expenses of
maintaining the Funds' legal existence and of shareholders' meetings; and
expenses of preparing and distributing reports, proxy statements and
prospectuses to existing shareholders. Each Fund bears its own expenses
associated with its establishment as a portfolio of the Company; these expenses
are amortized over a five-year period from the commencement of a Fund's
operations. Company expenses directly attributable to a Fund or class are
charged to that Fund or class; other expenses are allocated proportionately
among all of the Funds and classes in the Company in relation to the net assets
of each Fund and class.
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PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement and Portfolio Management
Agreements, each Manager places orders for the purchase and sale of portfolio
investments for the Funds' accounts with brokers or dealers it selects in its
discretion.
In effecting purchases and sales of portfolio securities for the account of a
Fund, each Manager will seek the best execution of the Fund's orders. Purchases
and sales of portfolio debt securities for the Funds are generally placed by
Managers with primary market makers for these securities on a net basis, without
any brokerage commission being paid by the Funds. Trading does, however, involve
transaction costs. Transactions with dealers serving as primary market makers
reflect the spread between the bid and asked prices. The Funds may purchase
securities during an underwriting, which will include an underwriting fee paid
to the underwriter. To the extent permitted by, and subject to conditions of,
applicable law and regulations, the Funds may purchase securities from an
underwriting syndicate of which an affiliate of the Company, the Adviser, the
Administrator or a Manager is a member (but not directly from such affiliate).
Purchases and sales of common stocks are generally placed by a Manager with
broker-dealers which, in the judgment of the particular Manager, provide prompt
and reliable execution at favorable security prices and reasonable commission
rates. Broker-dealers are selected on the basis of a variety of factors such as
reputation, capital strength, size and difficulty of order, sale of Fund shares
and research provided to the Managers. Broker-dealers selected to execute
portfolio transactions for the Funds may include affiliates of the Company, the
Adviser, Administrator or a Manager, provided the charge for any such
transaction does not exceed usual and customary levels. A Manager may cause a
Fund to pay commissions higher than another broker-dealer would have charged if
the Manager believes the commission paid is reasonable in relation to the value
of the brokerage and research services received by the Manager. The Funds will
not pay higher securities prices or higher mark-ups or mark-downs, in
recognition of the value of research services provided by a securities dealer,
on transactions with a securities dealer where the dealer sells securities to
the Fund or purchases them from the Fund, on a principal basis.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Managers may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds.
- - --------------------------------------------------------------------------------
FUND SHARE VALUATION
The net asset value per share for each class of shares of each Fund is
calculated as of the close of trading on the New York Stock Exchange ("NYSE") on
each business day (generally 4:00 p.m. Eastern time), on each day the NYSE is
open for trading, which excludes the following business holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of each class of shares of the Funds is computed by dividing the
value of net assets of each class (i.e., the value of the assets less the
liabilities) by the total number of such class's outstanding shares. All
expenses, including fees paid to the Adviser, the Managers, BISYS and BFSI, are
accrued daily and taken into account for the purpose of determining the net
asset value.
Securities listed on an exchange are valued on the basis of the last sale prior
to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken for the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the
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assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each business day. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Directors.
Notwithstanding the above, bonds and other fixed-income securities are valued by
using market quotations and may be valued on the basis of prices provided by a
pricing service approved by the Board of Directors. All assets and liabilities
initially expressed in foreign currencies will be expressed for valuation
purposes in U.S. dollars at the mean between the bid and asked prices of such
currencies against U.S. dollars as last quoted by any major bank.
With respect to options contracts sold by a Fund, the Fund records the premium
received as an asset and equivalent liability, and thereafter adjusts the
liability to the market value of the option determined in accordance with the
preceding paragraph. The premium paid for an option purchased by a Fund is
recorded as an asset and subsequently adjusted to market value. Open futures
contracts are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case such positions will be
valued by or under the direction of the Directors.
- - --------------------------------------------------------------------------------
PRICING OF FUND SHARES
Orders for the purchase of shares of each class will be executed at the net
asset value per share of that class plus any applicable sales charge (the
"public offering price") next determined after an order has been received in
proper order by the Funds, or by an authorized broker, investment adviser or
Service Organization and transmitted to the Funds by 4:00 p.m. Eastern Time.
(See "Purchase of Fund Shares.") The sales charge on purchases of each class of
shares of the Funds (except ESC Strategic Asset Preservation Fund, which has no
sales charge) is as follows:
<TABLE>
<CAPTION>
SALES CHARGE 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
or a Manager pursuant to a written agreement; (b) any person purchasing shares
with the proceeds of a distribution from a trust, investment management or other
fiduciary account managed by the Adviser or a Manager pursuant to a written
agreement; (c) any person purchasing shares with the proceeds of a redemption of
shares of a mutual fund, other
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35
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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
Funds; (f) directors or officers of BISYS, the Adviser or a Manager, or
affiliates or bona fide full-time employees of any of the foregoing who have
acted as such for not less than 90 days (including members of their immediate
families and their retirement plans or accounts); or (g) retirement accounts or
plans (or monies from retirement accounts or plans) for which there is a written
service agreement between the Company and the Plan Sponsor, so long as such
shares are purchased through the Distributor; or (h) any person purchasing
shares within an asset allocation or fee based program sponsored by a financial
services organization. The sales charge also does not apply to shares sold to
representatives of selling brokers and members of their immediate families. In
addition, the sales charge does not apply to sales to bank trust departments,
acting on behalf of one or more clients, of shares having an aggregate value
equal to or exceeding $200,000.
See "Dividends, Distributions and Federal Income Tax," for an explanation of
circumstances in which a sales charge paid to acquire shares of a mutual fund
may not be taken into account in determining gain or loss on the disposition of
those shares.
QUANTITY DISCOUNTS IN THE SALES CHARGES
The following quantity discounts shall be available to: (a) an individual, his
or her spouse, and their children under the age of 21, and any trust, pension,
IRA, spousal IRA, profit sharing or other benefit plan for such persons; (b) a
trustee or other fiduciary of a single trust estate or a single fiduciary
account; (c) a pension, profit-sharing or other employee benefit plan qualified
under Section 401 of the Internal Revenue Code of 1986, and (d) tax-exempt
organizations under Section 501(c)(3) of the Code.
Right of Accumulation
Each Fund (except ESC Strategic Asset Preservation Fund, which imposes no sales
charge) permits sales charges on Class A shares to be reduced through rights of
accumulation. For Class A shares, the schedule of reduced sales charges will be
applicable once the accumulated value of the account has reached $100,000. For
this purpose, the dollar amount of the qualifying concurrent or subsequent
purchase is added to the net asset value of any other Class A shares of those
Funds in the Company owned at the time by the investor. The sales charge imposed
on the Class A shares being purchased will then be at the rate applicable to the
aggregate of Class A shares purchased. For example, if the investor held Class A
shares of these Funds valued at $100,000 and purchased an additional $20,000 of
Class A shares of the Funds (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 to which they may be entitled unless, at the time of placing their
purchase order, the investors or their dealers make a written request for the
discount. The cumulative discount program may be amended or terminated at any
time. This particular privilege does not entitle the investor to any adjustment
in the sales charge paid previously on purchases of Class A shares of the Funds.
If the investor knows that he will be making additional purchases of shares in
the future, he may wish to consider executing a Letter of Intent.
Letter of Intent
The schedule of reduced sales charges is also available to Class A investors who
enter into a written Letter of Intent providing for the purchase, within a
13-month period, of Class A shares of a particular Fund. Shares of such Fund
previously purchased during a 90-day period prior to the date of receipt by the
Funds of the Letter of Intent which are still owned by the shareholder may also
be included in determining the applicable reduction, provided the shareholder or
the dealer notifies the Funds of such prior purchases.
A Letter of Intent (which is not applicable to investments in ESC Strategic
Asset Preservation Fund or in Class D shares of the other Funds) permits an
investor to establish a total investment goal to be achieved by any
- - --------------------------------------------------------------------------------
36
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- - --------------------------------------------------------------------------------
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 a Fund to
sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the Letter of Intent provides that a
sufficient number of escrowed shares will be liquidated to reimburse the
Distributor to the extent of the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges actually
paid. If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth under "Right of Accumulation," but there
will be no retroactive reduction of sales charges on previous purchases. At any
time while a Letter of Intent is in effect, a shareholder may, by written notice
to the Funds, increase the amount of the stated goal. In that event, shares
purchased during the previous 90 day period and still owned by the shareholder
will be included in determining the applicable sales charge reduction. The 5%
escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase Fund shares pursuant to a Letter of Intent
should carefully read the application for Letter of Intent which is available
from the Funds.
- - --------------------------------------------------------------------------------
MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Funds 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 Distributor reserves the right to reject
purchase orders. The officers of the Company are authorized to waive the minimum
initial and subsequent investment requirements of the Funds.
- - --------------------------------------------------------------------------------
PURCHASE OF FUND SHARES
All funds received by the Funds are invested in full and fractional shares of
the indicated class of the appropriate Fund. Certificates for shares are not
issued. BISYS maintains records of each shareholder's holdings of Fund shares,
and each shareholder receives a statement of transactions, holdings and
dividends. The Funds reserve the right to reject any purchase.
Each Fund, except ESC Strategic Asset Preservation Fund, offers investors a
choice of two classes of shares which differ principally with respect to sales
charges and the rate of expenses to which they are subject. Investors may select
the class which better suits their investment needs.
For Funds offering two classes of shares, a prospective investor, in selecting
between the classes, should consider the impact of the sales charge together
with the cumulative effect of the Service and Distribution Fees for each class
over the anticipated period of investment, as well as the effect of any sales
charge waivers to which the investor may be entitled. Investors should be aware
that other expenses attributable to each class may differ slightly due to the
allocation to each class of certain "class spe-
- - --------------------------------------------------------------------------------
37
<PAGE> 41
- - --------------------------------------------------------------------------------
cific" expenses, including distribution and marketing expenses and federal and
state securities registration fees. Finally, investors should be aware that
persons selling shares of the Funds may receive different levels of compensation
for sales of Class A and Class D shares. See "Purchase of Fund Shares" and
"Management of the Funds -- The Distributor".
An investment may be made using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service
Organization. Shares are available to new and existing shareholders through
authorized brokers, investment advisers and Service Organizations. To make an
investment using this method, a Purchase Application must have been completed
and the customer must notify the broker, investment adviser or Service
Organization of the amount to be invested. The broker will then contact the
Funds to place the order.
Orders received by the broker or Service Organization in proper order prior to
the determination of net asset value and transmitted to the Funds prior to the
close of its business day (which is currently 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 applicable Fund.
In most cases, the bank will either be a member of the Federal Reserve Banking
System or have a relationship with a bank that is. The bank will normally charge
a fee for handling the transaction. A completed Account Application must be
overnighted to the Funds at ESC Strategic Funds, Inc. c/o BISYS Fund Services,
Inc., 3435 Stelzer Road, Columbus, Ohio 43219-8021. Notification must be given
to the Funds 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
Funds for complete wiring instructions.
Investors who have read the Prospectus may establish a new regular account by
wire; IRAs and other qualified retirement plan accounts may not be opened in
this way. When new accounts are established by wire, the distribution options
will be set to reinvest all dividends and the social security or tax
identification number ("TIN") will not be certified until a signed application
is received. Completed applications should be forwarded immediately to the
Funds. By using the Purchase Application, an investor may specify other
distribution options and may add any special features offered by a Fund. Should
any dividend distributions or redemptions be paid before the TIN is certified,
they will be subject to 31% Federal tax withholding.
Institutional Accounts. Bank trust departments and other institutional
accounts, not subject to sales charges, may place orders directly with the Funds
by telephone at 1-800-261-FUND (3863).
Automatic Investment Program. An eligible shareholder may also participate in
the ESC Strategic Investment Program, an investment plan that automatically
debits money from the shareholder's bank account and invests it in one or more
of the Funds through the use of electronic funds transfers or automatic bank
drafts. Shareholders may commence their participation in this program with a
minimum initial investment of $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.
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RETIREMENT PLAN ACCOUNTS
All Funds may be used as a funding medium for IRAs and other qualified
retirement plans ("Plans"). The minimum initial investment for an IRA or a Plan
is $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 Funds at 1-800-261-FUND
(3863).
- - --------------------------------------------------------------------------------
EXCHANGE OF FUND SHARES
The Funds offer two convenient ways to exchange shares in one Fund for shares of
another Fund in the Company. Shares of a particular class of a Fund may be
exchanged only for shares of that same class in another Fund, with no sales
charge. Shares of ESC Strategic Asset Preservation Fund may be exchanged for
shares of another Fund with payment of the applicable sales charges. Before
engaging in an exchange transaction, a shareholder should read carefully the
information in the Prospectus describing the Fund into which the exchange will
occur. A shareholder may not exchange shares of a class of one Fund for shares
of the same class of another Fund that is not qualified for sale in the state of
the shareholder's residence. The minimum amount for an initial exchange is
$2,000. There is no minimum for subsequent exchanges, and no service fee is
imposed for an exchange. The Funds may terminate or amend the terms of the
exchange privilege at any time upon 60 days' notice to shareholders.
An exchange is taxable as a sale of a security on which a gain or loss may be
recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction. See "Dividends,
Distributions and Federal Income Tax" for an explanation of circumstances in
which a sales charge paid to acquire shares of the Funds may not be taken into
account in determining gain or loss on the disposition of those shares.
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the respective net asset values next determined following
receipt of the request by the Funds containing the information indicated below.
Exchange by Mail. To exchange Fund shares by mail, shareholders should simply
send a letter of instruction to the Funds. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the Fund from and the Fund into which the exchange is to be made;
(d) the dollar or share amount to be exchanged; and (e) the signatures of all
registered owners or authorized parties.
Exchange by Telephone. To exchange Fund shares by telephone or to ask any
questions, shareholders may call the Funds at 1-800-261-FUND (3863). Please be
prepared to give the telephone representative the following information: (a) the
account number, social security number and account registration; (b) if
applicable, the class of shares to be exchanged; (c) the name of the Fund from
which and the Fund into which the exchange is to be made; and (d) the dollar or
share amount to be exchanged. Telephone exchanges are available only if the
shareholder so indicates by checking the "yes" box on the Purchase Application.
The Funds employ procedures, including recording telephone calls, testing a
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it rea-
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39
<PAGE> 43
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sonably believes to be genuine. The Funds reserve the right to suspend or
terminate the privilege of exchanging by mail or by telephone at any time.
Telephone Redemption and Telephone Exchange will be suspended for a period of 10
days following a telephonic address change.
Automatic Exchange Program. The Automatic Exchange Program enables shareholders
to make regular, automatic withdrawals from an Investor A Share or Investor D
Share account in a Portfolio and use those proceeds to automatically make
purchases of the same class of Shares in another Portfolio. With shareholder
authorization, The Fund's Transfer Agent will withdraw the amount specified
(subject to the applicable minimums) from the shareholder's account and will
automatically invest that amount in Shares of the Portfolio designated by the
shareholder on the date of such deduction.
In order to participate in the Automatic Exchange Program, shareholders must
make a minimum initial purchase of $5,000 and maintain a minimum account balance
of $1,000. Automatic exchanges may be done on a monthly, quarterly, semi-annual
or annual basis in a stated amount of not less than $100. Additionally,
shareholders must complete the supplementary authorization form which may be
obtained from their investment representative or the Fund. To change
instructions with respect to the Automatic Exchange Program or to discontinue
this feature, shareholders must send a written request to their investment
representative or to the Fund. The Automatic Exchange Program may be amended or
terminated without notice at any time by the Fund.
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REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business day.
Shares will be redeemed at the net asset value next determined after a
redemption request in good order has been received by the Funds. See
"Determination of Net Asset Value." A redemption may be a taxable transaction on
which gain or loss may be recognized.
Where the shares to be redeemed have been purchased by check, the redemption
request will be held until the purchasing check has cleared, which may take up
to 15 days. Shareholders may avoid this delay by investing through wire
transfers of Federal funds. During the period prior to the time the shares are
redeemed, dividends on the shares will continue to accrue and be payable and the
shareholder will be entitled to exercise all other beneficial rights of
ownership.
Once the shares are redeemed, a Fund will ordinarily send the proceeds by check
to the shareholder at the address of record on the next business day. The Fund
may, however, take up to three days to make payment, although this will not be
the customary practice. Also, if the New York Stock Exchange is closed (or when
trading is restricted) for any reason other than the customary weekend or
holiday closing or if an emergency condition as determined by the SEC merits
such action, the Funds may suspend redemptions or postpone payment dates.
Redemption Methods. To ensure acceptance of a redemption request, it is
important that shareholders follow the procedures described below. Although the
Funds have no present intention to do so, the Funds reserve the right to refuse
or to limit the frequency of any telephone or wire redemptions. Of course, it
may be difficult to place orders by telephone during periods of severe market or
economic change, and a shareholder should consider alternative methods of
communications, such as couriers. The Funds' services and their provisions may
be modified or terminated at any time by the Funds. If the Funds terminate any
particular service, they will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
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
- - --------------------------------------------------------------------------------
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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
Funds and place a redemption trade. The broker may charge a fee for this
service.
By Mail. Shareholders may redeem shares by sending a letter directly to the
Funds. To be accepted, a letter requesting redemption must include: (a) the Fund
name, class of shares (if applicable) and account registration from which shares
are being redeemed; (b) the account number; (c) the amount to be redeemed; (d)
the signatures of all registered owners; and (e) 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, broker-dealers,
credit unions and savings associations. Corporations, partnerships, trusts or
other legal entities will be required to submit additional documentation.
By Telephone. Shareholders may redeem shares by calling the Funds toll free at
1-800-261-FUND (3863). Be prepared to give the telephone representative the
following information: (a) the account number, social security number and
account registration; (b) the name of the class (if applicable) and the Fund
from which shares are being redeemed; and (c) the amount to be redeemed.
Telephone redemptions are available only if the shareholder so indicates by
checking the "yes" box on the Purchase Application or on the Optional Services
Form. The Funds employ procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. 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 Funds by mail or
telephone and instructing the Funds to send a wire transmission to the
shareholder's bank.
The shareholder's instructions should include: (a) the account number, social
security number and account registration; (b) the name of the class (if
applicable) and the Fund from which shares are being redeemed; and (c) the
amount to be redeemed. Wire redemptions can be made only if the "yes" box has
been checked on the shareholder's Purchase Application, and a copy is attached
of a void check on an account where proceeds are to be wired. The bank may
charge a fee for receiving a wire payment on behalf of its customer.
Systematic Withdrawal Plan. An owner of $12,000 or more of shares of a Fund may
elect to have periodic redemptions made from his account to be paid on a
monthly, quarterly, semiannual or annual basis. The maximum payment per year is
12% of the account value at the time of the election. A sufficient number of
shares to make the scheduled redemption will normally be redeemed on the date
selected by the shareholder. Depending on the size of the payment requested and
fluctuation in the net asset value, if any, of the shares redeemed, redemptions
for the purpose of making such payments may reduce or even exhaust the account.
A shareholder may request that these payments be sent to a predesignated bank or
other designated party. Capital gains and dividend distributions paid to the
account will automatically be reinvested at net asset value on the distribution
payment date.
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Signature Guarantees. To protect shareholder accounts, the Funds and the
Administrator from fraud, signature guarantees are required to enable the Funds
to verify the identity of the person who has authorized a redemption from an
account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) and
the registered address, (2) a redemption of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Funds at 1-800-261-FUND (3863) for further details.
Reinstatement Privilege. A shareholder who has redeemed shares on which a sales
charge was paid may reinvest, without a sales charge, up to the full amount of
such redemption at the net asset value determined at the time of the
reinvestment within 30 days of the original redemption. This privilege must be
effected within 30 days of the redemption. The shareholder must reinvest in the
same Fund, same class, and the same account from which the shares were redeemed.
A redemption is a taxable transaction and gain may be recognized for Federal
income tax purposes even if the reinstatement privilege is exercised. Any loss
realized upon the redemption will not be recognized as to the number of shares
acquired by reinstatement, except through an adjustment in the tax basis of the
shares so acquired. See "Dividends, Distributions and Federal Income Tax" for an
explanation of circumstances in which a sales charge paid to acquire shares of a
Fund may not be taken into account in determining gain or loss on the
disposition of those shares.
Redemption of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Funds reserve the right to redeem, on not less
than 30 days' notice, an account in a Fund that has been reduced by a
shareholder (not by market action) to $500 or less. However, if during the
30-day notice period the shareholder purchases sufficient shares to bring the
value of the account above $500, the account will not be redeemed.
Redemption in Kind. All redemptions of shares of the Funds shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This commitment is irrevocable without the prior
approval of the SEC. In the case of redemption requests by shareholders in
excess of such amounts, the Board of Directors reserves the right to have a Fund
make payment, in whole or in part, in readily marketable securities or other
assets, in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued generally in the same manner as the
securities of that Fund are valued generally. If the recipient were to sell such
securities, he or she would incur brokerage charges.
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DIVIDENDS, DISTRIBUTIONS, AND FEDERAL INCOME TAXATION
Each Fund intends to qualify annually to elect to be treated as a regulated
investment company pursuant to the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, each Fund must meet
certain income, distribution and diversification requirements. In any year in
which a Fund qualifies as a regulated investment company and timely distributes
all of its taxable income and substantially all of its net tax-exempt interest
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income, if any, the Fund generally will not pay any U.S. federal income or
excise tax.
Each Fund intends to distribute to its shareholders substantially all of its
investment company taxable income (which includes, among other items, dividends
and interest and the excess, if any, of net short-term capital gains over net
long-term capital losses). ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund will declare distributions of such income daily and pay those
dividends monthly. ESC Strategic Appreciation Fund, ESC Strategic Global Equity
Fund, ESC Strategic Small Cap Fund, ESC Strategic Growth Fund and ESC Strategic
Value Fund will make distributions of such income at least annually. Each Fund
intends to distribute, at least annually, substantially all net capital gain
(the excess of net long-term capital gains over net short-term capital losses).
In determining amounts of capital gains to be distributed, any capital loss
carryovers from prior years will be applied against capital gains.
In the case of ESC Strategic Income Fund and ESC Strategic Asset Preservation
Fund, the amount declared each day as a dividend may be based on projections of
estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account for
any difference between the projected and actual monthly investment income.
Distributions will be paid in additional Fund shares of the relevant class based
on the net asset value of that class at the close of business of the payment
date of the distribution, unless the shareholder elects in writing, not less
than five full business days prior to the record date, to receive such
distributions in cash. Dividends declared in, and attributable to, the preceding
month will be paid within five business days after the end of such month. In the
case of the Funds that declare daily dividends, shares purchased will begin
earning dividends on the day after the purchase order is executed, and shares
redeemed will earn dividends through the day the redemption is executed.
Any dividend or other distribution paid by a Fund has the effect of reducing the
net asset value per share on the record date by the amount thereof. Therefore,
in the case of Funds which do not declare dividends daily, a dividend or other
distribution paid shortly after a purchase of shares would represent, in
substance, a return of capital to the shareholder (to the extent it is paid on
the shares so purchased), even though subject to income taxes, as discussed
below.
Distributions of investment company taxable income (regardless of whether
derived from dividends, interest or short-term capital gains) will be taxable to
shareholders as ordinary income. If a portion of a Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may qualify for the deduction for dividends received by corporations. No portion
of the dividends paid by ESC Strategic Income Fund or ESC Strategic Asset
Preservation Fund is expected to so qualify. Distributions of net long-term
capital gains designated by a Fund as capital gain dividends will be taxable as
long-term capital gains, regardless of how long a shareholder has held his Fund
shares. Distributions are taxable in the same manner whether received in
additional shares or in cash.
A distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Fund during October, November, or December of that year to
shareholders of record in such a month and paid by the Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
Any gain or loss realized by a shareholder upon the sale or other disposition of
shares of a Fund, or upon receipt of a distribution in complete liquidation of a
Fund, generally will be a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.
Under certain circumstances, the sales charge incurred in acquiring shares of a
Fund may not be taken into account in deter-
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mining the gain or loss on the disposition of those shares. This rule applies
when shares of a Fund are exchanged within 90 days after the date they were
purchased and new shares of a Fund are acquired without a sales charge or at a
reduced sales charge. In that case, the gain or loss recognized on the exchange
will be determined by excluding from the tax basis of the shares exchanged all
or a portion of the sales charge incurred in acquiring those shares. This
exclusion applies to the extent that the otherwise applicable sales charge with
respect to the newly acquired shares is reduced as a result of having incurred a
sales charge initially. The portion of the sales charge affected by this rule
will be treated as a sales charge paid for the new shares.
The Funds may be required to withhold Federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where a Fund or shareholder has been notified
by the Internal Revenue Service that the shareholder is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.
Further information relating to tax consequences is contained in the SAI.
Shareholders will be notified annually by the Company as to the federal tax
status of distributions made by the Fund(s) in which they invest. Depending on
the residence of the shareholder for tax purposes, distributions also may be
subject to state and local taxes, including withholding taxes. Foreign
shareholders may, for example, be subject to special withholding requirements.
Special tax treatment, including a penalty on certain pre-retirement
distributions, is accorded to accounts maintained as IRAs. Shareholders should
consult their own tax advisers as to the federal, state and local tax
consequences of ownership of shares of the Funds in their particular
circumstances.
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.
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DESCRIPTION OF SECURITIES AND
INVESTMENT PRACTICES
U.S. Government Securities (All Funds). U.S. Government securities are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Treasury bills, which have a maturity of up to one year,
are direct obligations of the United States and are the most frequently issued
marketable U.S. Government security. The U.S. Treasury also issues securities
with longer maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt securities
issued by U.S. Government-sponsored enterprises and federal agencies. Some
obligations of agencies are supported by the full faith and credit of the United
States or by U.S. Treasury guarantees, such as mortgage-backed certificates
issued by the Government National Mortgage Association; others, such as
obligations of the Federal Home Loan Banks, Federal Farm Credit Bank, Bank for
Cooperatives, Federal Intermediate Credit Banks and the Federal Land Bank, are
guaranteed by the right of the issuer to borrow from the U.S. Treasury; others,
such as obligations of the Federal National Mortgage Association, are
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supported by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as obligations of
the Student Loan Marketing Association and the Tennessee Valley Authority, are
backed only by the credit of the agency or instrumentality issuing the
obligation. In the case of obligations not backed by the full faith and credit
of the United States, the investor must look principally to the agency issuing
or guaranteeing the obligation for ultimate repayment.
Bank Obligations (All Funds). These obligations include negotiable certificates
of deposit and bankers' acceptances. The Funds limit their bank investments to
dollar-denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper (All Funds). Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions, as well as similar instruments issued by government
agencies and instrumentalities. Each Fund establishes its own standards of
creditworthiness for issuers of such investments.
Corporate Debt Securities (All Funds). A Fund's investments in U.S. dollar- or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments) which meet the previously
disclosed minimum ratings and maturity criteria established for the Fund under
the direction of the Board of Directors and the Fund's Manager or, if unrated,
are in the Manager's opinion comparable in quality to corporate debt securities
in which the Fund may invest. See "The Funds." The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Repurchase Agreements (All Funds). Securities held by the Funds may be subject
to repurchase agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed-upon time and price. These
agreements may be considered to be loans by the purchaser collateralized by the
underlying securities. These agreements will be fully collateralized and the
collateral plus accrued interest will be marked-to-market daily. The Funds will
enter into repurchase agreements only with dealers, domestic banks or recognized
financial institutions which, in the opinion of the Manager, present minimal
credit risks in accordance with guidelines adopted by the Board of Directors. In
the event of default by the seller under the repurchase agreement, a Fund may
have problems in exercising its rights to the underlying securities and may
experience time delays in connection with the disposition of such securities.
Loans of Portfolio Securities (All Funds). To increase current income each Fund
may lend its portfolio securities worth up to 5% of that Fund's total assets to
brokers, dealers and financial institutions, provided certain conditions are
met, including the condition that each loan is secured continuously by
collateral maintained on a daily mark-to-market basis in an amount at least
equal to the current market value of the securities loaned. For further
information, see the SAI.
Variable and Floating Rate Demand and Master Demand Notes (All Funds). The
Funds may, from time to time, buy variable or floating rate demand notes issued
by corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on 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
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remarketing agent will adjust the interest rate every seven days (or at other
specified intervals) in order to maintain the interest rate at the prevailing
rate for securities with a seven-day or other designated maturity. A Fund's
investment in demand instruments which provide that the Fund will not receive
the principal note amount within seven days' notice, in combination with the
Fund's other investments in illiquid instruments, will be limited to an
aggregate total of 15% of that Fund's net assets.
ESC Strategic Value Fund may also purchase inverse floating rate obligations
with coupon rates that vary inversely to the market rate of interest of the
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 Funds may also buy variable rate master demand notes. The terms of these
obligations permit a Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Funds have the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Manager will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, a Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the criteria set
forth in this Prospectus for commercial paper obligations.
Forward Commitments and When-Issued Securities (ESC Strategic Income Fund and
ESC Strategic Asset Preservation Fund).A Fund may purchase when-issued
securities and make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time if the Fund holds, and maintains
until the settlement date in a segregated account cash, or liquid securities in
an amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns.
Purchasing securities on a when-issued basis and forward commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of a
Fund's other assets. No income accrues on securities purchased on a when-issued
basis prior to the time delivery of the securities is made, although a Fund may
earn interest on securities it has deposited in the segregated account because
it does not pay for the when-issued securities until they are delivered.
Investing in when-issued securities has the effect of (but is not the same as)
leveraging the Fund's assets. Although a Fund would generally purchase
securities on a when-issued basis or enter into forward commitments with the
intention of actually acquiring securities, that Fund may dispose of a
when-issued security or forward commitment prior to settlement if the Manager
deems it appropriate to do so. A Fund may realize short-term profits or losses
upon such sales.
Mortgage-Related Securities (ESC Strategic Income Fund, ESC Strategic Value Fund
and ESC Strategic Asset Preservation Fund). Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
residential mortgage loans which underlie the securities (net of fees
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paid to the issuer or guarantor of the securities). Early repayment of principal
on mortgage pass-through securities (arising from prepayments of principal due
to sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred) may expose a Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with prepayment
features may not increase as much as other fixed-income securities. In
recognition of this prepayment risk to investors, the Public Securities
Association (the "PSA") has standardized the method of measuring the rate of
mortgage loan principal prepayments. The PSA formula, the Constant Prepayment
Rate (the "CPR"), or other similar models that are standard in the industry will
be used by a Fund in calculating maturity for purposes of its investment in
mortgage-related securities. Because the average life of mortgage-related
securities may lengthen with increases in interest rates, the portfolio-weighted
average life of the securities in which a Fund is invested may at times lengthen
due to this effect. Under these circumstances, a Manager may, but is not
required to, sell securities in order to maintain an appropriate
portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (such as securities guaranteed by the
Government National Mortgage Association ("GNMA"); or guaranteed by agencies or
instrumentalities of the U.S. Government (such as securities guaranteed by the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities created by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
A Fund may also invest in investment grade Collateralized Mortgage Obligations
("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding longer maturity classes receive principal only after
the first class has been retired. CMOs may be issued by government and
non-governmental entities. Some CMOs are debt obligations of FHLMC issued in
multiple classes with different maturity dates secured by the pledge of a pool
of conventional mortgages purchased by FHLMC. Other types of CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios. To the extent a
particular CMO is issued by an investment company, a Fund's ability to invest in
such CMOs will be limited. See "Investment Restrictions" in the SAI.
Assumptions generally accepted by the industry concerning the probability of
early payment may be used in the calculation of maturities for debt securities
that contain put or call provisions, sometimes resulting in a calculated
maturity different from the stated maturity of the security.
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It is anticipated that governmental, government-related or private entities may
create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-related securities are developed
and offered to investors, the Managers will, consistent with a Fund's investment
objectives, policies and quality standards, consider making investments in such
new types of mortgage-related securities.
Other Asset-Backed Securities (ESC Strategic Income Fund and ESC Strategic Asset
Preservation Fund). Other asset-backed securities (unrelated to mortgage loans)
have been offered to investors, such as Certificates for Automobile Receivables
("CARS"). CARS represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS are "passed through" monthly to
certificate holders and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. Underlying sales contracts are
subject to prepayment, which may reduce the overall return to certificate
holders. If the letter of credit is exhausted, certificate holders may also
experience delays in payment or losses on CARS if the full amounts due on
underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage or loss of the vehicles securing the contracts,
or other factors. For asset-backed securities, the industry standard uses a
principal prepayment model, the "ABS Model," which is similar to the PSA model
described previously under "Mortgage-Related Securities." Either the PSA model,
the ABS model or other similar models that are standard in the industry will be
used by a Fund in calculating maturity for purposes of its investment in
asset-backed securities.
A Fund may also invest in Stripped Mortgage-Backed Securities ("SMBS"), which
are derivative multi-class mortgage securities issued by U.S. Government
agencies or instrumentalities or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and their special purpose subsidiaries.
SMBS generally have two classes: one (the "IO" class) entitles the holders to
receive distributions consisting solely or entirely of all or a portion of
interest payments from the underlying pool of mortgages or mortgage-backed
securities ("mortgage assets"); the other (the "PO") class entitles the holders
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying mortgage asset pool. The cash flows and yields
on IO and PO classes are considerably more sensitive to changes in the rate of
principal payments (including prepayments) on the underlying mortgage assets
than an investment in a traditional mortgage-backed security, thus exposing a
Fund to more risk.
Foreign Securities (All Funds except ESC Strategic Asset Preservation Fund).
These Funds may invest directly in both sponsored and unsponsored U.S. dollar-
or foreign currency-denominated corporate securities (including preferred or
preference stock), certificates of deposit and bankers' acceptances issued by
foreign banks, U.S. dollar-denominated bonds sold in the United States ("Yankee
bonds"), other bonds denominated in U.S. dollars or other currencies and sold to
investors outside the United States ("Eurobonds"), and obligations of foreign
governments or their subdivisions, agencies and instrumentalities, international
agencies and supranational entities. There may be less information available to
a Fund concerning unsponsored securities, for which the paying agent is located
outside the United States. See "Risks of Investing in the Funds."
The Funds may purchase foreign securities traded in the United States or in
foreign markets. The Funds may invest directly in foreign equity securities and
in securities represented by European Depositary Receipts ("EDRs") or American
Depositary Receipts ("ADRs"). ADRs are dollar-denominated receipts generally
issued by domestic banks, which represent the deposit
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with the bank of a security of a foreign issuer, and which are publicly traded
on exchanges or over-the-counter in the United States. EDRs are receipts similar
to ADRs and are issued and traded in Europe.
There are certain risks associated with investments in unsponsored ADR programs.
Because the non-U.S. company does not actively participate in the creation of
the ADR program, the underlying agreement for service and payment will be
between the depositary and the shareholders. The company issuing the stock
underlying the ADRs pays nothing to establish the unsponsored facility, as fees
for ADR issuance and cancellation are paid by brokers. Investors directly bear
the expenses associated with certificate transfer, custody and dividend payment.
In addition, in an unsponsored ADR program, there may be several depositaries
with no defined legal obligations to the non-U.S. company. The duplicate
depositaries may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports. For more information, see "Risks of
Investing in the Funds."
ESC Strategic Value 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 bakers' 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 Untied 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.
Forward Foreign Currency Transactions (All Funds except ESC Strategic Asset
Preservation Fund).The Funds may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates. See the SAI for further information concerning forward foreign
currency transactions.
Futures Contracts and Options (All Funds). The Funds may purchase and sell
futures contracts on securities, currencies, and indices of securities, and
write and sell put and call options on securities, currencies and indices of
securities as a hedge against changes in interest rates, stock prices, currency
fluctuations and other market developments, provided that not more than 5% of a
Fund's net assets are committed to margin deposits on futures contracts and
premiums for options. See the SAI for further information about futures and
options. See "Risks of Investing in the Funds" for a discussion of risks related
to investing in futures and options.
Municipal Obligations (ESC Strategic Asset Preservation Fund). When consistent
with its investment objective and policies, including quality criteria, the Fund
may invest in securities issued by states, their political subdivisions and
agencies and instrumentalities of the foregoing ("Municipal Obligations"). Such
Municipal Obligations may include municipal bonds, floating rate and variable
rate Municipal Obligations, participation interests in municipal bonds,
tax-exempt asset-backed certificates, tax-exempt commercial paper, short-term
municipal notes, stand-by commitments, municipal lease obligations and third
party puts. For more information on Municipal Obligations, see "Risks of
Investing in the Funds" in this Prospectus and "Investment Policies" in the SAI.
Short Sales (ESC Strategic Appreciation Fund, ESC Strategic Global Equity Fund,
ESC Strategic Small Cap Fund, ESC Strategic Growth Fund and ESC Strategic Value
Fund). A Fund may from time to time sell securities short. A short sale is a
transaction in which a Fund sells securities it does not own (but has borrowed)
in anticipation of a decline in the market price of the securities. Risks
associated with short sales of securities are described under "Risks of
Investing in the Funds."
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To complete a short sale, a Fund must arrange through a broker to borrow the
securities to be delivered to the buyer. The proceeds received by a Fund from
the short sale are retained by the broker until the Fund replaces the borrowed
securities. In borrowing the securities to be delivered to the buyer, the Fund
becomes obligated to replace the securities borrowed at their market price at
the time of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
A Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by collateral deposited with the broker that consists
of cash or obligations of the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"). In addition, the Fund will
place in a segregated account with its custodian an amount of cash or U.S.
Government Securities equal to the difference, if any, between (a) the market
value of the securities sold at the time they were sold short, and (b) any cash
or U.S. Government Securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the Fund will maintain the segregated
account daily at a level so that (a) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will equal the current market value of the securities sold short, and (b)
the amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short. For additional
limitations on short sales, see "Risks of Investing in the Funds."
Short Sales Against the Box (ESC Strategic Appreciation Fund, ESC Strategic
Global Equity Fund, ESC Strategic Small Cap Fund, ESC Strategic Growth Fund and
ESC Strategic Value Fund). A Fund may, in addition to engaging in short sales as
described above, enter into a short sale of common stock such that when the
short position is open, the Fund owns an equal amount of preferred stock or debt
securities, convertible or exchangeable without payment of further
consideration, into an equal number of shares of the common stock sold short.
This kind of short sale, which is described as one "against the box," will be
entered into by a Fund for the purpose of receiving a portion of the interest
earned by the executing broker from the proceeds of the sale. The proceeds of
the sale will be held by the broker until the settlement date, when the Fund
delivers the convertible securities to close out its short position. Although,
prior to delivery, the Fund will have to pay an amount equal to any dividends
paid on the common stock sold short, the Fund will receive the dividends from
the preferred stock or interest from the debt securities convertible into the
stock sold short, plus a portion of the interest earned from the proceeds of the
short sale. A Fund will deposit, in a segregated account with its custodian,
convertible preferred stocks or convertible debt securities in connection with
short sales against the box.
Investments in Real Estate or Interests in Real Estate Investment Trusts. (ESC
Strategic Value Fund). The Fund may invest in equity or debt real estate
investment trusts ("REITs"), real estate development and 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 Funds" for a discussion of
risks related to REITs.
Other: The SAI contains information on other investments and investment
practices authorized for the Funds, each of which is currently expected to
affect less than 5% of the Fund's assets. These investments and practices for
ESC Strategic Value Fund include: investing on a when-issued or delayed delivery
basis; warrants; rights; in-
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vestment 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.
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INVESTMENT RESTRICTIONS
The following restrictions are applicable to each of the Funds, except as
otherwise indicated.
(1) Except for ESC Strategic Small Cap Fund and ESC Strategic Value Fund, no
Fund may, with respect to 75% of its total assets, purchase more than 10% of the
voting securities of any one issuer or invest more than 5% of the value of such
assets in the securities or instruments of any one issuer, except securities or
instruments issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
(2) No Fund may purchase securities or instruments which would cause 25% or more
of the market value of its total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is no
limit with respect to investments in the U.S. Government, its agencies and
instrumentalities.
(3) No Fund may borrow money, except that a Fund may borrow from banks up to 10%
of the current value of its total net assets for temporary or emergency
purposes. A Fund will make no purchases if its outstanding borrowings exceed 5%
of its total assets.
(4) No Fund may make loans, except that a Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements with respect to its portfolio
securities, and (c) purchase the types of debt instruments described in this
Prospectus or the SAI.
For purposes of investment restriction number (1), ESC Strategic Asset
Preservation Fund considers a Municipal Obligation to be issued by the
governmental entity (or entities) whose assets and revenues back the Municipal
Obligation. For a Municipal Obligation backed only by the assets and revenues of
a non-governmental user, such user is deemed to be the issuer; such issuers, to
the extent their principal business activities are in the same industry, are
also subject to investment restriction (2). For purposes of investment
restriction (2), public utilities are not deemed to be a single industry but are
separated by industrial categories, such as telephone or gas utilities.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of each Fund which may be changed with respect to that
Fund only when permitted by law and approved by the holders of a majority of the
applicable Fund's outstanding voting securities as described under "Other
Information -- Voting."
Additionally, as a non-fundamental policy, no Fund may invest more than 15% of
the value of its net assets in investments which are illiquid, or not readily
marketable (including repurchase agreements having maturities of more than seven
calendar days and variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount within seven days' notice).
Except for limits on borrowing and on the 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.
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OTHER INFORMATION
CAPITALIZATION
ESC Strategic Funds, Inc. was organized as a Maryland corporation on November
24, 1993 and currently consists of seven separately managed portfolios. The
Board of Directors may establish additional portfolios in the future. The
capitalization of the Company consists solely of 650 million shares of common
stock with a par value of $0.001 per share. When issued, shares of the Funds are
fully paid, non-assessable and freely transferable.
VOTING
Shareholders have the right to vote in the election of Directors and on any and
all matters on which, by law or under the provisions of the Articles of
Incorporation, they may be entitled to vote. The Company is not required to hold
regular annual meetings of the Funds' shareholders and does not intend to do so.
Each Fund's shareholders vote separately on matters affecting only that Fund and
shareholders of each class within a Fund vote separately on matters affecting
only that class, such as its service and distribution plan. For information
concerning exemptive relief that permits the Company to retain new Managers
without shareholder approval, see "Management of the Fund" and "Other
Information -- Voting Rights" in the SAI.
The Articles of Incorporation provide that the holders of not less than a
majority of the outstanding shares of the Company may remove a person serving as
Director. The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Other Information -- Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate voting
for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of a Fund, a class or the Company, as
applicable, means the vote of the lesser of: (1) 67% of the shares of the Fund
(a class or the Company) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2) more than 50%
of the outstanding shares of the Fund (a class or the Company).
PERFORMANCE INFORMATION
The Funds may, from time to time, include the yield and total return for shares
(including each class, as applicable) in advertisements or reports to
shareholders or prospective investors. The methods used to calculate the yield
and total return of the Funds are mandated by the SEC.
Quotations of "yield" will be based on the investment income per share during a
particular 30 day (or one month) period (including dividends and interest), less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the maximum public offering price
per share (for each class, as applicable) on the last day of the period.
Quotations of yield reflect a Fund's (and its classes') performance only during
the particular period on which the calculations are based. Yields will vary
based on changes in market conditions, the level of interest rates and the level
of the Fund's expenses, including class-specific expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future. Quotations of average annual total return will be
expressed in terms of the average annual compounded rate of return of a 62
hypothetical investment in shares of a Fund (or class) over periods of 1, 5 and
10 years (up to the life of the Fund), reflect the deduction of a proportional
share of Fund (and class-specific expenses, as applicable) on an annual basis,
and assume that all dividends and distributions are reinvested when paid.
Performance information for the Funds may be compared to various unmanaged
indices, such as the Standard & Poor's 500 Stock Index, the Dow Jones Industrial
Average, indices prepared by Lipper Analytical Services, and other entities or
organizations which track the performance of investment
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companies. Any performance information should be considered in light of each
Fund's investment objectives and policies, characteristics and quality of the
Fund and the market conditions during the time period indicated, and should not
be considered to be representative of what may be achieved in the future. For a
description of the methods used to determine yield and total return for the
Funds, see the SAI.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in a statement for
each shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Funds have been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
BFSI provides fund accounting functions for the Funds, and provides personnel
and facilities to perform shareholder servicing and transfer agency-related
services for the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to ESC Strategic Funds Inc., P.O.
Box 182485, Columbus, Ohio 43218-2487.
General and Account Information:
(800) 261-FUND (3863).
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APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as follows:
AAA -- judged to be the best quality and they carry the smallest degree of
investment risk; AA -- judged to be of high quality by all standards -- together
with the Aaa group, they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly
secured -- interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; BA -- judged to
have speculative elements, their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; CAA -- are of
poor standing -- such issues may be in default or there may be present elements
of danger with respect to principal or interest; CA -- speculative in a high
degree, often in default; C -- lowest rated class of bonds, regarded as having
extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal; whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D -- interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG or VMIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 -- denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 -- denotes adequate quality,
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protection commonly regarded as required of an investment security is present,
but there is specific risk; SQ -- denotes speculative quality, instruments in
this category lack margins of protection.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows:
PRIME-1 -- issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; PRIME-2 -- issuers (or
supporting institutions) have a strong ability for repayment of senior short-
term promissory obligations; PRIME-3 -- issuers (or supporting institutions)
have an acceptable ability for repayment of senior short-term promissory
obligations; NOT PRIME -- issuers do not fall within any of the Prime
categories.
DESCRIPTION OF S&P'S RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
INVESTMENT GRADE RATINGS: AAA -- the highest rating assigned by S&P, capacity to
pay interest and repay principal is extremely strong; AA -- has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A -- has strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories; BBB -- regarded as having an adequate capacity to pay interest and
repay principal -- whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATINGS: BB, B, CCC, CC, C -- debt rated in these categories
is regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal -- while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI -- reserved for
income bonds on which no interest is being paid; D -- in default, and payment of
interest and/or repayment of principal is in arrears. PLUS (+) OR MINUS
(-) -- the ratings from "AA" to "CCC" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
DESCRIPTION OF S&P'S RATING FOR MUNICIPAL NOTES AND SHORT-TERM MUNICIPAL DEMAND
OBLIGATIONS:
Rating categories are as follows: SP-1 -- has a very strong or strong capacity
to pay principal and interest -- those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation; SP-2 -- has a
satisfactory capacity to pay principal and interest; SP-3 -- issues carrying
this designation have a speculative capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR SHORT-TERM CORPORATE DEMAND OBLIGATIONS AND
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 -- the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- capacity for timely payment is
satisfactory -- however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 -- has adequate capacity for timely
payment -- however, is more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations; B -- regarded
as having only speculative capacity for timely payment; C -- a doubtful capacity
for payment; D -- in payment default -- the "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
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[ESC LOGO]
ESC STRATEGIC FUNDS, INC
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
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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<PAGE> 60
ESC STRATEGIC FUNDS, INC.
(THE "COMPANY")
3435 STELZER ROAD
COLUMBUS, OHIO 43219-8001
GENERAL AND ACCOUNT INFORMATION: (800) 261-FUND(3863)
EQUITABLE SECURITIES CORPORATION --
INVESTMENT ADVISER AND DISTRIBUTOR
BISYS FUND SERVICES--ADMINISTRATOR
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the seven
funds (the "Funds") advised by Equitable Securities Corporation.(the "Adviser").
The Funds are:
- ESC Strategic Appreciation Fund
- ESC Strategic Global Equity Fund
- ESC Strategic Small Cap Fund*
- ESC Strategic Income Fund
- ESC Strategic Asset Preservation Fund
- ESC Strategic Growth Fund
- ESC Strategic Value Fund
Each Fund has distinct investment objectives and policies and several
of the Funds have one or more Managers. See "Management." Shares of the Funds
are sold to the public by the Distributor as an investment vehicle for
individuals, institutions, corporations and fiduciaries, including customers of
the Adviser or its affiliates.
The Company is offering an indefinite number of shares of each class of
each Fund.
This SAI is not a prospectus and is authorized for distribution only
when preceded or accompanied by the prospectus for the Funds dated July 29,
1997 (the "Prospectus"). This SAI contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus. The Prospectus may be obtained without charge
by writing or calling the Funds at the address and information numbers printed
above.
July 29, 1997.
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* Currently, shares of the Small Cap Fund are not being offered to the public.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT POLICIES 3
Bank Obligations 3
Commercial Paper 3
Corporate Debt Securities 3
Repurchase Agreements 3
Variable and Floating Rate Demand and Master Demand Notes 4
Loans of Portfolio Securities 4
Foreign Securities 5
Forward Foreign Currency Exchange Contracts 5
Interest Rate Futures Contracts 5
Stock Index Futures Contracts 6
Option Writing and Purchasing 6
Options on Futures Contracts 7
Risks of Futures and Options Investments 9
Limitations on Futures Contracts and Options on Futures Contracts 9
Municipal Obligations 9
Municipal Lease Obligations 10
Brady Bonds 11
Warrants and Rights 12
Investment Companies, Investment Funds 12
Other Investment Policies of ESC Value Fund 12
INVESTMENT RESTRICTIONS 24
MANAGEMENT 27
Directors and Officers 27
Investment Adviser 30
The Managers 31
Distribution of Fund Shares 34
Administrative Services 35
Service Organizations 36
DETERMINATION OF NET ASSET VALUE 38
PORTFOLIO TRANSACTIONS 38
Portfolio Turnover 39
TAXATION 39
OTHER INFORMATION 44
Capitalization 44
Principal Shareholders 45
Voting Rights 51
Custodian, Transfer Agent and Dividend Disbursing Agent 51
Yield and Performance Information 52
Independent Accountants 53
Counsel 53
Registration Statement 53
FINANCIAL STATEMENTS 54
</TABLE>
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Funds may invest, the investment policies and portfolio
strategies that the Funds may utilize, and certain risks attendant to such
investments, policies and strategies.
Bank Obligations (All Funds). These obligations include negotiable
certificates of deposit and bankers' acceptances. A description of the banks the
obligations of which the Funds may purchase are set forth in the Prospectus. A
certificate of deposit is a short-term, interest-bearing negotiable certificate
issued by a commercial bank against funds deposited in the bank. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction. The borrower
is liable for payment as is the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date.
Commercial Paper (All Funds). Commercial paper includes short-term
unsecured promissory notes, variable rate demand notes and variable rate master
demand notes issued by domestic and foreign bank holding companies, corporations
and financial institutions and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by a Fund must
meet the minimum rating criteria for that Fund.
Corporate Debt Securities (All Funds). Fund investments in these
securities are limited to corporate debt securities (corporate bonds,
debentures, notes and similar corporate debt instruments) which meet the rating
criteria established for each Fund. Unlike a nonconvertible corporate
obligation, a convertible corporate obligation may be converted into or
exchanged for a prescribed amount of common stock or other equity security of
the same or different issuer within a particular period of time at a specified
price or formula. Convertible securities, are senior to common stock in an
issuer's capital structure and generally entail less risk than the issuer's
common stock, although the extent that the risk is reduced depends in large
measure upon a variety of factors, including the creditworthiness of the issuer
and its overall capital structure.
After purchase by a Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, a
Fund's Manager will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent the ratings given by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") or
another rating agency may change as a result of changes in such organizations or
their rating systems, the Funds will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the Prospectus and in this SAI.
Repurchase Agreements (All Funds). The Funds may invest in securities
subject to repurchase agreements with U.S. banks or broker-dealers. Such
agreements may be considered to be loans by the Funds for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"). A repurchase
agreement is a transaction in which the seller of a security commits itself at
the time of the sale to repurchase that security from the buyer at a mutually
agreed-upon time and price. The repurchase price exceeds the sale price,
reflecting an agreed-upon interest rate effective for the period the buyer owns
the security subject to repurchase. The agreed-upon rate is unrelated to the
interest rate on that security. A Manager will monitor the value of the
underlying security at the time the transaction is entered into and at all times
during the term of the repurchase agreement to insure that the value of the
security always equals or exceeds the repurchase price. In the event of default
by the seller under the repurchase agreement, the Funds may have problems in
exercising their
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<PAGE> 63
rights to the underlying securities and may incur costs and experience time
delays in connection with the disposition of such securities.
Variable and Floating Rate Demand and Master Demand Notes (All Funds).
The Funds may, from time to time, buy variable rate demand notes issued by
corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity in the 5 to 20 year range but carry
with them the right of the holder to put the securities to a remarketing agent
or other entity on short notice, typically seven days or less. The obligation of
the issuer of the put to repurchase the securities is backed up by a letter of
credit or other obligation issued by a financial institution. The purchase price
is ordinarily par plus accrued and unpaid interest. Ordinarily, the remarketing
agent will adjust the interest rate every seven days (or at other intervals
corresponding to the notice period for the put), in order to maintain the
interest rate at the prevailing rate for securities with a seven-day maturity.
The Funds may also buy variable rate master demand notes. The terms of
these obligations permit the investment of fluctuating amounts by the Funds at
varying rates of interest pursuant to direct arrangements between a Fund, as
lender, and the borrower. They permit weekly, and in some instances, daily,
changes in the amounts borrowed. The Funds have the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount, and the borrower may prepay up to the full amount of
the note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the lender and
the borrower, it is not generally contemplated that they will be traded, and
there is no secondary market for them, although they are redeemable (and thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. The Funds have no limitations on the type of issuer from
whom the notes will be purchased. However, in connection with such purchase and
on an ongoing basis, a Manager will consider the earning power, cash flow and
other liquidity ratios of the issuer, and its ability to pay principal and
interest on demand, including a situation in which all holders of such notes
make demand simultaneously. While master demand notes, as such, are not
typically rated by credit rating agencies, if not so rated, the Funds may, under
their minimum rating standards, invest in them only if at the time of an
investment the issuer meets the criteria set forth in the Prospectus for other
comparable debt obligations.
Floating rate demand and master demand notes are similar to variable
rate instruments except that their interest rates vary with a designated market
index or market rate, such as the coupon equivalent of the U.S. Treasury bill
rate.
Inverse Floaters. Inverse floating rate obligations are fixed-income
securities, that have coupon rates that vary inversely at a multiple of a
designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
Inverse floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity.
Loans of Portfolio Securities (All Funds). The Funds may lend their
portfolio securities to brokers, dealers and financial institutions, provided:
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Funds may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Funds will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 5% of the total
assets of a particular Fund.
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<PAGE> 64
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Funds may pay reasonable
finders, administrative and custodial fees. Loans of securities involve a risk
that the borrower may fail to return the securities or may fail to provide
additional collateral.
Foreign Securities (All Funds except ESC Strategic Asset Preservation
Fund). As described in the Prospectus, changes in foreign exchange rates will
affect the value of securities denominated or quoted in currencies other than
the U.S. dollar.
Since certain Funds may invest in securities denominated in currencies
other than the U.S. dollar, and since those Funds may, for various periods
pending investment for non speculative purposes, hold funds in bank deposits or
other money market investments denominated in foreign currencies, a Fund may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. Changes in foreign
currency exchange rates will influence values of securities in the Fund's
portfolio, from the perspective of U.S. investors. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net investment income and
gains, if any, to be distributed to shareholders by a Fund. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. These forces are affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors.
Forward Foreign Currency Exchange Contracts (All Funds except ESC
Strategic Asset Preservation Fund). Those Funds that purchase foreign
currency-denominated securities may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted between currency traders (usually large
commercial banks) and their customers. Forward foreign currency exchange
contracts may be bought or sold to protect a Fund against a possible loss
resulting from an adverse change in the relationship between foreign currencies
and the U.S. dollar, or between foreign currencies. Although such contracts are
intended to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase.
Interest Rate Futures Contracts (ESC Strategic Income Fund and ESC
Strategic Asset Preservation Fund). These Funds may purchase and sell interest
rate futures contracts ("futures contracts") as a hedge against changes in
interest rates. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. Futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there are
futures contracts based on securities such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury bills. For
municipal securities, there is the Bond Buyer Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract for
the sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if a Fund holds long-term U.S. Government securities and
its Manager anticipates a rise in long-term interest rates, the Fund could, in
lieu of disposing of its portfolio securities, enter into futures contracts for
the sale of similar long-term securities. If rates increased and the value of
the Fund's portfolio securities declined, the value of the Fund's futures
contracts would increase, thereby
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<PAGE> 65
protecting the Fund by preventing net asset value from declining as much as it
otherwise would have. Similarly, entering into futures contracts for the
purchase of securities has an effect similar to actual purchase of the
underlying securities, but permits the continued holding of securities other
than the underlying securities. For example, if a Manager expects long-term
interest rates to decline, the Fund might enter into futures contracts for the
purchase of long-term securities, so that it could gain rapid market exposure
that may offset anticipated increases in the cost of securities it intends to
purchase, while continuing to hold higher-yielding short- term securities or
waiting for the long-term market to stabilize.
Stock Index Futures Contracts (ESC Strategic Appreciation Fund, ESC
Strategic Global Equity Fund, ESC Strategic Small Cap Fund, ESC Strategic Growth
Fund and ESC Strategic Value Fund). These Funds may enter into stock index
futures contracts in order to protect the value of their common stock
investments. A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined by
the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller will recognize a gain determined by
the difference between the two index levels at the expiration of the stock index
futures contract, and the purchaser will realize a loss. Stock index futures
contracts expire on a fixed date, currently one to seven months from the date of
the contract, and are settled upon expiration of the contract.
The Funds intend to utilize stock index futures contracts only for the
purpose of attempting to protect the value of their common stock portfolios in
the event of a decline in stock prices and, therefore, usually will be sellers
of stock index futures contracts. This risk management strategy is an
alternative to selling securities in the portfolio and investing in money market
instruments. Also, stock index futures contracts may be purchased to protect a
Fund against an increase in prices of stocks which the Fund intends to purchase.
If the Fund is unable to invest its cash (or cash equivalents) in stock in an
orderly fashion, the Fund could purchase a stock index futures contract which
may be used to offset any increase in the price of the stock. However, it is
possible that the market may decline instead, resulting in a loss on the stock
index futures contract. If the Fund then concludes not to invest in stock at
that time, or if the price of the securities to be purchased remains constant or
increases, the Fund will realize a loss on the stock index futures contract that
is not offset by a reduction in the price of securities purchased. The Fund also
may buy or sell stock index futures contracts to close out existing futures
positions.
Option Writing and Purchasing (All Funds). A Fund may write (or sell)
put and call options on the securities that the Fund is authorized to buy or
already holds in its portfolio. These option contracts may be listed for trading
on a national securities exchange or traded over-the-counter. A Fund may also
purchase put and call options. A Fund will not write covered calls on more than
5% of its portfolio, and a Fund will not write covered calls with strike prices
lower than the underlying securities' cost basis on more than 5% of its total
portfolio. A Fund may not invest more than 5% of its total assets in option
purchases.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
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A Fund may sell "covered" put and call options as a means of hedging
the price risk of securities in the Fund's portfolio. The sale of a call option
against an amount of cash equal to the put's potential liability constitutes a
"covered put." When a Fund sells an option, if the underlying securities do not
increase (in the case of a call option) or decrease (in the case of a put
option) to a price level that would make the exercise of the option profitable
to the holder of the option, the option will generally expire without being
exercised and the Fund will realize as profit the premium paid for such option.
When a call option of which a Fund is the writer is exercised, the option holder
purchases the underlying security at the strike price and the Fund does not
participate in any increase in the price of such securities above the strike
price. When a put option of which a Fund is the writer is exercised, the Fund
will be required to purchase the underlying securities at the strike price,
which may be in excess of the market value of such securities.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market marker. This information is
carefully monitored by the Managers and verified in appropriate cases. OTC
options transactions will be made by a Fund only with recognized U.S. Government
securities dealers. OTC options are subject to the Funds' 15% limit on
investments in securities which are illiquid or not readily marketable (see
"Investment Restrictions"), provided that OTC option transactions by a Fund with
a primary U.S. Government securities dealer which has given the Fund an absolute
right to repurchase according to a "repurchase formula" will not be subject to
such 15% limit.
It may be a Fund's policy, in order to avoid the exercise of an option
sold by it, to cancel its obligation under the option by entering into a closing
purchase transaction, if available, unless it is determined to be in the Fund's
interest to sell (in the case of a call option) or to purchase (in the case of a
put option) the underlying securities. A closing purchase transaction consists
of a Fund purchasing an option having the same terms as the option sold by the
Fund and has the effect of canceling the Fund's position as a seller. The
premium which a Fund will pay in executing a closing purchase transaction may be
higher than the premium received when the option was sold, depending in large
part upon the relative price of the underlying security at the time of each
transaction. To the extent options sold by a Fund are exercised and the Fund
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate may increase,
resulting in a possible increase in short-term capital gains and a possible
decrease in long-term capital gains.
Options on Futures Contracts (All Funds). A Fund may purchase and write
put and call options on futures contracts that are traded on a U.S. exchange or
board of trade and enter into related closing transactions to attempt to gain
additional protection against the effects of interest rate, currency or equity
market fluctuations. There can be no assurance that such closing transactions
will be available at all times. In return for the premium paid, such an option
gives the purchaser the right to assume a position in a futures contract at any
time during the option period for a specified exercise price.
A Fund may purchase put options on futures contracts in lieu of, and
for the same purpose as, the sale of a futures contract. It also may purchase
such put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve
the same purpose as the actual purchase of the futures contracts. A Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
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A Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, a Fund
would pay more than the market price for the underlying securities or index
units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
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Risks of Futures and Options Investments. A Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while a Fund may benefit from the
use of futures contracts and related options, unanticipated changes in interest
rates may result in a poorer overall performance for that Fund than if it had
not entered into any such contracts. Additionally, the skills required to invest
successfully in futures and options may differ from skills required for managing
other assets in the Fund's portfolio. Further, although a Manager may engage in
transactions with respect to index-based futures contracts if the Manager
believes a correlation exists between price movements in the index and in a
Fund's portfolio securities, such a correlation is not likely to be perfect
because the Fund's portfolio is not likely to duplicate the index, making the
futures contract an imperfect hedge.
Limitations on Futures Contracts and Options on Futures Contracts. Each
Fund will use financial futures contracts and related options only for "bona
fide hedging" purposes, as such term is defined in applicable regulations of the
CFTC, or, with respect to positions in financial futures and related options
that do not qualify as "bona fide hedging" positions, will enter such
non-hedging positions only to the extent that aggregate initial margin deposits
plus premiums paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5% of the Fund's
total assets.
Municipal Obligations. (ESC Strategic Asset Preservation Fund). When
consistent with its investment objectives and policies, including quality
criteria, a Fund may invest in securities issued by states, their political
subdivisions and agencies and instrumentalities of the foregoing ("Municipal
Obligations"). Such Municipal Obligations include municipal bonds, floating rate
and variable rate Municipal Obligations, participation interests in municipal
bonds, asset-backed certificates, commercial paper, short-term municipal notes,
stand-by commitments, municipal lease obligations and third party puts. It may
be anticipated that governmental, government-related or private entities will
create other investments in addition to those described above. As new types of
Municipal Obligations are developed, a Manager may, consistent with a Fund's
investment objectives, policies and quality standards, consider making
investments in such types of Municipal Obligations. Municipal Obligations in
which a Fund may invest include "general obligation" and "revenue" securities.
General obligation securities are backed by the issuer's full faith, credit and
taxing power for the payment of principal and interest. The taxes that can be
levied for the payment of debt service may be limited or unlimited in terms of
rate or amount or special assessments. Revenue securities are secured primarily
by net revenues generated by a particular facility or group of facilities, or by
the proceeds of a special excise or other specific revenue source. Additional
security may be provided by a debt service reserve fund. Municipal bonds include
industrial development bonds ("IDBs"), moral obligation bonds, put bonds and
private activity bonds ("PABs"). PABs are generally related to the financing of
a facility used by a private entity or entities. The credit quality of such
bonds is usually directly related to that of the users of the facilities. The
interest on most PABs is subject to the Federal alternative minimum tax.
A Fund may purchase from banks participation interests in all or part
of specific holdings of Municipal Obligations. Each participation is backed by
an irrevocable letter of credit or guarantee of the selling bank. The credit of
either or both the issuer of the Municipal Obligations or of the selling bank
must meet the Fund's credit quality standards. A Fund has the right to sell the
participation back to the bank after seven days' notice for the full principal
amount of the Fund's interest plus accrued interest, but only (a) when necessary
to provide liquidity to the Fund, (b) to maintain the Fund's quality standards,
or (c) in the event of a default under the terms of the Municipal Obligation.
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A Fund may acquire "stand-by commitments," which will enable it to
improve its portfolio liquidity by making available same-day settlements on
sales of its securities. A stand-by commitment gives a Fund, when it purchases a
Municipal Obligation from a broker, dealer or other financial institution
("seller") the right to sell up to the same principal amount of such securities
back to the seller, at the Fund's option, at a specified price. Stand-by
commitments are also known as "puts." A Fund may acquire stand-by commitments
solely to facilitate portfolio liquidity and not to protect against changes in
the market price of the Fund's portfolio securities. The exercise by a Fund of a
stand-by commitment is subject to the ability of the other party to fulfill its
contractual commitment.
It is expected that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Directors
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security, subject to the stand-by commitment is less
than the exercise price of the stand-by commitment, such security will
ordinarily be valued at such exercise price. Where a Fund has paid for a
stand-by commitment, its cost will be reflected as unrealized depreciation for
the period during which the commitment is held.
There is no assurance that stand-by commitments will be available to a
Fund nor does a Fund assume that such commitments would continue to be available
under all market conditions.
A Fund may also purchase long-term fixed rate bonds that have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or trust certificates and may be combined with other features
such as interest rate swaps. A Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
The financial institution granting the option does not provide credit
enhancement. In the event that there is a default in the payment of principal or
interest, or downgrading of a bond to below investment grade, or a loss of the
bond's tax-exempt status, the put option will terminate automatically. The risk
to a Fund in this case will be that of holding a long- term bond which would
tend to lengthen the weighted average maturity of the Fund's portfolio.
Municipal Lease Obligations. (ESC Strategic Asset Preservation Fund).
Municipal lease obligations are municipal securities that may be supported by a
lease or an installment purchase contract issued by state and local government
authorities to acquire funds to obtain the use of a wide variety of equipment
and facilities such as fire and sanitation vehicles, computer equipment and
other capital assets. These obligations, which may be secured or unsecured, are
not general obligations and have evolved to make it possible for state and local
government authorities to obtain the use of property and equipment without
meeting constitutional and statutory requirements for the issuance of debt.
Thus, municipal lease obligations have special risks not normally associated
with municipal bonds. These obligations frequently contain "non-appropriation"
clauses that provide that the governmental issuer of the obligation has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purposes by the legislative body on a yearly or other
periodic basis. In addition to the "non-appropriation" risk, many municipal
lease obligations have not yet developed the depth of marketability associated
with municipal bonds; moreover, although the obligations may be secured by the
leased equipment, the disposition of the equipment in the event of foreclosure
might prove
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difficult. In order to limit certain of these risks, the Fund will limit its
investments in municipal lease obligations that are illiquid, together with all
other illiquid securities in its portfolio, to not more than 15% of its assets.
The liquidity of municipal lease obligations purchased by the Fund will be
determined pursuant to guidelines approved by the Board of Directors. Factors
considered in making such determinations may include; the frequency of trades
and quotes for the obligation; the number of dealers willing to purchase or sell
the security and the number of other potential buyers; the willingness of
dealers to undertake to make a market; the obligation's rating; and, if the
security is unrated, the factors generally considered by a rating agency.
Brady Bonds. (ESC Strategic Income Fund and ESC Strategic Value Fund).
"Brady Bonds" are created through the exchange of existing commercial bank loans
to foreign entities for new obligations in connection with debt restructurings
under a plan introduced by former U.S. Secretary of the Treasury, Nicholas F.
Brady (the "Brady Plan"). Brady Bonds have been issued only recently, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are
dollar-denominated) and they are actively traded in the over-the-counter
secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Brady Plan debt restructurings totaling more than $80 billion have been
implemented to date in Argentina, Bolivia, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela with the largest proportion of Brady Bonds
having been issued to date by Argentina, Mexico and Venezuela. Brazil has
announced plans to issue Brady Bonds in respect of approximately $44 billion of
bank debt but there can be no assurance that the circumstances regarding the
issuance of Brady Bonds by Brazil will not change.
Most Argentine and Mexican Brady Bonds and a significant portion of the
Venezuela Brady Bonds issued to date are collateralized Brady Bonds with
interest coupon payments collateralized on a rolling-forward basis by funds or
securities held in escrow by an agent for the bondholders. Of the other issuers
of Brady Bonds, Bolivia, Nigeria, the Philippines and Uruguay have to date
issued collateralized Brady Bonds. While the Adviser anticipates that
collateralized Brady Bonds will be issued by Brazil, there can be no assurance
that any such obligations will be issued or, if so, when. A Fund may purchase
Brady Bonds with no or limited
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collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and
sold in secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories. Many of the Brady Bonds and other sovereign debt
securities in which a Fund invests are likely to be acquired at a discount.
Warrants and Rights (All Funds). The Fund may invest up to 5% of its
net assets in warrants or rights (other than those acquired in units or attached
to other securities) that entitle the holder to buy equity securities at a
specific price for a specific period of time but will do so only if the equity
securities are deemed appropriate by the Manager for inclusion in the Fund's
portfolio.
Investment Companies and Investment Funds (All Funds). Each Fund is
permitted to invest in shares of other open-end or closed-end investment
companies. The Investment Company Act of 1940, as amended, generally prohibits
each Fund from acquiring more than 3% of the outstanding voting shares of
another investment company and limits such investments to no more than 5% of
each Fund's total assets in any one investment company and no more than 10% in
any combination of investment companies. The Act also prohibits the Fund and
other funds of the Company from acquiring in the aggregate more than 10% of the
outstanding voting shares of any registered closed-end investment company. To
the extent the Fund invests a portion of its assets in investment companies,
those assets will be subject to the expenses of any such investment company as
well as to the expenses of the Fund itself. The Fund may not purchase shares of
any affiliated investment company except as permitted by SEC Rule or Order.
Other Investment Policies of ESC Strategic Value Fund
In respect of ESC Strategic Value Fund, some emerging market countries
have laws and regulations that currently preclude direct foreign investment in
the securities of their companies. However, indirect foreign investment in the
securities of companies listed and traded on the stock exchanges in those
countries is permitted by certain emerging market countries through investment
funds. Any investment by the Fund in these investment funds would be subject to
applicable law. Under certain circumstances, an investment in an investment fund
will be subject to the additional limitations that apply to investments in
investment companies. Such investment funds also involve an extra layer of
expenses in addition to those of the Fund. Additionally such investment may
carry U.S. tax consequences. See "Taxation" section for further explanation.
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Mortgage-Related Securities.
REMICs: A REMIC is a CMO that qualifies for special tax treatment under
the code and invests in certain mortgages principally secured by interests in
real property. Investors may purchase beneficial interests in REMICs, which are
known as "regular" interests, or "residual" interests. Guaranteed REMIC
pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC
represent beneficial ownership interests in a REMIC trust consisting principally
of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through
certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment
of interest, and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates. FNMA
REMIC Certificates are issued and guaranteed as to timely distribution of
principal and interest by FNMA.
Parallel Pay Securities; PAC Bonds: Parallel pay CMOs and REMICs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, that must be
retired by its stated maturity date or final distribution date but may be
retired earlier. Planned Amortization Class CMOs ("PAC Bonds") generally require
payments of a specified amount of principal on each payment date. PAC Bonds are
always parallel pay CMOs with the required principal payment on such securities
having the highest priority after interest has been paid to all classes.
The Fund may also invest in Stripped Mortgage-Backed Securities
("SMBS"), derivative multi-class mortgage securities issued by U.S. Government
agencies or instrumentalities or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and their special purpose subsidiaries.
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SMBS generally have two classes: one (the "IO" class) entitles the
holders to receive distributions consisting solely or entirely of all or a
portion of interest payments from the underlying pool of mortgages or
mortgage-backed securities ("mortgage assets"); the other (the "PO") class
entitles the holders to receive distributions consisting solely or primarily of
all or a portion of the principal of the underlying mortgage asset pool. The
cash flows and yields on IO and PO classes are considerably more sensitive to
changes in the rate of principal payments (including prepayments) on the
underlying mortgage assets than an investment in a traditional mortgage-backed
security, thus exposing the Fund to more risk.
Mortgage-Backed Security Rolls. The Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities issued by GNMA, FNMA or
FHLMC. In a forward roll transaction, that is considered to be a borrowing by
the Fund, the Fund will sell a mortgage security to a bank or other permitted
entity and simultaneously agree to repurchase a similar security from the
institution at a later date at an agreed upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of mortgages with different
prepayment histories than those sold. Risks of mortgage-backed security rolls
include: (i) the risk of prepayment prior to maturity, (ii) the possibility that
the proceeds of the sale may have to be invested in money market instruments
(typically repurchase agreements) maturing not later than the expiration of the
roll, and (iii) the possibility that the market value of the securities sold by
the Fund may decline below the price at which the Fund is obligated to purchase
the securities. Upon entering into a mortgage-backed security roll, the Fund
will be required to place cash, U.S. Government Securities or other high-grade
debt securities in a segregated account with its Custodian in an amount equal to
its obligation under the roll.
Assumptions generally accepted by the industry concerning the
probability of early payment may be used in the calculation of maturities for
debt securities that contain put or call provisions, sometimes resulting in a
calculated maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above.
As new types of mortgage-related securities are developed and offered
to investors, the Manager will, consistent with the Fund's investment
objectives, policies and quality standards, consider making investments in such
new types of mortgage-related securities.
Other Asset-Backed Securities. Asset-backed securities are secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, that represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, known as collateralized obligations that are generally issued as
the debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt.
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Asset-backed securities are not issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; however, the payment of principal
and interest on such obligations may be guaranteed up to certain amounts and for
a certain period by a letter of credit issued by a financial institution (such
as a bank or insurance company) unaffiliated with the issuers of such
securities. The purchase of asset-backed securities raises risk considerations
peculiar to the financing of the instruments underlying such securities. For
example, there is a risk that another party could acquire an interest in the
obligations superior to that of the holders of the asset-backed securities.
There also is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
Asset-backed securities entail prepayment risk, that may vary depending on the
type of asset, but is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are unsecured
obligations of the card holder.
The market for asset-backed securities is at a relatively early state
of development. Accordingly, there may be a limited secondary market for such
securities. Some of the asset-backed securities in which the Fund may invest are
described below. Certificates for Automobile Receivables ("CARS"). CARS
represent undivided fractional interests in a trust ("trust') whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS are "passed through" monthly to certificate holders and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
that may reduce the overall return to certificate holders. If the letter of
credit is exhausted, certificate holders may also experience delays in payment
or losses on CARS if the full amounts due on underlying sales contracts are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts, or because of depreciation, damage or loss of the
vehicles securing the contracts, or other factors. For asset-backed securities,
the industry standard uses a principal prepayment model, the "ABS Model," which
is similar to the PSA model described previously under "Mortgage-Related
Securities." Either the PSA model, the ABS model or other similar models that
are standard in the industry will be used by the Fund in calculating the
maturity for purposes of its investment in asset-backed securities.
Structured Investments. Structured Investments are derivatives in the
form of a unit or units representing an undivided interest(s) in assets held in
a trust that is not an investment company as defined in the Investment Company
Act of 1940. A trust unit pays a return based on the total return of securities
and other investments held by the trust and the trust may enter into one or more
swaps to achieve its objective. For example, a trust may purchase a basket of
securities and agree to exchange the return generated by those securities for
the return generated by another basket or index of securities. The Fund will
purchase structured investments in trusts that engage in such swaps only where
the counterparties are approved by the Manager in accordance with credit-risk
guidelines established by the Board of Directors.
Structured Notes. Structured Notes are derivatives where the amount of
principal repayment and or interest payments is based upon the movement of one
or
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more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of structured notes allows the Fund to tailor
its investments to the specific risks and returns the Manager wishes to accept
while avoiding or reducing certain other risks.
Swaps. Swap contracts are derivatives in the form of a contract or
other similar instrument which is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specific index and agreed upon notional
amount. The term specified index includes, but is not limited to, currencies,
fixed interest rates, prices and total return on interest rate indices,
fixed-income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, the Fund may
agree to swap the return generated by a fixed-income index for the return
generated by a second fixed-income index. The currency swaps in which the Fund
may enter will generally involve an agreement to pay interest streams in one
currency based on a specified index in exchange for receiving interest streams
denominated in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon national amount.
The Fund will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two returns. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. The Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Fund's Board of Directors.
Interest rate and total rate of return swaps do not involve the
delivery of securities, other underlying assets, or principal. Accordingly, the
risk of loss with respect to interest rate and total rate of return swaps is
limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the other party to an interest rate or total rate of
return swap defaults, the Fund's risk of loss consists of the net amount of
interest payments that a portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
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<PAGE> 76
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Manager is incorrect in its forecasts
of market values, interest rates, and currency exchange rates, the investment
performance of the Fund would be less favorable than it would have been if this
investment technique were not used.
Zero Coupon Securities and Deferred Interest Obligations. The Fund may
invest in zero coupon securities and deferred interest obligations issued by the
U.S. Treasury or by private issuers such as domestic or foreign corporations.
Zero coupon U.S. Treasury securities include: (1) U.S. Treasury bills without
interest coupons, (2) U.S. Treasury notes and bonds that have been stripped of
their unmatured interest coupons and (3) receipts or certificates representing
interests in such stripped debt obligations or coupons. Zero coupon securities
and deferred interest obligations usually trade at a deep discount from their
face or par value and will be subject to greater fluctuations in market value in
response to changing interest rates than debt obligations of comparable
maturities that make current payments of interest. An additional risk of
private-issuer zero coupon securities and deferred interest obligations is the
credit risk that the issuer will be unable to make payment at maturity of the
obligations.
While zero coupon securities do not require the periodic payment of
interest, deferred interest obligations generally provide for a period of delay
before the regular payment of interest begins. Although this period of delay is
different for each deferred interest obligation, a typical period is
approximately one-third of the obligation's term to maturity. Such investments
benefit the issuer by mitigating its initial need for cash to meet debt service,
but some also provide a higher rate of return to attract investors who are
willing to defer receipt of such cash. With zero coupon securities, however, the
lack of periodic interest payments means that the interest rate is "locked in"
and the investor avoids the risk of having to reinvest periodic interest
payments in securities having lower rates.
Because the Fund accrues taxable income from zero coupon and deferred
interest securities without receiving cash, the Fund may be required to sell
portfolio securities in order to pay dividends or redemption proceeds for its
shares, which require the payment of cash. This will depend on several factors;
the proportion of shareholders who elect to receive dividends in cash rather
than reinvesting dividends in additional shares of the Fund, and the amount of
cash income the Fund receives from other investments and the sale of shares. In
either case, cash distributed or held by the Fund that is not reinvested by
investors in additional Fund shares will hinder the Fund from seeking current
income.
Custodial Receipts. The Fund may acquire U.S. Government Securities and
their unmatured interest coupons that have been separated (stripped) by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts (TIGRs) and Certificate of Accrual on Treasury Securities
(CATS). The stripped coupons are sold separately from the underlying principal,
which is usually sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. The
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<PAGE> 77
underlying U.S. Treasury bonds and notes themselves are generally held in
book-entry form at a Federal Reserve Bank. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most likely
will be deemed the beneficial holders of the underlying U.S. Government
Securities for federal tax and securities purposes. In the case of CATS and
TIGRs, the IRS has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies such
as the Fund. CATS and TIGRs are not considered U.S. Government Securities by the
Staff of the SEC, however. Further, the IRS' conclusion is contained only in a
general counsel memorandum, which is an internal document of no precedential
value or binding effect, and a private letter ruling, which also may not be
relied upon by the Fund. The Company is not aware of any binding legislative,
judicial or administrative authority on this issue.
Loan Participations. Through a loan participation, the Fund can buy
from a lender a portion of a larger loan that it has made to a borrower. By
buying loan participations, the Fund may be able to acquire interests in loans
from financially strong borrowers that the Fund could not otherwise acquire.
These instruments are typically interests in floating or variable rate senior
loans to U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending institution
and are subject to the credit risks of both the borrower and the lending
institution. While loan participations generally trade at par value, if the
borrowers have credit problems, some may sell at discounts. To the extent that
borrower's credit problems are resolved, the loan participations may then
appreciate in value. These loan participations, however, carry substantially the
same risk as that for defaulted debt obligations and may cause loss of the
entire investment. Most loan participations are illiquid and therefore will be
included in the Fund's limitation on illiquid investments.
Pay-in-Kind Bonds. Pay-in-kind bonds are securities that pay interest
through the issuance of additional bonds. The Fund will be deemed to receive
interest over the life of the bonds and be treated as if interest were paid on a
current basis for federal income tax purposes, although no cash interest
payments are received by the Fund until the cash payment date or until the bonds
mature.
Trade Claims. The Fund may invest in trade claims. Trade claims are
interest in amounts owed to suppliers of goods or services and are purchased
from creditors of companies in financial difficulty. For purchasers such as the
Fund, trade claims offer the potential for profits since they are often
purchased at a significant discount from face value and consequently, may
generate capital appreciation in the event that the market value of the claim
increases as the debtor's financial position improves or the claim is paid.
An investment in trade claims is speculative and carries a high degree
of risk. Trade claims are illiquid securities which generally do not pay
interest and there can be no guarantee that the debtor will ever be able to
satisfy the obligation on the trade claim. The markets in trade claims are not
regulated by federal securities laws or the SEC. Because trade claims are
unsecured, holders of trade claims may have a lower priority in terms of payment
than certain other creditors in a bankruptcy proceeding.
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<PAGE> 78
Equity-Linked Securities. The Fund may invest in equity-linked
securities, including, among others, PERCS, ELKS or LYONs, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. It is impossible to predict whether the price of
the underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market. The market for such securities may be shallow, and high volume trades
may be possible only with discounting. In addition to the foregoing risks, the
return on such securities depends on the creditworthiness of the issuer of the
securities, which may be the issuer of the underlying securities or a third
party investment banker or other lender. The creditworthiness of such third
party issuer of equity-linked securities may, and often does, exceed the
creditworthiness of the issuer of the underlying securities. The advantage of
using equity-linked securities over traditional equity and debt securities is
that the former are income producing vehicles that may provide a higher income
than the dividend income on the underlying equity securities while allowing some
participation in the capital appreciation of the underlying equity securities.
Another advantage of using equity-linked securities is that they may be used for
hedging to reduce the risk of investing in the generally more volatile
underlying equity securities.
The following are three examples of equity-linked securities. The Fund
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS")
technically is preferred stock with some characteristics of common stock. PERCS
are mandatorily convertible into common stock after a period of time, usually
three years, during which the investors' capital gains are capped, usually at
30%. Commonly, PERCS may be redeemed by the issuer at any time or if the
issuer's common stock is trading at a specified price level or better. The
redemption price starts at the beginning of the PERCS duration period at a price
that is above the cap by the amount of the extra dividends the PERCS holder is
entitled to receive relative to the common stock over the duration of the PERCS
and declines to the cap price shortly before maturity of the PERCS. In exchange
for having the cap on capital gains and giving the issuer the option to redeem
the PERCS at any time or at the specified common stock price level, the Fund may
be compensated with a substantially higher dividend yield than that on the
underlying common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS
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<PAGE> 79
are commonly not subject to redemption prior to maturity. ELKS usually bear
interest during the three-year term at a substantially higher rate than the
dividend yield on the underlying common stock. In exchange for having the cap on
the return that might have been received as capital gains on the underlying
common stock, the Fund may be compensated with the higher yield, contingent on
how well the underlying common stock does.
LYONs. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Fund will not receive any interest payments until the notes mature, typically in
15 to 20 years, when the notes are redeemed at face, or par value. The yield on
LYONs, typically, is lower-than-market rate for debt securities of the same
maturity, due in part to the fact that the LYONs are convertible into common
stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better, or, at the option of the holder, upon certain fixed dates. The
redemption price typically is the purchase price of the LYONs plus accrued
original issue discount to the date of redemption, which amounts to the
lower-than-market yield. The Fund will receive only the lower-than-market yield
unless the underlying common stock increases in value at a substantial rate.
LYONs are attractive to investors, like the Fund, when it appears that they will
increase in value due to the rise in value of the underlying common stock.
Arbitrage. The Fund may sell in one market a security which it owns and
simultaneously purchase the same security in another market, or it may buy a
security in one market and simultaneously sell it in another market, in order to
take advantage of differences between the prices of the security in the
different markets. Although the Fund does not actively engage in arbitrage, such
transactions
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<PAGE> 80
may be entered into only with respect to debt securities and will
occur only in a dealer's market where the buying and selling dealers involved
confirm their prices to the Fund at the time of the transaction, thus
eliminating any risk to the assets of the Fund.
Foreign Index-Linked Instruments. As part of its investment program,
and to maintain greater flexibility, the Fund may invest in instruments which
have the investment characteristics of particular foreign securities, securities
indexes, futures contracts or currencies. Such instruments may take a variety of
forms, such as debt instruments with interest or principal payments determined
by reference to the value of a currency or commodity at a future point in time.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries, or the differential in
interest rates between particular countries. The risks of such investments would
reflect the risks of investing in the index or other instrument, the performance
of which determines the return for the instrument. Tax considerations may limit
the Fund's ability to invest in foreign index-linked instruments.
Venture Capital. The Fund may invest in venture capital limited
partnerships and venture capital funds that, in turn, invest principally in
securities of early stage, developing companies. Investments in venture capital
limited partnerships and venture capital funds present a number of risks not
found in investing in established enterprises including the facts that such a
partnership's or fund's portfolio will be composed almost entirely of
early-stage companies that may lack depth of management and sufficient
resources, that may be marketing a new product for which there is no established
market, and that may be subject to intense competition from larger companies.
Any investment in a venture capital limited partnership or venture capital fund
will lack liquidity, will be difficult to value, and the Fund will not be
entitled to participate in the management of the partnership or fund. If for any
reason the services of the general partners of a venture capital limited
partnership were to become unavailable, such limited partnership could be
adversely affected.
In addition to investing in venture capital limited partnerships and
venture capital funds, the Fund may directly invest in early-stage, developing
companies. The risks associated with investing in these securities are
substantially similar to the risks set forth above. The Fund will typically
purchase equity securities in these early-stage, developing companies; however
from time to time, the Fund may purchase non-investment grade debt securities in
the form of convertible notes.
Such investments involve costs at the venture capital level which are
in addition to those of the Fund.
Leveraged Buyouts. The Fund may invest in leveraged buyout limited
partnerships and funds that, in turn, invest in leveraged buyout transactions
("LBOs"). An LBO, generally, is an acquisition of an existing business by a
newly formed corporation financed largely with debt assumed by such newly formed
corporation to be later repaid with funds generated from the acquired company.
Since most LBOs are by nature highly leveraged (typically with debt to equity
ratios of approximately 9 to 1), equity investments in LBOs may appreciate
substantially in
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<PAGE> 81
value given only modest growth in the earnings or cash flow of
the acquired business. Investments in LBO partnerships and funds, however,
present a number of risks. Investments in LBO limited partnerships and funds
will normally lack liquidity and may be subject to intense competition from
other LBO limited partnerships and funds. Additionally, if the cash flow of the
acquired company is insufficient to service the debt assumed in the LBO, the LBO
limited partnership or fund could lose all or part of its investment in such
acquired company.
Non-Publicly Traded Securities; Rule 144A Securities. The Fund may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "1933 Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act ("Rule 144A
Securities"). An investment in Rule 144A Securities will be considered illiquid
and therefore subject to the Fund's limitation on the purchase of illiquid
securities, unless the Fund's governing Board determines on an ongoing basis
that an adequate trading market exists for the security. In addition to an
adequate trading market, the Board will also consider factors such as trading
activity, availability of reliable price information and other relevant
information in determining whether a Rule 144A Security is liquid. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become
uninterested for a time in purchasing Rule 144A Securities. The Board will
carefully monitor any investments by the Fund in Rule 144A Securities. The Board
may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring the liquidity of Rule 144A Securities, although the
Board will retain ultimate responsibility for any determination regarding
liquidity.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk and may result in
substantial losses. These securities may be less liquid than publicly traded
securities, and the Fund may take longer to liquidate these positions than would
be the case for publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized on such sales
could be less than those originally paid by the Fund. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements applicable to companies whose securities
are publicly traded. The Fund's investments in illiquid securities are subject
to the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that is deemed to be representative of
their value, the value of the Fund's net assets could be adversely affected.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of each Fund, and
except as otherwise indicated, may not be changed with respect to a Fund without
the approval of a majority of the outstanding voting securities of that Fund
which, as defined in the Investment Company Act of 1940 ("1940 Act"), means the
lesser of (1) 67% of the shares of such Fund present at a meeting if the holders
of more than 50% of the outstanding shares of such Fund are present in person or
by proxy, or (2) more than 50% of the outstanding voting shares of such Fund.
Each Fund, except as indicated, may not:
(1) Except for ESC Strategic Small Cap Fund and ESC Strategic Value
Fund, with respect to 75% of its total assets, purchase more than 10% of the
voting securities
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<PAGE> 82
of any one issuer or invest more than 5% of the value of such assets in the
securities or instruments of any one issuer, except securities or instruments
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(2) Borrow money except that a Fund may borrow from banks up to 10% of
the current value of its total net assets for temporary or emergency purposes,
provided that a Fund may make no purchases if its outstanding borrowings exceed
5% of its total assets;
(3) Invest in real estate, provided that a Fund may invest in readily
marketable securities (except limited partnership interests) of issuers that
deal in real estate and securities secured by real estate or interests therein
and a Fund may hold and sell real estate (a) used principally for its own office
space or (b) acquired as a result of a Fund's ownership of securities.
(4) Engage in the business of underwriting securities of other issuers,
except to the extent that the purchase of securities directly from the issuer
(either alone or as one of a group of bidders) or the disposal of an investment
position may technically cause it to be considered an underwriter as that term
is defined under the Securities Act of 1933;
(5) Make loans, except that a Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements and (c) purchase the types of
debt instruments described in the Prospectus or the SAI;
(6) Purchase securities or instruments which would cause 25% or more of
the market value of the Fund's total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is no
limit with respect to investments in the U.S. Government, its agencies and
instrumentalities;
(7) Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that collateral
arrangements with respect to forward contracts, futures contracts or options,
including deposits of initial and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction; or
(8) Purchase or sell commodity contracts, except that the Fund may
invest in futures contracts and in options related to such contracts (for
purposes of this restriction, forward foreign currency exchange contracts are
not deemed to be commodities).
For restriction number 1, above, securities backed only by the assets
of a non-governmental user will be deemed to be issued by that user. For
purposes of investment restriction number 6, public utilities are not deemed to
be a single industry but are separated by industrial categories, such as
telephone or gas utilities.
The following policies of the Funds are non-fundamental and may be
changed by the Board of Directors without shareholder approval. These policies
provide that a Fund, except as otherwise specified, may not:
(a) Invest in companies for the purpose of exercising control
or management;
(b) Knowingly purchase securities of other investment
companies, except (i) in connection with a merger, consolidation,
acquisition, or reorganization; and (ii) a Fund may invest up to 10% of
its total assets in shares of other investment companies;
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<PAGE> 83
(c) Purchase securities on margin, except that a Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities;
(d) Mortgage, pledge, or hypothecate any of its assets, except
that a Fund may pledge not more than 15% of the current value of the
Fund's total net assets;
(e) Purchase or retain the securities of any issuer, if those
individual officers and Directors of the Company, the Adviser, the
Fund's Manager(s), the Administrator, or the Distributor, each owning
beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer;
(f) Invest more than 5% of its net assets in warrants which
are unattached to securities; included within that amount, no more than
2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York or American Stock Exchanges;
(g) Write, purchase or sell puts, calls or combinations
thereof, except as described in the Prospectus or SAI;
(h) Except for ESC Strategic Value Fund, invest more than 5%
of the current value of its total assets in the securities of companies
which, including predecessors, have a record of less than three years'
continuous operation;
(i) Invest more than 15% of the value of its net assets in
investments which are illiquid, or not readily marketable (including
repurchase agreements having maturities of more than seven calendar
days and variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount within seven days'
notice); or
(j) Invest in oil, gas or other mineral exploration or
development programs, although it may invest in issuers that own or
invest in such programs.
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<PAGE> 84
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of
the Company for the past five years are listed below. The address of each,
unless otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219.
Directors deemed to be "interested persons" of the Company for purposes of the
1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH COMPANY PRINCIPAL OCCUPATION
- - --------------------- --------------------- --------------------
<S> <C> <C>
*William Howard Director and President Equitable Securities Corporation
Cammack, Sr. (1) - Chairman, Managing Director
800 Nashville City Center and Director.
511 Union Street
Nashville, TN 37219-1743
Age: 65
*William Howard Director and Treasurer Equitable Securities Corporation
Cammack, Jr. (1) - Managing Director and Director.
800 Nashville City Center
511 Union Street
Nashville, TN 37219-1743
Age: 39
</TABLE>
1 William Howard Cammack, Sr. and William Howard Cammack, Jr. are father
and son.
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<PAGE> 85
<TABLE>
<CAPTION>
NAME, ADDRESS
AND AGE POSITION WITH COMPANY PRINCIPAL OCCUPATION
- - ------------- --------------------- --------------------
<S> <C> <C>
J. Bransford Wallace Director Willis Coroon Corporations
26 Century Boulevard (insurance) - Vice Chairman
Nashville, TN 37214 (1994); Chairman (1992-93);
Age: 65 various positions since prior to
1989.
Brownlee O. Currey, Jr. Director Osborn Communications, Inc. -
1100 Broadway Chairman; Nashville Banner
Nashville, TN 37203 Publishing Company - President.
Age: 69
E. Townes Duncan Director Solidus (1997 to present); Comptronix
30 Burton Hill Corporation (contract
Suite 100 manufacturing) - Chairman and
Nashville, TN 37215 Chief Executive Officer (1993-
Age: 44 1996); Massey Burch Investment
Group (venture capital) -
Principal (1985-1993).
John L. McAllister Assistant Secretary and Assistant Equitable Securities Corporation
Age: 34 Treasurer - Senior Vice President (1990-present);
Copyright Management, Inc. -
Analyst (1988-1989).
Ellen Stoutamire Secretary Employee of BISYS Fund Services; prior to
Age: 48 joining BISYS, principally employed as an
attorney for past 15 years
Bruce Treff Assistant Treasurer Employee of BISYS Fund Services
Age: 30
Michael Sakala Assistant Treasurer Employee of BISYS Fund Services
Age: 32
R. Jeffrey Young Assistant Treasurer Employee of BISYS Fund Services
Age: 31
Alaina Metz Assistant Secretary Employee of BISYS Fund Services
Age: 29
</TABLE>
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<PAGE> 86
Directors of the Company not affiliated with the Adviser, any Manager
or the Administrator receive from the Company an annual retainer of $2,000 and a
fee of $250 for each Board of Directors and Board committee meeting of the
Company attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Adviser, a
Manager or the Administrator do not receive compensation from the Company. Total
Compensation disclosed below includes the annual retainer, meeting fees and
out-of-pocket expenses.
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<PAGE> 87
DIRECTOR COMPENSATION
(FOR FISCAL YEAR ENDED MARCH 31, 1997)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS ESTIMATED REGISTRANT
AGGREGATE ACCRUED ANNUAL AND FUND
NAME OF COMPENSATION AS PART BENEFITS COMPLEX
PERSON FROM OF FUND UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT DIRECTORS
- - -------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C>
J. Bransford $7,412 0 N/A $7,412
Wallace
Brownlee O. $8,647 0 N/A $8,647
Currey, Jr.
E. Townes $4,941 0 N/A $4,941
Duncan
</TABLE>
As of July 2, 1997, officers and Directors of the Company, as a group,
owned .48% of the outstanding shares of ESC Strategic Small Cap Fund and 2.04%
of the outstanding shares of ESC Strategic Value Fund.
INVESTMENT ADVISER
Equitable Securities Corporation (the "Adviser") 511 Union Street,
Nashville, Tennessee 37219-1743, serves as investment adviser to the Funds,
providing overall supervision of the Managers. For Funds with multiple Managers,
the Adviser determines what portion of each Fund's assets shall be allocated to
each Manager from time to time. For these services, the Adviser receives from
each Fund a fee at an annual rate of 0.50% for ESC Strategic Asset Preservation
Fund; 1.0% ESC Strategic Appreciation Fund, ESC Strategic Global Equity Fund,
ESC Strategic Small Cap Fund, and ESC Strategic Income Fund; and 1.25% for ESC
Strategic Growth Fund and ESC Strategic Value Fund. Out of these fees, the
Adviser pays fees of the Managers. The Value Fund had not commenced operations
as of March 31, 1997.
Under the terms of the Investment Advisory Agreement for the Funds
between the Company and the Adviser ("Agreement"), the investment advisory
services of the Adviser to the Funds are not exclusive. The Adviser is free to,
and does, render investment advisory services to others.
The Agreement will continue in effect with respect to each Fund for a
period more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of each Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Agreement or interested
persons of any such parties, at its meeting held on April 4, 1994, and by the
sole shareholder of the Funds on April 4, 1994, except that the initial approval
of the Agreement by the Directors (including a majority of the independent
directors) and sole initial shareholder within respect to ESC Strategic Growth
Fund was on October 23, 1996, and such approvals with respect to ESC Strategic
Value Fund were on January 14, 1997. The Agreement was recently re-approved at
the January 14, 1997 Board of Directors meeting. The Agreement may be terminated
at any time without penalty by vote of the Directors (with respect to the
Company or a Fund) or, with respect to any Fund, by vote of the Directors or the
shareholders of that Fund, or by the Adviser, on 60 days written notice by
either party to the Agreement and will terminate automatically if assigned.
30
<PAGE> 88
THE MANAGERS
The Adviser has entered into Portfolio Management Agreements with one
or more Managers for each Fund. Each Manager provides services to the particular
Fund as Manager. The Funds' Managers are as follows:
- ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.,
Brandes Investment Partners, Inc., Scott & Stringfellow
Capital Management, Inc. and Equitable Asset Management, Inc.
(an affiliate of the Adviser).
- ESC Strategic Global Equity Fund -- GlobeFlex Capital, L.P.
and Murray Johnstone International Limited.
- ESC Strategic Income Fund -- Llama Asset Management Company,
L.P., Cincinnati Asset Management, Inc. and Murray Johnstone
International Limited.
- ESC Small Cap Fund -- Equitable Asset Management, Inc.
(a division of the Adviser's subsidiary, Equitable Trust
Company).
- ESC Strategic Asset Preservation Fund -- Equitable Asset
Management, Inc.
- ESC Strategic Growth Fund -- Equitable Asset Management, Inc.
- ESC Strategic Value Fund -- Equitable Asset Management, Inc.
For more information on each Manager, see the Prospectus. The following is
information regarding fees, in dollars and as a percentage of each Fund's
assets, paid by the Adviser to Managers of each of the Funds for the periods
indicated:
<TABLE>
<CAPTION>
PERIOD ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997
-------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
ESC Strategic
Appreciation Fund:
Aggregate fees to
Adviser $55,847 .21% $224,856 .95% $419,329 .99%
Aggregate fees to
Manager* $45,074 .17% $158,435 .67% $271,888 .64%
Fees retained by
Adviser $10,773 .04% $ 66,421 .28% $147,441 .35%
Fees paid to Equitable
Asset Management $11,554 .04% $ 41,231 .17% $66,053 .16%
ESC Strategic Global
Equity Fund
Aggregate fees to
Adviser $43,382 .25% $156,881 1.0% $207,116 .99%
Aggregate fees to
Manager* $22,009 .13% $ 76,894 .49% $104,400 .50%
Fees retained by
Adviser $21,373 .12% $ 79,987 .51% $102,716 .49%
</TABLE>
31
<PAGE> 89
<TABLE>
<CAPTION>
PERIOD ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997
-------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ESC Strategic Small
Cap Fund
Aggregate fees (Net) to
Adviser $52,773 .16% $199,170 .88% $652,644 .95%
Aggregate fees to
Manager* $61,569 .19% $166,841 .73% $502,819 .73%
Fees retained by
Adviser $(8,796) (.03)% $ 32,329 .15% $149,825 .22%
ESC Strategic Income
Fund
Aggregate fees (Net) to
Adviser $96,561 .25% $373,088 1.0% $380,147 1.0%
Aggregate fees to
Manager* $24,164 .06% $ 93,525 .25% $94,515 .25%
Fees retained by
Adviser $72,397 .19% $279,563 .75% $285,632 .75%
ESC Strategic Asset
Preservation Fund
Aggregate fees (Net) to
Adviser $8,250 .06% $ 16,394 .13% $30,428 .25%
Aggregate fees to
Manager* $ 0 0% $ 0 0% $3,157 .03%
Fees retained by
Adviser $8,250 .06% $16,394 .13% $27,271 .22%
</TABLE>
INCEPTION DATE
(JANUARY 28, 1997)
THROUGH
MARCH 31, 1997
----------------
ESC Strategic
Growth Fund
Aggregate fees to $0 0%
Adviser
Aggregate fees to $4,177 .12%
Manager
Fees retained by
Adviser $0 0%
32
<PAGE> 90
INCEPTION DATE
(MAY 5, 1997)
--------------
ESC Strategic
Value Fund n/a n/a
Aggregate fees to
Adviser n/a n/a
Aggregate fees to
Manager n/a n/a
Fees retained by
Adviser
* Pursuant to exemptive relief obtained from the Securities and Exchange
Commission, the Funds are permitted to disclose fees and fee rates on
an aggregate basis for individual Managers that are not affiliated with
the Adviser.
For the fiscal year ended March 31, 1997, pursuant to an agreement to
limit fund expenses, the Adviser waived fees of $30,428 for the Asset
Preservation Fund and $7,185 for the Growth Fund. Absent these waivers, Advisory
fees would have been $60,856 for the Asset Preservation Fund. The Adviser waived
its fees entirely with respect to the Growth Fund for the period from January
28, 1997 (commencement of operations) through March 31, 1997. The Adviser
received fees of $380,147; $207,116; $652,644 and $419,329 the Income, Global
Equity, Small Cap and Appreciation Funds, respectively, for the fiscal year
ended March 31, 1997. The Value Fund had not yet commenced operations as of
March 31, 1997.
For the fiscal year ended March 31, 1996, pursuant to an agreement to
limit fund expenses, the Adviser waived fees of $50,302, $25,762 and $11,800 for
the Asset Preservation, Small Cap and Appreciation Funds, respectively. Absent
these waivers, Advisory fees would have been $63,894, $224,932 and $236,656 for
the Asset Preservation, Small Cap and Appreciation Funds, respectively. The
Adviser received fees of $373,088 and $156,881 from the Income and Global Equity
Funds, respectively, for the fiscal year ended March 31, 1996.
For the period ended March 31, 1995, pursuant to an agreement to limit
Fund expenses, the Adviser waived fees of $48,047, $0, $49,973, $21,417 and
$32,786 for the Asset Preservation, Income, Global Equity, Small Cap and
Appreciation Funds, respectively. Absent this waiver agreement, Advisory fees
would have been $48,047, $277,567, $87,665, $71,388 and $82,592 for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
Each Manager performs services pursuant to a Portfolio Management
Agreement appointing the Manager to act as Manager to a Fund, with
responsibility for management of such portion of the Fund's assets as the
Adviser shall allocate to the Manager from time to time.
Each Portfolio Management Agreement provides that the Manager's
services to the Fund are not exclusive. Each Manager is free to and does provide
investment advisory services to others.
Each Portfolio Management Agreement provides that it will continue in
effect for a period beyond two years from the date of its execution only so long
as such continuance is approved at least annually by (i) the Directors or by
vote of the
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<PAGE> 91
holders of a majority of the Fund's outstanding voting securities and (ii) by a
majority of the Directors who are not parties to the Portfolio Management
Agreement or interested persons of any such party. The Portfolio Management
Agreement with Llama Asset Management Company, L.P. with respect to ESC
Strategic Income Fund was approved by the Board of Directors, including a
majority of the Company's independent Directors, at a meeting held July 20,
1994, and was approved by shareholders of ESC Strategic Income Fund at a meeting
held September 7, 1994. The Portfolio Management Agreement with Scott &
Stringfellow Capital Management, Inc. with respect to ESC Strategic Appreciation
Fund was approved by the Directors, including a majority of the independent
directors, on January 14, 1997. The Portfolio Management Agreement with EAM with
respect to ESC Strategic Growth Fund was approved by the Directors, including a
majority of the independent directors, and by the sole initial shareholder of
that Fund on October 23, 1996. Such approvals of the Portfolio Management
Agreement with EAM for ESC Strategic Value Fund were obtained on January 14,
1997. The other Portfolio Management Agreements for each Fund were obtained
approved by the Board of Directors, including a majority of the Directors who
are not parties to any Portfolio Management Agreement or interested persons of
any such party, at a meeting held on April 4, 1994, and by the sole shareholder
of each Fund on April 4, 1994. The Portfolio Management Agreements were
re-approved at the April 15, 1997 Board of Directors Meeting. Each Portfolio
Management Agreement may be terminated at any time without penalty (a) by the
Adviser, by the Fund upon vote of a majority of the Directors, or by vote of a
majority of the Fund's outstanding voting securities, each upon sixty days'
written notice to the Manager; or (b) by the Manager upon sixty days' notice to
the Company or the Adviser. A Portfolio Management Agreement will also
terminate automatically in the event of its assignment. The Company has
received exemptive relief that permits the Board of Directors, without
shareholder approval, to approve and cause the Company to enter into new
Portfolio Management Agreements in the event a new Manager is retained or an
existing Portfolio Management Agreement is amended, unless the Agreement is
with a Manager affiliated with the Adviser.
DISTRIBUTION OF FUND SHARES
Equitable (the "Distributor") serves as principal underwriter for the
shares of the Funds pursuant to a Distribution Contract. The Distribution
Contract provides that the Distributor will use its best efforts to maintain a
broad distribution of the Funds' shares among bona fide investors and may enter
into selling group agreements with responsible dealers and dealer managers as
well as sell the Funds' shares to individual investors. The Distributor is not
obligated to sell any specific amount of shares.
Service and distribution plans (the "Plans") have been adopted by each
of the Funds. The Plan for each Fund except ESC Strategic Asset Preservation
Fund, which has only one class of shares, provides for different rates of fee
payment with respect to each class of shares, as described in the Prospectus.
Pursuant to the Plans, the Funds may pay directly or reimburse the Distributor
monthly in amounts described in the Prospectus for costs and expenses of
marketing the shares, or classes of shares, of the Funds. The Board of Directors
has concluded that there is a reasonable likelihood that the Plans will benefit
the Funds and their shareholders.
Each Plan provides that it may not be amended to increase materially
the costs which the Funds or a class of shares may bear pursuant to the Plan
without shareholder approval and that other material amendments of the Plans
must be approved by the Board of Directors, and by the Directors who are neither
"interested persons" (as defined in the 1940 Act) of the Company nor have any
direct or indirect financial interest in the operation of the particular Plan or
any related agreement, by vote cast in person at a meeting called for the
purpose of considering such amendments. The selection and nomination of the
Directors of the Company have been committed to the discretion of the Directors
who are not "interested persons" of the Company. The Plans were approved by the
Board of Directors and by the Directors who are neither "interested persons" nor
have any direct or indirect financial interest in the operation of any Plan
("Plan Director"), by vote cast in person at an April 4, 1994 meeting called for
the purpose of voting on the Plans, and by the sole shareholder of ESC Strategic
Asset Preservation Fund and by the sole shareholder of each class of
34
<PAGE> 92
shares of each of the other Funds on April 4, 1994 (October 23, 1996 with
respect to ESC Strategic Growth Fund and January 14, 1997 with respect to ESC
Strategic Value Fund). The continuance of the Plans was re-approved by the
Directors and by a majority of the Plan Directors at a meeting held on January
14, 1997. The Plan for ESC Strategic Asset Preservation Fund is terminable at
any time by vote of a majority of the Plan Directors or by vote of the holders
of a majority of the Fund's shares. For the other Funds, each Plan is terminable
with respect to a class of shares of a Fund at any time by a vote of a majority
of the Plan Directors or by vote of the holders of a majority of the shares of
the class.
For the fiscal year ended March 31, 1997, the Distributor received
$17,770; $42,069; $24,898; $127,326; $96,480 and $570 for the Asset
Preservation (single class only), Income, Global Equity, Small Cap,
Appreciation and Growth Funds, respectively for Class A shares. For the
period, the Distributor received $10,963; $30,169; $108,542; $23,480 and $279
for the Income, Global Equity, Small Cap, Appreciation and Growth Funds,
respectively pursuant to Class D Plans (which were formerly Class B shares).
The Value Fund had not commenced operations as of March 31, 1997.
For the fiscal year ended March 31, 1996, the Distributor received
$10,557, $32,859; $16,888; $40,962 and $55,323 for Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds, respectively for Class A
shares. For the period, the Distributor received $10,400; $27,060; $36,932 and
$15,516 for the Income, Global Equity, Small Cap and Appreciation Funds,
respectively pursuant to Class D Plans (which were formerly Class B shares).
For the period ended March 31, 1995 the Distributor received $13,765,
$27,828; $10,299; $11,355 and $13,314 for the Asset Preservation, Income, Global
Equity, Small Cap and Appreciation Funds, respectively for Class A shares. For
the period ended March 31, 1995, the Distributor received $2,185; $6,800; $9,355
and $4,068 for the Income, Global Equity, Small Cap and Appreciation Funds,
respectively pursuant to Class D Plans (which were formerly Class B shares).
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), a subsidiary of The BISYS Group, Inc., currently serves as
Administrator of the Funds. BISYS became the successor Administrator to Furman
Selz LLC effective January 1, 1997. Additionally, effective January 1, 1997,
BISYS Fund Services, Inc., also a subsidiary of The BISYS Group, Inc. ("BFSI")
succeeded Furman Selz LLC as Transfer Agent and Fund Accountant to the Funds.
BISYS (the "Administrator") provides administrative services necessary
for the operation of the Funds, including among other things: (i) preparation of
shareholder reports and communications; (ii) regulatory compliance, such as
reports to and filings with the SEC and state securities commissions; and (iii)
general supervision of the operation of the Funds, including coordination of the
services performed by the Adviser, the Distributor, transfer agent, custodians,
independent accountants, legal counsel and others. In addition, BISYS furnishes
office space and facilities required for the conducting the business of the
Funds and pays the compensation of the Funds' officers, employees and Trustees
affiliated with BISYS. For these services, BISYS receives from each Fund a fee,
payable monthly, at the annual rate of 0.15% of each Fund's average daily net
assets.
35
<PAGE> 93
For the period ended March 31, 1997, Furman Selz LLC as former
administrator was entitled to fees in the amount of $13,579; $43,472; $22,578;
$63,535 and $44,387 from the Asset Preservation, Income, Global Equity, Small
Cap and Appreciation Funds, respectively. Furman Selz LLC voluntarily waived
administration fees of $6,790 for the Asset Preservation Fund. BISYS as
successor Administrator was entitled to fees in the amount of $4,678; $13,550;
$8,489; $33,009; $18,512 and $862 from the Asset Preservation, Income, Global
Equity, Small Cap, Appreciation Funds and Growth, respectively. BISYS
voluntarily waived fees of $2,338 and $862 for the Asset Preservation and
Growth Funds, respectively. The Value Fund had not commenced operations as of
March 31, 1997.
For the period ended March 31, 1996, the Furman Selz LLC was entitled
to and received fees in the amount of $55,963, $23,532, $33,740 and $35,498 from
the Income, Global Equity, Small Cap and Appreciation Funds, respectively.
Furman Selz was entitled to $19,168 in fees from the Asset Preservation Fund,
but voluntarily waived $14,250 for the same period.
For the period ended March 31, 1995, pursuant to an agreement to limit
Fund expenses, Furman Selz waived fees of $14,414, $0, $9,525, $5,442 and $6,884
for the Asset Preservation, Income, Global Equity, Small Cap and Appreciation
Funds, respectively. Absent this waiver agreement, administrative fees would
have been $14,414, $43,736, $13,150, $10,709 and $12,389 for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
The Administration Agreement for the Funds was approved by the Board
of Directors, including a majority of the Directors who are not parties to the
Contract or interested persons of such parties, at its meeting held on October
23, 1996 (January 14, 1997 with respect to ESC Strategic Value Fund) and was
re-approved at the April 15, 1997 Board of Directors Meeting. The
Administrative Services Contract is terminable with respect to a Fund or the
Company without penalty, at any time, by vote of a majority of the Directors
or, with respect to a Fund, by vote of the holders of a majority of the shares
of the Fund, each upon not more than 60 days written notice to the
Administrator, and upon 60 days notice, by the Administrator.
SERVICE ORGANIZATIONS
The Company may also contract with banks, trust companies,
broker-dealers or other financial organizations ("Service Organizations") to
provide certain administrative services for the Funds. Services provided by
Service Organizations may include among other things: providing necessary
personnel and facilities to establish and maintain certain shareholder accounts
and records; assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving funds in
connection with client orders to purchase or redeem shares; verifying and
guaranteeing client signatures in connection with redemption orders, transfers
among and changes in client-designating accounts; providing periodic statements
showing a client's account balance and, to the extent practicable, integrating
such information with other client transactions; furnishing periodic and annual
statements and confirmations of all purchases and redemptions of shares in a
client's account; transmitting proxy statements, annual reports, and updating
prospectuses and other communications from the Funds to clients; and
36
<PAGE> 94
providing such other services as the Funds or a client reasonably may request,
to the extent permitted by applicable statute, rule or regulation. Neither
the Adviser nor any Manager will be a Service Organization or receive fees for
servicing.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more than
the minimum initial or subsequent investments specified by the Funds or charging
a direct fee for servicing. If imposed, these fees would be in addition to any
amounts that might be paid to the Service Organization by the Funds. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult them
regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law. If a bank were prohibited from so acting, its shareholder
clients would be permitted to remain shareholders of the Funds and alternative
means for continuing the servicing of such shareholders would be sought. In that
event, changes in the operation of the Funds might occur and a shareholder
serviced by such a bank might no longer be able to avail itself of any services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
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<PAGE> 95
DETERMINATION OF NET ASSET VALUE
The Funds value their portfolio securities in accordance with the
procedures described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Managers are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Manager's
opinion is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
The Funds have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Company's Board of Directors, the Managers are
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Funds to obtain the
best results taking into account the broker-dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities. While the Managers generally
seek reasonably competitive spreads or commissions, the Funds will not
necessarily by paying the lowest spread or commission available.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Generally, money market securities are traded on a net basis and do not
involve brokerage commissions. Under the 1940 Act, persons affiliated with the
Funds, the Adviser, the Managers and BISYS are prohibited from dealing with
the Funds as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the SEC.
A Manager may, in circumstances in which two or more broker-dealers are
in a position to offer comparable results, give preference to a dealer that has
provided statistical or other research services to the Manager. By allocating
transactions in this manner, the Manager is able to supplement its research and
analysis with the views and information of securities firms. These items, which
in some cases may also be purchased for cash, include such matters as general
economic and securities market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Manager in advising
various of its clients (including the Funds), although not all of these services
are necessarily useful and of value in managing the Funds. The management fee
paid by the Funds is not reduced because the Manager and its affiliates receive
such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "Act"), a Manager may cause a Fund to pay a broker-dealer that provides
"brokerage and research services" (as defined in the Act) to the Manager an
amount of disclosed commission for effecting a securities transaction for the
Fund in excess of the
38
<PAGE> 96
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Managers may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds.
For the fiscal year ended March 31, 1997, the Appreciation Fund, Small
Cap and the Global Equity Fund paid brokerage commissions of $38,132, $2,400
and $8,976, respectively, to Equitable Securities Corporation. The Funds were
advised that front-end sales charges of $1,212, $8,018, $212,117, $18,063 and
$74,807 were paid to the Adviser from the Income, Global Equity, Small Cap,
Appreciation and Growth Funds, respectively. The Value Fund had not commenced
operations as of March 31, 1997.
For the fiscal year ended March 31, 1996, the Appreciation Fund, Small
Cap and the Global Equity Fund paid brokerage commissions of $29,031, $1,595
and $11,994, respectively, to Equitable Securities Corporation. The Funds were
advised that front-end sales charges of $3,682, $7,901, $106,790 and $42,946
were paid to the Adviser from the Income, Global Equity, Small Cap and
Appreciation Funds, respectively.
During the period ended March 31, 1995 the Appreciation Fund and the
Global Equity Fund paid brokerage commissions in total of $17,257 to Equitable
Securities Corporation. Brokerage commissions of $625 were paid from the Income
Fund to Furman Selz. The Funds were advised that sales load commissions of
$62,681, $27,800, $44,998 and $18,635 were paid to ESC from the Income, Global
Equity, Small Cap and Appreciation Funds, respectively.
PORTFOLIO TURNOVER
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Funds whenever such changes are believed to be
in the best interests of the Funds and their shareholders. It is anticipated
that the annual portfolio turnover rate for a Fund normally will not exceed
100%, although it may be higher under some circumstances. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less. The portfolio
turnover rate for the fiscal year ended March 31, 1997 was 41%, 123%, 94%, 65%,
71% and 14% for the Asset Preservation, Income, Global Equity, Small Cap,
Appreciation and Growth Funds, respectively. The Value Fund had not commenced
operations as of March 31, 1997. The portfolio turnover rate for the fiscal
year ended March 31, 1996 was 40%, 138%, 92%, 102% and 78% for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. The Growth Fund had not commenced operations as of March 31,
1996. The portfolio turnover rate for each Fund with Multiple Managers will be
an aggregate of the rates for each portion of assets managed by a particular
Manager. Rates for each portion may vary significantly.
TAXATION
The Funds intend to qualify (in the case of the Growth and Value Funds)
and continue to qualify annually as regulated investment companies under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To
qualify as a regulated investment company, a Fund must (a) distribute to
shareholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, taxable interest less expenses and the
excess of net short-term capital gains over
39
<PAGE> 97
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 a Fund, (i) stock or securities; (ii) options, futures, and
forward contracts (other than those on foreign currencies), and (iii) foreign
currencies (including options, futures, and forward contracts on such
currencies) not directly related to the Fund's principal business of investing
in stock or securities (or options and futures with respect to stocks or
securities)) held less than 3 months; and (d) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies), or of two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses.
By meeting these requirements, a Fund generally will not be subject to Federal
income tax on its investment company taxable income and net capital gains which
are distributed to shareholders. If the Funds do not meet all of these Code
requirements, they will be taxed as ordinary corporations.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, each Fund must distribute for each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such year,
and (3) all ordinary income and capital gain net income (adjusted for certain
ordinary losses) for previous years that were not distributed during such years.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions from certain of the
Funds may be eligible for the dividends-received deduction available to
corporations. Distributions of net capital gains, if any, designated by the
Funds as capital gain dividends are taxable to shareholders as long-term capital
gain, regardless of the length of time the Funds' shares have been held by a
shareholder. All distributions are taxable to the shareholder in the same manner
whether reinvested in additional shares or received in cash. Shareholders will
be notified annually as to the Federal tax status of distributions.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution, nevertheless, would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Funds. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
will nevertheless generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares
of a Fund, a shareholder may realize a gain or loss depending upon his basis in
his
40
<PAGE> 98
shares. Such gain or loss generally will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands. Such gain or loss
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on a disposition will be disallowed to the
extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
Under certain circumstances, the sales charge incurred in acquiring
shares of a Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies where shares of a Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Fund are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred the sales charge
initially. Instead, the portion of the sales charge affected by this rule will
be treated as a sales charge paid for the new shares.
The taxation of equity options is governed by the Code section 1234.
Pursuant to Code section 1234, the premium received by a Fund for selling a put
or call option is not included in income at the time of receipt. If the option
expires, the premium is short-term capital gain to the Fund. If the Fund enters
into a closing transaction, the difference between the amount paid to close out
its position and the premium received is short-term capital gain or loss. If a
call option written by a Fund is exercised, thereby requiring the Fund to sell
the underlying security, the premium will increase the amount realized upon the
sale of such security and any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term depending upon the holding period of
the security. With respect to a put or call option that is purchased by a Fund,
if the option is sold, any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term, depending upon the holding period of
the option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If the
option is exercised, the cost of the option, in the case of a call option, is
added to the basis of the purchased security and, in the case of a put option,
reduces the amount realized on the underlying security in determining gain or
loss.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts that several of the Funds may invest in are so-called
"section 1256 contracts." With certain exceptions, gains or losses on section
1256 contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by a Fund at the
end of each taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on a position that is part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences to a Fund
41
<PAGE> 99
of hedging transactions are not entirely clear. Hedging transactions may
increase the amount of short-term capital gain realized by a Fund which is taxed
as ordinary income when distributed to stockholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
A Fund will not realize gain or loss on a short sale of a security
until it closes the transaction by delivering the borrowed security to the
lender. All or a portion of any gain arising from a short sale may be treated as
short-term capital gain, regardless of the period for which the Fund held the
security used to close the short sale. In addition, a Fund's holding period of
any security which is substantially identical to that which is sold short may be
reduced or eliminated as a result of the short sale.
Certain requirements that must be met under the Code in order for a
Fund to qualify as a regulated investment company may limit the extent to which
a Fund will be able to engage in short sales and transactions in options,
futures, and forward contracts.
Certain of the debt securities acquired by a Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by a Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security, including a
tax-exempt debt security, having market discount will be treated as ordinary
income to the extent it does not exceed the accrued market discount on such debt
security. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency, and the time the Fund actually collects such receivables or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain options and forward and futures contracts, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or losses, may increase, decrease, or
eliminate the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
42
<PAGE> 100
Some Funds may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC under the Code if at least
one-half of its assets constitutes investment-type assets or 75% or more of its
gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock. A
Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless of whether any distributions are received
from the PFIC. If this election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to market the
Fund's PFIC shares at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated, but the Fund could, in
limited circumstances, incur nondeductible interest charges. Each Fund's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC stock.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and intends to elect to treat such foreign taxes paid by the Fund
that qualify as income or similar taxes under U.S. income tax principles as paid
by its shareholders. Pursuant to this election, a shareholder would be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by a Fund, and would be entitled
either to deduct his pro rata share of foreign taxes in computing his taxable
income or to use it as a foreign tax credit against his U.S. Federal income tax
liability, subject to limitations. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit (see below). Each shareholder will be
notified within 60 days after the close of a Fund's taxable year whether the
foreign taxes paid by a Fund will "pass-through" for that year and, if so, such
notification will designate (a) the shareholder's portion of the foreign taxes
paid to each such country and (b) the portion of the dividend which represents
income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his total foreign
source taxable income. For this purpose, if a Fund makes the election described
in the preceding paragraph, the source of the Fund's income flows through to its
shareholders. With respect to a Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency fluctuations gains,
including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables, will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the foreign tax
credit) including foreign source passive income of a Fund. The foreign tax
credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals, and foreign taxes generally may not be deducted in
computing alternative minimum taxable income.
43
<PAGE> 101
The Funds are required to report to the Internal Revenue Service
("IRS") all distributions except in the case of certain exempt shareholders. All
such distributions generally are subject to withholding of Federal income tax at
a rate of 31% ("backup withholding") in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Funds with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions, whether
reinvested in additional shares or taken in cash, will be reduced by the amounts
required to be withheld. Backup withholding is not an additional tax. Any amount
withheld may be credited against the shareholder's U.S. Federal income tax
liability. Investors may wish to consult their tax advisors about the
applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be exempt
from state and local taxes in certain states. Shareholders should consult their
tax advisors with respect to particular questions of Federal, state and local
taxation. Shareholders who are not U.S. persons should consult their tax
advisors regarding U.S. and foreign tax consequences of ownership of shares of
the Funds including the likelihood that distributions to them would be subject
to withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
Changes in the tax law frequently come under consideration. Since the
Funds do not undertake to furnish tax advice, it is important for shareholders
to consult their tax advisers regularly about the tax consequences to them of
investing in one or more of the Funds.
OTHER INFORMATION
CAPITALIZATION
The Company is a Maryland corporation established under Articles of
Incorporation dated November 24, 1993 and currently consists of seven
separately managed portfolios (the Company has two other portfolios which are
currently inactive). Six of the Funds currently being offered have two classes
of shares. The capitalization of the Company consists solely of 650 million
shares of common stock with a par value of $0.001 per share. The Board of
Directors may establish additional Funds (with different investment objectives
and fundamental policies), or additional classes of shares, at any time in the
future. Establishment and offering of additional Funds or classes will not
alter the rights of the Company's shareholders. When issued, shares are fully
paid, non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In any liquidation of a Fund or
class, each shareholder is entitled to receive his pro rata share of the net
assets of that Fund or class.
Expenses incurred in connection with each Fund's organization and the
public offering of its shares for the period ended March 31, 1997 was $18,175
for Asset Preservation, $18,416 for Income, $18,585 for Global Equity, $23,736
for Small Cap, $19,914 for Appreciation and $0 for Growth. These costs have been
deferred and are being amortized on a straight-line basis over a period of not
less than five years.
44
<PAGE> 102
PRINCIPAL SHAREHOLDERS
As of July 2, 1997, the following persons owned of record or
beneficially 5% or more shares of a class of the Funds:
<TABLE>
SHAREHOLDER SHARES OWNED PERCENTAGE
- - ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC APPRECIATION FUND - CLASS A
Alex Brown & Sons Incorporated 492,342.9 17.55%
FBO 495-20895-16
P.O. Box 1346
Baltimore, MD 21203-1346
Equitable Trust Company 202,3214.77 7.21%
511 Union Street
Suite 800
Nashville, TN 37219-1729
Wachovia Bank of North Carolina 1,255,028.89 44.74%**
Successor TTEE U/A for Avondale
Mills Inc Assoc Profit Share Plan
Dtd 4-1-90
301 N. Main Street MC-NC31051
Winston-Salem, NC 27150-0001
ESC STRATEGIC APPRECIATION FUND - CLASS D
Alex Brown & Sons Incorporated 23,067.22 8.03%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 14,577.34 5.08%
FBO 495-77221-11
P.O. Box 1346
Baltimore, MD 21203-1346
Charles Lee Phillips Trust Dtd 15,623.204 5.44%
6-27-94 H. Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Edward Randall Phillips II Trust 15,623.20 5.44%
U/A Dtd 6-27-94 H. Ronald Burton
TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Harry Jason Phillips Trust 14,953.68 5.21%
H. Ronald Burton TTEE Dtd 6-27-94
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
</TABLE>
- - ----------
** Beneficial ownership of shares is disclaimed by record account holder.
45
<PAGE> 103
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- - ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC GLOBAL EQUITY FUND - CLASS A
Equitable Trust Company 208,545.65 13.33%
511 Union Street Suite 800
Nashville, TN 37219-1729
Nationsbank of TN N.A. C/F FBO 545,561.08 34.86%**
U/A Nashville Memorial Health
Systems Foundations/Attn SAS
A/C 65066006841050
P.O. Box 831575
Dallas, TX 75283-1575
Comerica Bank TTEE 100,171.78 6.40%
Republic Automotive Parts Employees
Retirement Plan #72144
POB 75000/Attn M/C 3446 M/F Dept.
Detroit, MI 48275-0001
ESC STRATEGIC GLOBAL EQUITY FUND - CLASS D
Alex Brown & Sons Incorporated 35,192.85 9.56%
FBO 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 22,140.23 6.02%
FBO 495-21923-10
P.O. Box 1346
Baltimore, MD 21203-1346
Trustmark
Trust Account 36866400 33,024.30 8.97%
P.O. Box 105870
Atlanta, GA 30348-5870
Trustmark
Trust Account 36833500 55,052.56 14.96%
P.O. Box 105870
Atlanta, GA 30348-5870
ESC STRATEGIC SMALL CAP FUND - CLASS A
Equitable Trust Company 350,986.58 7.64%
511 Union Company Suite 800
Nashville, TN 37219-1729
ESC STRATEGIC SMALL CAP FUND - CLASS D
John E. Steuri & Grace D. Steuri JTWROS 39,518.16 5.68%
52 River Ridge Road
Little Rock, AR 72227-1518
Alex Brown & Sons Incorporated 40,442.08 5.81%
FBO 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
ESC STRATEGIC INCOME FUND - CLASS A
Homeowners Association of Amer 219,461.94 7.79%
6365 Taft Street, Suite 2000
Hollywood, FL 33024-5934
</TABLE>
**Beneficial ownership of shares is disclaimed by record account holder.
46
<PAGE> 104
Nationsbank of TN N.A. Cust FBO 1,412,321.42 50.11%**
U/A Nashville Memorial Health
Systems Foundation/Attn SAS
A/C 65066006841050
P.O. Box 831575
Dallas, TX 75283-1575
**Beneficial ownership of shares is disclaimed by record account holder.
47
<PAGE> 105
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- - ----------- ------------ ----------
<S> <C> <C>
Wright Industries Inc. 232,187.55 8.24%
Employee Pension Trust
First American Trust Company Ttee
707 Spence Lane
Nashville, TN 37217-1143
Wachovia Bank of North Carolina 378,304.26 13.42%
Successor Ttee U/A for Avondale
Mills Inc Assoc Profit Share Plan
DTD 4-1-90
301 N. Main Street MC-NC31051
Winston-Salem, NC 27150-0001
ESC STRATEGIC INCOME FUND - CLASS D
Alex Brown & Sons Incorporated 12,307.85 12.473%
FBO 495-07032-17
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 11,149.57 11.30%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 7,392.28 7.50%
FBO 495-21922-11
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 27,727.265 28.10%**
FBO 495-12543-19
P.O. Box 1346
Baltimore, MD 21203-1346
Alex Brown & Sons Incorporated 5,963.92 6.04%
FBO 495-18067-12
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
**Beneficial ownership of shares is disclaimed by record account holder.
48
<PAGE> 106
ESC STRATEGIC ASSET PRESERVATION FUND
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- - ----------- ------------ ----------
<S> <C> <C>
Wachovia Bank of North Carolina 560,944.19 58.34%**
Successor TTEE U/A for Avondale
Mills Inc Assoc Profit Share Plan
Dtd 4-1-90
301 N. Main Street MC-NC31051
Winston Salem, NC 27150-0001
Nationsbank of TN NA Escrow Agent 312,615.23 32.52%**
FBO Healthtrust Inc Nashville Mem
Health Systems Inc U/A 3-31-94
Attn SAS Acct 65011000064238
P.O. Box 831575
Dallas, TX 75283-1575
ESC STRATEGIC GROWTH FUND - CLASS A
Alex Brown & Sons Incorporated 44,000.00 8.27%
FBO 495-20645-19
P.O. Box 1346
Baltimore, MD 21203
Equitable Trust Company 45,124.01 8.48%
511 Union Company Suite 800
Nashville, TN 37219-1729
Alex Brown & Sons Incorporated 51,104.98 9.60%
FBO 495-20645-19
P.O. Box 1346
Baltimore, MD 21203
ESC STRATEGIC GROWTH FUND - CLASS D
Alex Brown & Sons Incorporated 18,808.00 5.51%
FBO 495-22809-17
P.O. Box 1346
Baltimore, MD 21203
Alex Brown & Sons Incorporated 11,822.66 5.08%
FBO 495-07258-14
P.O. Box 1346
Baltimore, MD 21203
Alex Brown & Sons Incorporated 15,919.86 6.84%
FBO 495-77221-11
P.O. Box 1346
Baltimore, MD 21203
ESC STRATEGIC VALUE FUND - CLASS A
Alex Brown & Sons Incorporated 32,763.77 6.70%
FBO 495-12019-12
P.O. Box 1346
Baltimore, MD 21203
Alex Brown & Sons Incorporated 50,000.00 10.22%
FBO 495-12007-18
P.O. Box 1346
Baltimore, MD 21203
Equitable Securities Corp. 50,000.00 10.22%
Customer Fee Account
511 Union Company Suite 800
Nashville, TN 37219-1729
</TABLE>
**Beneficial ownership of shares is disclaimed by record account holder.
49
<PAGE> 107
<TABLE>
<S> <C> <C>
Alex Brown & Sons Incorporated 30,465.00 6.23%
FBO 495-17559-19
P.O. Box 1346
Baltimore, MD 21203
ESC STRATEGIC VALUE FUND - CLASS D
Alex Brown & Sons Incorporated 3,440.00 5.32%
FBO 495-25883-19
P.O. Box 1346
Baltimore, MD 21203
Alex Brown & Sons Incorporated 4,926.11 7.62%
FBO 495-20069-16
P.O. Box 1346
Baltimore, MD 21203
Alex Brown & Sons Incorporated 7,389.16 11.43%
FBO 495-26064-18
P.O. Box 1346
Baltimore, MD 21203
Alex Brown & Sons Incorporated 3,516.56 5.44%
FBO 495-17005-17
P.O. Box 1346
Baltimore, MD 21203
Charles Lee Phillips Trust Dtd 10,386.07 16.06%
6-27-94 H. Ronald Burton TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Edward Randall Phillips II Trust 10,386.06 16.06%
U/A Dtd 6-27-94 H. Ronald Burton
TTEE
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
Harry Jason Phillips Trust 9,089.24 14.05%
H. Ronald Burton TTEE Dtd 6-27-94
229 Ward Circle Suite B-13
Brentwood, TN 37027-7518
</TABLE>
50
<PAGE> 108
VOTING RIGHTS
Under the Articles of Incorporation, the Company is not required to
hold annual meetings of each Fund's shareholders to elect Directors or for other
purposes. It is not anticipated that the Company will hold shareholders'
meetings unless required by law or the Articles of Incorporation. In this
regard, the retention of a new investment adviser for the Company, or a new
Manager with respect to a Fund, requires approval both by a majority of the
Company's directors, including a majority of its directors who are not parties
to such contract or "interested persons" (as defined in the Investment Company
Act of 1940) of any such party, and by a vote of a majority of the outstanding
voting securities of the Company or Fund, as applicable. For this purpose, the
"vote of a majority of the outstanding voting securities" of the Company or a
Fund, as applicable, means the vote of the lesser of (1) 67% of the shares of
the Company or Fund, as applicable, if the holders of more than 50% of the
outstanding shares of the Company or Fund, as applicable, are present in person
or by proxy; or (2) more than 50% of the outstanding shares of the Company or
Fund, as applicable. The Company received an order from the Securities and
Exchange Commission that permits it to retain new Managers and to approve
amendments of agreements with Managers without obtaining shareholder approval,
unless they are affiliated with the Adviser. Additionally, the Company will be
required to hold a meeting to elect Directors to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Directors have been
elected by the shareholders of the Company. In addition, the Articles of
Incorporation provide that the holders of not less than a majority of the
outstanding shares of the Company may remove persons serving as Director.
The Company's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Directors, in which case the holders of the remaining shares would not be able
to elect any Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, acts as custodian of the Company's assets, but plays no role in
making decisions as to the purchase or sale of portfolio securities for the
Funds.
BISYS Fund Services, Inc., a subsidiary of The BISYS Group, Inc.
("BFSI") succeeded Furman Selz LLC as Transfer Agent to the funds effective
November 9, 1996. Pursuant to a Transfer Agency Agreement between the Company
and BFSI, BFSI provides the Company with transfer and dividend disbursing agent
services, for which it receives a fee of $15.00 per account per year subject to
a required minimum fee of $10,000 for each Fund, plus out-of-pocket expenses.
For the period ended March 31, 1997 Furman Selz LLC, as transfer agent, was
entitled to and received fees in the amount of $7,500 for each of the Asset
Preservation, Income, Global Equity and Appreciation Funds; Furman Selz LLC was
entitled to and received fees in the amount of $20,812 for the Small Cap Fund.
BFSI, as successor Transfer Agent, was entitled to and received fees in the
amount of $2,500 for each of the Asset Preservation, Income, Global Equity and
Appreciation Funds; BFSI was entitled to and received fees in the amount of
$12,470 and $1,774 for the Small Cap and Growth Funds, respectively. The
Value Fund had not commenced operations as of March 31, 1997. For the fiscal
year ended March 31, 1996, Furman Selz voluntarily waived transfer agency fees
of $10,000 for each Fund. Absent these waivers, the Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds would have incurred $11,796,
$14,942, $16,307, $23,536 and $16,395, respectively. For the period ended March
31, 1995, pursuant to an agreement to limit Fund expenses, the Transfer Agent
waived fees of $7,842, $4,464, $3,310, $2,102, and $2,946 for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. Absent this waiver agreement, transfer agent fees would have been
$9,342, $9,096, $8,877, $8,137 and $7,370 for the Asset Preservation, Income,
Global Equity, Small Cap and Appreciation Funds, respectively. Pursuant to a
Fund Accounting Agreement,
51
<PAGE> 109
the Company compensates Furman Selz for providing fund accounting services for
the Funds. For the fiscal year ended March 31, 1996, Furman Selz earned $34,056,
$40,222, $39,554, $31,533 and $39,370 in fund accounting services from the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively. For the period ended March 31, 1995, Furman Selz earned for fund
accounting services $32,273; $36,180; $35,020; $25,666 and $22,016 for the Asset
Preservation, Income, Global Equity, Small Cap and Appreciation Funds,
respectively.
YIELD AND PERFORMANCE INFORMATION
The Funds may, from time to time, include their yield, effective yield,
and average annual total return in advertisements or reports to shareholders or
prospective investors.
Quotations of yield for each class of shares of the Funds will be based
on the investment income per share earned during a particular 30-day period,
less expenses accrued with respect to that class during a period ("net
investment income"), and will be computed by dividing net investment income for
the class by the maximum offering price per share of that class on the last day
of the period, according to the following formula:
YIELD = 2[(a-b + 1)(6)-1]
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the last
day of the period.
The 30-day yield for the period ended March 31, 1997 was 5.04% and
5.03% for the Asset Preservation and Income Funds, respectively.
Quotations of average annual total return will be expressed in terms of
the average annual compounded rate of return of a hypothetical investment in
each class of shares of a Fund over periods of 1, 5 and 10 years (up to the life
of the Fund), calculated pursuant to the following formula:
P (1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return for the class, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect the deduction of the maximum
sales charge and a proportional share of Fund and class-specific expenses (net
of certain reimbursed expenses) on an annual basis, and will assume that all
dividends and distributions are reinvested when paid.
Quotations of yield and total return will reflect only the performance
of a hypothetical investment in a class of shares of the Funds during the
particular time period shown. Yield and total return for the Funds will vary
based on changes in the market conditions and the level of the Fund's (and
classes') expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
For the period April 25, 1994, May 4, 1994, May 12, 1994, June 8, 1994
and July 6, 1994, and January 28, 1997 (commencement of operations) respectively
through March 31, 1997, the average annual total returns for Class A shares were
as follows: 5.01% for the Asset Preservation Fund, 5.80% for the Income Fund,
7.44% for the Global Equity Fund, 26.32% for the Small Cap Fund, 16.92% for the
Appreciation Fund, and (7.94)% (aggregate) for the Growth Fund. For the period
May 4, 1994, May 12, 1994, June 8, 1994, July 6, 1994, and January 28, 1997
(commencement of operations) respectively through March 31, 1997, the average
annual
52
<PAGE> 110
total returns for Class D shares were as follows: 5.24% for the Income
Fund, 6.82% for the Global Equity Fund, 25.83% for the Small Cap Fund, 16.41%
for the Appreciation Fund, and (5.14)% (aggregate) for the Growth Fund.
For the fiscal year ended March 31, 1997, the average annual total
returns for Class A shares were as follows: 4.12% for the Asset Preservation
Fund, (0.77)% for the Income Fund, 3.56% for the Global Equity Fund, 9.81% for
the Small Cap Fund, 9.14% for the Appreciation Fund and (7.94)% (aggregate) for
the Growth Fund. For the same period, the average annual total returns for Class
D shares were as follows: 1.85% for the Income Fund, 6.37% for the Global Equity
Fund, 12.87% for the Small Cap Fund, 12.08% for the Appreciation Fund, and
(5.14)% (aggregate) for the Growth Fund.
In connection with communicating its yields or total return to
current or prospective unit holders, the Funds also may compare these figures
to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Funds' results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund.
Investors who purchase and redeem shares of the Funds through a
customer account maintained at a Service Organization may be charged one or more
of the following types of fees as agreed upon by the Service Organization and
the investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and average
annual total return of the Funds for those investors.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the
Company. Price Waterhouse LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of SEC filings.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C., 20005,
passes upon certain legal matters in connection with the shares offered by the
Company and also acts as Counsel to the Company.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included
in the Company's Registration Statement filed with the SEC under the Securities
Act of 1933 with respect to the securities offered hereby, certain portions of
which have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
53
<PAGE> 111
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Report of Independent Accountants and financial statements of the
Funds included in their Annual Report for the period ended March 31, 1997 (the
"Annual Report") are incorporated herein by reference to such Annual Report.
Copies of such Annual Report are available without charge upon request by
writing to ESC Strategic Funds, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-8006 or telephoning (800) 261-3863.
The financial statements incorporated by reference into this Statement
of Additional Information have been audited by Price Waterhouse LLP, independent
accountants, and have been so included and incorporated by reference in reliance
upon the report of said firm, which report is given upon their authority as
experts in auditing and accounting.
54
<PAGE> 112
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the periods ended March
31, 1997
Incorporated by reference into Statement of Additional Information:
(1) Portfolio of Investments at March 31, 1997.
(2) Statements of Assets and Liabilities dated March 31, 1997.
(3) Statements of Operations for the fiscal year ended March 31,
1997 (audited).
(4) Statements of Changes in Net Assets for the fiscal periods
ended March 31, 1997 and March 31, 1996 (audited).
(5) Notes to Financial Statements at March 31, 1997 (audited).
(6) Financial Highlights for the fiscal periods ended March 31,
1997. (audited)
(7) Report of Independent Accountants.
(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> 113
(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) Financial Statements in the Registrant's Annual Report for
the fiscal year ended March 31, 1997 as filed with the
Commission on June 5, 1997 are incorporated herein by
reference.
(13) (a) Purchase Agreement. (**)
(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) (a) Schedules for Computation.
(b) Schedules for Computation.
(17) Financial Data Schedules
(18) Multi-Class Plan, as amended January 14, 1997 (*****)
(19) Power of Attorney in favor of Jeffrey L. Steele (*)
* 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 and are
incorporated herein by reference.
***** Filed with Post-Effective Amendment No. 7, February 18, 1997 and are
incorporated herein by reference.
38
<PAGE> 114
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of June 30, 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 354
Class D 145
ESC Strategic Global Equity Fund
Class A 287
Class D 89
ESC Strategic Small Cap Fund
Class A 3,750
Class D 1,108
ESC Strategic Income Fund
Class A 116
Class D 30
ESC Strategic Growth Fund
Class A 234
Class D 112
ESC Strategic Asset Preservation Fund 15
ESC Strategic Value Fund
Class A 111
Class D 25
</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> 115
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> 116
<TABLE>
<CAPTION>
BUSINESS AND
NAME TITLE OTHER CONNECTIONS
- - ---- ----- -----------------
<S> <C> <C>
William H. Cammack, Sr. Chairman, Managing Position with
Director and Director Equitable
Securities
Corporation, 1972
to present;
Director and President ESC Strategic
Funds, Inc.,
1994 to present.
Katie H. Gambill President, Head of Position with
Equity Capital Equitable
Markets, Managing Securities
Director and Director Corporation,
1972 to present.
William P. Johnston Chief Executive Position with
Officer, Managing Equitable
Director and Director Securities
Corporation,
1987 to present.
Hershel L. Smith, Jr. Chief Financial Position with
Officer, Chief Equitable
Operations Officer Securities
and Managing Director Corporation,
1986 to present.
Tom R. Steele Managing Director and Position with
Director Equitable
Securities
Corporation,
1988 to present.
W. Howard Cammack, Jr. Managing Director and Position with
Director Equitable
Securities
Corporation,
1979 to present;
Director and ESC Strategic
Treasurer, Funds, Inc.,
1994 to present.
Raymond H. Pirtle, Jr. Managing Director Position with
Equitable
Securities
Corporation,
1989 to present
Stephen S. Riven Managing Director Position with
Equitable
Securities
Corporation,
1989 to present
Roger T. Briggs, Jr. Managing Director Position with
Equitable
Securities
Corporation,
1995 to present
</TABLE>
(1) The address of all Directors and Officers of Equitable Securities
Corporation is 800 Nashville City Center, 511 Union Street, Nashville,
Tennessee 37279-1743.
41
<PAGE> 117
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS(1) WITH UNDERWRITER WITH REGISTRANT
- - ------------------- ---------------- ---------------
<S> <C> <C>
William H. Cammack, Sr. Chairman, Managing Director and
Director President
Katie H. Gambill President, Head of None
Equity Capital
Markets, Managing
Director and Director
William P. Johnston Chief Executive None
Officer, Managing
Director and Director
Hershel L. Smith, Jr. Chief Financial None
Officer, Chief
Operations Officer
and Managing Director
Tom R. Steele Managing Director None
W. Howard Cammak, Jr. Managing Director None
Raymond H. Pirtle, Jr. Managing Director None
Stephen S. Riven Managing Director None
Roger T. Briggs, Jr. Managing Director None
</TABLE>
42
<PAGE> 118
<TABLE>
<S> <C> <C>
Tom R. Steele Managing Director and None
Director
W. Howard Cammack, Jr. Managing Director and Director and Treasurer
Director
</TABLE>
(1) The address of all directors and officers is 800 Nashville City
Center, 511 Union Street, Nashville, Tennessee 37219-1743.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) Equitable Securities Corporation, 800 Nashville City Center, 511
Union Street, Nashville, Tennessee 37219-1743 (records relating to
its functions as investment adviser and distribution - all
portfolios).
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as administrator).
(3) ESC Strategic Funds, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as transfer agent and Fund
accountant).
(4) Drinker Biddle & Reath, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496 (Registrant's Agreement and Declaration of
Trust, and Code of Regulations).
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
43
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that
it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended,
and has duly caused this Post-Effective Amendment No. 8 to Registrant's
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Washington, D.C. on the 29th day of July,
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. 8 to Registrant's Registration Statement has
been signed by the following persons in the capacities indicated on the 29th
day of July, 1997.
SIGNATURE TITLE
- - --------- -----
/s/ *
- - -----------------------
William H. Cammack, Sr. Director and President
/s/ *
- - -----------------------
William H. Cammack, Jr. Director and Treasurer
/s/ *
- - -----------------------
J. Bransford Wallace Director
/s/ *
- - -----------------------
Brownlee O. Currey, Jr. Director
/s/ *
- - -----------------------
E. Townes Duncan Director
/s/ Assistant Treasurer
*By: /s/
---------------------------
Jeffrey L. Steele
Attorney-in-Fact
44
<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <C> <S>
11 -- Consent of Price Waterhouse LLP
16 -- Schedule for Computation of Performance Quotations
17 -- Financial Data Schedules for fiscal year ended March 31,
1997
</TABLE>
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 8 to the registration statement on Form N-1A (the Registration
Statement) of our report dated May 16, 1997, relating to the financial
statements and financial highlights appearing in the March 31, 1997 Annual
Report to Shareholders of ESC Strategic Funds, Inc., which is also incorporated
by reference into the Registration Statement. We also consent to the references
to us under the headings Independent Accountants and Financial Statements in
such Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
July 28, 1997
<PAGE> 1
ESC Strategic Funds
EXHIBIT 16
TOTAL RETURN
VARIABLE FUNDS
NO LOAD CALCULATIONS
Strategic Growth Fund
Class A Shares
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 0.00%
- - --------------------------
T= (ERV/P) - 1
WHERE: T= TOTAL RETURN
ERV= REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P= A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: ( 01/28/97 TO 03/31/97 ):
( 964.0 /1,000) -1 = -3.60%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 01
<NAME> ESC STRATEGIC FUNDS, ASSET PRESERVATION FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 10,253
<INVESTMENTS-AT-VALUE> 10,199
<RECEIVABLES> 204
<ASSETS-OTHER> 2,317
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,720
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32
<TOTAL-LIABILITIES> 32
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,761
<SHARES-COMMON-STOCK> 1,283
<SHARES-COMMON-PRIOR> 1,324
<ACCUMULATED-NII-CURRENT> 8
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (54)
<NET-ASSETS> 12,688
<DIVIDEND-INCOME> 15
<INTEREST-INCOME> 724
<OTHER-INCOME> 0
<EXPENSES-NET> 112
<NET-INVESTMENT-INCOME> 627
<REALIZED-GAINS-CURRENT> (18)
<APPREC-INCREASE-CURRENT> (110)
<NET-CHANGE-FROM-OPS> 499
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 627
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 401
<NUMBER-OF-SHARES-REDEEMED> 502
<SHARES-REINVESTED> 60
<NET-CHANGE-IN-ASSETS> (425)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (11)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 216
<AVERAGE-NET-ASSETS> 12,219
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .49
<PER-SHARE-GAIN-APPREC> (0.11)
<PER-SHARE-DIVIDEND> .49
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.66
<EXPENSE-RATIO> .002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 21
<NAME> ESC STRATEGIC FUNDS, GLOBAL EQUITY FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 20,356
<INVESTMENTS-AT-VALUE> 22,043
<RECEIVABLES> 54
<ASSETS-OTHER> 472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,569
<PAYABLE-FOR-SECURITIES> 22
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61
<TOTAL-LIABILITIES> 83
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,924
<SHARES-COMMON-STOCK> 1,569
<SHARES-COMMON-PRIOR> 1,321
<ACCUMULATED-NII-CURRENT> (2)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 877
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,687
<NET-ASSETS> 22,486
<DIVIDEND-INCOME> 318
<INTEREST-INCOME> 66
<OTHER-INCOME> 0
<EXPENSES-NET> 488
<NET-INVESTMENT-INCOME> (104)
<REALIZED-GAINS-CURRENT> 1,451
<APPREC-INCREASE-CURRENT> 329
<NET-CHANGE-FROM-OPS> 1,676
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 538
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 258
<NUMBER-OF-SHARES-REDEEMED> 48
<SHARES-REINVESTED> 37
<NET-CHANGE-IN-ASSETS> 4,164
<ACCUMULATED-NII-PRIOR> 84
<ACCUMULATED-GAINS-PRIOR> 94
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 490
<AVERAGE-NET-ASSETS> 20,554
<PER-SHARE-NAV-BEGIN> 11.08
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 0.97
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .35
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> .009
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 022
<NAME> ESC STRATEGIC FUNDS, GLOBAL EQUITY FUND, CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 20,356
<INVESTMENTS-AT-VALUE> 22,043
<RECEIVABLES> 54
<ASSETS-OTHER> 472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,569
<PAYABLE-FOR-SECURITIES> 22
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61
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<NAME> ESC STRATEGIC FUNDS
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<NAME> ESC STRATEGIC FUNDS, INCOME FUND, CLASS A
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<NAME> ESC STRATEGIC FUNDS
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<NAME> ESC STRATEGIC FUNDS, INCOME FUND, CLASS D
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<NAME> ESC STRATEGIC FUNDS
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<NAME> ESC STRATEGIC FUNDS, SMALL CAP FUND, CLASS D
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</TABLE>
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<NAME> ESC STRATEGIC FUNDS
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<NAME> ESC STRATEGIC FUNDS, SMALL CAP FUND, CLASS A
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<NAME> ESC STRATEGIC FUNDS
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<NAME> ESC STRATEGIC FUNDS, APPRECIATION FUNDS, CLASS A
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