<PAGE> 1
Registration Nos. 33-72190
811-8166
As filed with the Securities and Exchange Commission on July 17, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12
ESC STRATEGIC FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 182487, COLUMBUS, OHIO 43218-2487
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 261-3863
W. HOWARD CAMMACK, JR.
SUNTRUST EQUITABLE SECURITIES CORPORATION
800 NASHVILLE CITY CENTER
NASHVILLE, TENNESSEE 37219-1743
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
JEFFREY L. STEELE, ESQ. MARTIN R. DEAN
DECHERT PRICE & RHOADS BISYS FUND SERVICES
1775 EYE STREET, N.W. 3435 STELZER ROAD
WASHINGTON, D.C. 20006-2401 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.
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ESC STRATEGIC FUNDS, INC.
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(C))
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PART A
N-1A ITEM NO. LOCATION
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<S> <C> <C>
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>
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<TABLE>
<CAPTION>
PART B
N-1A ITEM NO. LOCATION
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<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Investment Policies
Item 14. Management of the Registrant Management
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.
P.O. BOX 182487
COLUMBUS, OHIO 43218-2487
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
SUNTRUST EQUITABLE SECURITIES -- INVESTMENT ADVISER
BISYS FUND SERVICES -- ADMINISTRATOR AND DISTRIBUTOR
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This Prospectus describes the six funds (the "Funds") comprising ESC
Strategic Funds, Inc. (the "Company"), an open-end management registered
investment company advised by SunTrust Equitable Securities (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 International Equity Fund*
ESC Strategic Small Cap Fund**
ESC Strategic Income Fund
ESC Strategic Growth Fund
ESC Strategic Value Fund
Each of the Funds offers two classes 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 17, 1998,
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.
- ---------------
* Formerly, ESC Strategic Global Equity Fund.
** Currently, shares of the Small Cap Fund are available only to existing
shareholders.
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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 17, 1998
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Highlights.................................................. 2
Fund Expenses............................................... 5
Fee Table................................................... 5
Financial Highlights........................................ 8
The Funds................................................... 14
Other Investment Policies of the Funds...................... 19
Risks of Investing in the Funds............................. 19
Management Strategies....................................... 26
Management of the Funds..................................... 28
Fund Share Valuation........................................ 34
Pricing of Fund Shares...................................... 35
Minimum Purchase Requirements............................... 37
Purchase of Fund Shares..................................... 37
Retirement Plan Accounts.................................... 38
Exchange of Fund Shares..................................... 39
Redemption of Fund Shares................................... 40
Dividends, Distributions, and Federal Income Taxation....... 42
Description of Securities and Investment Practices.......... 44
Investment Restrictions..................................... 50
Other Information........................................... 52
Appendix.................................................... 54
</TABLE>
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HIGHLIGHTS
THE FUNDS, THEIR ADVISER AND MANAGERS
This Prospectus describes the six 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 SunTrust Equitable Securities
(the "Adviser"). The Adviser, headquartered in Nashville, Tennessee, is a New
York Stock Exchange member investment banking and securities brokerage firm and
a wholly-owned subsidiary of SunTrust Banks, Inc. Founded in 1930, the Adviser's
predecessor, Equitable Securities Corporation, developed a national clientele as
an investment banking firm dealing in both corporate and municipal securities.
In 1968, the American Express Company acquired Equitable Securities Corporation
and in 1972 the firm was reestablished as an independent company when a group of
its employees purchased the firm. Equitable Securities Corporation was acquired
by SunTrust Banks, Inc. on January 2, 1998. Equitable Trust Company, an
affiliate of the Adviser, formed in 1991, provides investment management, trust,
and other fiduciary services to individuals and other clients. Equitable Asset
Management, Inc., another Adviser affiliate, is an investment adviser that
serves as Manager to some of the Funds. 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 SunTrust Equitable
Securities in the latter's role as Adviser of the Funds.
For certain of the Funds, the Adviser may from time to time seek 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, SunTrust Equitable Securities 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 1.00% for ESC Strategic Appreciation Fund, ESC Strategic
International Equity Fund, ESC Strategic Small
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2
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Cap Fund and ESC Strategic Income Fund; and 1.25% for ESC Strategic Growth Fund
and ESC Strategic Value Fund. These fees are higher than those for most other
investment companies and are used by the Adviser to pay Managers' fees, at no
additional cost to the Funds. See "Management of the Funds." The Funds and their
Managers are as follows:
- - ESC Strategic Appreciation Fund -- This Fund's objective is long-term capital
appreciation. It invests in a diversified portfolio comprised mainly of
publicly traded common stocks and securities convertible into or exchangeable
for common stock, primarily of U.S.-based companies. The Fund uses the
Multiple Manager Strategy. Its Managers currently are GlobeFlex Capital, L.P.,
Brandes Investment Partners, L.P., and Atlantic Capital Management, LLC.
- - ESC Strategic International Equity Fund (formerly 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 of non-U.S.
issuers. The Fund diversifies its investments among various non-U.S.
countries. The Fund's current Manager is Murray Johnstone International
Limited. (Prior to July 17, 1998, this Fund's investments were diversified
across both domestic and international markets.)
- - ESC Strategic Small Cap Fund (currently available only to existing
shareholders) -- 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 A LIMITED NUMBER OF ISSUERS AND THEREFORE DOES NOT INTEND TO
BE DIVERSIFIED. The Fund's Manager is Equitable Asset Management, Inc.
("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 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.
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3
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THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
distributes the Funds' shares and may be reimbursed for certain of its
distribution-related expenses. BISYS also 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 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 "Pricing of Fund
Shares." Class A shares are also subject to a Service and Distribution Fee
calculated at an annual rate of up to 0.25% of the average daily net asset value
of Class A shares. Class D* shares are offered with a 1.50% front-end sales
charge and are subject to a Service and Distribution Fee at an annual rate of up
to 0.75% based on the average daily net asset value of Class D shares. See
"Management of the Funds -- The Distributor."
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>
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- - 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 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.
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4
<PAGE> 8
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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 are paid monthly.
- -Distributions for ESC Strategic Appreciation Fund, ESC Strategic International
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 purpose of the following tables is to assist you in understanding the
various costs and expenses that an investor in each Fund will bear, directly or
indirectly.
FEE TABLE
<TABLE>
<CAPTION>
ESC STRATEGIC ESC STRATEGIC
APPRECIATION INTERNATIONAL 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........................ 0.55% 0.55% 1.23% 1.23% 0.40% 0.40%
---- ---- ---- ---- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES...... 1.80% 2.30% 2.48% 2.98% 1.65% 2.15%
==== ==== ==== ==== ==== ====
</TABLE>
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* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of a Fund, long-term shareholders may pay more initial sales charges
than the economic equivalent of the maximum front-end sales charge permitted
by rules of the NASD. See "Management of the Funds."
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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5
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<TABLE>
<CAPTION>
ESC STRATEGIC
INCOME FUND
------------------
CLASS A CLASS D
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)........................................ 4.50% 1.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)............................. None None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................. None None
Exchange Fees............................................... None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net assets annualized)
Management Fees........................................... 1.00% 1.00%
12b-1 Fees*............................................... 0.25% 0.75%
Other Expenses............................................ 0.62% 0.62%
---- ----
TOTAL PORTFOLIO OPERATING EXPENSES.......................... 1.87% 2.37%
==== ====
</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**......................................... .075% 0.75% 0.75% 0.75%
---- ---- ---- ----
12b-1 Fees*............................................... 0.25% 0.75% 0.25% 0.75%
Other Expenses**.......................................... 0.62% 0.62% 0.56% 0.56%
---- ---- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES.......................... 1.62% 2.12% 1.56% 2.06%
==== ==== ==== ====
</TABLE>
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* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of a Fund, long-term shareholders may pay more initial sales charges
than the economic equivalent of the maximum front-end sales charge permitted
by rules of the NASD. See "Management of the Funds."
** Amounts shown for "Management Fees" reflect waivers of a portion of the fees
payable to the Adviser for the ESC Strategic Growth Fund and ESC Strategic
Value Fund. Amounts shown for "Other Expenses" reflect a reimbursement of
certain expenses for the Growth and Value Funds by the Adviser. Without these
waivers and reimbursements, the Funds' estimated Management Fees would be
1.25% and 1.25% for the Growth and Value Funds, respectively. "Other
Expenses" and "Total Portfolio Operating Expenses," respectively, would be:
0.95% and 2.45% for Class A shares of the Growth Fund and 0.95% and 2.95% for
Class D shares of the Growth Fund; 0.81% and 2.31% for Class A shares of the
Value Fund and 0.81% and 2.81% 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
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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 INTERNATIONAL 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>
1 year....................................... $ 62 $ 38 $ 69 $ 45 $ 61 $ 36
3 years...................................... $ 99 $ 86 $119 $106 $ 95 $ 81
5 years...................................... $138 $136 $171 $169 $131 $129
10 years..................................... $247 $275 $314 $340 $232 $260
</TABLE>
<TABLE>
<CAPTION>
ESC STRATEGIC
INCOME FUND
------------------
CLASS A CLASS D
------- -------
<S> <C> <C>
1 year...................................................... $ 63 $ 39
3 years..................................................... $101 $ 88
5 years..................................................... $142 $140
10 years.................................................... $254 $283
</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.................................... $ 61 $ 36 $ 60 $ 36
3 years................................... $ 94 $ 80 $ 92 $ 79
5 years................................... $129 $127 n/a n/a
10 years.................................. $229 $256 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.
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7
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FINANCIAL HIGHLIGHTS
The following tables present per share financial information for the periods
listed for each Fund. Each of the financial highlights have been audited by the
Funds' independent accountants. These financial highlights should be read in
conjunction with, audited financial statements for the same periods which are
incorporated by reference into the Statement of Additional Information.
<TABLE>
<CAPTION>
APPRECIATION FUND
-------------------------------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------------------- --------------------------------------------------
JULY 6, 1994 JULY 6, 1994
(COMMENCEMENT (COMMENCEMENT
YEAR YEAR YEAR OF OPERATIONS) YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED THROUGH ENDED ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995 1998 1997 1996 1995
--------- --------- --------- -------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning of
period............... $ 14.03 $ 13.02 $ 10.67 $ 10.00 $13.85 $12.91 $10.63 $10.00
------- ------- ------- ------- ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss)...... 0.02 (0.04) (0.05) -- (0.08) (0.08) (0.09) (0.03)
Net realized and
unrealized
gains/(losses)
on investments..... 6.02 1.92 2.71 0.73 6.04 1.89 2.68 0.72
------- ------- ------- ------- ------ ------ ------ ------
Total from investment
operations........... 6.04 1.88 2.66 0.73 5.96 1.81 2.59 0.69
------- ------- ------- ------- ------ ------ ------ ------
Less Dividends and
Distributions:
From realized gains.. (4.27) (0.87) (0.31) (0.06) (4.27) (0.87) (0.31) (0.06)
------- ------- ------- ------- ------ ------ ------ ------
Total Dividends and
Distributions........ (4.27) (0.87) (0.31) (0.06) (4.27) (0.87) (0.31) (0.06)
------- ------- ------- ------- ------ ------ ------ ------
Net asset value per
share, end of
period............... $ 15.80 $ 14.03 $ 13.02 $ 10.67 $15.54 $13.85 $12.91 $10.63
======= ======= ======= ======= ====== ====== ====== ======
Total Return
(excludes sales
charge)............ 46.73% 14.25% 25.07% 7.32% 46.76% 13.81% 24.50% 6.92%
Ratios/Supplemental
Data:
Net Assets End of
Period (in
thousands)......... $33,394 $44,767 $25,561 $15,126 $7,384 $4,054 $2,482 $1,693
Ratios to Average Net
Assets of:
Net investment
income/(loss).... (0.40%) (0.30%) (0.39%) (0.04%)* (0.90%) (0.78%) (0.86%) (0.56%)*
Expenses net of
waivers/reimbursements
and expenses paid
by third
parties.......... 1.80% 1.82% 2.00% 2.00%* 2.30% 2.34% 2.50% 2.50%*
Expenses before
waivers/reimbursements
and expenses paid
by third
parties.......... 1.80% 1.84% 2.10% 2.88%* 2.30% 2.36% 2.64% 3.40%*
Portfolio turnover
rate............... 67% 71% 78% 58% 67% 71% 78% 58%
</TABLE>
* Annualized.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
-------------------------------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------------------- --------------------------------------------------
MAY 12, 1994 MAY 12, 1994
(COMMENCEMENT (COMMENCEMENT
YEAR YEAR YEAR OF OPERATIONS) YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED THROUGH ENDED ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995 1998 1997 1996 1995
--------- --------- --------- -------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning of
period............... $ 11.66 $ 11.08 $ 9.90 $ 10.00 $11.47 $10.95 $ 9.82 $10.00
------- ------- ------- ------- ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss)...... -- (0.04) (0.04) (0.05) (0.13) (0.10) (0.09) (0.07)
Net realized and
unrealized gains/
(losses) on
investments........ 2.37 0.97 1.46 (0.03) 2.44 0.97 1.46 (0.10)
------- ------- ------- ------- ------ ------ ------ ------
Total from investment
operations........... 2.37 0.93 1.42 (0.08) 2.31 0.87 1.37 (0.17)
------- ------- ------- ------- ------ ------ ------ ------
Less Dividends and
Distributions:
From realized gains.. (1.97) (0.35) (0.24) (0.02)(a) (1.97) (0.35) (0.24) (0.01)(a)
------- ------- ------- ------- ------ ------ ------ ------
Total Dividends and
Distributions........ (1.97) (0.35) (0.24) (0.02) (1.97) (0.35) (0.24) (0.01)
------- ------- ------- ------- ------ ------ ------ ------
Net asset value per
share, end of
period............. $ 12.06 $ 11.66 $ 11.08 $ 9.90 $11.81 $11.47 $10.95 $ 9.82
======= ======= ======= ======= ====== ====== ====== ======
Total Return
(excludes sales
charge)............ 22.24% 8.44% 14.41% (0.84%) 22.09% 7.99% 14.01% (1.72%)
Ratios/Supplemental
Data:
Net Assets End of
Period (in
thousands)......... $13,286 $18,282 $14,597 $ 9,213 $2,776 $4,204 $3,725 $3,322
Ratios to Average Net
Assets of:
Net investment
income/(loss).... (0.50%) (0.40%) (0.36%) (0.65%)* (1.00%) (0.90%) (0.83%) (1.51%)*
Expenses net of
waivers/
reimbursements
and expenses paid
by third
parties.......... 2.48% 2.25% 2.37% 2.50%* 2.98% 2.78% 2.87% 2.98%*
Expenses before
waivers/
reimbursements
and expenses paid
by third
parties.......... 2.48% 2.25% 2.43% 3.22%* 2.98% 2.79% 2.96% 3.69%*
Portfolio Turnover
Rate............. 79% 94% 92% 76% 79% 94% 92% 76%
</TABLE>
(a) Represents distribution in excess of net investment income.
* Annualized.
- --------------------------------------------------------------------------------
9
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP FUND
-------------------------------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------------------- --------------------------------------------------
JUNE 8, 1994 JUNE 8, 1994
(COMMENCEMENT (COMMENCEMENT
YEAR YEAR YEAR OF OPERATIONS) YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED THROUGH ENDED ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995 1998 1997 1996 1995
--------- --------- --------- -------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning of
period............... $ 17.55 $ 15.88 $ 11.25 $ 10.00 $ 17.35 $ 15.76 $11.22 $10.00
-------- ------- ------- ------- ------- ------- ------ ------
Income from Investment
Operations
Net investment
income/(loss)...... 0.02 (0.05) (0.08) (0.03) (0.07) (0.11) (0.16) (0.05)
Net realized and
unrealized gains/
(losses) on
investments........ 6.97 2.46 5.19 1.52 6.95 2.44 5.18 1.51
-------- ------- ------- ------- ------- ------- ------ ------
Total from investment
operations........... 6.99 2.41 5.11 1.49 6.88 2.33 5.02 1.46
-------- ------- ------- ------- ------- ------- ------ ------
Less Dividends and
Distributions:
From net investment
income............. -- -- -- (0.24) -- -- -- (0.24)
From realized gains.. (1.73) (0.74) (0.48) -- (1.73) (0.74) (0.48) --
-------- ------- ------- ------- ------- ------- ------ ------
Total Dividends and
Distributions........ (1.73) (0.74) (0.48) (0.24) (1.73) (0.74) (0.48) (0.24)
-------- ------- ------- ------- ------- ------- ------ ------
Net asset value per
share, end of
period............... $ 22.81 $ 17.55 $ 15.88 $ 11.25 $ 22.50 $ 17.35 $15.76 $11.22
======== ======= ======= ======= ======= ======= ====== ======
Total Return
(excludes sales
charge)............ 40.64% 14.99% 45.88% 15.03% 40.47% 14.59% 45.19% 14.72%
Ratios/Supplemental
Data:
Net Assets End of
Period (in
thousands)......... $126,857 $72,488 $28,840 $ 8,785 $38,274 $22,392 $8,897 $3,367
Ratios to Average Net
Assets of:
Net investment
income/(loss).... (0.18%) (0.44%) (0.80%) (0.43%)* (0.68%) (0.96%) (1.30%) (0.93%)*
Expenses net of
waivers/
reimbursements
and expenses paid
by third
parties.......... 1.65% 1.66% 2.00% 2.00%* 2.15% 2.19% 2.50% 2.50%*
Expenses before
waivers/
reimbursements
and expenses paid
by third
parties.......... 1.68% 1.74% 2.18% 3.28%* 2.18% 2.29% 2.74% 3.68%*
Portfolio turnover
rate............... 67% 65% 102% 151% 67% 65% 102% 151%
</TABLE>
* Annualized.
- --------------------------------------------------------------------------------
10
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME FUND
-------------------------------------------------------------------------------------------------------
CLASS A CLASS D
-------------------------------------------------- --------------------------------------------------
MAY 4, 1994 MAY 4, 1994
(COMMENCEMENT (COMMENCEMENT
YEAR YEAR YEAR OF OPERATIONS) YEAR YEAR YEAR OF OPERATIONS)
ENDED ENDED ENDED THROUGH ENDED ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995 1998 1997 1996 1995
--------- --------- --------- -------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning of
period............... $ 9.73 $ 9.89 $ 9.94 $ 10.00 $ 9.73 $ 9.89 $ 9.94 $10.00
------- ------- ------- ------- ------ ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss)...... 0.34 0.60 0.59 0.55 0.28 0.50 0.54 0.50
Net realized and
unrealized
gains/(losses) on
investments........ 0.44 (0.16) 0.16 (0.05) 0.45 (0.16) 0.16 (0.05)
------- ------- ------- ------- ------ ------ ------ ------
Total from investment
operations........... 0.78 0.44 0.75 0.50 0.73 0.34 0.70 0.45
------- ------- ------- ------- ------ ------ ------ ------
Less Dividends and
Distributions:
From net investment
income............. (0.52) (0.60) (0.59) (0.01) (0.47) (0.50) (0.54) (0.01)
From realized gains.. -- -- (0.21) (0.55) -- -- (0.21) (0.50)
------- ------- ------- ------- ------ ------ ------ ------
Total Dividends and
Distributions........ (0.52) (0.60) (0.80) (0.56) (0.47) (0.50) (0.75) (0.51)
------- ------- ------- ------- ------ ------ ------ ------
Net asset value per
share, end of
period............... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 9.99 $ 9.73 $ 9.89 $ 9.94
======= ======= ======= ======= ====== ====== ====== ======
Total Return
(excludes sales
charge).......... 8.18% 3.91% 7.67% 5.30% 7.64% 3.39% 7.11% 4.74%
Ratios/Supplemental
Data:
Net Assets End of
Period (in
thousands)......... $24,413 $32,506 $36,891 $32,373 $ 823 $1,420 $1,446 $1,241
Ratios to Average Net
Assets of:
Net investment
income/(loss).... 5.27% 5.49% 5.87% 6.29%* 4.77% 4.99% 5.37% 5.73%*
Expenses net of
waivers/
reimbursements
and expenses paid
by third
parties.......... 1.87% 1.65% 1.70% 1.85%* 2.37% 2.15% 2.20% 2.29%*
Expenses before
waivers/
reimbursements
and expenses paid
by third
parties.......... 1.87% 1.70% 1.75% 1.86%* 2.37% 2.21% 2.25% 2.31%*
Portfolio Turnover
Rate............. 130% 123% 138% 92% 144% 123% 138% 92%
</TABLE>
* Annualized.
- --------------------------------------------------------------------------------
11
<PAGE> 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH FUND
-----------------------------------------------------------------------
CLASS A CLASS D
---------------------------------- ----------------------------------
JANUARY 28, 1997 JANUARY 28, 1997
(COMMENCEMENT) (COMMENCEMENT)
OF OPERATIONS) OF OPERATIONS)
YEAR ENDED THROUGH YEAR ENDED THROUGH
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net asset value per share,
beginning of period..... $ 9.64 $10.00 $ 9.63 $10.00
------- ------ ------ ------
Income from Investment
Operations
Net investment
income/(loss)......... 0.01 -- (0.03) --
Net realized and
unrealized
gains/(losses) on
investments........... 4.65 (0.36) 4.63 (0.37)
------- ------ ------ ------
Total from investment
operations.............. 4.66 (0.36) 4.60 (0.37)
------- ------ ------ ------
Less Dividends and
Distributions:
From realized gains..... (0.36) -- (0.36) --
Distributions in excess of
realized gains.......... (0.26) -- (0.26) --
------- ------ ------ ------
Total Dividends and
Distributions........... (0.62) -- (0.62) --
------- ------ ------ ------
Net asset value per share,
end of period........... $ 13.68 $ 9.64 $13.61 $ 9.63
======= ====== ====== ======
Total Return (excludes
sales charge)......... 48.92% (3.60)% 48.33% (3.70)%
Ratios/Supplemental Data:
Net Assets End of Period
(in thousands)........ $19,942 $2,852 $9,689 $1,304
Ratios to Average Net
Assets of:
Net investment
income/(loss)....... (0.36)% 0.25%* (0.86)% (0.23)%*
Expenses net of
waivers/reimbursements
and expenses paid by
third parties....... 1.62% 2.00%* 2.12% 2.50%*
Expenses before
waivers/reimbursements
and expenses paid by
third parties....... 2.45% 5.51%* 2.95% 6.91%*
Portfolio turnover
rate.................. 86% 14% 86% 14%
</TABLE>
* Annualized.
- --------------------------------------------------------------------------------
12
<PAGE> 16
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE FUND
--------------------------------
CLASS A CLASS D
------------- -------------
MAY 7, 1997 MAY 7, 1997
(COMMENCEMENT (COMMENCEMENT
OF OF
OPERATIONS) OPERATIONS)
THROUGH THROUGH
MARCH 31, MARCH 31,
1998 1998
------------- -------------
<S> <C> <C>
Net asset value per share, beginning of period.......... $ 10.00 $10.00
------- ------
Income from Investment Operations
Net investment income................................. 0.04 0.01
Net realized and unrealized gains on investments...... 1.60 1.58
------- ------
Total from investment operations...................... 1.64 1.59
------- ------
Less Dividends and Distributions:
From net investment income............................ (0.03) (0.02)
From realized gains................................... (0.10) (0.10)
------- ------
Total Dividends and Distributions....................... (0.13) (0.12)
------- ------
Net asset value per share, end of period.............. $ 11.51 $11.47
======= ======
Total Return (excludes sales charge).................. 16.47% 15.95%
Ratios/Supplemental Data:
Net Assets End of Period (in thousands)............... $13,804 $4,505
Ratios to Average Net Assets of:
Net investment income/(loss)....................... 0.42%* (0.13)%*
Expenses net of waivers/reimbursements and expenses
paid by third parties............................ 1.56%* 2.06%*
Expenses before waivers/reimbursements and expenses
paid by third parties............................ 2.31%* 2.81%*
Portfolio turnover rate............................... 32% 32%
</TABLE>
* Annualized.
- --------------------------------------------------------------------------------
13
<PAGE> 17
- --------------------------------------------------------------------------------
THE FUNDS
Each Fund is a separate investment fund or portfolio, commonly known as a mutual
fund. The Funds are portfolios of the Company, which was organized under the
laws of the State of Maryland on November 24, 1993 as an open-end management
investment company. The Company's Board of Directors oversees the overall
management of the Funds and elects the Funds' officers. The Adviser continuously
monitors the performance of each Fund and its Managers and determines proper
allocations of assets in each Fund's portfolio and among Managers for Funds
using the Multiple Manager Strategy. See "Management Strategies." Investments
and investment management decisions are made by the respective Manager(s) for
each Fund based on the investment objective and policies of that Fund. For
information regarding the Managers, see "Management of the Funds." There can be
no assurance that a Fund will achieve its investment objective.
ESC Strategic Appreciation Fund. Investors seeking long-term growth of capital
and for whom current income is not an objective should consider investing in ESC
Strategic Appreciation Fund.
The investment objective of ESC Strategic Appreciation Fund is long-term capital
appreciation. The Fund invests in publicly traded common stocks and securities
convertible into or exchangeable for common stock, primarily of U.S.-based
companies. The Fund's investment policies reflect the Adviser's analysis
indicating that (a) an equity orientation is attractive because, as measured by
broad market indices, equities have historically out-performed fixed income
securities and inflation over longer periods but with greater short-term risk of
volatility, and (b) the short-term market risk of price volatility associated
with equity investments may be reduced by using the Multiple Manager Strategy.
See "Management Strategies." Although the Fund's portfolio consists primarily of
equity securities, the Fund may invest in debt instruments to the extent
consistent with its investment objective and for temporary defensive purposes.
These debt obligations may include U.S. Government securities, certificates of
deposit, bankers' acceptances, commercial paper, repurchase 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, L.P., and
Atlantic Capital Management, LLC.
ESC Strategic International Equity Fund (formerly, 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
International Equity Fund.
The investment objective of ESC Strategic International Equity Fund is long-term
capital appreciation. The Fund invests in publicly traded common stocks and
securities convertible into or exchangeable for common stock. The Fund
diversifies its investments across various international markets that have
exhibited divergent return characteristics. The Fund also uses the Emerging
Market Strategy (see "Management Strategies" and "Risks of Investing in the
Funds"). 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. 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. As a
further non-fundamental policy, the three different countries referred to in the
prior sentence do not include the United States. 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
- --------------------------------------------------------------------------------
14
<PAGE> 18
- --------------------------------------------------------------------------------
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, including debt securities of U.S. issuers, for cash
management purposes, and may invest up to 100% of its assets in such securities
for temporary defensive purposes. Permitted debt investments are comparable to
those for ESC Strategic Appreciation Fund. The Fund's Manager currently is
Murray Johnstone International Limited. (Prior to July 17, 1998, this Fund's
investment policy was to diversify its portfolio across both U.S. and
international markets.)
ESC Strategic Small Cap Fund. This Fund is designed for investors seeking
long-term capital appreciation and who believe that smaller companies may offer
special opportunities for growth over the long term. This Fund currently is
available only to its existing shareholders and is not otherwise available to
the public.
The investment objective of ESC Strategic Small Cap Fund is a high level of
capital appreciation. Under normal circumstances, at least 65% of the value of
the Fund's total assets will be invested in equity securities of issuers with
market capitalization of $1 billion or less, and as a matter of operating
policy, the Fund will invest primarily in companies with market capitalization
of $800 million or less at the time of investment. The Fund's portfolio will
include equity securities of companies believed by the Manager to show superior
prospects for growth due, for example, to promising new products, new
distribution strategies, new manufacturing technologies or new management teams
or management philosophy. In the Manager's view, such companies tend to be
responsible for technological breakthroughs and/or unique solutions to market
needs. By focusing on internal rather than external factors, the Fund attempts
to minimize the risk associated with macro-economic forces such as changes in
commodity prices, currency exchange rates and interest rates.
In selecting portfolio companies, the Manager considers the growth rate in
earnings, financial performance, management strengths and weaknesses, and
current 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 common stocks of 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 in-
- --------------------------------------------------------------------------------
15
<PAGE> 19
- --------------------------------------------------------------------------------
struments) rated high grade or better or, if unrated, determined to be of
comparable quality by the Fund's Manager.
Investing in companies that are undergoing internal change may involve special
risks due to the unknown effects of change. Additionally, the Fund will not be a
"diversified" investment company and may therefore invest substantial portions
of its assets in securities of individual issuers. Thus, the Fund will not have
the same diversification of investment risk as a diversified fund. (A
"diversified" investment company must, with respect to at least 75% of its
assets, invest no more than 5% of its total assets in the securities of a single
issuer, and own no more than 10% of the outstanding voting securities of a
single issuer, except for cash, cash items, U.S. Government securities, and
securities of other investment companies.) The Fund intends, however, to meet
the diversification requirements under the Internal Revenue Code of 1986 to
qualify for tax treatment as a regulated investment company. The Fund's Manager
is EAM.
ESC Strategic Income Fund. Investors seeking a high level of current income
together with total return should consider investing in ESC Strategic Income
Fund. The longer-term securities in which the Fund normally invests generally
have higher yields, but higher risks and greater price fluctuation, than
shorter-term securities. See "Risks of Investing in the Funds -- Interest Rate
Risk".
The primary investment objective of ESC Strategic Income Fund is a high level of
current income, with a secondary objective of total return. The Fund invests
primarily in corporate, government and other debt instruments of U.S. and
non-U.S. issuers and, under normal circumstances, will have at least 65% of the
value of its total assets invested in income producing securities. In selecting
debt securities for ESC Strategic Income Fund, the Managers seek those
instruments that appear best calculated to achieve the Fund's investment
objective. To provide the Managers with maximum flexibility and to accommodate
their differing management styles, the Fund has not adopted quality restrictions
with respect to obligations in which its assets may be invested. Thus, the
Fund's investments generally will include securities that are unrated, and up to
40% of the Fund's assets may be invested in securities that 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 Growth Fund. Investors seeking long-term capital appreciation
should consider investing in ESC Strategic Growth Fund.
The investment objective of the Fund is a high level of capital appreciation.
Under normal circumstances, at least 65% of the value of the Funds' total assets
will be invested in equity securities of 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
- --------------------------------------------------------------------------------
16
<PAGE> 20
- --------------------------------------------------------------------------------
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 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
- --------------------------------------------------------------------------------
17
<PAGE> 21
- --------------------------------------------------------------------------------
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 confidence in
the company's potential; 5) a reversal pattern or other technical signs of
ebbing strength in the price of the security are observed, or 6) superior
investment opportunities exist in other securities.
The Fund's annual turnover is generally expected to be less than 100 percent.
Although it is expected that the Fund will invest for long-term capital
appreciation, the Manager may liquidate securities without regard to how long
they have been held, if such action is considered appropriate.
The Manager will attempt to manage the Fund's risk, although there can be no
assur-
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ance the Manager will be successful in this effort. The Manager seeks to reduce
market risk by owning underfollowed companies with low investor expectations.
The Manager seeks to manage valuation risk by purchasing companies at prices
substantially below their intrinsic or private market value. The Manager seeks
to manage financial risk by investing in businesses with free cash flow and
strong balance sheets. Portfolio risk is managed by holding a number of
securities.
In summary, the Manager believes the ESC Strategic Value Fund is a suitable
investment for investors seeking long-term capital appreciation from purchasing
"value" securities. The Manager expects the average holding period of its
securities normally to be two to five years. The Fund is not appropriate for
investors seeking to capitalize on short-term market fluctuations or for
investors who would be likely to sell shares in the event of short-term declines
in value.
The Fund's Manager is EAM. For information regarding the Manager, see
"Management of the Fund."
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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, subject to certain limits. (See "Risks of Investing in the Funds" and
the SAI). 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 the amount of that respective Fund's investment in any single issuer.
Foreign Securities (All Funds). Investing in the securities of issuers in any
foreign country, including American Depositary Receipts (ADRs), European
Depositary Receipts (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
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(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 characterized by significant price volatility. There is a
risk in emerging market countries that a future economic or political crisis
could lead to price controls, forced mergers of companies, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies, any of which may have a detrimental effect on the Funds'
investments.
Interest Rate Risk. Changes in interest rates affect the value of securities in
a variety of ways, not all of which are predictable. The most direct effect of
interest rate changes, however, is on fixed income securities. Generally, the
current market value of fixed in-
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come 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. ESC Strategic
Income Fund will generally be substantially invested in such securities and will
typically be vulnerable to the effects of interest rate risk on the market value
of its portfolio securities. The yield to maturity on particular securities will
vary depending on prevailing interest rates for such securities at the time of
the investment.
Risks of Lower Rated and Non-Investment Grade Securities and Sovereign Debt
Obligations. ESC Strategic Income 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.
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 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
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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 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
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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, 1998, the ESC Strategic Income
Fund held securities of 55 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, 1998.
<TABLE>
<CAPTION>
PERCENT OF
RATINGS ASSETS
- ------- ----------
<S> <C>
Cash & Equivalents.......................................... 14.93%
Aaa/AAA..................................................... 26.96%
Aa/AA....................................................... 14.45%
A/A......................................................... 12.73%
Baa/BBB..................................................... 2.11%
Ba/BB....................................................... 0%
B/B......................................................... 27.76%
Caa/CCC..................................................... 1.06%
Ca/CC....................................................... 0%
Lower....................................................... 0%
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
UNRATED, BUT EQUIVALENT TO ASSETS
- -------------------------- ----------
<S> <C>
B/B......................................................... 0%
</TABLE>
The above chart is intended solely to provide disclosure about the ESC Strategic
Income Fund's asset composition at March 31, 1998. 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 Adviser or a Manager 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 its net assets,
measured at the time of investment, in illiquid securities. Illiquid securities
include those on which there are legal restrictions on trading ("restricted
securities") as well as those for which there is a limited trading market. These
securities may be difficult for 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 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.
MANAGEMENT STRATEGIES
The Adviser uses various strategies intended to increase the return of the Funds
and to
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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 when such strategy appears
advisable for the particular Fund. Under this strategy, the Adviser allocates
portions of a Fund's assets among multiple specialist managers with dissimilar
investment styles and security selection disciplines. The Adviser monitors the
performance of both the total Fund portfolio and of each Manager and will
reallocate Fund assets among individual Managers, or recommend to the Company
that it employ or terminate particular Managers, to the extent the Adviser deems
appropriate to achieve the overall objectives of the particular Fund. The
Adviser intends to recommend reallocations if, under the Adviser's strategic
analysis, a Manager's allocation becomes over-weighted as a result of extended
appreciation and in order that undervalued securities and management styles
receive additional allocations. Under certain circumstances, when deemed in the
best interests of a Fund and its shareholders, the Adviser may recommend that a
Manager's allocation be set temporarily at zero.
The Multiple Manager Strategy is based on analysis of performance of investment
managers which indicates that even highly successful investment managers
experience variations in performance which may be caused by factors or
conditions that affect the particular universe of securities emphasized by that
investment manager or otherwise impact his particular investment style. By
recognizing the effect of these factors on particular Managers, the Adviser can
reallocate or rebalance the assets of a Fund among Managers from time to time to
provide a more favorable risk/reward relationship. As a result of this strategy,
the Adviser hopes both to increase the prospects for investment return and to
reduce market risk.
To the extent the Adviser is successful in (a) identifying and retaining
Managers who have achieved superior investment records and have appropriately
divergent investment styles, (b) monitoring Managers' performance and adherence
to stated styles, and (c) strategically allocating Fund assets among multiple
Managers, over time the Adviser believes the Funds with multiple Managers may
achieve a better rate of return with lower volatility than would typically be
expected of any one management style.
The Adviser selects Managers based on the continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to specific investment styles. While superior performance is regarded
as the ultimate goal, short-term performance by itself is not a significant
factor in selecting or terminating Managers, and the Adviser does not anticipate
frequent changes in Managers. Criteria for employment of Managers include, but
are not limited to, the following:
(1) Managers must display discipline and thoroughness in pursuit of stated
investment objectives.
(2) Managers must maintain over time consistently above-average performance.
Most importantly, Managers must display an ability to conserve values in down
markets.
(3) Managers must demonstrate a high level of service and responsibility to
clients. The Adviser monitors continually the performance of Managers as well as
management firm staffs and organizations to assess overall competence.
The Company has received an exemptive order (the "Order") from the Securities
and Exchange Commission that will permit, subject to certain conditions, the
Adviser to retain new Managers (except a Manager affiliated with the Adviser)
without shareholder approval of the contracts with those Managers. Within 60
days of such retention of a new Manager, shareholders of any affected Fund will
receive information similar to what would have been provided in a proxy
statement, except for fees to be paid to the Manager. The Order relieves the
Company from requirements to disclose fees paid to individual Managers (except
Managers affili-
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ated 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 may seek to enhance investment return for
ESC Strategic International 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."
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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, 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."
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THE ADVISER: SUNTRUST EQUITABLE SECURITIES
SunTrust Equitable Securities, 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. The
Adviser was acquired by SunTrust Banks, Inc. ("SunTrust") effective January 2,
1998. SunTrust is a bank holding company headquartered in Atlanta, Georgia, with
banking assets of $60 billion and discretionary trust assets of $65 billion as
of December 31, 1997. 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. One of
the Managers, EAM, is an affiliate of the Adviser. The Adviser and its
affiliates, prior to their acquisition by SunTrust Banks, Inc., had
approximately $1.6 billion under management at December 31, 1997.
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 1.00% for ESC Strategic
Appreciation Fund, ESC Strategic International Equity Fund (formerly 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 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, 1998 were .03% with respect to ESC Strategic Appreciation Fund, .75% with
respect to ESC Strategic Small Cap Fund, 0% with respect to ESC Strategic Growth
Fund and .69% with respect to the Value 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, 1998, expressed
as a percentage of the assets of each Fund, were as follows: ESC Strategic
Appreciation Fund, 1.00%, .62% and .38%; ESC Strategic International Equity
Fund, 1.00%, .54% and .46%; ESC Strategic Small Cap Fund, 1.00%, .75% and .25%;
ESC Strategic Income Fund, 1.00%, .36% and .64%; ESC Strategic Growth Fund,
.56%, 0% and .56% and ESC Strategic Value Fund, .93%, .69% and .24%. 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 International Equity Fund -- 2.50% (Class A) and 3.00% (Class D);
ESC Strategic Small Cap Fund -- 2.00% (Class A) and 2.50% (Class D); ESC
Strategic Income Fund -- 2.00% (Class A) and 2.50% (Class D); 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, 1998,
pursuant to an agreement to limit Fund expenses, the Adviser waived fees of
$109,801 for the Growth Fund and $32,150 for the period from May 7, 1997
(commencement of operations) through March 31, 1998 for the Value Fund. No
reimbursements were necessary for the Appreciation, International Equity, Small
Cap, Growth or Income Funds. The Value Fund was reimbursed a total of $28, 234.
The Adviser received fees of $482,226, $189,362, $1,387,887, $285,164, $89,791
and $93,518 from the Appreciation, International Equity, Small Cap, Income,
Growth and Value Funds, respectively, for the period ended March 31, 1998.
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 Director of
the Company, is head of the Adviser's Investment Advisory Group, and is a member
of the Board of Directors of the Adviser, Equitable Trust Company, and EAM. In
1986,
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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 formed in 1994 by a group of six 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, 1998 the firm had
approximately $1.33 billion 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, 1998 the firm had
approximately $174 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, 1998 the firm had approximately $261.4 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 $7.5 billion of assets under management as of March 31,
1998. 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, L.P., 12750 High Bluff Drive, San Diego, California
92130, has been providing investment advisory services since 1974 (including
predecessors). Brandes Investment Partners, L.P. manages approximately $20
billion for individual, corporate, pension plan and other clients as of March
31, 1998.
Atlantic Capital Management, LLC., 909 East Main Street, Richmond, Virginia
23219, organized in 1982 as Scott & Stringfellow Capital Management, Inc. and
reorganized under its present name in February, 1998, is a registered investment
adviser whose services focus on investment in small capitalization growth
stocks. As of March 31, 1998, the firm has $646 million of assets under
management.
Equitable Asset Management, Inc. ("EAM"), 800 Nashville City Center, Nashville,
Tennessee 37219-1743, is a subsidiary of Equitable Trust Company, a
single-purpose financial institution chartered under Tennessee banking statutes
and a wholly-owned subsidiary of the Adviser. EAM began business as an
investment adviser in 1988 and at March 31, 1998 managed approximately $674
million in assets. Frank D. Inman, a Director of EAM, has primary investment
responsibility for equity management at EAM, including EAM's services to ESC
Strategic Small Cap Fund and ESC Strategic Growth Fund. Mr. Inman joined the
Adviser in May of 1988. 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 management of the ESC Strategic Value Fund
resides with C. Markes Hinton, Jr. Mr. Hinton joined the Advisor in August 1993
and 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
the Adviser, Mr. Hinton was a
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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
Effective January 2, 1998, BISYS became the Distributor for the Funds pursuant
to a Distribution Contract. Prior to January 2, 1998, the Adviser served as the
Company's distributor.
Each of the Funds 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, 1998, the Company paid distribution fees in the amounts of $69,082,
$36,835, $265,118, 106,750, $27,168 and $20,278 for the Income, International
Equity, Small Cap, Appreciation, Growth and Value 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, 1998 the Company paid
distribution fees in the amounts of $6,626, $31,515, $245,556, $41,418, $38,252
and $14,566, for the Income, International Equity, Small Cap, Appreciation,
Growth and Value Funds, respectively pursuant to Class D Plans. Service Fees are
paid to securities dealers and other financial institutions for maintaining
shareholder accounts and providing related services to shareholders.
Under each of the Plans, each Fund pays the Distributor and other securities
dealers and other financial institutions and organizations for certain
shareholder service or distribution activities. Selling dealers may be paid
amounts, totaling annually up to 0.25% of the average daily net asset value of
Class A shares, and 0.75% of the average daily net asset value of Class D shares
in their clients' accounts. Amounts received by the Distributor may,
additionally, subject to the Plan maximums, be used to cover certain other costs
and expenses related to the distribution of Fund shares and provision of service
to Fund shareholders, including: (a) advertising by radio, television,
newspapers, magazines, brochures, sales literature, direct mail or any other
form of advertising; (b) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses; (c)
costs of printing prospectuses and other materials to be given or sent to
prospective investors; and (d) such other similar services as the Directors
determine to be reasonably calculated to result in the sale of shares of the
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.
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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 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 serves as Administrator of the Funds. 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, 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, 1998, BISYS as Administrator received fees in the
amount of $42,775; $28,404; $208,183; $72,334, $5,222 and $2,210 from the
Income, International Equity, Small Cap, Appreciation, Growth and Value Funds,
respectively. BISYS voluntarily waived fees of $18,729 for the Growth Fund and
for the period from May 7, 1997 through March 31, 1998, $12,870 for the Value
Fund.
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 $15,000 for each Fund, plus out-of-pocket expenses. For the
period ended March 31, 1998, BFSI, as Transfer Agent, was entitled to and
received fees in the amount of $4,564 for the Asset Preservation (to September
29, 1997) and $13,634, $19,876, $153,667, $21,462, $20,351 and $8,792 for the
Income, International Equity, Appreciation, Small Cap, Growth and Value Funds,
respectively.
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, 1998, BFSI, as Fund
Accountant, earned for fund accounting services excluding out-of-pocket expenses
$30,000 for each of the Income, International Equity, Small Cap, Appreciation
and Growth Funds and $27,500 for the Value Fund.
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
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may vary between the classes, as noted above, include: legal and accounting
expenses; Directors' fees and expenses; insurance premiums; custodian and
transfer agent fees and expenses; expenses incurred in acquiring or disposing of
the Funds' portfolio securities; expenses of registering and qualifying the
Funds' shares for sale with the SEC and with various state securities
commissions; expenses of maintaining the Funds' legal existence and of
shareholders' meetings; and expenses of preparing and distributing reports,
proxy statements and prospectuses to existing shareholders. Each Fund bears its
own expenses associated with its establishment as a portfolio of the Company;
these expenses are amortized over a five-year period from the commencement of a
Fund's operations. Company expenses directly attributable to a Fund or class are
charged to that Fund or class; other expenses are allocated proportionately
among all of the Funds and classes in the Company in relation to the net assets
of each Fund and class.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement and Portfolio Management
Agreements, each Manager places orders for the purchase and sale of portfolio
investments for the Funds' accounts with brokers or dealers it selects in its
discretion.
In effecting purchases and sales of portfolio securities for the account of a
Fund, each Manager will seek the best execution of the Fund's orders. Purchases
and sales of portfolio debt securities for the Funds are generally placed by
Managers with primary market makers for these securities on a net basis, without
any brokerage commission being paid by the Funds. Trading does, however, involve
transaction costs. Transactions with dealers serving as primary market makers
reflect the spread between the bid and asked prices. The Funds may purchase
securities during an underwriting, which will include an underwriting fee paid
to the underwriter. To the extent permitted by, and subject to conditions of,
applicable law and regulations, the Funds may purchase securities from an
underwriting syndicate of which an affiliate of the Company, the Adviser, the
Administrator or a Manager is a member (but not directly from such affiliate).
Purchases and sales of common stocks are generally placed by a Manager with
broker-dealers which, in the judgment of the particular Manager, provide prompt
and reliable execution at favorable security prices and reasonable commission
rates. Broker-dealers are selected on the basis of a variety of factors such as
reputation, capital strength, size and difficulty of order, sale of Fund shares
and research provided to the Managers. Broker-dealers selected to execute
portfolio transactions for the Funds may include affiliates of the Company, the
Adviser, Administrator or a Manager, provided the charge for any such
transaction does not exceed usual and customary levels. A Manager may cause a
Fund to pay commissions higher than another broker-dealer would have charged if
the Manager believes the commission paid is reasonable in relation to the value
of the brokerage and research services received by the Manager. The Funds will
not pay higher securities prices or higher mark-ups or mark-downs, in
recognition of the value of research services provided by a securities dealer,
on transactions with a securities dealer where the dealer 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.
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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, 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 assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each business day. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Directors.
Notwithstanding the above, bonds and other fixed-income securities are valued by
using market quotations and may be valued on the basis of prices provided by a
pricing service approved by the Board of Directors. All assets and liabilities
initially expressed in foreign currencies will be expressed for valuation
purposes in U.S. dollars at the mean between the bid and asked prices of such
currencies against U.S. dollars as last quoted by any major bank.
With respect to options contracts sold by a Fund, the Fund records the premium
received as an asset and equivalent liability, and thereafter adjusts the
liability to the market value of the option determined in accordance with the
preceding paragraph. The premium paid for an option purchased by a Fund is
recorded as an asset and subsequently adjusted to market value. Open futures
contracts are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case such positions will be
valued by or under the direction of the Directors.
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PRICING OF FUND SHARES
Orders for the purchase of shares of each class will be executed at the net
asset value per share of that class plus any applicable sales charge (the
"public offering price") next determined after an order has been received in
proper order by the Funds, or by an authorized broker, investment adviser or
Service Organization and transmitted to the Funds by 4:00 p.m. Eastern Time.
(See "Purchase of Fund Shares.") The sales charge on purchases of each class of
shares of the Funds is as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A AMOUNT OF SALES
PERCENTAGE OF CHARGE REALLOWED
------------------- TO DEALERS AS A
PUBLIC NET PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
CLASS A SHARES PRICE INVESTED PRICE
- -------------- -------- -------- ----------------
<S> <C> <C> <C>
Amount of Investment
Less than $100,000.......................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000............................. 3.50% 3.63% 3.00%
$250,000 but less than $500,000............................. 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000........................... 2.00% 2.04% 1.75%
$1,000,000 and over......................................... None None None
CLASS D SHARES
- ------------------------------------------------------------
Amount of Investment
Less than $1,000,000........................................ 1.50% 1.52% 1.25%
$1,000,000 and over......................................... None None None
</TABLE>
Class A and D shares are offered at net asset value without an initial sales
charge for purchases of $1 million or more, but such purchases are subject to a
Contingent Deferred Sales Charge equal to 1% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gains
distributions) or the total cost of such shares in the event of a share
redemption within twelve months following the purchase. The Distributor may
provide additional compensation to securities dealers in an amount up to .75% of
the offering price of Class A or Class D shares, as applicable, of the Funds for
individual sales of $1 million to $5 million and .50% of the offering price of
Class A or Class D shares, as applicable, for individual sales over $5 million.
The sales charge will not apply to shares of either class purchased by: (a)
trust, investment management and other fiduciary accounts managed by the Adviser
or a Manager pursuant to a written agreement; (b) any person purchasing shares
with the proceeds of a distribution from a trust, investment management or other
fiduciary account managed by the Adviser or a Manager pursuant to a written
agreement; (c) any person purchasing shares with the proceeds of a redemption of
shares of a mutual fund, other than ESC Strategic Funds, Inc., that were
originally purchased with a sales load; (d) 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.
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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, 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 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 Class D shares of
the Funds) permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales commission applicable to
the amount represented by the goal as if it were a single investment. A number
of shares 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 retroac-
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tive reduction of sales charges on previous purchases. At any time while a
Letter of Intent is in effect, a shareholder may, by written notice to the
Funds, increase the amount of the stated goal. In that event, shares purchased
during the previous 90-day period and still owned by the shareholder will be
included in determining the applicable sales charge reduction. The 5% escrow and
minimum purchase requirements will be applicable to the new stated goal.
Investors electing to purchase Fund shares pursuant to a Letter of Intent should
carefully read the application for Letter of Intent which is available from the
Funds.
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MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Funds is $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. An IRA account is subject to a $12 annual
maintenance fee. No fee is charged on subsequent IRA accounts that are opened
under the same tax identification number. The Distributor reserves the right to
reject purchase orders. The officers of the Company are authorized to waive the
minimum initial and subsequent investment requirements of the Funds.
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PURCHASE OF FUND SHARES
All funds received by the Funds are invested in full and fractional shares of
the indicated class of the appropriate Fund. Certificates for shares are not
issued. BFSI 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 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.
A prospective investor, in selecting between the classes, should consider the
impact of the sales charge together with the cumulative effect of the Service
and Distribution Fees for each class over the anticipated period of investment,
as well as the effect of any sales charge waivers to which the investor may be
entitled. Investors should be aware that other expenses attributable to each
class may differ slightly due to the allocation to each class of certain "class
specific" expenses, including distribution and marketing expenses and federal
and state securities registration fees. Finally, investors should be aware that
persons selling shares of the Funds may receive different levels of compensation
for sales of Class A and Class D shares. See "Purchase of Fund Shares" and
"Management of the Funds -- The Distributor".
An investment may be made using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service
Organization. Shares are available to new and existing shareholders through
authorized brokers, investment advisers and Service Organizations. To make an
investment using this method, a Purchase Application must have been completed
and the customer must notify the broker, investment adviser or Service
Organization of the amount to be invested. The broker will then contact the
Funds to place the order.
Orders received by the broker or Service Organization in proper order prior to
the determination of net asset value and transmitted to the Funds prior to the
close of its business day (which is currently 4:00 p.m., Eastern time), will
become effective that
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37
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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).
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EXCHANGE OF FUND SHARES
The Funds offer two convenient ways to exchange shares in one Fund for shares of
another Fund in the Company. Shares of a particular class of a Fund may be
exchanged only for shares of that same class in another Fund, with no sales
charge. 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. This
exchange privilege is not intended to afford shareholders a way to speculate on
short-term movements in the market. Accordingly, in order to prevent excessive
use of the exchange privilege that may potentially disrupt the management of the
Company and increase transaction costs, the Company has established a policy of
limiting excessive exchange activity. Exchange activity will not be deemed
excessive if limited to four substantive exchange redemptions from a Fund during
any calendar year.
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 at P.O. Box 182487, Columbus, Ohio
43218-2487. 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) the class
of shares to be exchanged; (c) the name of the Fund from which and the Fund into
which the exchange is to be made; and (d) the dollar or share amount to be
exchanged. Telephone exchanges are available only if the shareholder so
indicates by checking the "yes" box on the Purchase Application. The Funds
employ procedures, including recording telephone calls, testing a caller's
identity, and sending written confirmation of telephone transactions, designed
to give reasonable assurance that instructions communicated by telephone are
genuine, and to discourage fraud. To the extent that a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. A Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Funds
reserve the right to suspend or terminate the privilege of exchanging by mail or
by telephone at any time. Telephone Redemption and Telephone Exchange will be
suspended for a period of 10 days following a telephonic address change.
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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 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
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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 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 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.
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
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(3) share transfer requests. Signature guarantees may be obtained from certain
eligible financial institutions, including but not limited to, the following:
banks, trust companies, credit unions, securities brokers and dealers, savings
and loan associations and participants in the Securities and Transfer
Association Medallion Program ("STAMP"), the Stock Exchange Medallion Program
("SEMP") or the New York Stock Exchange Medallion Signature Program ("MSP").
Shareholders may contact the Funds at 1-800-261-FUND (3863) for further details.
Reinstatement Privilege. A shareholder who has redeemed shares on which a sales
charge was paid may reinvest, without a sales charge, up to the full amount of
such redemption at the net asset value determined at the time of the
reinvestment within 30 days of the original redemption. This privilege must be
effected within 30 days of the redemption. The shareholder must reinvest in the
same Fund, same class, and the same account from which the shares were redeemed.
A redemption is a taxable transaction and gain may be recognized for Federal
income tax purposes even if the reinstatement privilege is exercised. Any loss
realized upon the redemption will not be recognized as to the number of shares
acquired by reinstatement, except through an adjustment in the tax basis of the
shares so acquired. See "Dividends, Distributions and Federal Income Tax" for an
explanation of circumstances in which a sales charge paid to acquire shares of a
Fund may not be taken into account in determining gain or loss on the
disposition of those shares.
Redemption of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Funds reserve the right to redeem, on not less
than 30 days' notice, an account in a Fund that has been reduced by a
shareholder (not by market action) to $500 or less. However, if during the
30-day notice period the shareholder purchases sufficient shares to bring the
value of the account above $500, the account will not be redeemed.
Redemption in Kind. All redemptions of shares of the Funds shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This commitment is irrevocable without the prior
approval of the SEC. In the case of redemption requests by shareholders in
excess of such amounts, the Board of Directors reserves the right to have a Fund
make payment, in whole or in part, in readily marketable securities or other
assets, in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued generally in the same manner as the
securities of that Fund are valued generally. If the recipient were to sell such
securities, he or she would incur brokerage charges.
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DIVIDENDS, DISTRIBUTIONS, AND FEDERAL INCOME TAXATION
Each Fund intends to qualify annually to elect to be treated as a regulated
investment company pursuant to the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, each Fund must meet
certain income, distribution and diversification requirements. In any year in
which a Fund qualifies as a regulated investment company and timely distributes
all of its taxable income and substantially all of its net tax-exempt interest
income, if any, the Fund generally will not pay any U.S. federal income or
excise tax.
Each Fund intends to distribute to its shareholders substantially all of its
investment company taxable income (which includes, among other items, dividends
and interest and the excess, if any, of net short-term capital gains over net
long-term capital losses). ESC Strategic Income Fund will make distributions of
such income monthly. ESC Strategic Appreciation Fund, ESC Strate-
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42
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gic International 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.
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 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 and will be subject to a maximum
federal tax rate of 28% or 20%, depending upon the Fund's holding period for the
assets whose sale produces the gain. 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 determining the gain or loss on the
disposition of those shares. This rule applies when shares of a Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Fund are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred a sales charge
initially. The portion of the sales charge affected by this rule will be treated
as a sales charge paid for the new shares.
The Funds may be required to withhold Federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
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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 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
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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 one-third 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
remarketing agent will adjust the interest rate every six days (or at other
specified intervals) in order to maintain the interest rate at the prevailing
rate for securities with a six-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 six 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.
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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). The
Fund may purchase when-issued securities and make contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
if the Fund holds, and maintains until the settlement date in a segregated
account cash, or liquid securities in an amount sufficient to meet the purchase
price, or if the Fund enters into offsetting contracts for the forward sale of
other securities it owns. Purchasing securities on a when-issued basis and
forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. No income accrues on
securities purchased on a when-issued basis prior to the time delivery of the
securities is made, although the Fund may earn interest on securities it has
deposited in the segregated account because it does not pay for the when-issued
securities until they are delivered. Investing in when-issued securities has the
effect of (but is not the same as) leveraging the Fund's assets. Although the
Fund would generally purchase securities on a when-issued basis or enter into
forward commitments with the intention of actually acquiring securities, it may
dispose of a when-issued security or forward commitment prior to settlement if
the Manager deems it appropriate to do so. The Fund may realize short-term
profits or losses upon such sales.
Mortgage-Related Securities (ESC Strategic Income Fund and ESC Strategic Value
Fund). Mortgage pass-through securities are securities representing interests
in "pools" of mortgages in which payments of both interest and principal on the
securities are made monthly, in effect "passing through" monthly payments made
by the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose a Fund 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 simi-
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lar models that are standard in the industry will be used by a Fund in
calculating maturity for purposes of its investment in mortgage-related
securities. Because the average life of mortgage-related securities may lengthen
with increases in interest rates, the portfolio-weighted average life of the
securities in which a Fund is invested may at times lengthen due to this effect.
Under these circumstances, a Manager may, but is not required to, sell
securities in order to maintain an appropriate portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (such as securities guaranteed by the
Government National Mortgage Association ("GNMA"); or guaranteed by agencies or
instrumentalities of the U.S. Government (such as securities guaranteed by the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities created by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
A Fund may also invest in investment grade Collateralized Mortgage Obligations
("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding longer maturity classes receive principal only after
the first class has been retired. CMOs may be issued by government and
non-governmental entities. Some CMOs are debt obligations of FHLMC issued in
multiple classes with different maturity dates secured by the pledge of a pool
of conventional mortgages purchased by FHLMC. Other types of CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios. To the extent a
particular CMO is issued by an investment company, a Fund's ability to invest in
such CMOs will be limited. See "Investment Restrictions" in the SAI.
Assumptions generally accepted by the industry concerning the probability of
early payment may be used in the calculation of maturities for debt securities
that contain put or call provisions, sometimes resulting in a calculated
maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private entities may
create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. 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). 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
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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 the Fund in
calculating maturity for purposes of its investment in asset-backed securities.
The 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 the
Fund to more risk.
Foreign Securities (All Funds). The Funds may invest directly in both sponsored
and unsponsored U.S. dollar- or foreign currency-denominated corporate
securities (including preferred or preference stock), certificates of deposit
and bankers' acceptances issued by foreign banks, U.S. dollar-denominated bonds
sold in the United States ("Yankee bonds"), other bonds denominated in U.S.
dollars or other currencies and sold to investors outside the United States
("Eurobonds"), and obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. There may be less information available to a Fund concerning
unsponsored securities, for which the paying agent is located outside the United
States. See "Risks of Investing in the Funds."
The Funds may purchase foreign securities traded in the United States or in
foreign markets. The Funds may invest directly in foreign equity securities and
in securities represented by European Depositary Receipts ("EDRs") or American
Depositary Receipts ("ADRs"). ADRs are dollar-denominated receipts generally
issued by domestic banks, which represent the deposit with the bank of a
security of a foreign issuer, and which are publicly traded on exchanges or
over-the-counter in the United States. EDRs are receipts similar to ADRs and are
issued and traded in Europe.
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 effi-
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ciency 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 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 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). 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 related options. See the SAI for further information about futures
and options and limitations on their use. See "Risks of Investing in the Funds"
for a discussion of risks related to investing in futures and options.
Short Sales (ESC Strategic Appreciation Fund, ESC Strategic International 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."
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
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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
International 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; investment companies and investment funds;
mortgage-related securities and other asset-backed securities; structured
securities; swaps; zero coupon and deferred interest obligations; pay-in-kind
securities; custodial receipts, trade claims, loan participations, equity-linked
securities, sovereign debt obligations, arbitrage, foreign index-linked
instruments, venture capital and leveraged buy-outs.
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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
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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 (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 six
calendar days and variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount within six 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 six 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.
YEAR 2000 RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Adviser, the Managers, BISYS and the Funds' other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Adviser is taking steps to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Managers, BISYS and the Funds' other
major service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds as a
result of the Year 2000 Problem.
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 partic-
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ular 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 hypothetical
investment in shares of a Fund (or class) over periods of 1, 5 and 10 years (up
to the life of the Fund), reflect the deduction of a proportional share of Fund
(and class-specific expenses, as applicable) on an annual basis, and assume that
all dividends and distributions are reinvested when paid.
Performance information for the Funds may be compared to various unmanaged
indices, such as the Standard & Poor's 500 Stock Index, the Dow Jones Industrial
Average, indices prepared by Lipper Analytical Services, and other entities or
organizations which track the performance of investment companies. Any
performance information should be considered in light of each Fund's investment
objectives and policies, characteristics and quality of the Fund and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Funds, see the SAI.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in a statement for
each shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Funds have been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
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 182487, 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, protec-
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tion 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
P.O. BOX 182487
COLUMBUS, OHIO 43218-2487
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
INVESTMENT ADVISER
SunTrust Equitable Securities Corporation
800 Nashville City Center
Nashville, Tennessee 37219-1743
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIAN
Union Bank of California
475 Sansome Street
San Francisco, CA 94111
COUNSEL
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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<PAGE> 60
ESC STRATEGIC FUNDS, INC.
(THE "COMPANY")
P.O. BOX 182487
COLUMBUS, OHIO 43218-2487
GENERAL AND ACCOUNT INFORMATION: (800) 261-FUND(3863)
SUNTRUST EQUITABLE SECURITIES --
INVESTMENT ADVISER
BISYS FUND SERVICES--ADMINISTRATOR AND DISTRIBUTOR
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the six
funds (the "Funds") advised by SunTrust Equitable Securities (the "Adviser").
The Funds are:
- ESC Strategic Appreciation Fund
- ESC Strategic International Equity Fund*
- ESC Strategic Small Cap Fund**
- ESC Strategic Income 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 17,
1998, as supplemented from time to time (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 17, 1998.
- ----------
* Formerly, ESC Strategic Global Equity Fund
** Currently, shares of the Small Cap Fund are available only to existing
shareholders of that Fund.
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<PAGE> 61
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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<PAGE> 62
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 rights to the underlying securities and may incur costs and
experience time delays in connection with the disposition of such securities.
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<PAGE> 63
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 one-third of the
total assets of a particular Fund.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Funds may pay reasonable
finders, administrative and custodial fees. Loans of securities involve a risk
that the borrower may fail to return the securities or may fail to provide
additional collateral.
Foreign Securities (All Funds). 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.
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<PAGE> 64
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). 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). This Fund
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 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 International 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
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<PAGE> 65
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.
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.
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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.
A Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, a Fund
would pay more than the market price for the underlying securities or index
units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Risks of Futures and Options Investments. A Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while a Fund may benefit from the
use of futures contracts and related options, unanticipated changes in interest
rates may result in a poorer overall performance for that Fund than if it had
not entered into any such contracts. Additionally, the skills required to invest
successfully in futures and options may differ from skills required for managing
other assets in the Fund's portfolio. Further, although a Manager may engage in
transactions with 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
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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.
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 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). Each 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
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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 may
invest in shares of other open-end or closed-end investment companies as
permitted by the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder. 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.
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.
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The Fund may also invest in Stripped Mortgage-Backed Securities
("SMBS"), derivative multi-class mortgage securities issued by U.S. Government
agencies or instrumentalities or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and their special purpose subsidiaries.
SMBS generally have two classes: one (the "IO" class) entitles the
holders to receive distributions consisting solely or entirely of all or a
portion of interest payments from the underlying pool of mortgages or
mortgage-backed securities ("mortgage assets"); the other (the "PO") class
entitles the holders to receive distributions consisting solely or primarily of
all or a portion of the principal of the underlying mortgage asset pool. The
cash flows and yields on IO and PO classes are considerably more sensitive to
changes in the rate of principal payments (including prepayments) on the
underlying mortgage assets than an investment in a traditional mortgage-backed
security, thus exposing the Fund to more risk.
Mortgage-Backed Security Rolls. The Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities issued by GNMA, FNMA or
FHLMC. In a forward roll transaction, that is considered to be a borrowing by
the Fund, the Fund will sell a mortgage security to a bank or other permitted
entity and simultaneously agree to repurchase a similar security from the
institution at a later date at an agreed upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of mortgages with different
prepayment histories than those sold. Risks of mortgage-backed security rolls
include: (i) the risk of prepayment prior to maturity, (ii) the possibility that
the proceeds of the sale may have to be invested in money market instruments
(typically repurchase agreements) maturing not later than the expiration of the
roll, and (iii) the possibility that the market value of the securities sold by
the Fund may decline below the price at which the Fund is obligated to purchase
the securities. Upon entering into a mortgage-backed security roll, the Fund
will be required to place cash, U.S. Government Securities or other high-grade
debt securities in a segregated account with its Custodian in an amount equal to
its obligation under the roll.
Assumptions generally accepted by the industry concerning the
probability of early payment may be used in the calculation of maturities for
debt securities that contain put or call provisions, sometimes resulting in a
calculated maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above.
As new types of mortgage-related securities are developed and offered
to investors, the Manager will, consistent with the Fund's investment
objectives, policies and quality standards, consider making investments in such
new types of mortgage-related securities.
Other Asset-Backed Securities. Asset-backed securities are secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, that represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, known as collateralized obligations that are generally issued as
the debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; however, the payment of principal
and interest on such obligations may be guaranteed up to certain amounts and for
a certain period by a letter of credit issued by a financial institution (such
as a bank or insurance company) unaffiliated with the issuers of such
securities. The purchase of asset-backed securities raises risk considerations
peculiar to the financing of the instruments underlying such securities. For
example, there is a risk that another party could acquire an interest in the
obligations superior to that of the holders of the asset-backed securities.
There also is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
Asset-backed securities entail prepayment risk, that may vary depending on the
type of asset, but is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are
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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 whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARS are "passed through" monthly to certificate holders and are guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the trustee or originator of the
trust. Underlying sales contracts are subject to prepayment, that may reduce the
overall return to certificate holders. If the letter of credit is exhausted,
certificate holders may also experience delays in payment or losses on CARS if
the full amounts due on underlying sales contracts are not realized by the trust
because of unanticipated legal or administrative costs of enforcing the
contracts, or because of depreciation, damage or loss of the vehicles securing
the contracts, or other factors. For asset-backed securities, the industry
standard uses a principal prepayment model, the "ABS Model," which is similar to
the PSA model described previously under "Mortgage-Related Securities." Either
the PSA model, the ABS model or other similar models that are standard in the
industry will be used by the Fund in calculating the maturity for purposes of
its investment in asset-backed securities.
Structured Investments. Structured Investments are derivatives in the
form of a unit or units representing an undivided interest(s) in assets held in
a trust that is not an investment company as defined in the Investment Company
Act of 1940. A trust unit pays a return based on the total return of securities
and other investments held by the trust and the trust may enter into one or more
swaps to achieve its objective. For example, a trust may purchase a basket of
securities and agree to exchange the return generated by those securities for
the return generated by another basket or index of securities. The Fund will
purchase structured investments in trusts that engage in such swaps only where
the counterparties are approved by the Manager in accordance with credit-risk
guidelines established by the Board of Directors.
Structured Notes. Structured Notes are derivatives where the amount of
principal repayment and or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the 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 notional 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
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Directors.
Interest rate and total rate of return swaps do not involve the
delivery of securities, other underlying assets, or principal. Accordingly, the
risk of loss with respect to interest rate and total rate of return swaps is
limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the other party to an interest rate or total rate of
return swap defaults, the Fund's risk of loss consists of the net amount of
interest payments that a portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Swaps that include caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Manager is incorrect in its forecasts
of market values, interest rates, and currency exchange rates, the investment
performance of the Fund would be less favorable than it would have been if this
investment technique were not used.
Zero Coupon Securities and Deferred Interest Obligations. The Fund may
invest in zero coupon securities and deferred interest obligations issued by the
U.S. Treasury or by private issuers such as domestic or foreign 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.
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Custodial Receipts. The Fund may acquire U.S. Government Securities and
their unmatured interest coupons that have been separated (stripped) by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts (TIGRs) and Certificate of Accrual on Treasury Securities
(CATS). The stripped coupons are sold separately from the underlying principal,
which is usually sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. The underlying U.S. Treasury bonds
and notes themselves are generally held in book-entry form at a Federal Reserve
Bank. Counsel to the underwriters of these certificates or other evidences of
ownership of U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities most likely will be deemed the beneficial
holders of the underlying U.S. Government Securities for federal tax and
securities purposes. In the case of CATS and TIGRs, the IRS has reached this
conclusion for the purpose of applying the tax diversification requirements
applicable to regulated investment companies such as the Fund. CATS and TIGRs
are not considered U.S. Government Securities by the Staff of the SEC, however.
Further, the IRS' conclusion is contained only in a general counsel memorandum,
which is an internal document of no precedential value or binding effect, and a
private letter ruling, which also may not be relied upon by the Fund. The
Company is not aware of any binding legislative, judicial or administrative
authority on this issue.
Loan Participations. Through a loan participation, the Fund can buy
from a lender a portion of a larger loan that it has made to a borrower. By
buying loan participations, the Fund may be able to acquire interests in loans
from financially strong borrowers that the Fund could not otherwise acquire.
These instruments are typically interests in floating or variable rate senior
loans to U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending institution
and are subject to the credit risks of both the borrower and the lending
institution. While loan participations generally trade at par value, if the
borrowers have credit problems, some may sell at discounts. To the extent that
borrower's credit problems are resolved, the loan participations may then
appreciate in value. These loan participations, however, carry substantially the
same risk as that for defaulted debt obligations and may cause loss of the
entire investment. Most loan participations are illiquid and therefore will be
included in the Fund's limitation on illiquid investments.
Pay-in-Kind Bonds. Pay-in-kind bonds are securities that pay interest
through the issuance of additional bonds. The Fund will be deemed to receive
interest over the life of the bonds and be treated as if interest were paid on a
current basis for federal income tax purposes, although no cash interest
payments are received by the Fund until the cash payment date or until the bonds
mature.
Trade Claims. The Fund may invest in trade claims. Trade claims are
interest in amounts owed to suppliers of goods or services and are purchased
from creditors of companies in financial difficulty. For purchasers such as the
Fund, trade claims offer the potential for profits since they are often
purchased at a significant discount from face value and consequently, may
generate capital appreciation in the event that the market value of the claim
increases as the debtor's financial position improves or the claim is paid.
An investment in trade claims is speculative and carries a high degree
of risk. Trade claims are illiquid securities which generally do not pay
interest and there can be no guarantee that the debtor will ever be able to
satisfy the obligation on the trade claim. The markets in trade claims are not
regulated by federal securities laws or the SEC. Because trade claims are
unsecured, holders of trade claims may have a lower priority in terms of payment
than certain other creditors in a bankruptcy proceeding.
Equity-Linked Securities. The Fund may invest in equity-linked
securities, including, among others, PERCS, ELKS or LYONs, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. It is impossible to predict whether the price of
the underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial or other factors affecting the
capital markets, the stock exchanges
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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 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.
14
<PAGE> 74
Arbitrage. The Fund may sell in one market a security which it owns and
simultaneously purchase the same security in another market, or it may buy a
security in one market and simultaneously sell it in another market, in order to
take advantage of differences between the prices of the security in the
different markets. Although the Fund does not actively engage in arbitrage, such
transactions may be entered into only with respect to debt securities and will
occur only in a dealer's market where the buying and selling dealers involved
confirm their prices to the Fund at the time of the transaction, thus
eliminating any risk to the assets of the Fund.
Foreign Index-Linked Instruments. As part of its investment program,
and to maintain greater flexibility, the Fund may invest in instruments which
have the investment characteristics of particular foreign securities, securities
indexes, futures contracts or currencies. Such instruments may take a variety of
forms, such as debt instruments with interest or principal payments determined
by reference to the value of a currency or commodity at a future point in time.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries, or the differential in
interest rates between particular countries. The risks of such investments would
reflect the risks of investing in the index or other instrument, the performance
of which determines the return for the instrument. Tax considerations may limit
the Fund's ability to invest in foreign index-linked instruments.
Venture Capital. The Fund may invest in venture capital limited
partnerships and venture capital funds that, in turn, invest principally in
securities of early stage, developing companies. Investments in venture capital
limited partnerships and venture capital funds present a number of risks not
found in investing in established enterprises including the facts that such a
partnership's or fund's portfolio will be composed almost entirely of
early-stage companies that may lack depth of management and sufficient
resources, that may be marketing a new product for which there is no established
market, and that may be subject to intense competition from larger companies.
Any investment in a venture capital limited partnership or venture capital fund
will lack liquidity, will be difficult to value, and the Fund will not be
entitled to participate in the management of the partnership or fund. If for any
reason the services of the general partners of a venture capital limited
partnership were to become unavailable, such limited partnership could be
adversely affected.
In addition to investing in venture capital limited partnerships and
venture capital funds, the Fund may directly invest in early-stage, developing
companies. The risks associated with investing in these securities are
substantially similar to the risks set forth above. The Fund will typically
purchase equity securities in these early-stage, developing companies; however
from time to time, the Fund may purchase non-investment grade debt securities in
the form of convertible notes.
Such investments involve costs at the venture capital level which are
in addition to those of the Fund.
Leveraged Buyouts. The Fund may invest in leveraged buyout limited
partnerships and funds that, in turn, invest in leveraged buyout transactions
("LBOs"). An LBO, generally, is an acquisition of an existing business by a
newly formed corporation financed largely with debt assumed by such newly formed
corporation to be later repaid with funds generated from the acquired company.
Since most LBOs are by nature highly leveraged (typically with debt to equity
ratios of approximately 9 to 1), equity investments in LBOs may appreciate
substantially in value given only modest growth in the earnings or cash flow of
the acquired business. Investments in LBO partnerships and funds, however,
present a number of risks. Investments in LBO limited partnerships and funds
will normally lack liquidity and may be subject to intense competition from
other LBO limited partnerships and funds. Additionally, if the cash flow of the
acquired company is insufficient to service the debt assumed in the LBO, the LBO
limited partnership or fund could lose all or part of its investment in such
acquired company.
15
<PAGE> 75
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 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;
16
<PAGE> 76
(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;
(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
17
<PAGE> 77
the principal note amount within seven days' notice); or
(j) Invest in oil, gas or other mineral exploration or
development programs, although it may invest in issuers that own or
invest in such programs.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of the Company
for the past five years are listed below. The address of each, unless otherwise
indicated, is 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 SunTrust Equitable Securities
Cammack, Jr.(1) -- Managing Director
800 Nashville City Center
Nashville, TN 37219-1743
Age: 40
J. Bransford Wallace Director Willis Coroon Corporations
26 Century Boulevard (insurance) -- Vice Chairman
Nashville, TN 37214 (1994); Chairman (1992-93);
Age: 66 various positions since prior to
1989.
Brownlee O. Currey, Jr. Director Osborn Communications, Inc. --
1115 Sneed Road Chairman; Nashville Banner
Franklin, TN 37069 Publishing Company --
Age: 70 President.
E. Townes Duncan Director Solidus (1997 to present);
30 Burton Hill Corporation Comptronix
Suite 100 (contract manufacturing) --
Nashville, TN 37215 Chairman and Chief Executive
Age: 45 Officer (1993-1996); Massey
Burch Investment Group (venture
capital) Principal (1985-1993).
John L. McAllister Vice President and SunTrust Equitable Securities
Age: 35 Treasurer -- Senior Vice President (1990-
present); Copyright Management, Inc.
- Analyst (1988-1989).
Ellen Stoutamire Secretary Employee of BISYS Fund
Age: 49 Services; prior to joining BISYS,
principally employed as an
attorney for past 15 years
R. Jeffrey Young President Employee of BISYS Fund
Age: 33 Services since 10/93; Broadway
and Seymour/The Heebink Group
</TABLE>
18
<PAGE> 78
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 $1,000 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.
DIRECTOR COMPENSATION
(FOR FISCAL YEAR ENDED MARCH 31, 1998)
<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 Wallace $7,000 0 N/A $7,000
Brownlee O. Currey, Jr $7,000 0 N/A $7,000
E. Townes Duncan $7,000 0 N/A $7,000
</TABLE>
As of June 22, 1998, officers and Directors of the Company, as a group,
owned less than one percent of the outstanding shares of the Funds.
19
<PAGE> 79
INVESTMENT ADVISER
SunTrust Equitable Securities (the "Adviser") 800 Nashville City
Center, Nashville, Tennessee 37219-1743, serves as investment adviser to the
Funds, providing overall supervision of the Managers. The Adviser, formerly
known as Equitable Securities Corporation assumed its new name when it was
acquired by SunTrust Banks, Inc. on January 2, 1998 . For Funds with multiple
Managers, the Adviser determines what portion of each Fund's assets shall be
allocated to each Manager from time to time. For these services, the Adviser
receives from each Fund a fee at an annual rate of 1.0% for each of ESC
Strategic Appreciation Fund, ESC Strategic International Equity Fund, ESC
Strategic Small Cap Fund, and ESC Strategic Income Fund; and 1.25% for each of
ESC Strategic Growth Fund and ESC Strategic Value Fund. Out of these fees, the
Adviser pays fees of the Managers.
Under the terms of the Investment Advisory Agreement for the Funds
between the Company and the Adviser ("Agreement"), the investment advisory
services of the Adviser to the Funds are not exclusive. The Adviser is free to,
and does, render investment advisory services to others.
The Agreement will continue in effect with respect to each Fund for a
period more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of each Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Agreement or interested
persons of any such parties, at its meeting held on October 20, 1997, and by the
shareholders of the Funds on December 19, 1997. The Agreement may be terminated
at any time without penalty by vote of the Directors (with respect to the
Company or a Fund) or, with respect to any Fund, by vote of the Directors or the
shareholders of that Fund, or by the Adviser, on 60 days written notice by
either party to the Agreement and will terminate automatically if assigned.
THE MANAGERS
The Adviser has entered into Portfolio Management Agreements with one
or more Managers for each Fund. Each Manager provides services to the particular
Fund as Manager. The Funds' Managers are as follows:
-- ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.,
Brandes Investment Partners, L.P., and Atlantic Capital
Management, LLC.
-- ESC Strategic International Equity Fund --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 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:
20
<PAGE> 80
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ESC STRATEGIC
APPRECIATION FUND:
Aggregate fees to
Adviser $224,856 .95% $419,329 .99% $ 482,226 1.00%
Aggregate fees to
Manager* $158,435 .67% $271,888 .64% $ 301,106 .62%
Fees retained by
Adviser $ 66,421 .28% $147,441 .35% $ 181,120 .38%
Fees paid to Equitable
Asset Management* $ 41,231 .17% $ 66,053 .16% $ 14,424 .03%
* EAM was terminated as a Manager of this Fund effective January 2, 1998
ESC STRATEGIC
INTERNATIONAL
EQUITY FUND
Aggregate fees to
Adviser $156,881 1.0% $207,116 .99% $ 189,362 1.0%
Aggregate fees to
Manager* $ 76,894 .49% $104,400 .50% $ 102,120 .54%
Fees retained by
Adviser $ 79,987 .51% $102,716 .49% $ 87,242 .46%
ESC STRATEGIC SMALL CAP FUND
Aggregate fees (Net) to
Adviser $199,170 .88% $652,644 .95% $1,387,887 1.0%
Aggregate fees to
Manager* $166,841 .73% $502,819 .73% $1,052,586 .76%
Fees retained by
Adviser $ 32,329 .15% $149,825 .22% $ 335,301 .24%
ESC STRATEGIC INCOME
FUND
Aggregate fees (Net) to
Adviser $373,088 1.0% $380,147 1.0% $ 285,164 1.0%
Aggregate fees to
Manager* $ 93,525 .25% $ 94,515 .25% $ 102,117 .36%
Fees retained by
Adviser $279,563 .75% $285,632 .75% $ 183,047 .64%
</TABLE>
21
<PAGE> 81
<TABLE>
<CAPTION>
INCEPTION DATE
(JANUARY 28, 1997)
THROUGH FISCAL YEAR ENDED
MARCH 31, 1997 MARCH 31, 1998
------------------ -----------------
<S> <C> <C> <C> <C>
ESC STRATEGIC
GROWTH FUND
Aggregate fees to
Adviser $ 0 0% $89,791 .56%
Aggregate fees to
Manager $4,177 .12% $ 0 .0%
Fees retained by
Adviser $ 0 0% $89,791 .56%
<CAPTION>
INCEPTION DATE
(MAY 5, 1997)
THROUGH MARCH 31, 1998
----------------------
<S> <C> <C> <C> <C>
ESC STRATEGIC
VALUE FUND
Aggregate fees to
Adviser n/a n/a $93,518 .93%
Aggregate fees to
Manager n/a n/a $68,890 .69%
Fees retained by
Adviser n/a n/a $24,628 .24%
</TABLE>
* Pursuant to exemptive relief obtained from the Securities and Exchange
Commission, the Funds are permitted to disclose fees and fee rates on
an aggregate basis for individual Managers that are not affiliated with
the Adviser.
22
<PAGE> 82
For the period ended March 31, 1998, pursuant to an agreement to limit
Fund expenses, the Adviser waived fees of $109,801 for the Growth Fund and
$32,150 for the period from May 1, 1997 (commencement of operations) through
March 31, 1998 for the Value Fund. No reimbursements were necessary for the
Appreciation, International Equity, Small Cap, Growth or Income Funds. The Value
Fund was reimbursed a total of $28,234. The Adviser received fees of $482,226,
$189,362, $1,387,887, $285,164, $89,791 and $93,518 from the Appreciation,
International Equity, Small Cap, Income, Growth and Value Funds, respectively,
for the period ended March 31, 1998.
For the fiscal year ended March 31, 1997, pursuant to an agreement to
limit Fund expenses, the Adviser waived fees of $7,185 for the Growth 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,
International 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 $25,762 and $11,800 for the
Small Cap and Appreciation Funds, respectively. Absent these waivers, advisory
fees would have been $224,932 and $236,656 for the Small Cap and Appreciation
Funds, respectively. The Adviser received fees of $373,088 and $156,881 from the
Income and International Equity Funds, respectively, for the fiscal year ended
March 31, 1996.
Each Manager performs services pursuant to a Portfolio Management
Agreement appointing the Manager to act as Manager to a Fund, with
responsibility for management of such portion of the Fund's assets as the
Adviser shall allocate to the Manager from time to time.
Each Portfolio Management Agreement provides that the Manager's
services to the Fund are not exclusive. Each Manager is free to and does provide
investment advisory services to others.
Each Portfolio Management Agreement provides that it will continue in
effect for a period beyond two years from the date of its execution only so long
as such continuance is approved at least annually by (i) the Directors or by
vote of the holders of a majority of the Fund's outstanding voting securities
and (ii) by a majority of the Directors who are not parties to the Portfolio
Management Agreement or interested persons of any such party. The Portfolio
Management Agreement with Llama Asset 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 Atlantic Capital
Management, LLC with respect to ESC Strategic Appreciation Fund was approved by
the Directors, including a majority of the independent directors, on February
10, 1998. 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 approved by the Board of
Directors, including a majority of the Directors who are not parties to any
Portfolio Management Agreement or interested persons of any such party, at a
meeting held on April 4, 1994, and by the sole shareholder of each Fund on April
4, 1994. The Portfolio Management Agreements were re-approved at the October 20,
1997 Special Board of Directors Meeting. Each Portfolio Management Agreement may
be terminated at any time without penalty (a) by the Adviser, by the Fund upon
vote of a majority of the Directors, or by vote of a majority of the Fund's
outstanding voting securities, each upon sixty days' written notice to the
Manager; or (b) by the Manager upon sixty days' notice to the Company or the
Adviser. A Portfolio Management Agreement will also terminate automatically in
the event of its assignment. The Company has received exemptive relief that
permits the Board of Directors, without shareholder approval, to approve and
cause the Company to enter into new Portfolio Management Agreements in the event
a new Manager is retained or an existing
23
<PAGE> 83
Portfolio Management Agreement is amended, unless the Agreement is with a
Manager affiliated with the Adviser.
DISTRIBUTION OF FUND SHARES
Effective January 2, 1998, BISYS Fund Services (the "Distributor")
became the Distributor for the Funds pursuant to a Distribution Contract and as
Distributor serves as principal underwriter for the shares of the Fund. Prior to
January 2, 1998, the Adviser served as the Company's distributor. The
Distribution Agreement 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. Each Plan 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 each class of
shares of each of the 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 February 10, 1998. 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 period ended March 31, 1998, the Company paid distribution fees
in the amount of $69,082, $36,835, $265,118, 106,750, $27,168 and $20,278 for
the Income, International Equity, Small Cap, Appreciation, Growth and Value
Funds, respectively pursuant to Class A Plans. For the period ended March 31,
1998 the Company paid distribution fees in the amount of $6,626, $31,515,
$245,556, $41,418, $38,252 and $14,566, for the Income, International Equity,
Small Cap, Appreciation, Growth and Value Funds, respectively pursuant to Class
D Plans.
For the fiscal year ended March 31, 1997, the Distributor received
$42,069; $24,898; $127,326; $96,480 and $570 for the Income, International
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, International Equity, Small Cap, Appreciation,
Growth and Value Funds, respectively pursuant to Class D Plans (which were
formerly Class B shares).
For the fiscal year ended March 31, 1996, the Distributor received
$32,859; $16,888; $40,962 and $55,323 for Income, International Equity, Small
Cap and Appreciation Funds, respectively for Class A
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shares. For the period, the Distributor received $10,400; $27,060; $36,932 and
$15,516 for the Income, International 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 has served as
Administrator of the Funds since January 1, 1997. Since November 9, 1996, BISYS
Fund Services, Inc., also a subsidiary of The BISYS Group, Inc. ("BFSI") has
served 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.
For the period ended March 31, 1998, BISYS was entitled to fees in the
amount of $42,775; $28,404; $208,183; $72,334; $23,951 and $15,080; from the
Income, International Equity, Small Cap, Appreciation, Growth and Value Funds,
respectively. BISYS voluntarily waived fees of $18,729 for the Growth Fund and,
for the period from May 7, 1997 through March 31, 1998, $12,870 for the Value
Fund.
For the period ended March 31, 1997, Furman Selz, the Funds' former
administrator, was entitled to fees of $43,472; $22,578; $63,535; and $44,387
from Income, International Equity, Small Cap and Appreciation Funds,
respectively. For same period, BISYS, as successor Administrator, was entitled
to fees of $13,550; $8,489; $33,009; $18,512 and $862 from the Income,
International Equity, Small Cap, Appreciation and Growth Funds, respectively.
(Value Fund had not commenced operations as of March 31, 1997.)
For the period ended March 31, 1996, Furman Selz LLC, the Funds'
former Administrator, was entitled to and received fees in the amount of
$55,963, $23,532, $33,740 and $35,498 from the Income, International 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 November 4, 1997 Board of Directors Meeting. The
Administration Agreement 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
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such information with other client transactions; furnishing periodic and annual
statements and confirmations of all purchases and redemptions of shares in a
client's account; transmitting proxy statements, annual reports, and updating
prospectuses and other communications from the Funds to clients; and providing
such other services as the Funds or a client reasonably may request, to the
extent permitted by applicable statute, rule or regulation. Neither the Adviser
nor any Manager will be a Service Organization or receive fees for servicing.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more than
the minimum initial or subsequent investments specified by the Funds or charging
a direct fee for servicing. If imposed, these fees would be in addition to any
amounts that might be paid to the Service Organization by the Funds. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult them
regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law. If a bank were prohibited from so acting, its shareholder
clients would be permitted to remain shareholders of the Funds and alternative
means for continuing the servicing of such shareholders would be sought. In that
event, changes in the operation of the Funds might occur and a shareholder
serviced by such a bank might no longer be able to avail itself of any services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
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DETERMINATION OF NET ASSET VALUE
The Funds value their portfolio securities in accordance with the
procedures described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Managers are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Manager's
opinion is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
The Funds have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Company's Board of Directors, the Managers are
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Funds to obtain the
best results taking into account the broker-dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities. While the Managers generally
seek reasonably competitive spreads or commissions, the Funds will not
necessarily be paying the lowest spread or commission available.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of 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 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
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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, 1998, International Equity, Small
Cap, Appreciation, Growth, and Value Fund paid total brokerage commissions of
$4,014, $18,843, $27,634, $1,514 and $3,486, respectively, to SunTrust Equitable
Securities.
For the fiscal year ended March 31, 1997, the Appreciation Fund, Small
Cap and the International 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 Equitable Securities Corporation from the Income,
International Equity, Small Cap, Appreciation, Growth and Value Funds,
respectively.
For the fiscal year ended March 31, 1996, the Appreciation Fund, Small
Cap and the International 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, International 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, 1998 was 130%, 79%, 67%, 67%, 86% and 32% for
the Income, International Equity, Small Cap, Appreciation, Growth and Value
Funds, respectively. The portfolio turnover rate for the fiscal year ended March
31, 1997 was 123%, 94%, 65%, 71% and 14% for the Income, International Equity,
Small Cap, Appreciation, Growth and Value Funds, respectively. The portfolio
turnover rate for the fiscal year ended March 31, 1996 was 138%, 92%, 102% and
78% for the Income, International Equity, Small Cap and Appreciation Funds,
respectively. The portfolio turnover rate for each Fund with Multiple Managers
will be an aggregate of the rates for each portion of assets managed by a
particular Manager. Rates for each portion may vary significantly.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Funds and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
The Funds intend to continue to qualify annually as regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, a Fund must
(a) each taxable year distribute to shareholders at least 90% of its investment
company taxable income (which includes, among other items, dividends, taxable
interest less expenses and the excess of net short-term capital gains over net
long-term capital losses); (b) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities loans
and
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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; and (c) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies), or of two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses.
By meeting these requirements, a Fund generally will not be subject to Federal
income tax on its investment company taxable income and net capital gains which
are distributed to shareholders. If the Funds do not meet all of these Code
requirements, they will be taxed as ordinary corporations.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, each Fund must distribute for each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such year,
and (3) all ordinary income and capital gain net income (adjusted for certain
ordinary losses) for previous years that were not distributed during such years.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions from certain of the
Funds may be eligible for the dividends-received deduction available to
corporations. The Funds expect that distributions of net capital gains, if any,
designated by a Fund as capital gain dividends will generally be taxable to
shareholders as either "20% Gains" or "28% Gains," depending upon the Fund's
holding period for the assets sold. "20% Gains" arise from sales of assets held
by the Fund for more than 18 months and are subject to a maximum tax rate of
20%; "28% Gains" arise from sales of assets held by the Fund for more than one
year but no more than 18 months and are subject to a maximum tax rate of 28%.
Net capital gains from assets held for one year or less will be taxed as
ordinary income. Distributions will be subject to these gains rates regardless
of how long a shareholder has held Fund shares, and all distributions are
taxable to the shareholder in the same manner whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a stockholder's
cost basis, such distribution, nevertheless, would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Funds. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
will nevertheless generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares
of a Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands. Such gain or loss
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on a disposition will be disallowed to the
extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after
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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 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.
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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.
Recently enacted rules may affect the timing and character of gain if a
Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
Notwithstanding any of the foregoing, a Fund may recognize gain (but
not loss)from a constructive sale of certain "appreciated financial position" if
the Fund enters into a short sale, notional principal contract, futures or
forward contract transaction with respect to the appreciated position or
substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment does not apply to certain transactions closed in the 90-day
period ending with the thirtieth day after the close of the Fund's taxable year,
if certain conditions are met. Similarly, if a Fund enters into a short sale of
property that becomes substantially worthless, the Fund will recognize gain at
that time as though it had closed the short sale. Future Treasury Department
regulations may apply similar treatment to other transactions with respect to
property that becomes substantially worthless.
Certain requirements that must be met under the Code in order for a
Fund to qualify as a regulated investment company may limit the extent to which
a Fund will be able to engage in short sales and transactions in options,
futures, and forward contracts.
Certain of the debt securities acquired by a Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some of the debt securities may be purchased by a Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security, including a
tax-exempt debt security, having market discount will be treated as ordinary
income to the extent it does not exceed the accrued market discount on such debt
security. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency, and the time the Fund actually collects such receivables or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain options and forward and futures contracts, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or losses, may increase, decrease, or
eliminate the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
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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.
Alternatively, a Fund may elect to mark-to-market its PFIC shares at the end of
each taxable year, with the result that unrealized gains are treated as though
they were realized and reported as ordinary income. Any mark-to-market losses
and loss from an actual disposition of PFIC shares would be deductible as
ordinary losses to the extent of any mark-to-market gains included in income in
prior years.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and intends to elect to treat such foreign taxes paid by the Fund
that qualify as income or similar taxes under U.S. income tax principles as paid
by its shareholders. Pursuant to this election, a shareholder would be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by a Fund, and would be entitled
either to deduct his pro rata share of foreign taxes in computing his taxable
income or to use it as a foreign tax credit against his U.S. Federal income tax
liability, subject to limitations. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit (see below). Each shareholder will be
notified within 60 days after the close of a Fund's taxable year whether the
foreign taxes paid by a Fund will "pass-through" for that year and, if so, such
notification will designate (a) the shareholder's portion of the foreign taxes
paid to each such country and (b) the portion of the dividend which represents
income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his total foreign
source taxable income. For this purpose, if a Fund makes the election described
in the preceding paragraph, the source of the Fund's income flows through to its
shareholders. With respect to a Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency fluctuations gains,
including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables, will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the foreign tax
credit) including foreign source passive income of a Fund. The foreign tax
credit limitation rules do not apply to certain elections by individual
taxpayers who have limited creditable foreign taxes and no foreign source income
other than passive investment-type income. The foreign tax credit is eliminated
with respect to foreign taxes withheld on dividends if the dividend-paying
shares or the shares of the Fund are held by the Fund or the shareholder, as the
case may be, for less than 16 days (46 days in the case of preferred shares)
during the 30-day period (90-day period for preferred shares) beginning 15 days
(45 days for preferred shares) before the shares become ex-dividend. The foreign
tax credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals, and foreign taxes generally may not be deducted in
computing alternative minimum taxable income.
32
<PAGE> 92
The Funds are required to report to the Internal Revenue Service
("IRS") all distributions except in the case of certain exempt shareholders. All
such distributions generally are subject to withholding of Federal income tax at
a rate of 31% ("backup withholding") in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Funds with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions, whether
reinvested in additional shares or taken in cash, will be reduced by the amounts
required to be withheld. Backup withholding is not an additional tax. Any amount
withheld may be credited against the shareholder's U.S. Federal income tax
liability. Investors may wish to consult their tax advisors about the
applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be exempt
from state and local taxes in certain states. Shareholders should consult their
tax advisors with respect to particular questions of Federal, state and local
taxation. Shareholders who are not U.S. persons should consult their tax
advisors regarding U.S. and foreign tax consequences of ownership of shares of
the Funds including the likelihood that distributions to them would be subject
to withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
Changes in the tax law frequently come under consideration. Since the
Funds do not undertake to furnish tax advice, it is important for shareholders
to consult their tax advisers regularly about the tax consequences to them of
investing in one or more of the Funds.
OTHER INFORMATION
CAPITALIZATION
The Company is a Maryland corporation established under Articles of
Incorporation dated November 24, 1993 and currently consists of six separately
managed portfolios. The Funds currently offer two classes of shares. The
capitalization of the Company consists solely of 650 million shares of common
stock with a par value of $0.001 per share. The Board of Directors may establish
additional Funds (with different investment objectives and fundamental
policies), or additional classes of shares, at any time in the future.
Establishment and offering of additional Funds or classes will not alter the
rights of the Company's shareholders. When issued, shares are fully paid,
non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In any liquidation of a Fund or class,
each shareholder is entitled to receive his pro rata share of the net assets of
that Fund or class.
Expenses incurred in connection with each Fund's organization and the
public offering of its shares and amortized during the period ended March 31,
1998 were $8,797 for Income, $8,786 for International Equity, $10,844 for Small
Cap, $8,789 for Appreciation, $0 for Growth, and $0 for Value Fund. Costs
incurred in connection with the organization and initial registration of the
Funds, with the exception of the Growth Fund and Value Fund have been deferred
and are being amortized on a straight-line basis over sixty months beginning
with each Fund's commencement of operations.
33
<PAGE> 93
PRINCIPAL SHAREHOLDERS
As of June 22, 1998, the following persons owned of record or
beneficially 5% or more shares of a class of the Funds:
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC APPRECIATION FUND - CLASS A
BT Alex Brown Incorporated 118,192.369 5.76%
FBO 495-07027-14
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 642,497.168 31.28%**
FBO 495-20895-16
P.O. Box 1346
Baltimore, MD 21203-1346
Equitable Trust Company 199,994.113 9.75%
Suite 800
Nashville, TN 37219-1729
ESC STRATEGIC APPRECIATION FUND - CLASS D
BT Alex Brown Incorporated 36,499.436 7.37%
FBO 495-21832-10
P.O. Box 1346
Baltimore, MD 21203-1346
ESC STRATEGIC INTERNATIONAL EQUITY
FUND - CLASS A
Equitable Trust Company 206,631.030 18.89%
Nashville, TN 37219-1729
Comerica Bank TTEE 100,171.775 9.16%
Republic Automotive Parts Employees
Retirement Plan #72144
POB 75000/Attn M/C 3446 M/F Dept
Detroit, MI 48275-0001
</TABLE>
- ----------
** Beneficial ownership of shares is disclaimed by record account holder.
34
<PAGE> 94
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC INTERNATIONAL EQUITY
FUND - CLASS D
BT Alex Brown Incorporated 21,126.819 9.02%
FBO 495-21823-10
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 13,149.666 5.62%
FOB 495-08452-16
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 26,230.124 11.20%
FOB 495-21923-10
P.O. Box 1346
Baltimore, MD 21203-1346
H. Ronald Burton 12,363.340 5.28%
TRST Charles Lee Phillips Trust
Dtd 06/27/94
229 Ward Circle, Suite B-13
Brentwood, TN 37027
ESC STRATEGIC SMALL CAP FUND - CLASS A
Equitable Trust Company 416,360.007 7.59%
Nashville, TN 37219-1729
ESC STRATEGIC INCOME FUND - CLASS A
First American National Bank 296,407.720 12.045%
Cash
800 First American Center
Nashville, TN 37237-0801
Homeowners Association of Amer 229,904.571 9.35%
P.O. Box 221210
Ft. Lauderdale, FL 33355
Bankers Trust Company 1,479,523.785 60.141%**
FBO Nashville Memorial Foundation
Attn Mike Bloebaum
P.O. Box 9014
Church Street Station
New York, NY 10008
</TABLE>
- ----------
** Beneficial ownership of shares is disclaimed by record account holder.
35
<PAGE> 95
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC INCOME FUND - CLASS D
BT Alex Brown Incorporated 12,307.853 14.98%
FBO 495-26845-14
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 8,976.647 10.92%
FBO 495-25434-13
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 7,709.063 9.38%
FBO 495-21922-11
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 6,2,9.496 7.57%
FBO 495-18067-12
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
- ----------
** Beneficial ownership of shares is disclaimed by record account holder.
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC GROWTH FUND - CLASS A
none
ESC STRATEGIC GROWTH FUND - CLASS D
none
ESC STRATEGIC VALUE FUND - CLASS A
none
ESC STRATEGIC VALUE FUND - CLASS D
none
</TABLE>
36
<PAGE> 96
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
Union Bank of California, 475 Sansome Street, San Francisco, California
94111, acts as custodian of the Company's assets, but plays no role in making
decisions as to the purchase or sale of portfolio securities for the Funds.
BISYS Fund Services, Inc., a subsidiary of The BISYS Group, Inc.
("BFSI") succeeded Furman Selz LLC as Transfer Agent and Fund Accountant to the
funds effective November 9, 1996. Pursuant to a Transfer Agency Agreement
between the Company and BFSI, BFSI provides the Company with transfer and
dividend disbursing agent services, for which it receives a fee of $15.00 per
account per year subject to a required minimum fee of $15,000 for each Fund,
plus out-of-pocket expenses. Prior to October 1, 1997, the required minimum fee
for each Fund was $10,000. For the period ended March 31, 1998, BFSI, as
Transfer Agent, was entitled to and received fees in the amount of $4,564 for
the Asset Preservation (to September 29, 1997) and $13,634, $19,876, $153,667,
$21,462, $20,351 and $8,792 for the Income, International Equity, Appreciation,
Small Cap, Growth and Value Funds, respectively.
For the period ended March 31, 1997, Furman Selz LLC, as transfer
agent, was entitled to and received fees of $7,500 from Income, International
Equity and Appreciation Funds, and $20,812 for Small Cap Fund. BFSI, as
successor transfer agent, was entitled to and received fees in the amount of
$2,500 for each of the Income, International Equity and Appreciation Funds; BFSI
was entitled to and received fees in the amount of $12,470 and $1,774 for the
Small Cap, Growth and Value Funds, respectively. 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, International
Equity, Small Cap and Appreciation Funds would have incurred $11,796, $14,942,
$16,307, $23,536 and $16,395, respectively.
Pursuant to a Fund Accounting Agreement between the Company and BFSI,
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,
1998, BFSI, as Fund Accountant, earned for fund accounting services excluding
out-of-pocket expenses $10,000 for the Asset Preservation (to September 29,
1997) and $30,000 for each of the Income, International Equity, Small Cap,
Appreciation and Growth Funds and $27,500 for the Value Fund.
37
<PAGE> 97
For the period ended March 31, 1997, BFSI and Furman Selz earned a
total of $40,289, $54,374, $34,033, $45,913 and $5,923 for the Income,
International Equity, Small Cap and Growth Funds, respectively. (Value Fund had
not yet commenced operations.) For the fiscal year ended March 31, 1996, Furman
Selz earned $40,222, $39,554, $31,533 and $39,370 in fund accounting services
from the Income, International 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, 1998 was 4.80% and
4.31% for Class A and Class D shares of the Income Fund, 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,
July 6, 1994, January 28, 1997 (commencement of operations) and May 7, 1997
(commencement of operations), respectively through March 31, 1998, the average
annual total returns for Class A shares were as follows: 5.15% for the Income
Fund, 9.73% for the International Equity Fund, 28.36% for the Small Cap Fund,
22.71% for the Appreciation Fund, 30.96% for the Growth Fund, and 11.23% for the
Value Fund (aggregate total return). For the period May 4, 1994, May 12, 1994,
June 8, 1994, July 6, 1994, and January 28, 1997 (commencement of operations)
and May 7, 1997 (commencement of operations), respectively through March 31,
1998, the average annual total returns for Class D shares were as follows: 5.44%
for the Income Fund, 10.11% for the International Equity Fund, 29.00% for the
Small Cap Fund, 23.34% for the Appreciation Fund, 33.89% for the Growth Fund and
14.21% for the Value Fund (aggregate total return).
For year ended March 31, 1998, the annual total return for Class A
shares were as follows: 3.31% for the Income Fund, 16.74% for the International
Equity Fund, 34.31% for the Small Cap Fund, 40.13% for the Appreciation Fund
and 42.21% for the Growth Fund. For the year ended March 31, 1998, the annual
total return for Class D shares were as follows: 6.03% for the Income Fund,
20.26% for the International Equity Fund, 38.37% for the Small Cap Fund, 44.56%
for the Appreciation Fund and 46.10% for the Growth Fund.
38
<PAGE> 98
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
PricewaterhouseCoopers LLP serves as the independent accountants for
the Company. PricewaterhouseCoopers LLP provides audit services, tax return
preparation and assistance and consultation in connection with review of
SEC filings.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C.,
20006-2401, passes upon certain legal matters in connection with the shares
offered by the Company and also acts as Counsel to the Company.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included
in the Company's Registration Statement filed with the SEC under the Securities
Act of 1933 with respect to the securities offered hereby, certain portions of
which have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Report of Independent Accountants and audited financial statements
of the Funds included in their Annual Report for the period ended March 31, 1998
(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., P.O. Box 182487, Columbus, Ohio
43218-2487 or telephoning (800) 261-FUND (3863).
39
<PAGE> 99
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.
40
<PAGE> 100
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, 1998
*Incorporated by reference into the Statement of Additional Information
from Registrant's Annual Report to Shareholders for the period ended March
31, 1998, as filed with the Commission on June 24, 1998:
(1) Portfolio of Investments at March 31, 1998.*
(2) Statements of Assets and Liabilities dated March 31, 1998.*
(3) Statements of Operations for the fiscal year ended March 31,1998
(audited).*
(4) Statements of Changes in Net Assets for the fiscal periods ended March
31, 1998 and March 31, 1997 (audited).*
(5) Notes to Financial Statements at March 31, 1998 (audited).*
(6) Financial Highlights for the fiscal period ended March 31, 1998
(audited)*
(7) Report of Independent Accountants.*
(b) Exhibits:
(1) (a) Articles of Incorporation of Registrant. (1)
(b) Certificate of Correction. (1)
(c) Articles of Amendment. (Growth) (5)
(d) Articles of Amendment. (Value) (5)
(2) By-laws of Registrant. (1)
(3) Not applicable.
(4) Specimen certificates of shares of common stock of Registrant. (1)
(5) (a) Investment Advisory Agreement. (6)
(b) Portfolio Management Agreement for ESC Strategic Growth Fund. (4)
(c) Portfolio Management Agreement for other Funds of Registrant. (2)
(d) Portfolio Management Agreement with Cincinnati Asset Management, Inc.
(2)
(e) Portfolio Management Agreement for ESC Strategic Value Fund. (5)
(6) (a) Master Distribution Contract. (2)
1
<PAGE> 101
(b) Distribution Contract Supplements for ESC Strategic Growth Fund. (4)
(c) Distribution Contract Supplements for other Funds of Registrant. (2)
(d) Distribution Contract Supplements for ESC Strategic Value Fund. (5)
(e) Form of Dealer and Selling Group Agreement. (1)
(f) Form of Escrow Agreement. (1)
(7) Not applicable.
(8) Custody Agreement. (2)
(9) (a) Administrative Services Contract. (5)
(b) Transfer Agency Agreement. (5)
(c) Sub-Transfer Agency Agreement. (2)
(d) Accounting Agent Contract. (5)
(e) Form of Services Agreement. (1)
(10) Opinion of Counsel. (1)
(11) Consent of Independent Accountants--filed herewith.
(12) Financial Statements in the Registrant's Annual Report for the fiscal year
ended March 31, 1998 as filed with the Commission on June 24, 1998 are
incorporated herein by reference.
(13) (a) Purchase Agreement. (2)
(b) Purchase Agreement for ESC Strategic Growth Fund (5)
(c) Purchase Agreement for ESC Strategic Value Fund (5)
(14) Not applicable.
(15) (a) Form of Master Distribution Plan. (1)
(b) Distribution Plan Supplements for ESC Strategic Growth Fund (4)
(c) Forms of Distribution Plan Supplement. (1)
(d) Distribution Plan Supplements for ESC Strategic Value Fund (4)
(16) (a) Schedules for Computations (8)
(b) Schedules for Computation (Value Fund)(9)
(17) Financial Data Schedules--filed herewith
(18) Multi-Class Plan, as amended January 14, 1997 (5)
(19) (a) Power of Attorney in favor of Jeffrey L. Steele (1)
2
<PAGE> 102
(b) Powers of Attorney in Favor of Jeffrey L. Steele and Olivia P. Adler
(8)
* Incorporated by reference to the Registrant's Annual Report filed with the
Securities and Exchange Commission on June 24, 1998.
(1) Filed with Pre-Effective Amendment No. 3, April 5, 1994, and are
incorporated herein by reference.
(2) Filed with Post-Effective Amendment No. 2, July 28, 1995, and are
incorporated herein by reference.
(3) Filed with Post-Effective Amendment No. 3, July 26, 1996, and are
incorporated herein by reference.
(4) Filed with Post-Effective Amendment No. 6, December 5, 1996 and are
incorporated herein by reference.
(5) Filed with Post-Effective Amendment No. 7, February 18, 1997 and are
incorporated herein by reference.
(6) Filed with Post-Effective Amendment No. 8, July 29, 1997 and are
incorporated herein by reference.
(7) Filed with Post-Effective Amendment No. 9, October 30, 1997 and are
incorporated herein by reference.
(8) Filed with Post-Effective Amendment No. 10, May 18, 1998 and are
incorporated herein by reference.
3
<PAGE> 103
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of June 22, 1998, 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 607
Class D 332
ESC Strategic Global Equity Fund
Class A 289
Class D 80
ESC Strategic Small Cap Fund
Class A 3,886
Class D 1,116
ESC Strategic Income Fund
Class A 119
Class D 37
ESC Strategic Growth Fund
Class A 1,522
Class D 575
ESC Strategic Asset Preservation Fund 0
ESC Strategic Value Fund
Class A 632
Class D 173
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VII of Registrant's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to the Articles of Incorporation or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Investment Company Act of 1940 and, therefore, is unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by directors, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such directors, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Investment Company Act of 1940 and will be governed by the
final adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
SunTrust Equitable Securities, the investment adviser to ESC Strategic
Funds, Inc., is a New York Stock Exchange member investment banking and
securities brokerage firm. The names of SunTrust Equitable Securities' directors
and officers and their business and other connections for at least the past two
years are as follows: (1)
4
<PAGE> 104
<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 Corporation,
Director and Director 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 Corporation,
and Managing Director 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
Treasurer, ESC Strategic 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 SunTrust Equitable Securities
is 800 Nashville City Center, Nashville, Tennessee 37279-1743.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) The information required by this item 29 with respect to the
Distributor is incorporated by reference to Schedule A of Form BD
filed by BISYS Fund Services Limited Partnership pursuant to the
Securities Exchange Act of 1934 (SEC File No. 8-32480).
(c) Not applicable.
5
<PAGE> 105
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) SunTrust Equitable Securities, 800 Nashville City Center, Nashville,
Tennessee 37219-1743 (records relating to its functions as investment
adviser).
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as administrator, transfer agent, fund accountant
and distributor).
(3) 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.
6
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this Post-Effective Amendment No. 11 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 17th day of July, 1998.
ESC STRATEGIC FUNDS, INC. ESC STRATEGIC FUNDS, INC.
* By: /s/ *
-------------------------------
R. Jeffrey Young John L. McAllister
President Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 11 to Registrant's Registration Statement has
been signed by the following persons in the capacities indicated on the 17th
day of July, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ *
- ----------------------
William H. Cammack, Jr. Director
/s/ *
- ----------------------
J. Bransford Wallace Director
/s/ *
- ----------------------
Brownlee O. Currey, Jr. Director
/s/ *
- ----------------------
E. Townes Duncan Director
*By: /s/ Jeffrey L. Steele
----------------------------------
Jeffrey L. Steele
Attorney-in-Fact
</TABLE>
7
<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. 11 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated May 19, 1998, relating to the financial
statements and financial highlights appearing in the March 31, 1998 Annual
Report to Shareholders of ESC Strategic Funds, Inc. which is incorporated by
reference into the Registration Statement. We also consent to the references to
us under the headings "Independent Accountants" and "Financial Statements" in
the Statement of Additional Information.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
July 16, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> ESC STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 24,697,380
<INVESTMENTS-AT-VALUE> 24,891,795
<RECEIVABLES> 497,269
<ASSETS-OTHER> 21,320
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,410,384
<PAYABLE-FOR-SECURITIES> 8,146
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166,004
<TOTAL-LIABILITIES> 174,150
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,110,100
<SHARES-COMMON-STOCK> 2,443,891<F1>
<SHARES-COMMON-PRIOR> 3,339,466<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 170,920
<ACCUMULATED-NET-GAINS> 104,443
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 192,621
<NET-ASSETS> 25,236,234
<DIVIDEND-INCOME> 16,098
<INTEREST-INCOME> 2,014,084
<OTHER-INCOME> 0
<EXPENSES-NET> 535,851
<NET-INVESTMENT-INCOME> 1,494,331
<REALIZED-GAINS-CURRENT> 315,559
<APPREC-INCREASE-CURRENT> 506,910
<NET-CHANGE-FROM-OPS> 2,316,800
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,452,325<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 155,058<F1>
<NUMBER-OF-SHARES-REDEEMED> 1,181,717<F1>
<SHARES-REINVESTED> 131,084<F1>
<NET-CHANGE-IN-ASSETS> (8,689,730)
<ACCUMULATED-NII-PRIOR> 397,655
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 779,672
<GROSS-ADVISORY-FEES> 285,164
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 539,171
<AVERAGE-NET-ASSETS> 27,610,627<F1>
<PER-SHARE-NAV-BEGIN> 9.73<F1>
<PER-SHARE-NII> 0.34<F1>
<PER-SHARE-GAIN-APPREC> 0.44<F1>
<PER-SHARE-DIVIDEND> 0.52<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 9.99<F1>
<EXPENSE-RATIO> 1.87<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS A SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> ESC STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 24,697,380
<INVESTMENTS-AT-VALUE> 24,891,795
<RECEIVABLES> 497,269
<ASSETS-OTHER> 21,320
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,410,384
<PAYABLE-FOR-SECURITIES> 8,146
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166,004
<TOTAL-LIABILITIES> 174,150
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,110,100
<SHARES-COMMON-STOCK> 82,351<F1>
<SHARES-COMMON-PRIOR> 145,898<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 170,920
<ACCUMULATED-NET-GAINS> 104,433
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 192,621
<NET-ASSETS> 25,236,234
<DIVIDEND-INCOME> 16,098
<INTEREST-INCOME> 2,014,084
<OTHER-INCOME> 0
<EXPENSES-NET> 535,851
<NET-INVESTMENT-INCOME> 1,494,331
<REALIZED-GAINS-CURRENT> 315,559
<APPREC-INCREASE-CURRENT> 506,910
<NET-CHANGE-FROM-OPS> 2,316,800
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 42,035<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 17,012<F1>
<NUMBER-OF-SHARES-REDEEMED> 84,249<F1>
<SHARES-REINVESTED> 3,690<F1>
<NET-CHANGE-IN-ASSETS> (8,689,730)
<ACCUMULATED-NII-PRIOR> 397,655
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 779,672
<GROSS-ADVISORY-FEES> 285,164
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 539,171
<AVERAGE-NET-ASSETS> 881,894<F1>
<PER-SHARE-NAV-BEGIN> 9.73<F1>
<PER-SHARE-NII> 0.56<F1>
<PER-SHARE-GAIN-APPREC> 0.28<F1>
<PER-SHARE-DIVIDEND> 0.45<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 9.99<F1>
<EXPENSE-RATIO> 2.37<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS D SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> ESC STRATEGIC GLOBAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 12,920,464
<INVESTMENTS-AT-VALUE> 16,210,244
<RECEIVABLES> 109,680
<ASSETS-OTHER> 27,250
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,347,174
<PAYABLE-FOR-SECURITIES> 228,712
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56,494
<TOTAL-LIABILITIES> 285,206
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,039,270
<SHARES-COMMON-STOCK> 1,101,884<F1>
<SHARES-COMMON-PRIOR> 1,568,551<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 28,171
<ACCUMULATED-NET-GAINS> 760,675
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,290,194
<NET-ASSETS> 16,061,968
<DIVIDEND-INCOME> 304,604
<INTEREST-INCOME> 70,733
<OTHER-INCOME> 0
<EXPENSES-NET> 490,630
<NET-INVESTMENT-INCOME> (115,193)
<REALIZED-GAINS-CURRENT> 2,620,302
<APPREC-INCREASE-CURRENT> 1,602,799
<NET-CHANGE-FROM-OPS> 4,107,908
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 1,988,043<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 102,868<F1>
<NUMBER-OF-SHARES-REDEEMED> 692,279<F1>
<SHARES-REINVESTED> 122,744<F1>
<NET-CHANGE-IN-ASSETS> (6,424,255)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 876,664
<OVERDISTRIB-NII-PRIOR> 2,380
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 189,362
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 491,447
<AVERAGE-NET-ASSETS> 14,720,509<F1>
<PER-SHARE-NAV-BEGIN> 11.66<F1>
<PER-SHARE-NII> 0<F1>
<PER-SHARE-GAIN-APPREC> 2.37<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 1.97<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.06<F1>
<EXPENSE-RATIO> 2.48<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS A SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> ESC STRATEGIC GLOBAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 12,920,464
<INVESTMENTS-AT-VALUE> 16,210,244
<RECEIVABLES> 109,680
<ASSETS-OTHER> 27,250
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,347,174
<PAYABLE-FOR-SECURITIES> 228,712
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56,494
<TOTAL-LIABILITIES> 285,206
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,039,270
<SHARES-COMMON-STOCK> 234,924<F1>
<SHARES-COMMON-PRIOR> 366,560<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 28,171
<ACCUMULATED-NET-GAINS> 760,675
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,290,194
<NET-ASSETS> 16,061,968
<DIVIDEND-INCOME> 304,604
<INTEREST-INCOME> 70,733
<OTHER-INCOME> 0
<EXPENSES-NET> 490,530
<NET-INVESTMENT-INCOME> (115,193)
<REALIZED-GAINS-CURRENT> 2,620,302
<APPREC-INCREASE-CURRENT> 1,602,799
<NET-CHANGE-FROM-OPS> 4,107,908
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 658,846<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 13,339<F1>
<NUMBER-OF-SHARES-REDEEMED> 206,722<F1>
<SHARES-REINVESTED> 61,747<F1>
<NET-CHANGE-IN-ASSETS> (6,424,255)<F1>
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 876,664
<OVERDISTRIB-NII-PRIOR> 2,380
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 189,362
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 491,447
<AVERAGE-NET-ASSETS> 4,198,103<F1>
<PER-SHARE-NAV-BEGIN> 11.47<F1>
<PER-SHARE-NII> (0.13)<F1>
<PER-SHARE-GAIN-APPREC> 2.44<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 1.97<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 11.81<F1>
<EXPENSE-RATIO> 2.98<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS D SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> ESC STRATEGIC SMALL CAP FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 126,291,429
<INVESTMENTS-AT-VALUE> 165,290,658
<RECEIVABLES> 896,685
<ASSETS-OTHER> 61,440
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 166,248,783
<PAYABLE-FOR-SECURITIES> 902,762
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 214,727
<TOTAL-LIABILITIES> 1,117,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122,771,780
<SHARES-COMMON-STOCK> 5,561,203<F1>
<SHARES-COMMON-PRIOR> 4,129,592<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,360,285
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,999,229
<NET-ASSETS> 165,131,294
<DIVIDEND-INCOME> 430,642
<INTEREST-INCOME> 1,624,643
<OTHER-INCOME> 0
<EXPENSES-NET> 2,464,452
<NET-INVESTMENT-INCOME> (409,168)
<REALIZED-GAINS-CURRENT> 13,586,328
<APPREC-INCREASE-CURRENT> 30,415,943
<NET-CHANGE-FROM-OPS> 43,593,103
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 8,972,632<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,661,014<F1>
<NUMBER-OF-SHARES-REDEEMED> 613,954<F1>
<SHARES-REINVESTED> 384,551<F1>
<NET-CHANGE-IN-ASSETS> 70,251,411
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,923,356
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,387,887
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,528,712
<AVERAGE-NET-ASSETS> 106,196,936<F1>
<PER-SHARE-NAV-BEGIN> 17.55<F1>
<PER-SHARE-NII> 0.02<F1>
<PER-SHARE-GAIN-APPREC> 6.97<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 1.73<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 22.81<F1>
<EXPENSE-RATIO> 1.65<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS A SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> ESC STRATEGIC SMALL CAP FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 126,291,429
<INVESTMENTS-AT-VALUE> 165,290,658
<RECEIVABLES> 896,685
<ASSETS-OTHER> 61,440
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 166,248,783
<PAYABLE-FOR-SECURITIES> 902,762
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 214,727
<TOTAL-LIABILITIES> 1,117,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122,771,780
<SHARES-COMMON-STOCK> 1,701,274<F1>
<SHARES-COMMON-PRIOR> 1,290,948<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,360,285
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,999,229
<NET-ASSETS> 165,131,294
<DIVIDEND-INCOME> 430,642
<INTEREST-INCOME> 1,624,643
<OTHER-INCOME> 0
<EXPENSES-NET> 2,464,452
<NET-INVESTMENT-INCOME> (409,168)
<REALIZED-GAINS-CURRENT> 13,586,328
<APPREC-INCREASE-CURRENT> 30,415,943
<NET-CHANGE-FROM-OPS> 43,593,103
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 2,767,599<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 428,750<F1>
<NUMBER-OF-SHARES-REDEEMED> 151,079<F1>
<SHARES-REINVESTED> 132,655<F1>
<NET-CHANGE-IN-ASSETS> 70,251,411
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,923,356
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,387,887
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,526,712
<AVERAGE-NET-ASSETS> 32,784,432<F1>
<PER-SHARE-NAV-BEGIN> 17.35<F1>
<PER-SHARE-NII> (0.07)<F1>
<PER-SHARE-GAIN-APPREC> 6.95<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 1.73<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 22.50<F1>
<EXPENSE-RATIO> 2.15<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS D SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> ESC STRATEGIC APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 29,310,646
<INVESTMENTS-AT-VALUE> 41,152,156
<RECEIVABLES> 459,801
<ASSETS-OTHER> 28,484
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 41,640,441
<PAYABLE-FOR-SECURITIES> 795,194
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 67,352
<TOTAL-LIABILITIES> 862,546
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,486,997
<SHARES-COMMON-STOCK> 2,114,008<F1>
<SHARES-COMMON-PRIOR> 3,190,643<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 171,962
<ACCUMULATED-NET-GAINS> 3,620,464
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,842,396
<NET-ASSETS> 40,777,895
<DIVIDEND-INCOME> 519,880
<INTEREST-INCOME> 153,397
<OTHER-INCOME> 0
<EXPENSES-NET> 892,320
<NET-INVESTMENT-INCOME> (219,043)
<REALIZED-GAINS-CURRENT> 12,458,936
<APPREC-INCREASE-CURRENT> 6,933,791
<NET-CHANGE-FROM-OPS> 19,173,684
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 9,402,699<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 402,557<F1>
<NUMBER-OF-SHARES-REDEEMED> 2,074,474<F1>
<SHARES-REINVESTED> 595,282<F1>
<NET-CHANGE-IN-ASSETS> (8,043,411)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,077,670
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 482,226
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 897,355
<AVERAGE-NET-ASSETS> 42,668,962<F1>
<PER-SHARE-NAV-BEGIN> 14.03<F1>
<PER-SHARE-NII> 0.02<F1>
<PER-SHARE-GAIN-APPREC> 6.02<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 4.27<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 15.80<F1>
<EXPENSE-RATIO> 1.80<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS A SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> ESC STRATEGIC APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 29,310,646
<INVESTMENTS-AT-VALUE> 41,152,156
<RECEIVABLES> 459,801
<ASSETS-OTHER> 28,484
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 41,640,441
<PAYABLE-FOR-SECURITIES> 795,194
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 67,352
<TOTAL-LIABILITIES> 862,546
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,486,997
<SHARES-COMMON-STOCK> 475,250<F1>
<SHARES-COMMON-PRIOR> 292,678<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 171,962
<ACCUMULATED-NET-GAINS> 3,620,464
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,842,396
<NET-ASSETS> 40,777,895
<DIVIDEND-INCOME> 519,880
<INTEREST-INCOME> 153,397
<OTHER-INCOME> 0
<EXPENSES-NET> 892,320
<NET-INVESTMENT-INCOME> (219,043)
<REALIZED-GAINS-CURRENT> 12,458,936
<APPREC-INCREASE-CURRENT> 6,933,791
<NET-CHANGE-FROM-OPS> 19,173,684
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 1,466,362<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 154,004<F1>
<NUMBER-OF-SHARES-REDEEMED> 75,471<F1>
<SHARES-REINVESTED> 104,039<F1>
<NET-CHANGE-IN-ASSETS> (8,043,411)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,077,670
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 482,226
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 897,355
<AVERAGE-NET-ASSETS> 5,531,549<F1>
<PER-SHARE-NAV-BEGIN> 13.85<F1>
<PER-SHARE-NII> (0.08)<F1>
<PER-SHARE-GAIN-APPREC> 6.04<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 4.27<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 15.54<F1>
<EXPENSE-RATIO> 2.30<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS D SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 51
<NAME> ESC STRATEGIC GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 26,261,615
<INVESTMENTS-AT-VALUE> 30,097,711
<RECEIVABLES> 189,103
<ASSETS-OTHER> 20,452
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,307,266
<PAYABLE-FOR-SECURITIES> 616,086
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,981
<TOTAL-LIABILITIES> 676,067
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,244,024
<SHARES-COMMON-STOCK> 1,458,113<F1>
<SHARES-COMMON-PRIOR> 295,961<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 448,921
<ACCUM-APPREC-OR-DEPREC> 3,836,096
<NET-ASSETS> 29,631,199
<DIVIDEND-INCOME> 59,663
<INTEREST-INCOME> 142,166
<OTHER-INCOME> 0
<EXPENSES-NET> 285,348
<NET-INVESTMENT-INCOME> (83,519)
<REALIZED-GAINS-CURRENT> 601,246
<APPREC-INCREASE-CURRENT> 3,963,507
<NET-CHANGE-FROM-OPS> 4,481,234
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 660,123<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,186,062<F1>
<NUMBER-OF-SHARES-REDEEMED> 72,221<F1>
<SHARES-REINVESTED> 48,311<F1>
<NET-CHANGE-IN-ASSETS> 25,475,649
<ACCUMULATED-NII-PRIOR> 561
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 25,751
<GROSS-ADVISORY-FEES> 199,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 418,762
<AVERAGE-NET-ASSETS> 10,913,961<F1>
<PER-SHARE-NAV-BEGIN> 9.64<F1>
<PER-SHARE-NII> 0.01<F1>
<PER-SHARE-GAIN-APPREC> 4.65<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0.62<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 13.68<F1>
<EXPENSE-RATIO> 1.62<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS A SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> ESC STRATEGIC GROWTH FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 26,261,615
<INVESTMENTS-AT-VALUE> 30,097,711
<RECEIVABLES> 189,103
<ASSETS-OTHER> 20,452
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,307,266
<PAYABLE-FOR-SECURITIES> 616,086
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,981
<TOTAL-LIABILITIES> 676,067
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,244,024
<SHARES-COMMON-STOCK> 711,840<F1>
<SHARES-COMMON-PRIOR> 135,392<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 448,921
<ACCUM-APPREC-OR-DEPREC> 3,836,096
<NET-ASSETS> 29,631,199
<DIVIDEND-INCOME> 59,663
<INTEREST-INCOME> 142,166
<OTHER-INCOME> 0
<EXPENSES-NET> 285,348
<NET-INVESTMENT-INCOME> (83,519)
<REALIZED-GAINS-CURRENT> 601,246
<APPREC-INCREASE-CURRENT> 3,963,507
<NET-CHANGE-FROM-OPS> 4,481,234
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 318,033<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 579,982<F1>
<NUMBER-OF-SHARES-REDEEMED> 28,316<F1>
<SHARES-REINVESTED> 24,782<F1>
<NET-CHANGE-IN-ASSETS> 25,475,649
<ACCUMULATED-NII-PRIOR> 561
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 25,751
<GROSS-ADVISORY-FEES> 199,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 418,762
<AVERAGE-NET-ASSETS> 5,123,201<F1>
<PER-SHARE-NAV-BEGIN> 9.63<F1>
<PER-SHARE-NII> (0.03)<F1>
<PER-SHARE-GAIN-APPREC> 4.63<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0.62<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 13.61<F1>
<EXPENSE-RATIO> 2.12<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS D SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 061
<NAME> ESC STRATEGIC VALUE FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> MAY-07-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 16,973,410
<INVESTMENTS-AT-VALUE> 18,357,203
<RECEIVABLES> 51,302
<ASSETS-OTHER> 39,984
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,448,489
<PAYABLE-FOR-SECURITIES> 80,215
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,149
<TOTAL-LIABILITIES> 139,364
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,746,586
<SHARES-COMMON-STOCK> 1,199,696<F1>
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 178,746
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,383,793
<NET-ASSETS> 18,309,125
<DIVIDEND-INCOME> 57,625
<INTEREST-INCOME> 144,904
<OTHER-INCOME> 0
<EXPENSES-NET> 170,985
<NET-INVESTMENT-INCOME> 31,544
<REALIZED-GAINS-CURRENT> 305,111
<APPREC-INCREASE-CURRENT> 1,383,793
<NET-CHANGE-FROM-OPS> 1,720,448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 28,213<F1>
<DISTRIBUTIONS-OF-GAINS> 98,921<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,248,837<F1>
<NUMBER-OF-SHARES-REDEEMED> 60,086<F1>
<SHARES-REINVESTED> 10,945<F1>
<NET-CHANGE-IN-ASSETS> 18,309,125
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 125,668
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 248,535
<AVERAGE-NET-ASSETS> 9,068,353<F1>
<PER-SHARE-NAV-BEGIN> 10.00<F1>
<PER-SHARE-NII> 0.04<F1>
<PER-SHARE-GAIN-APPREC> 1.60<F1>
<PER-SHARE-DIVIDEND> 0.03<F1>
<PER-SHARE-DISTRIBUTIONS> 0.10<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 11.51<F1>
<EXPENSE-RATIO> 1.56<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS A SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 062
<NAME> ESC STRATEGIC VALUE FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> MAY-07-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 16,973,410
<INVESTMENTS-AT-VALUE> 18,357,203
<RECEIVABLES> 51,302
<ASSETS-OTHER> 39,984
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,448,489
<PAYABLE-FOR-SECURITIES> 80,215
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,149
<TOTAL-LIABILITIES> 139,364
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,746,586
<SHARES-COMMON-STOCK> 392,807<F1>
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 178,746
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,383,793
<NET-ASSETS> 18,309,125
<DIVIDEND-INCOME> 57,625
<INTEREST-INCOME> 144,904
<OTHER-INCOME> 0
<EXPENSES-NET> 170,985
<NET-INVESTMENT-INCOME> 31,544
<REALIZED-GAINS-CURRENT> 305,111
<APPREC-INCREASE-CURRENT> 1,383,793
<NET-CHANGE-FROM-OPS> 1,720,448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,506<F1>
<DISTRIBUTIONS-OF-GAINS> 26,269<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 400,749<F1>
<NUMBER-OF-SHARES-REDEEMED> 10,728<F1>
<SHARES-REINVESTED> 2,786<F1>
<NET-CHANGE-IN-ASSETS> 18,309,125
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 125,668
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 248,535
<AVERAGE-NET-ASSETS> 2,174,971<F1>
<PER-SHARE-NAV-BEGIN> 10.00<F1>
<PER-SHARE-NII> 0.01<F1>
<PER-SHARE-GAIN-APPREC> 1.58<F1>
<PER-SHARE-DIVIDEND> 0.02<F1>
<PER-SHARE-DISTRIBUTIONS> 0.10<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 11.47<F1>
<EXPENSE-RATIO> 2.06<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CLASS D SHARES
</FN>
</TABLE>
