<PAGE> 1
Registration Nos. 33-72190
811-8166
As filed with the Securities and Exchange Commission on July 30, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
POST-EFFECTIVE AMENDMENT NO. X
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
AMENDMENT NO. 13 X
ESC STRATEGIC FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
3435 STELZER ROAD, COLUMBUS, OHIO 43219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 662-8417
W. HOWARD CAMMACK, JR.
SUNTRUST EQUITABLE SECURITIES CORPORATION
800 NASHVILLE CITY CENTER
511 UNION STREET
NASHVILLE, TENNESSEE 37219-1743
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
JEFFREY L. STEELE, ESQ. 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
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) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
----------------------
<PAGE> 2
ESC Strategic Funds Logo
ESC STRATEGIC FUNDS, INC.
PROSPECTUS
JULY 30, 1999
ESC STRATEGIC APPRECIATION FUND
ESC STRATEGIC INTERNATIONAL EQUITY FUND
ESC STRATEGIC SMALL CAP FUND
ESC STRATEGIC SMALL CAP II FUND
ESC STRATEGIC INCOME FUND
THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED OR DISAPPROVED THE
SHARES DESCRIBED IN THIS PROSPECTUS OR
DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
QUESTIONS?
Call 1-800-261-FUND(3863)
or your investment representative.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
LOGO
Carefully review this 3 About the ESC Strategic Funds
important section, which 4 ESC Strategic Appreciation Fund
summarizes each fund's 6 ESC Strategic International Equity Fund
investments, risks, past 8 ESC Strategic Small Cap Fund
performance, and fees. 10 ESC Strategic Small Cap II Fund
12 ESC Strategic Income Fund
14 Fund Expenses
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
LOGO
Review this section for 17 ESC Strategic Appreciation Fund
information on investment 18 ESC Strategic International Equity Fund
strategies and their risks. 19 ESC Strategic Small Cap Fund
19 ESC Strategic Small Cap II Fund
21 ESC Strategic Income Fund
23 Management Strategies
FUND MANAGEMENT
TRIANGLE
LOGO
Review this section for 27 The Investment Adviser
details on the people and 27 The Managers
organizations who oversee 28 The Administrator and Distributor
the funds. 28 Year 2000
SHAREHOLDER INFORMATION
TRIANGLE
LOGO
Review this section for 29 Pricing of Fund Shares
details on how shares are 30 Purchasing and Adding to Your Shares
valued, how to purchase, 33 Selling Your Shares
sell and exchange shares, 35 General Policies on Selling Your Shares
related charges and payments 37 Distribution Arrangements/Sales Charges
of dividends and 39 Distribution and Service (12b-1) Fees
distributions. 40 Exchanging Your Shares
41 Dividends, Distributions and Taxes
FINANCIAL HIGHLIGHTS
TRIANGLE
LOGO
Review this section for 42 Financial Highlights
details on selected
financial highlights of the
funds.
</TABLE>
2
<PAGE> 4
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ABOUT THE ESC STRATEGIC FUNDS
The following "Risk/Return Summary and Fund Expenses" section describes each
Fund's objectives, principal investment strategies, certain performance
information and the Funds' expenses. Detailed descriptions of the Funds are
included following the Risk/Return Summary on pages 17-22.
<TABLE>
<S> <C>
SUMMARY OF PRINCIPAL RISKS This summary describes certain of the principal risks that
apply to the Funds. These risks can cause the value of your
investment to decline. Except for Equity Risk, all the risks
affect each Fund to some degree. Other risks, as applicable
to each Fund, are defined in the Investment Objectives,
Strategies and Risks section of this prospectus.
MARKET RISK This is the risk that the value of a Fund's investments will
fluctuate as the stock or bond markets fluctuate and that
prices overall will decline over short or longer-term
periods.
MANAGEMENT RISK This risk is the possibility that a Fund's manager(s) may
make poor choices in selecting securities and that the Fund
will not perform as well as other funds.
EQUITY RISK (Not applicable to Income Fund) Stocks (equity securities)
have no guaranteed value and their market prices can
fluctuate, at times dramatically, in response to factors
including market conditions, political and other events and
developments affecting the particular issuer or its industry
or market segments.
OTHER IMPORTANT THINGS FOR - There is no assurance that a Fund will achieve its
YOU TO NOTE: investment objective.
- An investment in a Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
</TABLE>
3
<PAGE> 5
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC APPRECIATION FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation.
PRINCIPAL INVESTMENT The Fund pursues its objective by investing, under normal market conditions,
STRATEGIES primarily in a diversified portfolio of common stocks and securities
convertible into common stock issued by U.S. based companies. The Fund's
rebalancing procedures require the Fund to sell securities in sectors that
become overweighted (and presumably over-valued) and to purchase securities in
underweighted (and presumably undervalued) sectors. The Fund uses the Multiple
Manager Strategy. See page 23. The Fund's managers are Westcap Investors, LLC,
Brandes Investment Partners, L.P., and Atlantic Capital Management, LLC.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund are:
- Equity Risk
- Market Risk
- Management Risk
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- Pursuing a long-term goal, such as retirement
- Seeking to add a growth component to your portfolio
- Willing to accept higher risks of investing in the stock market in exchange
for potentially higher long term returns
This Fund will not be appropriate for anyone:
- Seeking regular income
- Pursuing a short-term goal or investing emergency reserves
- Seeking safety of principal
</TABLE>
4
<PAGE> 6
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC APPRECIATION FUND
CONTINUED
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF
12/31 FOR CLASS A SHARES*
<TABLE>
<S> <C>
'1995' 25.59
'1996' 22.63
'1997' 25.86
'1998' -4.75
</TABLE>
The bar chart above does not reflect the
impact of any applicable sales charges or
account fees which would reduce returns.
Both the chart and the table assume
reinvestment of dividends and
distributions. Performance of the Fund
shown in the table and chart reflects
effect of fee waivers and/or expense
reimbursement. Without waivers or
reimbursements, the Fund performance would
have been higher.
Best quarter: Q2
1997 16.96%
Worst quarter: Q3
1998 -22.05%
AVERAGE ANNUAL TOTAL
RETURNS*
(for the periods ending
December 31, 1998)
The chart and table on this
page show how the
Appreciation Fund has
performed and how its
performance has varied from
year to year. The bar chart
gives some indication of
the risks of an investment
in the Fund by showing
changes in the Fund's
yearly performance over the
past four calendar years.
The table below it compares
the Fund's performance over
time to that of the
Standard & Poor's (S&P)
Midcap 400 Index, an
unmanaged index generally
representative of the U.S.
stock market, the Lipper
Capital Appreciation Index,
an equally weighted
benchmark comprised of
equity mutual funds, and
the S&P 500 Stock Index, an
unmanaged index of 500
selected common stocks,
most of which are listed on
the New York Stock
Exchange. Of course, past
performance does not
indicate how the Fund will
perform in the future. The
returns for
Class D shares will differ
from the Class A returns
shown in the bar chart
because of differences in
expenses of each class.
<TABLE>
<CAPTION>
INCEPTION DATE PAST YEAR SINCE INCEPTION
<S> <C> <C> <C>
----------------------------------------------
CLASS A
(with 4.50% front-end sales charge) 7/6/94 (9.06)% 14.02%
----------------------------------------------
CLASS D
(with 1.50% front-end sales charge) 7/6/94 (6.42)% 14.43%
----------------------------------------------
S&P MIDCAP 400 INDEX 19.12% 22.76%
----------------------------------------------
LIPPER CAPITAL APPRECIATION INDEX 19.97% 20.04%
----------------------------------------------
S&P 500 STOCK INDEX 28.58% 27.70%
--------------------------------------------------------------------------------------------
</TABLE>
* For the period January 1, 1999 through June 30, 1999, the aggregate
(non-annualized) total returns of Class A shares were 1.32% and Class D
shares were 4.26% versus 6.87% for the S&P Midcap 400 Index, 14.97% for the
Lipper Capital Appreciation Index and 12.39% for the S&P 500 Stock Index.
5
<PAGE> 7
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC INTERNATIONAL
EQUITY FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation.
PRINCIPAL INVESTMENT The Fund normally invests primarily in a diversified
STRATEGIES portfolio of publicly traded common stocks and securities
convertible into or exchangeable for common stock of
non-U.S. based companies. The Fund diversifies its
investments among various non-U.S. countries. Investments
are made in countries deemed to offer favorable operating
environments and companies for investment are selected
within those countries based on analysis of various
fundamental factors. Anticipated currency movements are a
factor in both country and stock selection. The Fund follows
the Multiple Market Strategy and Emerging Market Strategy.
See page 24. The Fund's manager is Murray Johnstone
International Limited.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund are:
- Equity Risk
- Market Risk
- Management Risk
- Foreign Risk
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- Seeking international diversification of investments
- Seeking long-term growth of capital
- Willing to accept the risks of price fluctuations
associated with foreign investments
This Fund will not be appropriate for anyone:
- Seeking regular income
- Pursuing a short-term goal or investing emergency reserves
- Seeking safety of principal
</TABLE>
6
<PAGE> 8
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC INTERNATIONAL
EQUITY FUND
CONTINUED
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF
12/31 FOR CLASS A SHARES*
<TABLE>
<S> <C>
'1995' 14.01
'1996' 11.40
'1997' 10.04
'1998' 4.32
</TABLE>
The bar chart above does not reflect the
impact of any applicable sales charges or
account fees which would reduce returns.
Both the chart and the table assume
reinvestment of dividends and
distributions. Performance of the Fund
shown in the table and chart reflects
effect of fee waivers and/or expense
reimbursement. Without waivers or
reimbursements, the Fund performance would
have been higher.
Best quarter: Q4
1998 18.71%
Worst quarter: Q3
1998 -17.46%
AVERAGE ANNUAL TOTAL
RETURNS
(for the periods ending
December 31, 1998)
The chart and table on this
page show how the
International Equity Fund
has performed and how its
performance has varied from
year to year. The bar chart
gives some indication of
the risks of an investment
in the Fund by showing
changes in the Fund's
yearly performance over the
past four calendar years.
The table below it compares
the Fund's performance over
time to that of the Morgan
Stanley Capital
International Europe,
Australia and Far East
("EAFE") Index, an
unmanaged index comprised
of a sample of companies
representative of the
market structure of 20
European and Pacific Basin
countries and the Lipper
Global Fund Index, an
equally weighted benchmark
composed of equity mutual
funds. Of course, past
performance does not
indicate how the Fund will
perform in the future. The
returns for Class D shares
will differ from the Class
A returns shown in the
7
bar chart because of
differences in expenses of
each class.
<TABLE>
<CAPTION>
INCEPTION DATE PAST YEAR SINCE INCEPTION
<S> <C> <C> <C>
----------------------------------------------
CLASS A
(with 4.50% front-end sales charge) 5/12/94 (0.38)% 6.54%
----------------------------------------------
CLASS D
(with 1.50% front-end sales charge) 5/12/94 2.58% 6.77%
----------------------------------------------
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE
INDEX 20.33% 8.71%
----------------------------------------------
LIPPER GLOBAL FUND INDEX 14.63% 12.54%
--------------------------------------------------------------------------------------------
</TABLE>
* For the period January 1, 1999 through June 30, 1999, the aggregate
(non-annualized) total returns of Class A shares were 3.81% and Class D
shares were 6.67% versus 3.97% for the Morgan Stanley Capital International
EAFE Index and 9.29% for the Lipper Global Fund Index.
8
<PAGE> 9
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC SMALL CAP FUND
Please note: this Fund is closed
to new investors.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with a high level of
capital appreciation.
PRINCIPAL INVESTMENT The Fund pursues its objective by investing, under normal
STRATEGIES market conditions, primarily in companies with market
capitalizations under $800 million. The Manager selects
equity securities of companies it believes show prospects
for growth due, for example, to promising new products, new
distribution strategies, new manufacturing technologies or
new management teams or management philosophy, as well as
fundamental factors. The Funds manager is Equitable Asset
Management, Inc.
MARKET CAPITALIZATION is a common measure of the size of a
company. It is the market price of a share of the company's
stock multiplied by the number of shares that are
outstanding.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund are:
- Equity Risk
- Market Risk
- Management Risk
- Small Capitalization Risk
- Non-Diversification Risk
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- Seeking to add a capital appreciation component to your
portfolio
- Willing to accept higher risks associated with investing
in the small capitalization stocks in exchange for
potentially higher long-term returns
- Investing for long-term goals, such as retirement
This Fund will not be appropriate for anyone:
- Seeking regular income
- Pursuing a short-term goal or investing emergency reserves
- Seeking safety of principal
</TABLE>
8
<PAGE> 10
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC SMALL CAP FUND
CONTINUED
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF
12/31 FOR CLASS A SHARES*
<TABLE>
<S> <C>
'1995' 42.27
'1996' 27.43
'1997' 23.62
'1998' -11.3
</TABLE>
The bar chart above does not reflect the
impact of any applicable sales charges or
account fees which would reduce returns.
Both the chart and the table assume
reinvestment of dividends and
distributions. Performance of the Fund
shown in the table chart reflects effect of
fee waivers and/or expense reimbursement.
Without waivers or reimbursements, the Fund
performance would have been higher.
Best quarter: Q3
1997 19.19%
Worst quarter: Q3
1998 -25.92%
AVERAGE ANNUAL TOTAL
RETURNS*
(for the periods ending
December 31, 1998)
The chart and table on this
page show how the Small Cap
Fund has performed and how
its performance has varied
from year to year. The bar
chart gives some indication
of the risks of an
investment in the Fund by
showing changes in the
Fund's yearly performance
over the last four calendar
years. The table below it
compares the Fund's
performance over time to
that of the Russell 2000
Index, an unmanaged index
of small-cap growth stocks,
the NASDAQ Industrials
Index, generally
representative of the
performance of small
companies in the U.S. stock
market and the Lipper Small
Cap Fund Index, an equally
weighted benchmark
comprised of equity mutual
funds. Of course, past
performance does not
indicate how the Fund will
perform in the future. The
returns for Class D shares
will differ from the Class
A returns shown in the bar
chart because of
differences in expenses of
each class.
<TABLE>
<CAPTION>
INCEPTION DATE PAST YEAR SINCE INCEPTION
<S> <C> <C> <C>
----------------------------------------------
CLASS A
(with 4.50% front-end sales charge) 6/8/94 (15.29)% 17.37%
----------------------------------------------
CLASS D
(with 1.50% front-end sales charge) 6/8/94 (12.99)% 17.74%
----------------------------------------------
RUSSELL 2000 INDEX (2.55)% 14.96%
----------------------------------------------
NASDAQ INDUSTRIALS INDEX 6.82% 14.32%
----------------------------------------------
LIPPER SMALL CAP FUND INDEX (0.83)% 14.98%
--------------------------------------------------------------------------------------------
</TABLE>
* For the period January 1, 1999 through June 30, 1999, the aggregate
(non-annualized) total returns of Class A shares were 4.74% and Class D
shares were 7.76% versus 9.28% for the Russell 2000 Index, 25.06% for the
NASDAQ Industrials Index and 9.43% for the Lipper Small Cap Fund Index.
9
<PAGE> 11
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC SMALL CAP II FUND
(FORMERLY ESC STRATEGIC GROWTH
FUND)
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks a high level of capital appreciation.
PRINCIPAL INVESTMENT The Fund seeks to achieve its objective by investing, under
STRATEGIES normal market conditions, primarily in equity securities of
companies with market capitalizations under $800 million. In
selecting securities for the Fund, the Manager employs
fundamental analysis of traditional small capitalization
companies it believes have prospects for rapid growth. This
Fund's management style is generally comparable to that of
the ESC Strategic Small Cap Fund. The Fund's manager is
Equitable Asset Management, Inc.
MARKET CAPITALIZATION is a common measure of the size of a
company. It is the market price of a share of the company's
stock multiplied by the number of shares that are
outstanding.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund are:
- Equity Risk
- Market Risk
- Management Risk
- Small Capitalization Risk
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- Seeking to add a capital appreciation component to your
portfolio
- Willing to accept higher risks associated with investing
in the small capitalization stocks in exchange for
potentially higher long-term returns
- Investing for long-term goals, such as retirement
This Fund will not be appropriate for anyone:
- Seeking regular income
- Pursuing a short-term goal or investing emergency reserves
- Seeking safety of principal
</TABLE>
10
<PAGE> 12
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC SMALL CAP II FUND
CONTINUED
PERFORMANCE BAR CHART AND TABLE
TOTAL RETURN AS OF 12/31
FOR CLASS A SHARES*
<TABLE>
<S> <C>
'1998' -12.08
</TABLE>
The bar chart above does not reflect the
impact of any applicable sales charges or
account fees which would reduce returns.
Both the chart and the table assume
reinvestment of dividends and
distributions. Performance of the Fund
shown in the table and chart reflects
effect of fee waivers and/or expense
reimbursement. Without waivers or
reimbursements, the Fund performance would
have been higher.
Best quarter: Q4
1998 17.55%
Worst quarter: Q3
1998 -27.76%
AVERAGE ANNUAL TOTAL
RETURNS*
(for the periods ending
December 31, 1998)
The chart and table on this
page show how the Small Cap
II Fund has performed and
how its performance has
varied from year to year.
The bar chart gives some
indication of the risks of
an investment in the Fund
by showing the Fund's
performance during its
first full calendar year.
The table below it compares
the Fund's performance over
time to that of the Russell
2000 Index, an unmanaged
index of small-cap growth
stocks and the Lipper Small
Cap Fund Index, an equally
weighted benchmark
comprised of equity mutual
funds. Of course, past
performance does not
indicate how the Fund will
perform in the future. The
returns for Class D shares
will differ from the Class
A returns shown in the bar
chart because of
differences in expenses of
each class.
<TABLE>
<CAPTION>
INCEPTION DATE PAST YEAR SINCE INCEPTION
<S> <C> <C> <C>
----------------------------------------------
CLASS A
(with 4.50% front-end sales charge) 1/28/97 (16.06)% 4.81%
----------------------------------------------
CLASS D
(with 1.50% front-end sales charge) 1/28/97 (13.77)% 6.06%
----------------------------------------------
RUSSELL 2000 INDEX (2.55)% 8.49%
----------------------------------------------
LIPPER SMALL CAP FUND INDEX (0.83)% 5.85%
--------------------------------------------------------------------------------------------
</TABLE>
* For the period January 1, 1999 through June 30, 1999, the aggregate
(non-annualized) total returns of Class A Shares were (2.97)% and Class D
Shares were (0.18)% versus 9.28% for the Russell 2000 Index and 9.43% for
the Lipper Small Cap Fund Index.
11
<PAGE> 13
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC INCOME FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Fund seeks a high level of current income with a
secondary objective of total return.
PRINCIPAL INVESTMENT The Fund invests primarily in a diversified portfolio of
STRATEGIES higher yielding, lower rated corporate, government and other
debt instruments of U.S. issuers, although up to 35% of its
assets may be invested in debt instruments of non-U.S.
issuers. The Fund may invest up to 100% of its assets in
debt securities rated below investment grade. Such debt
securities are commonly known as "junk bonds." The Manager
seeks out companies with good fundamentals and performing
prospects that are currently out of favor with investors.
The Manager prefers securities that produce current income.
The Fund also follows the Emerging Market Strategy. See page
24. The Fund's manager is Cincinnati Asset Management, Inc.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund are:
- Market Risk
- Management Risk
- Foreign Risk
- Interest Rate Risk
- Credit Risk
WHO MAY WANT TO INVEST? Consider investing in the Fund if you:
- Are seeking a high level of current income together with
total returns
- Looking to add a monthly income component to your
portfolio
- Willing to accept the risks of price and dividend
fluctuations associated with investing in lower rated debt
securities
This Fund will not be appropriate for anyone:
- Investing emergency reserves
- Seeking the highest assurance of safety of principal
</TABLE>
12
<PAGE> 14
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
logo
ESC STRATEGIC INCOME FUND
CONTINUED
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF
12/31
FOR CLASS A SHARES*
<TABLE>
<S> <C>
'1995' 14.91
'1996' 5.84
'1997' 5.05
'1998' 4.43
</TABLE>
The bar chart above does not reflect the
impact of any applicable sales charges or
account fees which would reduce returns.
Both the chart and the table assume
reinvestment of dividends and
distributions. Performance of the Fund
shown in the table and chart reflects
effect of fee waivers and/or expense
reimbursement. Without waivers or
reimbursements, the Fund performance would
have been higher.
Best quarter: Q2
1995 6.79%
Worst quarter: Q2
1997 -1.77%
AVERAGE ANNUAL TOTAL
RETURNS*
(for the periods ending
December 31, 1998)**
The chart and table on this
page show how the Income
Fund has performed and how
its performance has varied
from year to year. The bar
chart gives some indication
of the risks of an
investment in the Fund by
showing changes in the
Fund's yearly performance
over the past four calendar
years. The table below it
compares the Fund's
performance over time to
that of the Lehman Brothers
High Yield Bond Index, a
market-value weighted
index, which covers the
universe of fixed rate,
non-investment grade debt.
Of course, past performance
does not indicate how the
Fund will perform in the
future. The returns for
Class D shares will differ
from the Class A returns
shown in the bar chart
because of differences in
expenses of each class.
<TABLE>
<CAPTION>
INCEPTION DATE PAST YEAR SINCE INCEPTION
<S> <C> <C> <C>
----------------------------------------------
CLASS A
(with 4.50% front-end sales charge) 5/4/94 (0.26)% 5.02%
----------------------------------------------
CLASS D
(with 1.50% front-end sales charge) 5/4/94 2.41% 5.18 %
----------------------------------------------
LEHMAN BROTHERS HIGH YIELD BOND INDEX*** 1.87% 10.02 %
----------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
* For the period January 1, 1999 through June 30, 1999, the aggregate
(non-annualized) total returns of Class A Shares were (3.26)% and Class D
Shares were (0.38)% versus 2.2% for the Lehman Brothers High Yield Bond
Index.
** For current performance information, including the Fund's 30-day yield,
call 1-800-261-FUND (3863).
*** Effective September 30, 1998, the Fund's investment strategy changed,
therefore changing the index to which it compares its performance. Due to
this fact, comparing the Fund's performance to the Lehman Brothers High
Yield Bond Index should not be considered as representative of the Fund's
long-term potential.
13
<PAGE> 15
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
LOGO
FUND EXPENSES
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUNDS.
Annual Fund operating expenses are paid out of Fund assets, and are reflected
in the share price. The fees and expenses for each Fund and Class are based
upon the actual operating expenses of that Fund and Class for the fiscal year
ended March 31, 1999. The Funds' Adviser has voluntarily agreed to waive a
portion of its fee with respect to certain Funds. The voluntary fee waiver
will cause a Fund's return to be higher than it would otherwise be without
the fee waiver. (See the footnotes to the Fee Table below.)
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR APPRECIATION FUND INTERNATIONAL EQUITY FUND
INVESTMENT) CLASS A CLASS D CLASS A CLASS D
<S> <C> <C> <C> <C>
Maximum Sales (Load) Imposed on Purchases (as a
percentage of offering price) 4.50% 1.50% 4.50% 1.50%
Maximum Deferred Sales Charge (Load) (as a
percentage of offering or sale price, whichever
is less) None None None None
ANNUAL FUND OPERATING EXPENSE (EXPENSE THAT ARE
DEDUCTED FROM FUND ASSETS)
Management fees(1) 1.00% 1.00% 1.00% 1.00%
Distribution and Service (12b-1) fees(2) 0.25% 0.75% 0.25% 0.75%
Other expenses(3) 0.72% 0.72% 1.30% 1.30%
Total Annual Fund Operating Expenses 1.97% 2.47% 2.55% 3.05%
Fee Waivers/Reimbursements -- -- 0.05% 0.05%
Net Annual Fund Operating Expenses(1) 1.97% 2.47% 2.50% 3.00%
</TABLE>
(1) The Adviser has contractually agreed to waive a portion of its fees
and/or reimburse the Funds to limit Net Annual Fund Operating Expenses to
the following until at least March 31, 2000: Appreciation Fund, 2.00%
(Class A) and 2.50% (Class D); International Equity Fund, 2.50% (Class A)
and 3.00% (Class D). You will be notified if these waivers or
reimbursements are discontinued after that date.
(2) Investors should be aware that, due to the distribution fees, a long-term
shareowner in a Fund may pay over time more than the economic equivalent
of the maximum front-end sales charge permitted under the rules of the
National Association of Securities Dealers, Inc.
(3) Certain Service Organizations may receive fees from a Fund in amounts up
to an annual rate of 0.25% of the daily net asset value of the Fund
shares owned by the shareholders with whom the Service Organization has a
servicing relationship.
14
<PAGE> 16
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
LOGO
FUND EXPENSES CONTINUED
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUNDS.
Annual Fund operating expenses are paid out of Fund assets, and are reflected
in the share price. The fees and expenses for each Fund and Class are based
upon the actual operating expenses of that Fund and Class for the fiscal year
ended March 31, 1999. The Funds' Adviser has voluntarily agreed to waive a
portion of its fee with respect to certain Funds. The voluntary fee waiver
will cause a Fund's return to be higher than it would otherwise be without
the fee waiver. (See the footnotes to the Fee Table below.)
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR SMALL CAP FUND SMALL CAP II FUND INCOME FUND
INVESTMENT) CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales (Load) Imposed on Purchases (as a
Percentage of offering price) 4.50% 1.50% 4.50% 1.50% 4.50% 1.50%
Maximum Deferred Sales Charge (Load) (as a
percentage of offering or sale price, whichever
is less) None None None None None None
ANNUAL FUND OPERATING EXPENSE (EXPENSE THAT ARE
DEDUCTED FROM FUND ASSETS)
Management fees(1) 1.00% 1.00% 1.25% 1.25% 1.00% 1.00%
Distribution and Service (12b-1) fees(2) 0.25% 0.75% 0.25% 0.75% 0.25% 0.75%
Other expenses(3) 0.54% 0.54% 0.77% 0.77% 0.97% 0.97%
Total Annual Fund Operating Expenses 1.79% 2.29% 2.27% 2.77% 2.22% 2.72%
Fee Waivers/Reimbursements -- -- 0.27% 0.27% 0.22% 0.22%
Net Annual Fund Operating Expenses(1) 1.79% 2.29% 2.00% 2.50% 2.00% 2.50%
</TABLE>
(1) The Adviser has contractually agreed to waive a portion of its fees
and/or reimburse the Funds to limit Net Annual Fund Operating Expenses to
the following until at least March 31, 2000: Small Cap Fund, 2.00% (Class
A) and 2.50% (Class D); Small Cap II Fund, 2.00% (Class A) and 2.50%
(Class D); Income Fund, 2.00% (Class A) and 2.50% (Class D). You will be
notified if these waivers or reimbursements are discontinued after that
date.
(2) Investors should be aware that, due to the distribution fees, a long-term
shareowner in a Fund may pay over time more than the economic equivalent
of the maximum front-end sales charge permitted under the rules of the
National Association of Securities Dealers, Inc.
(3) Certain Service Organizations may receive fees from a Fund in amounts up
to an annual rate of 0.25% of the daily net asset value of the Fund
shares owned by the shareholders with whom the Service Organization has a
servicing relationship.
15
<PAGE> 17
RISK/RETURN SUMMARY AND FUND EXPENSES
TRIANGLE
LOGO
FUND EXPENSES CONTINUED
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
APPRECIATION FUND
CLASS A SHARES $641 $1,040 $1,465 $2,642
CLASS D SHARES $396 $ 908 $1,446 $2,914
INTERNATIONAL EQUITY FUND
CLASS A SHARES $692 $1,203 $1,740 $3,202
CLASS D SHARES $448 $1,073 $1,723 $3,461
SMALL CAP FUND
CLASS A SHARES $624 $ 988 $1,376 $2,461
CLASS D SHARES $379 $ 855 $1,357 $2,736
SMALL CAP II FUND
CLASS A SHARES $644 $1,103 $1,587 $2,918
CLASS D SHARES $399 $ 971 $1,569 $3,184
INCOME FUND
CLASS A SHARES $644 $1,093 $1,567 $2,873
CLASS D SHARES $399 $ 961 $1,549 $3,140
</TABLE>
Use the table at right to
compare fees and expenses
with those of other mutual
funds. It illustrates the
amount of fees and expenses
you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of
each period
- no changes in the Fund's
operating expenses, except
for the expiration of the
current contractual fee
waivers and reimbursements
on March 31, 2000
- reinvestment of all
dividends and distributions
Because this example is
hypothetical and for
comparison only, your actual
costs will be different.
16
<PAGE> 18
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
The following section describes the investment objectives, strategies and
risks of each of the Funds. More detailed information on investments and
strategies, and related risks, affecting the Funds is found in "Description
of Securities and Investment Practices of the Funds" on page 25. Note also
that the Adviser uses certain management strategies intended to increase the
Funds' return and to lower volatility, to the extent consistent with a
particular Fund's investment objective. See "Management Strategies" on page
23.
ESC STRATEGIC APPRECIATION FUND
TICKER SYMBOL: CLASS A ESSAX CLASS D ESSDX
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE: The Fund's investment objective is long-term capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests at least 65% of its total
assets in publicly traded common stocks and securities convertible into or
exchangeable for common stock, primarily of U.S.-based companies. The Adviser
has determined to use the Multiple Manager Strategy for this Fund because its
analysis indicates that the use of several Managers will tend to reduce the
risk from short-term price volatility of stocks. The Fund has authority to
invest in debt securities (including U.S. Government securities, money market
instruments, and investment-grade corporate obligations) where consistent
with its investment objective. The Fund may also invest all or a portion of
its assets in these debt securities to address adverse market conditions or
for cash management, and these investments may cause to Fund to fail to
achieve its investment objective. The Fund may invest in obligations that are
rated BBB by Moody's Investors Service, Inc. ("Moody's") or Baa by Standard &
Poor's Corporation ("S&P").
The Fund employs a defensive disciplined rebalancing process which forces the
sale of securities in over-weighted and, presumably, over-valued sectors and
the purchase of securities in under-weighted and, presumably, under-valued
sectors. This process seeks to create value over time.
The Fund's Managers are Westcap Investors, LLC, Brandes Investment Partners,
L.P., and Atlantic Capital Management, LLC.
PRINCIPAL RISKS: The principal risks of investing in the Fund are Equity
Risk, Market Risk and Management Risk. However, other important risks are
Foreign Risk, Interest Rate and Credit Risk, including risks related to
investment in securities rated BBB or Baa by Moody's or S&P, which may be
deemed to have speculative characteristics.
17
<PAGE> 19
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
ESC STRATEGIC INTERNATIONAL
EQUITY FUND
TICKER SYMBOL: CLASS A ESGAX CLASS D ESGDX
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE: The Fund's investment objective is long-term capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests at least 65% of its total
assets in publicly traded common stocks and securities convertible into or
exchangeable for common stocks. The Fund uses the Multiple Market Strategy
and the Emerging Market Strategy (see "Management Strategies" on page 23.)
The Fund diversifies its investments across various markets, primarily
outside the U.S., that have shown differing return characteristics. As a
fundamental policy, under normal market conditions, the Fund will have at
least 65% of its total assets invested in issuers of at least three different
countries (not including the United States). In selecting investments for the
Fund in mature markets, the Fund's Manager seeks smaller companies it
believes have potential for above-average growth. The Fund may also invest in
securities of issuers in emerging market countries. The Fund may invest in
investment grade debt securities (including U.S. Government securities, money
market instruments, and corporate obligations) and other asset classes that
appear to offer opportunity for capital appreciation. The Fund may also
invest all or a portion of its assets in these debt securities to address
adverse market conditions or for cash management, and these investments may
cause the Fund to fail to achieve its investment objective.
The Fund's Manager selects securities for buying or selling by pairing a
top-down approach for country allocation and a bottom-up approach for stock
selection. The Manager allocates among countries by analyzing statistical
information, including macroeconomic criteria, monetary policies, fiscal and
performance factors and currency considerations. From this analysis, the
Manager determines what markets (countries) they believe offer favorable
operating environments. The Manager selects stocks by applying certain value
measures, such as price-to-earnings ratios, return on equity and
price-to-book value ratio. These measurers are market specific according to
the stage of the economic cycle and in recognition of local factors that
influence domestic investors, including political conditions. The Manager
will also conduct financial statement analysis, company visits and management
assessments of particular companies. Both country and stock decisions are
structured to take into account anticipated currency movements.
The Fund's Manager is Murray Johnstone International Limited.
PRINCIPAL RISKS: Principal risks of investing in the Fund are Market Risk,
Management Risk and Equity Risk (which are defined on page 3 of this
prospectus) and Foreign Risk, which is the risk that investments in issuers
located in foreign countries may have greater price volatility and less
liquidity. Investments in foreign securities also are subject to political,
regulatory, and diplomatic risks. Changes in currency rates are an additional
risk of investments in foreign securities. Investments in emerging markets
involve additional risks. See "Management Strategies -- Emerging Market
Strategy." To the extent that the Fund invests in fixed income securities,
the Fund will also have Interest Rate and Credit Risk, including risks
related to investment in obligations that are rated BBB by Moody's or Baa by
S&P, which may have speculative characteristics. Credit Risk is the risk that
the issuer of a security will be unable or unwilling to make timely payments
of interest or principal, or to otherwise honor its obligations. This risk is
greater for lower rated securities. Interest Rate Risk is the risk that the
value of a Fund's investments in income-producing or fixed-income or debt
securities will decline as interest rates rise.
18
<PAGE> 20
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
ESC STRATEGIC SMALL CAP FUND
ESC STRATEGIC SMALL CAP II FUND
SMALL CAP FUND TICKER SYMBOL: CLASS A ESCAX CLASS D ESCDX
SMALL CAP II FUND TICKER SYMBOL: CLASS A EGRAX CLASS D N/A
Shares of ESC Strategic Small Cap Fund are currently available only to
existing shareholders of the Fund.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE: The investment objective of each of these Funds is a
high level of capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES: The investment policies and strategies of
each of these Funds are substantially identical, although the portfolio
securities held by each Fund will differ for historical and other reasons. In
particular, ESC Strategic Small Cap II Fund adopted its current name and
investment policies comparable to those of ESC Strategic Small Cap Fund on
January 1, 1999. Various other factors, such as timing of cash flow, and
position size and availability, and the fact that ESC Strategic Small Cap
Fund is non-diversified will also result in portfolio differences. In
managing each Fund's portfolio, the Manager attempts to treat each Fund
fairly, but there can be no assurance that any transaction for one Fund can
or will be duplicated for the other Fund.
Each Fund will, under normal circumstances, invest primarily (at least 65% of
total assets) in equity securities of issuers with market capitalization of
$1 billion or less. As a matter of operating policy, each Fund's investments
will normally be principally in issuers with market capitalization of $800
million or less at the time of investment. Although each Fund will invest
principally in common stocks, each may also invest in convertible preferred,
participating preferred and preferred stocks. The Funds' equity investments
may be traded on domestic or foreign securities exchanges or in
over-the-counter markets. During periods of adverse market conditions, or
anticipated adverse market conditions, each Fund may invest all or a portion
of its assets in debt securities (including U.S. Government securities, money
market instruments, and corporate obligations) that are rated A or better by
Moody's or S&P or, if unrated, are deemed of comparable quality by the
Manager. These investments may cause the particular Fund to fail to achieve
its investment objective. Each Fund may also invest in these debt securities
for cash management and liquidity purposes.
The Funds' Manager will select securities that it believes offer 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, companies of this type
tend to be responsible for technological breakthroughs and/or unique
solutions to market needs. 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 Funds' portfolios will show earnings growth exceeding 20%
compared to the previous year's comparable period. Companies with excessive
levels of debt will generally be avoided.
19
<PAGE> 21
ESC STRATEGIC SMALL CAP FUND
ESC STRATEGIC SMALL CAP II FUND
CONTINUED
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
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 prices when purchased are between five and fifteen
times projected earnings for the coming year.
Although the Funds' 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 Managers; or (d) alternative investments, in
the Manager's view, offer superior potential for appreciation.
The Funds' Manager is Equitable Asset Management, Inc. ("EAM").
PRINCIPAL RISKS: The principal risks of investing in these Funds are Market
Risk, Management Risk and Equity Risk (which are defined on page 3 of this
prospectus) and Small Capitalization Risk, which is the risk that investments
in small-capitalization companies tend to be more volatile and less easily
traded than investments in large-capitalization companies. In addition,
small-capitalization companies may have more risk because they often have
limited product lines, markets or financial resources. Furthermore, investing
in companies that are undergoing internal change may involve special risks
due to the unknown effects of change.
Additionally, ESC Strategic Small Cap Fund is not a "diversified" investment
company and therefore may invest substantial portions of its assets in
securities of particular issuers. This exposes the Fund to greater risk of
negative developments affecting such an issuer than would be the case for a
diversified investment company. The Fund does intend, however, to meet the
regulated investment company diversification requirements under the Internal
Revenue Code of 1986.
20
<PAGE> 22
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
ESC STRATEGIC INCOME FUND
TICKER SYMBOL: CLASS A ESIAX CLASS D ESIDX
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVES: The Fund's investment objective is a high level of
current income, with a secondary objective of total return.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests primarily in corporate,
government and other debt instruments of U.S. and non-U.S. issuers. Under
normal market conditions, at least 65% of the Fund's total assets will be
invested in income-producing debt securities. Investments in foreign
securities will be limited to 35% of its total assets. Up to 100% of the
Fund's assets may be invested in "junk bonds." Junk bonds are securities that
are rated below investment grade -- i.e., that are rated below BBB by Moody's
or below Baa by S&P -- or that, if unrated, are deemed of comparable quality.
Junk bonds also include securities that are in default (rated D by S&P),
although such holdings by the Fund are expected to be minimal. (See also
"Description of Securities and Investment Practices of the Funds" on page
25.)
In selecting debt securities for the Fund, the Fund's Manager attempts to
achieve high current yield by employing a discipline that focuses on total
return over a full market/economic cycle, striving to preserve capital in
down markets. The Manager employs a "bottom-up" approach, identifying
investment opportunities that present the most attractive value with strong
prospects for income and growth. The Fund follows the Emerging Market
Strategy with respect to its non-U.S. and international issuers (see
"Management Strategies.")
The Fund primarily invests in higher yielding, lower rated bonds of U.S. and
foreign issuers. In choosing the Fund's investments in a value-oriented
approach, the Manager will seek out companies with good fundamentals and
potentially strong future prospects that are currently out of favor with
investors. The Manager employs a bottom-up approach of research to identify
investment opportunities that represent the most attractive value and that
have strong prospects for consistent income and growth. Potential and current
investments are also subject to continual research, which includes regular
vigorous analysis to identify issues that are overvalued and those that
should be sold to reinvest in better opportunities. The Manager strives to
preserve capital in attempting to achieve the Fund's investment objective.
The Manager's investing discipline focuses on total return over a full
market/economic cycle. The Manager prefers to invest in full-coupon,
interest-paying securities for their cash flow advantage and usually lower
volatility than deferred interest or zero coupon bonds.
The Fund's Manager is Cincinnati Asset Management, Inc.
PRINCIPAL RISKS: The principal risks of investing in the Fund include Market
Risk and Management Risk (which are defined on page 3 of this prospectus) and
Foreign Risk, Interest Rate Risk and Credit Risk. Foreign Risk is the risk
that investments in issuers located in foreign countries may have greater
price volatility and less liquidity. Investments in foreign securities also
are subject to political, regulatory, and diplomatic risks. Changes in
currency rates are an additional risk of investments in foreign securities.
Investments in emerging markets involve additional risks. See "Management
Strategies Emerging Market Strategy." Interest Rate Risk is the risk that the
value of a Fund's investments in income-producing or fixed-income or debt
securities will decline as interest rates rise. Credit Risk is the risk that
the issuer of a security will be unable or unwilling to make timely payments
of interest or principal, or to otherwise honor its obligations. This risk is
greater for lower rated securities. Securities
21
<PAGE> 23
ESC STRATEGIC INCOME FUND
CONTINUED
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
rated Baa by Moody's or BBB by S&P may have speculative characteristics. Junk
bond investments typically have higher yields than higher rated securities.
However, junk bond investments also have greater risk of untimely payment of
principal and interest, as well as greater default and other risks, than
higher rated securities.
Special considerations concerning Lower-Rated Securities, Junk Bonds and
Sovereign Debt: As noted, the Fund may invest without limit in medium and
lower-rated securities that may be deemed to have major risk exposures in the
event of adverse conditions. The Manager's determination that a particular
security will be advantageous for the Fund may not be accurate. Some of these
securities may be vulnerable to default and some may already be in default.
Although these securities tend to be less sensitive to changes in interest
rates than higher-rated securities, they are more vulnerable to economic and
other conditions affecting the issuer. Moreover, the issuers of these
securities are often less creditworthy and may be highly leveraged, so that
they may not be able to meet their obligations on debt instruments in the
event of adverse developments. These securities, moreover, may be
subordinated to other obligations of the issuer, so that priority will go to
making payments on the more senior obligations.
Additionally, secondary markets for lower rated securities are less liquid
than for higher rated securities, so it may be difficult for the Fund to
dispose of these securities or to sell them at a favorable price. The limited
market may also make it difficult for the Fund to obtain accurate prices on
its portfolio securities from time to time, which may require pricing
judgements to be made by the Funds' board of directors.
Debt securities issued by the governments of developing and emerging
countries ("sovereign debt"), and payments due on these securities, are
directly exposed to risks from political, social and economic changes in
those countries, as well as to changes in balance of payments, interest
rates, cash flow, availability of foreign exchange and size of overall debt
burden. Currency fluctuations and devaluations, as well as the issuer's
ability to obtain credit from international lenders, can affect the value of
these securities, the value of payments on these obligations and the ability
of the obligor to pay. The Fund may have limited recourse against a foreign
sovereign in the event of default. Holders of these securities may also be
asked to participate in restructurings under arrangements that are likely to
be less favorable to the Fund than its original investment. Adverse
developments may make the government unable or unwilling to meet its
obligations to pay interest and principal in full, in a timely manner, or at
all. See "Management Strategies -- Emerging Market Strategy" for more
discussion of risks in these countries.
See the Statement of Additional Information for a fuller discussion of
lower-rated and sovereign debt securities.
22
<PAGE> 24
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
MANAGEMENT STRATEGIES
The Adviser uses the following strategies in an effort to increase the return
of the Funds and to lower their volatility, to the extent consistent with the
objectives of each Fund.
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
favorable performance records that have dissimilar investment styles and
security selection disciplines. The Adviser monitors the performance of both
the total Fund portfolio and of each Manager. From time to time the Adviser
will reallocate Fund assets among individual Managers, or recommend that
particular Managers be hired or terminated, when the Adviser believes the
action is 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 through
extended appreciation and so 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 permits the Adviser, subject to certain
conditions to retain new Managers (except a
23
<PAGE> 25
MANAGEMENT STRATEGIES
CONTINUED
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
logo
Manager affiliated with the Adviser) without shareholder approval of the
contracts with those Managers. Within 60 days of retaining 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 Funds from requirements to disclose fees
paid to individual Managers (except Managers affiliated with the Adviser,
such as EAM) in the prospectus and other documents. Aggregate advisory fees
paid by each Fund, aggregate fees paid to Managers of each Fund, fees
retained by the Adviser with respect to each Fund and fees paid to Managers
affiliated with the Adviser will be disclosed.
From time to time, the Adviser may recommend that the services of a Manager
be terminated. The criteria for termination may 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.
24
<PAGE> 26
MANAGEMENT STRATEGIES
CONTINUED
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
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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 Funds. 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.
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES OF THE FUNDS
This section describes certain securities in which the Funds may invest, as
well as certain investment practices of the Funds. These and other securities
and practices are described more fully in the Statement of Additional
Information.
All Funds may invest or engage in:
- Obligations of the U.S. government, its agencies and
instrumentalities -- some of these obligations may be backed by the full
faith and credit of the U.S. Treasury, while others may have lesser
backing.
- Dollar-denominated obligations of U.S. or foreign banks with over $1
billion in total assets at the time of investment by a Fund. U.S. banks
must additionally be Federal Reserve System members, or must be examined
by the Controller of the Currency or have deposits insured by the
Federal Deposit Insurance Corporation.
- Commercial paper.
- Corporate debt obligations.
- Variable and floating rate master demand notes.
- Foreign securities, including U.S. dollar- or foreign-currency
denominated corporate securities, sponsored or unsponsored depository
receipts related to those securities, foreign bank securities, and
foreign government and international agency securities. Investments in
foreign securities involve higher costs and risks that are different
from investments in U.S. securities. These risks come from differences
in securities markets, tax policies, the level of government regulation,
disclosure and accounting standards, and from currency fluctuations.
There is also risk of negative government actions and from political and
social unrest. For unsponsored depository receipts, a Fund may not
receive full or timely information regarding the securities, there may
be delays in the Fund's receipts of dividends and other payments, and it
may bear more costs than for a
25
<PAGE> 27
MANAGEMENT STRATEGIES
CONTINUED
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
TRIANGLE
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sponsored depository
receipt. Emerging
market investments
involve additional
risks. See
"Management
Strategies-Emerging
Market Strategy."
- Hedging transactions, including forward foreign currency transactions,
and futures and options transactions. Hedging transactions are designed
to offset negative movements in the markets for certain currencies or
securities. The Managers are not obliged to enter into hedging
transactions, and hedging transactions do not always achieve their
desired purpose. They can also cause a Fund to lose money or to fail to
get the benefit of a gain if, for example, the markets move in an
unanticipated direction or if the Fund cannot close out of a position.
- Repurchase agreements.
- Loans of portfolio securities. A Fund may lend its portfolio securities
worth up to one-third of its total assets to brokers, dealers and other
financial institutions. Loans are subject to certain conditions, and
must be fully collateralized throughout their term. These loans involve
risk to the extent the borrower defaults on its obligations.
Additionally, the ESC Strategic Income Fund may invest in:
- Securities on a "when-issued" or forward commitment basis, where the
purchase price is fixed on a contract date for securities to be paid for
and delivered at a later date beyond the customary settlement time. The
Fund must segregate liquid assets to meet this commitment, and risks
loss if the price of the security declines before the settlement date.
- Mortgage-related securities, including mortgage pass-through securities
issued by U.S. Government-backed entities or by commercial firms,
Collateralized Mortgage Obligations ("CMOs") issued by government and
non-government entities, and Stripped Mortgage-Backed Securities
("SMBS"). Mortgage pass-through securities are subject to prepayment
risk. Although the value of these securities, like other
interest-bearing securities, tend to vary inversely with interest rates,
if interest rates decline, the value of mortgage pass-through securities
with a prepayment feature does not increase as much as other income
securities. Increase in interest rates tends to lengthen the term of
mortgage pass-through securities, which can cause the average portfolio
maturity and duration of the Fund to increase. CMOs are structured
securities collateralized by whole mortgage loans or pools of mortgage
pass-through securities. The various classes of CMOs have different
maturities, with payments of principal and interest going first to the
holders of the shortest maturity class. SMBS generally have two classes:
an "IO" class, which entitles holders to distributions consisting solely
of interest payments from the underlying obligation; and a "PO" class,
on which holders receive distributions based solely on principal
payments from the underlying assets.
- Other asset-backed securities, based on other types of pooled
obligations.
- Zero coupon bonds (which do not pay interest until maturity) and
pay-in-kind securities (which pay interest in the form of additional
securities). These securities may be more speculative than securities
which pay income periodically and in cash. Further, the Fund is required
to accrue and pay out annually to shareholders its anticipated earnings
on these securities prior to its actual receipt of those earnings.
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FUND MANAGEMENT
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THE INVESTMENT ADVISER
SunTrust Equitable Securities ("STES" or the "Adviser"), 800 Nashville City
Center, Nashville, Tennessee 37219-1743 is the adviser for the Funds. STES, a
wholly-owned subsidiary of SunTrust Banks, Inc., was founded in 1930 and
manages more than $1.5 billion in assets. 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 Funds, 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 Equitable Asset
Management, Inc.
For these advisory services, the Funds paid as follows during their fiscal
year ended 3/31/99:
<TABLE>
<CAPTION>
PERCENTAGE OF
AVERAGE NET ASSETS
FOR THE YEAR ENDED 3/31/99
<S> <C>
------------------------------
ESC Strategic Appreciation Fund 1.00%
------------------------------
ESC Strategic International Equity Fund 1.00%
------------------------------
ESC Strategic Small Cap Fund 1.00%
------------------------------
ESC Strategic Small Cap II Fund 0.75%*
------------------------------
ESC Strategic Income Fund 1.00%
--------------------------------------------- ------------------------------
</TABLE>
* The Adviser waived a portion of its contractual fees for the most recent
fiscal year. Contractual fees without waivers would be 1.25%.
THE MANAGERS
Equitable Asset Management, Inc. ("EAM"), located at 800 Nashville City
Center, Nashville, Tennessee, is Manager to the ESC Strategic Small Cap Fund
and the ESC Strategic Small Cap II Fund. EAM, an affiliate of the Adviser,
was formed in 1988. Frank D. Inman, a Director of EAM, has primary investment
responsibility for management of the Small Cap and Small Cap II Funds. Mr.
Inman has twenty years of investment experience.
Westcap Investors, LLC, located at 11111 Santa Monica Blvd., Suite 820, Los
Angeles California, 90025, is part of the advisory group responsible for the
management of the ESC Strategic Appreciation Fund.
Brandes Investment Partners, L.P., located at 12750 High Bluff Drive, San
Diego, California 92130, is part of the advisory group responsible for
management of the ESC Strategic Appreciation Fund. Brandes has been providing
investment advisory services since 1974.
Atlantic Capital Management, LLC, located at 909 East Main Street, Richmond,
Virginia 23219, is also part of the advisory group responsible for management
of the ESC Strategic Appreciation Fund. Atlantic Capital was organized in
1982 as Scott & Stringfellow Capital Management, Inc. and reorganized under
its present name in February, 1998.
Murray Johnstone International Limited, located at 11 West Nile Street,
Glasgow, Scotland G1 2PX, is primarily responsible for the daily management
of the ESC Strategic International Equity Fund. Organized in 1989, the firm
is a wholly-owned subsidiary of the Murray Johnstone Group, whose origin goes
back to 1907.
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FUND MANAGEMENT
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THE MANAGERS
CONTINUED
Cincinnati Asset Management, Inc., located at 11300 Cornell Park Drive,
Cincinnati, Ohio 45242, is responsible for the daily management of the ESC
Strategic Income Fund. 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.
THE ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership ("BISYS"), whose address is 3435
Stelzer Road, Columbus, Ohio 43219-3035, serves as the Funds' administrator
and distributor.
The Statement of Additional Information ("SAI") has more detailed information
about the Adviser and other service providers.
YEAR 2000
Like other funds and business organizations around the world, the Funds could
be adversely affected if the computer systems used by the Adviser and the
Funds' other service providers do not properly process and calculate
date-related information for the year 2000 and beyond. In addition, Year 2000
issues may adversely affect companies in which the Funds invest where, for
example, such companies incur substantial costs to address Year 2000 issues
or suffer losses caused by the failure to adequately or timely do so. These
risks may be heightened by the Funds' investments in foreign securities.
The Funds have been assured that the Adviser, the Managers, and the Funds'
other service providers (i.e., Administrator, Transfer Agent, Fund Accounting
Agent, Custodian and Distributor) have developed and are implementing clearly
defined and documented plans intended to minimize risks to services critical
to the Funds' operations associated with Year 2000 issues. Internal efforts
include a commitment to dedicate adequate staff and funding to identify and
remedy Year 2000 issues, and specific actions such as inventorying software
systems, determining inventory items that may not function properly after
December 31, 1999, reprogramming or replacing such systems, and retesting for
Year 2000 readiness. The Funds' Adviser and service providers are likewise
seeking assurances from their respective vendors and suppliers that such
entities are addressing any Year 2000 issues, and each provider intends to
engage, where appropriate, in private and industry or "streetwide" interface
testing of systems for Year 2000 readiness.
In the event that any systems upon which the Fund is dependent are not Year
2000 ready by December 31, 1999, administrative errors and account
maintenance failures would likely occur. While the ultimate costs or
consequences of incomplete or untimely resolution of Year 2000 issues by the
Adviser or the Funds' service providers cannot be accurately assessed at this
time, the Fund currently has no reason to believe that the Year 2000 plans of
the Adviser and the Funds' service providers will not be completed by
December 31, 1999, or that the anticipated costs associated with full
implementation of their plans will have a material adverse impact on either
their business operations or financial condition or those of the Funds. The
Funds and the Adviser will continue to closely monitor developments relating
to this issue, including development by the Adviser and the Funds' service
providers of contingency plans for providing back-up computer services in the
event of a systems failure or the inability of any provider to achieve Year
2000 readiness. Separately, the Adviser will monitor potential investment
risk related to Year 2000 issues.
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PRICING OF FUND SHARES
---------------------------
HOW NAV IS CALCULATED
The NAV is calculated by
adding the total value of a
Fund's investments and
other assets, subtracting
its liabilities and then
dividing that figure by the
number of outstanding
shares of the Fund:
NAV =
Total Assets - Liabilities
------------------------------------------------------------------------------
Number of Shares
Outstanding
1. The NAV will be
calculated separately
for Class A and Class D
shares.
2. You can find most Funds'
NAV daily in The Wall
Street Journal and other
newspapers.
---------------------------
Per share net asset value (NAV) for each Fund is determined and its shares are
priced at the close of regular trading on
the New York Stock Exchange, normally at
4:00 p.m. Eastern time on days the
Exchange is open.
Some of the Funds invest in securities that are primarily listed on foreign
exchanges and trade on weekends or other
days when the Fund does not price its
shares. As a result, a Fund's NAV may
change on days when shareholders will be
unable to purchase or redeem the Funds'
shares.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is accepted by
the Fund less any applicable sales charge
as noted in the section on "Distribution
Arrangements/Sales Charges." This is what
is known as the offering price.
Each Fund's securities are generally valued at current market prices. If market
quotations are not available, prices will
be based on fair value as determined by
methods approved by the Funds' Directors.
After the pricing of a foreign security has been established, if an event occurs
which would likely cause the value to
change, the value of the foreign security
may be priced at fair value as determined
in good faith by or at the direction of
the Funds' Directors.
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PURCHASING AND ADDING TO YOUR SHARES
<TABLE>
<CAPTION>
MINIMUM MINIMUM
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
<S> <C> <C>
Regular (non-retirement) $1,000 $50
----------------------------------------------------------
Retirement (IRA)* $ 250 $50
----------------------------------------------------------
Automatic Investment Plan $1,000 $50
</TABLE>
*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.
- All purchases must be in U.S. dollars.
- A fee will be charged for any checks that
do not clear.
- Third-party checks are not accepted.
A Fund may waive its minimum purchase
requirement and the Distributor may reject
a purchase order if it considers it in the
best interest of the Fund and its
shareholders.
You may purchase Funds
through the Funds'
Distributor or through
banks, brokers and other
investment
representatives, which
may charge additional
fees and may require
higher minimum
investments or impose
other limitations on
buying and selling
shares. If you purchase
shares through an
investment
representative, that
party is responsible for
transmitting orders by
close of business and
may have an earlier
cut-off time for
purchase and sale
requests. Consult your
investment
representative or
institution for specific
information.
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SHAREHOLDER INFORMATION
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PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
INSTRUCTIONS FOR OPENING OR
ADDING TO AN ACCOUNT
BY MAIL
If purchasing through your financial advisor or broker, simply tell your
advisor or broker that you wish to purchase shares of the Funds and he or she
will take care of the necessary documentation. For all other purchases,
follow the instructions below.
Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "ESC Strategic Funds,
Inc." Also include the name of the appropriate Fund(s) on the check.
3.Mail application and payment to: ESC Strategic Funds, Inc., P.O. Box
182487, Columbus, OH 43218-2487 If by overnight service, send to: ESC
Strategic Funds, Inc., c/o BISYS Fund Services, Attn: T.A. Operations, 3435
Stelzer Road, Columbus, OH 43219.
Subsequent Investments:
1. Use the investment slip attached to your
account statement. Or, if unavailable,
2. Provide the following information:
- Fund name
- Share class
- Amount invested
- Account name
- Account number
Include your account number on your check.
3. Mail information and payment to addresses in
#3 above.
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be
a U.S. bank. Your bank or broker may charge for this service.
Choose the electronic purchase option on your account application or call
1-800-261-FUND (3863). Your account can generally be set up for electronic
purchases within 15 days.
Call 1-800-261-FUND (3863) to arrange a transfer from your bank account.
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an
electronic purchase or
sale, the transaction is
made through the
Automated Clearing House
(ACH) and may take up to
eight days to clear.
There is generally no fee
for ACH transactions.
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SHAREHOLDER INFORMATION
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PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
BY WIRE TRANSFER
Note: Your bank may charge a wire transfer fee.
Please phone the Funds at 1-800-261-FUND (3863) for instructions on opening
an account or purchasing additional shares by wire transfer.
You can add to your account by using the convenient options described below.
The Fund reserves the right to change or eliminate these privileges at any
time with 60 days notice.
AUTOMATIC INVESTMENT PLAN
You can make automatic investments in the Funds from your bank account,
through payroll deduction or from your federal employment, Social Security or
other regular government checks. Automatic investments can be as little as
$50, once you've invested the $1,000 minimum required to open the account.
To invest regularly from your bank account:
Complete the Automatic Investment Plan portion on your Account Application.
Make sure you note:
- Your bank name, address and account number
- The amount you wish to invest automatically (minimum $50)
- How often you want to invest (every month, 4 times a year, twice a year
or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck or government check: Call
1-800-261-FUND (3863) for an enrollment form.
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SELLING YOUR SHARES
You may sell your shares
at any time. Your sales
price will be the next NAV
after your sell order is
received by the Fund, its
transfer agent, or your
investment representative.
Normally you will receive
your proceeds within a
week after your request is
received. See section on
"General Policies on
Selling Shares" below.
WITHDRAWING MONEY FROM YOUR FUND INVESTMENT
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also
known as redeeming shares or a redemption of
shares.
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through a financial adviser or broker, ask him or her
for redemption procedures. Your adviser and/or broker may have transaction
minimums and/or transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
BY TELEPHONE
1.You may redeem shares by calling 1-800-261-FUND (3863). Be prepared to give
the telephone representative the following information:
- the account number, social security number and account registration;
- the name of the class and the Fund from which shares are being redeemed;
and
- the amount to be redeemed.
Telephone redemptions are available only if you checked 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.
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SHAREHOLDER INFORMATION
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SELLING YOUR SHARES
CONTINUED
BY REGULAR OR OVERNIGHT MAIL
1. Call 1-800-261-FUND to request redemption forms or write a letter of
instruction indicating:
- your Fund, class of shares and account number
- amount you wish to redeem
- address where your check should be sent
- account owner signature(s)
2. Mail to: ESC Strategic Funds, Inc. P.O. Box 182487 Columbus, OH
43218-2487. If by overnight service, send to: ESC Strategic Funds, Inc.
c/o BISYS Fund Services, Attn: T.A. Operations, 3435 Stelzer Road,
Columbus, Ohio 43219.
BY WIRE
You must indicate this option on your application.
1. You may redeem shares by contacting the Funds by mail or telephone and
instructing the Funds to send a wire transmission to your bank. Your
instructions should include:
- the account number, social security number and account registration;
- the name of the class (if applicable) and the Fund from which shares are
being redeemed; and
- the amount to be redeemed.
If you call by 4 p.m. Eastern time, your payment will normally be wired to
your bank on the next business day.
The Fund may charge a wire transfer fee.
Note: Your financial institution may also charge a separate fee.
ELECTRONIC REDEMPTIONS
Call 1-800-261-FUND (3863) to request an electronic redemption. Your bank
must participate in the Automated Clearing House (ACH) and must be a U.S.
bank.
If you call by 4 p.m. Eastern time, the NAV of your shares will normally be
determined on the same day and the proceeds credited within 8 days.
Your bank may charge for this service.
SYSTEMATIC WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The maximum annual payment 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
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SHAREHOLDER INFORMATION
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SELLING YOUR SHARES
CONTINUED
you select. 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. You
may request that these payments be sent to a predesignated bank or another
designated party. To activate this feature:
- Make sure you've checked the appropriate box on the Account Application. Or
call 1-800-261-FUND (3863).
- Include a voided personal check.
- Your account must have a value of $12,000 or more to start withdrawals. If
the value of your account falls below $500 due to withdrawals, you may be
asked to add sufficient funds to bring the account back to $500, or the
Fund may close your account and mail the proceeds to you.
GENERAL POLICIES ON SELLING YOUR SHARES
SIGNATURE GUARANTEES
To protect shareholder accounts from fraud, signature guarantees are required
to enable the Funds to verify the identity of the person who has authorized a
redemption from an account. Signature guarantees are required for (1)
redemptions where the proceeds are to be sent to someone other than the
registered shareholder(s) and the registered address, (2) a redemption of
$25,000 or more, and (3) share transfer requests. Signature guarantees may be
obtained from certain eligible financial institutions, including but not
limited to, the following: banks, trust companies, credit unions, securities
brokers and dealers, savings and loan associations and participants in the
Securities and Transfer Association Medallion Program ("STAMP"), the Stock
Exchange Medallion Program ("SEMP") or the New York Stock Exchange Medallion
Signature Program ("MSP"). Shareholders may contact the Funds at 1-800-
261-FUND (3863) for further details.
REDEMPTIONS WITHIN 15 DAYS OF INITIAL INVESTMENT
When you have made your initial investment by check, payment of any
redemption proceeds may be delayed until the Transfer Agent is satisfied that
the check has cleared (which may require up to 15 days). You can avoid this
delay by purchasing shares through wire transfers of Federal funds.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission ("SEC") in order to
protect remaining shareholders.
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
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GENERAL POLICIES ON SELLING YOUR SHARES
CONTINUED
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.
The Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind
will consist of securities equal in market value to your shares. When you
convert these securities to cash, you will pay brokerage charges.
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.
UNDELIVERABLE REDEMPTION CHECKS
If redemption checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be cancelled and the money reinvested in
the Fund at the then current net asset value.
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DISTRIBUTION ARRANGEMENTS/SALES CHARGES
This section describes the sales charges and fees you will pay as an investor
in different share classes offered by the Funds and ways to qualify for
reduced sales charges.
<TABLE>
<S> <C> <C>
CLASS A CLASS D
Sales Charge (Load) Higher front-end sales charge than Lower front-end sales charge than
Class D; reduced sales charges Class A.
available.
Distribution and Service Fee Subject to annual distribution and Subject to annual distribution and
(12b-1) Fee shareholder servicing fees servicing fees of up to 0.75% of
of up to 0.25% of the Fund's the Fund's assets.
total assets.
Fund Expenses Lower annual expenses than Class D Higher annual expenses than Class
shares. A shares.
</TABLE>
CALCULATION OF SALES CHARGES
CLASS A SHARES AND CLASS D SHARES
Class A and Class D shares are each sold at their public offering price. This
price includes the initial sales charge. Therefore, part of the money you
invest will be used to pay the sales charge. The remainder is invested in
Fund shares. The sales charge decreases with larger purchases. There is no
sales charge on reinvested dividends and distributions.
The current sales charge rates are as follows:
FOR CLASS A SHARES
<TABLE>
<S> <C> <C>
SALES CHARGE SALES CHARGE
AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT
Up to $100,000 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above(1) None None
</TABLE>
(1) There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed
in the first year after purchase. This charge will be based on the lower
of your cost for the shares or their NAV at the time of redemption. There
will be no CDSC on reinvested distributions.
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DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
FOR CLASS D SHARES
<TABLE>
<S> <C> <C>
SALES CHARGE SALES CHARGE
AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT
Up to $999,999 1.50% 1.52%
$1,000,000 and above(1) None none
</TABLE>
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 Class A or Class D shares, as applicable, for individual sales over
$5 million.
(1) There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed
in the first year after purchase. This charge will be based on the lower
of your cost for the shares or their NAV at the time of redemption. There
will be no CDSC on reinvested distributions.
SALES CHARGE REDUCTIONS
Reduced sales charges for Class A shares are available to shareholders with
investments of $100,000 or more. In addition, you may qualify for reduced
sales charges under the following circumstances.
- Letter of Intent. You inform the Fund in writing that you intend to
purchase enough shares over a 13-month period to qualify for a reduced
sales charge. You must include a minimum of 5% of the total amount you
intend to purchase with your letter of intent.
- Rights of Accumulation. When the value of shares you already own plus the
amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the reduced
sales charge.
- Combination Privilege. Combine accounts of multiple Funds or accounts of
immediate family household members (spouse and children under 21) to
achieve reduced sales charges.
SALES CHARGE WAIVERS
CLASS A SHARES
The following qualify for waivers of sales charges:
- Shares purchased by investment representatives through asset allocation
or fee-based investment products or accounts.
- Shares purchased with the proceeds from redemptions from another mutual
fund complex that were originally purchased with a front-end sales
charge.
- Shares purchased for trust or other advisory accounts established with
the Adviser or its affiliates or a Manager.
38
<PAGE> 40
SHAREHOLDER INFORMATION
TRIANGLE
logo
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
- Shares purchased by directors, officers, employees, and family members of
the Funds, the Adviser, a Manager, or BISYS, and their affiliates and any
organization that provides services to the Funds.
- Shares purchased by representatives of selling brokers and members of
their immediate families.
- Shares purchased by bank trust departments, acting on behalf of one or
more clients, with shares having an aggregate value equal to or exceeding
$200,000.
- Shares purchased with proceeds of a distribution from a trust, investment
management or other fiduciary account managed by the Adviser or a
Manager.
- Shares purchased for retirement accounts or plans (or monies from
retirement accounts or plans) for which there is a written service
agreement between the Funds and the Plan Sponsor, so long as such shares
are purchased through BISYS.
REINSTATEMENT PRIVILEGE
If you have sold Class A or D shares and decide to reinvest in the Fund
within a 30 day period, you will not be charged the applicable sales load on
amounts up to the value of the shares you sold. You must reinvest in the same
Fund, same class and the same account. Please note that a redemption is a
taxable transaction and any gain may be recognized for Federal income tax
purposes even if the reinstatement privilege is exercised.
DISTRIBUTION AND SERVICE (12b-1) FEES
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and
distribution of the Funds' shares and/or for providing shareholder services.
12b-1 fees are paid from Fund assets on an ongoing basis, and will increase
the cost of your investment. Class A shares and Class D shares pay 12b-1 fees
of up to 0.25% and 0.75%, respectively, of the average daily net assets of a
Fund.
Long-term shareholders may pay indirectly more than the equivalent of the
maximum permitted front-end sales charge due to the recurring nature of 12b-1
distribution and service fees.
SERVICE ORGANIZATIONS
Various banks, trust companies, broker-dealers (other than the Distributor)
and other financial organizations ("Service Organization(s)") may provide
certain administrative services for its customers who invest in the Funds
through accounts maintained at that Service Organization. Under servicing
agreements with the Service Organization, the Funds will pay the Service
Organization an annual rate up to .25% of the Fund's average daily net assets
of either class owned by shareholders for these services, which include
maintaining shareholder records, answering shareholder inquiries and
forwarding materials and information to shareholders.
If you purchase, sell or exchange shares of the Funds through a customer
account maintained at a Service Organization, you may be charged extra for
other services which are not specified in the servicing agreement with the
Fund but are covered under separate fee schedules provided by the Service
Organization to their customers. Customers with accounts at Service
Organizations should consult their Service Organization for information
concerning their sub-accounts.
39
<PAGE> 41
SHAREHOLDER INFORMATION
TRIANGLE
logo
EXCHANGING YOUR SHARES
You can exchange your
shares in one Fund for
shares of the same class of
another ESC Strategic Fund,
usually without paying
additional sales charges
(see "Notes" below). No
transaction fees are
charged for exchanges.
The minimum amount for an
initial exchange is $2,000.
Exchanges from one Fund to
another are taxable.
AUTOMATIC EXCHANGES
You can use the Funds'
Automatic Exchange feature
to purchase shares of the
Funds at regular intervals
through regular, automatic
redemptions. To participate
in the Automatic Exchange:
- Complete the
appropriate section of
the Account
Application.
- Make a minimum initial
purchase of $5,000 and
maintain a minimum
account balance of
$1,000.
- Make monthly,
quarterly, semi-annual
or annual exchanges of
a stated amount of no
less than $100.
To change the Automatic Exchange instructions or to discontinue the feature,
you must send a written request to ESC Strategic Funds, Inc., P.O. Box
182487, Columbus, Ohio 43218-2487.
NOTES ON EXCHANGES
You may not exchange shares of a class of one Fund or shares of the same
class of another Fund that is not qualified for sale in your state of
residence.
The registration and tax identification numbers of the two accounts must be
identical.
The Exchange Privilege (including automatic exchanges) may be changed or
eliminated at any time without notice to shareholders.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to ESC Strategic Funds, Inc.,
P.O. Box 182487, Columbus OH
43218-2487, or by calling
1-800-261-FUND (3863). Please
provide the following information:
- Your name and telephone number
- The exact name on your account and account number
- Taxpayer identification number (usually your Social Security number)
- Dollar value or number of shares to be exchanged
- The name of the Fund from which the exchange is to be made
- The name of the Fund into which the exchange is being made.
- The signatures of all registered owners or authorized parties.
See "Selling Your Shares" for important information about telephone
transactions.
To prevent disruption in the management of the Funds, due to market timing
strategies, exchange activity may be
limited to four substantive
exchanges during any calendar year.
40
<PAGE> 42
SHAREHOLDER INFORMATION
TRIANGLE
logo
DIVIDENDS, DISTRIBUTIONS AND TAXES
Any income a Fund receives is paid out, less expenses, to its shareholders as
dividends. Income dividends on the ESC Strategic Appreciation Fund, ESC
Strategic International Equity Fund, ESC Strategic Small Cap Fund and ESC
Strategic Small Cap II Fund are at least paid annually. Dividends on the ESC
Strategic Income Fund are paid monthly. Capital gains for all Funds are
distributed at least annually.
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends are higher for Class A shares than for Class D, because Class A
shares have lower distribution expenses.
An exchange of shares is considered a sale, and any related gains may be
subject to applicable taxes.
Dividends are taxable as ordinary income. Taxes on capital gains by the Funds
will vary with the length of time the Fund has held the security -- not how
long you have invested in the Fund.
Some dividends are taxable in the year in which they are declared, even if
they are paid and/or appear on your account statement the following year.
Dividends and distributions are treated in the same manner for federal income
tax purposes whether you receive them in cash or in additional shares.
You will be notified in January each year about the federal tax status of
distributions made by a Fund. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements.
There is a penalty on certain pre-retirement distributions from retirement
accounts. Consult your tax adviser about the federal, state and local tax
consequences in your particular circumstances.
------------------------------------------------------------
AVOID 31% TAX WITHHOLDING
The Funds are required to withhold 31% of taxable dividends,
capital gains distributions and redemptions paid to
shareholders who have not provided the Fund with their
taxpayer identification number in compliance with IRS rules.
To avoid this, make sure you provide your correct Tax
Identification Number (Social Security Number for most
investors) on your account application.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF
HOW LONG YOU'VE OWNED YOUR SHARES. THEREFORE, IF YOU INVEST
SHORTLY BEFORE THE DISTRIBUTION DATE, SOME OF YOUR
INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A TAXABLE
DISTRIBUTION.
------------------------------------------------------------
41
<PAGE> 43
FINANCIAL HIGHLIGHTS
TRIANGLE
logo
The financial highlights table is intended to help you understand the Funds'
financial performance for the period of the Funds' operations. Certain
information reflects financial results for a single fund share. The total
returns in the table represent the rate that you would have earned or lost on
an investment in the funds (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included
in the Annual Report, which is available upon request.
APPRECIATION FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
JULY 6, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD............. $ 15.80 $ 14.03 $ 13.02 $ 10.67 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income/(loss).... (0.06) 0.02 (0.04) (0.05) --
Net realized and unrealized
gains/ (losses) on
investments................... (3.50) 6.02 1.92 2.71 0.73
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT
OPERATIONS...................... (3.56) 6.04 1.88 2.66 0.73
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From realized gains............. (1.51) (4.27) (0.87) (0.31) (0.06)
------- ------- ------- ------- -------
NET ASSET VALUE PER SHARE, END OF
PERIOD.......................... $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67
======= ======= ======= ======= =======
TOTAL RETURN (EXCLUDES SALES
CHARGE)....................... (22.43)% 46.73% 14.25% 25.07% 7.32%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands).................... $18,916 $33,394 $44,767 $25,561 $15,126
Ratios to Average Net Assets of:
Net investment
income/(loss)............... (0.44)% (0.40)% (0.30)% (0.39)% (0.04)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 1.95% 1.80% 1.82% 2.00% 2.00%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 1.97% 1.80% 1.84% 2.10% 2.88%*
Portfolio turnover rate......... 96% 67% 71% 78% 58%
</TABLE>
------------------
* Annualized.
42
<PAGE> 44
FINANCIAL HIGHLIGHTS
TRIANGLE
logo
APPRECIATION FUND
<TABLE>
<CAPTION>
CLASS D
----------------------------------------------------------------------------------
JULY 6, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD............. $ 15.54 $13.85 $12.91 $10.63 $10.00
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income/(loss).... (0.15) (0.08) (0.08) (0.09) (0.03)
Net realized and unrealized
gains/ (losses) on
investments................... (3.41) 6.04 1.89 2.68 0.72
------- ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS...................... (3.56) 5.96 1.81 2.59 0.69
------- ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
From realized gains............. (1.51) (4.27) (0.87) (0.31) (0.06)
------- ------ ------ ------ ------
NET ASSET VALUE PER SHARE, END OF
PERIOD.......................... $ 10.47 $15.54 $13.85 $12.91 $10.63
======= ====== ====== ====== ======
TOTAL RETURN (EXCLUDES SALES
CHARGE)..................... (22.82)% 46.76% 13.81% 24.50% 6.92%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands).................... $ 4,400 $7,384 $4,054 $2,482 $1,693
Ratios to Average Net Assets of:
Net investment
income/(loss)............... (0.94)% (0.90)% (0.78)% (0.86)% (0.56)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 2.45% 2.30% 2.34% 2.50% 2.50%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 2.47% 2.30% 2.36% 2.64% 3.40%*
Portfolio turnover rate......... 96% 67% 71% 78% 58%
</TABLE>
------------------
* Annualized.
43
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FINANCIAL HIGHLIGHTS
TRIANGLE
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INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
MAY 12, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD............. $12.06 $ 11.66 $ 11.08 $ 9.90 $10.00
------ ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income/(loss).... (0.06) -- (0.04) (0.04) (0.05)
Net realized and unrealized
gains/(losses) on
investments................... (0.31) 2.37 0.97 1.46 (0.03)
------ ------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS...................... (0.37) 2.37 0.93 1.42 (0.08)
------ ------- ------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS:
From realized gains............. (0.94) (1.97) (0.35) (0.24) (0.02)(a)
------ ------- ------- ------- ------
NET ASSET VALUE PER SHARE, END OF
PERIOD.......................... $10.75 $ 12.06 $ 11.66 $ 11.08 $ 9.90
====== ======= ======= ======= ======
TOTAL RETURN (EXCLUDES SALES
CHARGE)..................... (2.22)% 22.24% 8.44% 14.41% (0.84)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands).................... $7,816 $13,286 $18,282 $14,597 $9,213
Ratios to Average Net Assets of:
Net investment
income/(loss)............... (0.44)% (0.50)% (0.40)% (0.36)% (0.65)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 2.45% 2.48% 2.25% 2.37% 2.50%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 2.55% 2.48% 2.25% 2.43% 3.22%*
Portfolio Turnover Rate......... 123% 79% 94% 92% 76%
</TABLE>
------------------
(a) Represents distribution in excess of net investment income.
* Annualized.
44
<PAGE> 46
FINANCIAL HIGHLIGHTS
TRIANGLE
logo
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS D
----------------------------------------------------------------------------------
MAY 12, 1994
(COMMENCEMENT)
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD............. $11.81 $11.47 $10.95 $ 9.82 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income/(loss).... (0.16) (0.13) (0.10) (0.09) (0.07)
Net realized and unrealized
gains/(losses) on
investments................... (0.26) 2.44 0.97 1.46 (0.10)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS...................... (0.42) 2.31 0.87 1.37 (0.17)
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
From realized gains............. (0.94) (1.97) (0.35) (0.24) (0.01)(a)
------ ------ ------ ------ ------
NET ASSET VALUE PER SHARE, END OF
PERIOD.......................... $10.45 $11.81 $11.47 $10.95 $ 9.82
====== ====== ====== ====== ======
TOTAL RETURN (EXCLUDES SALES
CHARGE)..................... (2.73)% 22.09% 7.99% 14.01% (1.72)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands).................... $1,880 $2,776 $4,204 $3,725 $3,322
Ratios to Average Net Assets of:
Net investment
income/(loss)............... (0.94)% (1.00)% (0.90)% (0.83)% (1.51)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 2.95% 2.98% 2.78% 2.87% 2.98%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 3.05% 2.98% 2.79% 2.96% 3.69%*
Portfolio Turnover Rate......... 123% 79% 94% 92% 76%
</TABLE>
------------------
(a) Represents distribution in excess of net investment income.
* Annualized.
45
<PAGE> 47
FINANCIAL HIGHLIGHTS
TRIANGLE
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SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
JUNE 8, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD.......... $ 22.81 $ 17.55 $ 15.88 $ 11.25 $10.00
------- -------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income/
(loss)..................... (0.12) 0.02 (0.05) (0.08) (0.03)
Net realized and unrealized
gains/(losses) on
investments................ (5.59) 6.97 2.46 5.19 1.52
------- -------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS................... (5.71) 6.99 2.41 5.11 1.49
------- -------- ------- ------- ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
From net investment income... -- -- -- -- --
From realized gains.......... (0.51) (1.73) (0.74) (0.48) (0.24)
------- -------- ------- ------- ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS................ (0.51) (1.73) (0.74) (0.48) (0.24)
------- -------- ------- ------- ------
NET ASSET VALUE PER SHARE, END
OF PERIOD.................... $ 16.59 $ 22.81 $ 17.55 $ 15.88 $11.25
======= ======== ======= ======= ======
TOTAL RETURN (EXCLUDES
SALES CHARGE)............ (24.97)% 40.64% 14.99% 45.88% 15.03%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands)................. $74,740 $126,857 $72,488 $28,840 $8,785
Ratios to Average Net Assets
of:
Net investment income/
(loss)................... (0.54)% (0.18)% (0.44)% (0.80)% (0.43)%*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 1.79% 1.65% 1.66% 2.00% 2.00%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties**................ 1.79% 1.68% 1.74% 2.18% 3.28%*
Portfolio Turnover Rate...... 57% 67% 65% 102% 151%
</TABLE>
------------------
* Annualized.
** For the year ended March 31, 1999, there were no waivers or
reimbursements.
46
<PAGE> 48
FINANCIAL HIGHLIGHTS
TRIANGLE
logo
SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS D
----------------------------------------------------------------------------------
JUNE 8, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD.......... $ 22.50 $ 17.35 $ 15.76 $11.22 $10.00
------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income/
(loss)..................... (0.22) (0.07) (0.11) (0.16) (0.05)
Net realized and unrealized
gains/(losses) on
investments................ (5.51) 6.95 2.44 5.18 1.51
------- ------- ------- ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... (5.73) 6.88 2.33 5.02 1.46
------- ------- ------- ------ ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
From net investment income... -- -- -- -- --
From realized gains.......... (0.51) (1.73) (0.74) (0.48) (0.24)
------- ------- ------- ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS................ (0.51) (1.73) (0.74) (0.48) (0.24)
------- ------- ------- ------ ------
NET ASSET VALUE PER SHARE, END
OF PERIOD.................... $ 16.26 $ 22.50 $ 17.35 $15.76 $11.22
======= ======= ======= ====== ======
TOTAL RETURN (EXCLUDES
SALES CHARGE)............ (25.40)% 40.47% 14.59% 45.19% 14.72%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands)................. $22,075 $38,274 $22,392 $8,897 $3,367
Ratios to Average Net Assets
of:
Net investment income/
(loss)................... (1.04)% (0.68)% (0.96)% (1.30)% (0.93)%*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.29% 2.15% 2.19% 2.50% 2.50%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties**................ 2.29% 2.18% 2.29% 2.74% 3.68%*
Portfolio Turnover Rate...... 57% 67% 65% 102% 151%
</TABLE>
------------------
* Annualized.
** For the year ended March 31, 1999, there were no waivers or
reimbursements.
47
<PAGE> 49
FINANCIAL HIGHLIGHTS
TRIANGLE
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SMALL CAP II FUND
<TABLE>
<CAPTION>
CLASS A CLASS D
-------------------------------------- --------------------------------------
JANUARY 28, JANUARY 28,
1997 1997
YEAR YEAR (COMMENCEMENT) YEAR YEAR (COMMENCEMENT)
ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS)
MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH
1999 1998 MARCH 31, 1997 1999 1998 MARCH 31, 1997
--------- --------- -------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD............. $ 13.68 $ 9.64 $10.00 $ 13.61 $ 9.63 $10.00
------- ------- ------ ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income/(loss).... (0.09) 0.01 -- (0.16) (0.03) --
Net realized and unrealized
gains/(losses) on
investments................... (3.98) 4.65 (0.36) (3.93) 4.63 (0.37)
------- ------- ------ ------- ------ ------
TOTAL FROM INVESTMENT
OPERATIONS...................... (4.07) 4.66 (0.36) (4.09) 4.60 (0.37)
------- ------- ------ ------- ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income...... -- (0.36) -- -- (0.36) --
From realized gains............. -- (0.26) -- -- (0.26) --
------- ------- ------ ------- ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS................... -- (0.62) -- -- (0.62) --
------- ------- ------ ------- ------ ------
NET ASSET VALUE PER SHARE, END OF
PERIOD.......................... $ 9.61 $ 13.68 $ 9.64 $ 9.52 $13.61 $ 9.63
======= ======= ====== ======= ====== ======
TOTAL RETURN (EXCLUDES SALES
CHARGE)..................... (29.75)% 48.92% (3.60)% (30.05)% 48.33% (3.70)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands).................... $20,077 $19,942 $2,852 $ 7,435 $9,689 $1,304
Ratios to Average Net Assets of:
Net investment
income/(loss)............... (0.87)% (0.36)% 0.25%* (1.37)% (0.86)% (0.23)%*
Expenses net of waivers/
reimbursements and expenses
paid by third parties....... 2.00% 1.62% 2.00%* 2.50% 2.12% 2.50%*
Expenses before waivers/
reimbursements and expenses
paid by third parties....... 2.27% 2.45% 5.51%* 2.77% 2.95% 6.91%*
Portfolio turnover rate......... 58% 86% 14% 58% 86% 14%
</TABLE>
------------------
* Annualized.
48
<PAGE> 50
FINANCIAL HIGHLIGHTS
TRIANGLE
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INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
MAY 4, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD.......... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00
------ ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income/
(loss)..................... 0.51(a) 0.34 0.60 0.59 0.55
Net realized and unrealized
gains/(losses) on
investments................ 0.04 0.44 (0.16) 0.16 (0.05)
------ ------- ------- ------- -------
TOTAL FROM INVESTMENT
OPERATIONS................... 0.55 0.78 0.44 0.75 0.50
------ ------- ------- ------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS:
From net investment income... (0.57) (0.52) (0.60) (0.59) (0.01)
From tax return of capital... (0.05) -- -- -- --
From realized gains.......... (0.15) -- -- (0.21) (0.55)
------ ------- ------- ------- -------
TOTAL DIVIDENDS AND
DISTRIBUTIONS................ (0.77) (0.52) (0.60) (0.80) (0.56)
------ ------- ------- ------- -------
NET ASSET VALUE PER SHARE, END
OF PERIOD.................... $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94
====== ======= ======= ======= =======
TOTAL RETURN (EXCLUDES
SALES CHARGE)............ 5.64% 8.18% 3.91% 7.67% 5.30%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands)................. $7,230 $24,413 $32,506 $36,891 $32,373
Ratios to Average Net Assets
of:
Net investment income/
(loss)................... 5.09% 5.27% 5.49% 5.87% 6.29%*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 1.91% 1.87% 1.65% 1.70% 1.85%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.22% 1.87% 1.70% 1.75% 1.86%*
Portfolio Turnover Rate...... 95% 130% 123% 138% 92%
</TABLE>
------------------
(a) Calculated using the average share method.
* Annualized.
49
<PAGE> 51
FINANCIAL HIGHLIGHTS
TRIANGLE
logo
INCOME FUND
<TABLE>
<CAPTION>
CLASS D
----------------------------------------------------------------------------------
MAY 4, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE,
BEGINNING OF PERIOD.......... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income/
(loss)..................... 0.50(a) 0.28 0.50 0.54 0.50
Net realized and unrealized
gains/(losses) on
investments................ 0.01 0.45 (0.16) 0.16 (0.05)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 0.51 0.73 0.34 0.70 0.45
------ ------ ------ ------ ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
From net investment income... (0.46) (0.47) (0.50) (0.54) (0.01)
From tax return of capital... (0.05) -- -- -- --
From realized gains.......... (0.15) -- -- (0.21) (0.50)
------ ------ ------ ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS................ (0.66) (0.47) (0.50) (0.75) (0.51)
------ ------ ------ ------ ------
NET ASSET VALUE PER SHARE, END
OF PERIOD.................... $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94
====== ====== ====== ====== ======
TOTAL RETURN (EXCLUDES
SALES CHARGE)............ 5.23% 7.64% 3.39% 7.11% 4.74%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (in
thousands)................. $ 548 $ 823 $1,420 $1,446 $1,241
Ratios to Average Net Assets
of:
Net investment income/
(loss)................... 5.03% 4.77% 4.99% 5.37% 5.73%*
Expenses net of waivers/
reimbursements and
expenses paid by third
parties.................. 2.44% 2.37% 2.15% 2.20% 2.29%*
Expenses before waivers/
reimbursements and
expenses paid by third
parties.................. 2.96% 2.37% 2.21% 2.25% 2.31%*
Portfolio Turnover Rate...... 95% 130% 123% 138% 92%
</TABLE>
------------------
(a) Calculated using the average share method.
* Annualized.
50
<PAGE> 52
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
The Funds' annual and semi-annual reports to shareholders contain additional
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected a Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
You can get free copies of Annual/Semi-Annual Reports and the SAI of the ESC
Strategic Funds, or request other information and discuss your questions about
the funds by contacting a broker that sells the Funds. Or contact the Funds at:
ESC STRATEGIC FUNDS, INC.
P.O. BOX 182487
COLUMBUS, OHIO 43219
TELEPHONE: 1-800-261-FUND
(3863)
You can review the Funds' reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. You can get copies:
- - For a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
- - Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-8166.
<PAGE> 53
ESC STRATEGIC FUNDS, INC.
(THE "COMPANY")
3435 STELZER ROAD
COLUMBUS, OHIO 43219-8001
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 five 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 Small Cap II Fund**
- ESC Strategic Income 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 30, 1999, 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 29, 1999.
* Currently, shares of the Small Cap Fund are available only to existing
shareholders of that Fund.
** Formerly, ESC Strategic Growth Fund.
<PAGE> 54
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES 4
Bank Obligations 4
Commercial Paper 4
Corporate Debt Securities 4
Repurchase Agreements 4
Variable and Floating Rate Demand and Master Demand Notes 5
Inverse Floaters 5
Loans of Portfolio Securities 5
Foreign Securities 5
Special Considerations Concerning Emerging Markets 7
Forward Foreign Currency Exchange Contracts 7
Lower Rated and Non-Investment Grade Securities and Sovereign Debt Obligations 7
Municipal Lease Obligations 9
Short Sales 10
Risks of Illiquid Securities 10
Forward Commitments and When-Issued Securities 10
Foreign Currency Options 10
Interest Rate Futures Contracts 10
Stock Index Futures Contracts 11
Option Writing and Purchasing 11
Options on Futures Contracts 12
Risks of Options Transactions 13
Risks of Futures and Related Options Transactions 13
Limitations on Futures Contracts and Options on Futures Contracts 14
Brady Bonds 14
Warrants and Rights 15
Investment Companies and Investment Funds 15
Mortgage-Related Securities 15
Parallel Pay Securities; PAC Bonds 17
Mortgage-Backed Security Rolls 17
Other Asset-Backed Securities 18
Structured Investments 18
Structured Notes 19
Swaps 19
Zero Coupon Securities and Deferred Interest Obligations 20
Custodial Receipts 20
Loan Participations 21
Pay-In-Kind Bonds 21
Trade Claims 21
Equity-Linked Securities 21
Arbitrage 22
Foreign Index-Linked Instruments 22
Venture Capital 23
Leveraged Buyouts 23
Non-Publicly Traded Securities; Rule 144A Securities 23
INVESTMENT RESTRICTIONS 24
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
MANAGEMENT 25
Directors and Officers 25
Investment Adviser 27
The Managers 27
Distribution of Fund Shares 30
Administrative Services 31
Service Organizations 31
DETERMINATION OF NET ASSET VALUE 32
PORTFOLIO TRANSACTIONS 32
Portfolio Turnover 33
TAXATION 34
OTHER INFORMATION 38
Capitalization 38
Principal Shareholders 39
Voting Rights 41
Custodian, Transfer Agent and Dividend Disbursing Agent 41
Yield and Performance Information 42
Independent Accountants 43
Counsel 43
Registration Statement 43
FINANCIAL STATEMENTS 43
</TABLE>
<PAGE> 56
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). The Funds may invest in U.S. dollar-
or foreign currency-denominated obligations of foreign issuers. 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 that, in the
opinion of the Manager, present minimal credit risks in accordance with
guidelines adopted by the Board of Directors. 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.
<PAGE> 57
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). 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
<PAGE> 58
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.
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 (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.
Changes in foreign exchange rates will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. Since certain
Funds may invest in securities denominated in currencies other than the U.S.
dollar, and since those Funds may, for various periods pending investment for
non speculative purposes, hold funds in bank deposits or other money market
investments denominated in foreign currencies, a Fund may be affected favorably
or unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. Changes in foreign currency exchange
rates will influence values of securities in the Fund's portfolio, from the
perspective of U.S. investors. Changes in foreign currency exchange rates may
also affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if any,
to be distributed to shareholders by a Fund. The rate of exchange between the
U.S. dollar and other currencies is determined by the forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors.
<PAGE> 59
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.
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. 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 off-sets will always be
available to a Fund.
Lower Rated and Non-Investment Grade Securities and Sovereign Debt
Obligations (ESC Strategic Income Fund). ESC Strategic Income 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 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 the
Fund with a commensurate effect on the value of its respective shares.
Therefore, an investment in this Fund should not be considered as a complete
investment program for all investors.
<PAGE> 60
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 the 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 the Fund to the direct
or indirect consequences of political, social or economic changes in the
developing and emerging countries that issue the securities. The ability and
willingness of sovereign obligors in developing and emerging countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country.
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 currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
<PAGE> 61
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 the 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 an effort to reduce credit risk, the ESC Strategic Income Fund
diversifies its holdings among many issuers. As of March 31, 1999, the ESC
Strategic Income Fund held securities of 35 issuers.
The chart below shows, on a dollar-weighted basis, the credit quality
characteristics of the Strategic Income Fund. The chart reflects average
percentages of the Strategic Income Fund's assets invested in bonds having the
ratings shown below, based upon the Strategic Income Fund's portfolio holdings
at March 31, 1999.
<TABLE>
<CAPTION>
PERCENT OF
RATINGS ASSETS
<S> <C>
Cash & Equivalents........................................................................... 12%
Aaa/AAA...................................................................................... 0%
Aa/AA........................................................................................ 0%
A/A.......................................................................................... 0%
Baa/BBB...................................................................................... 4%
Ba/BB........................................................................................ 3%
B/B.......................................................................................... 73%
Caa/CCC...................................................................................... 0%
Ca/CC........................................................................................ 0%
Lower........................................................................................ 4%
</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,
<PAGE> 62
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 (ESC Strategic Income Fund). 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 (All Funds except ESC Strategic Income Fund). 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 (All Funds). 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.
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 sale cannot assure that these techniques will always be
successful.
Foreign Currency Options (All Funds). 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
<PAGE> 63
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.
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 and ESC
Strategic Small Cap II Fund). These Funds may enter into stock index futures
contracts in order to protect the value of their common stock investments. A
stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
As the aggregate market value of the stocks in the index changes, the value of
the index also will change. In the event that the index level rises above the
level at which the stock index futures contract was sold, the seller of the
stock index futures contract will realize a loss determined by the difference
between the two index levels at the time of expiration of the stock index
futures contract, and the purchaser will realize a gain in that amount. In the
event the index level falls below the level at which the stock index futures
contract was sold, the seller will recognize a gain determined by the difference
between the two index levels at the expiration of the stock index futures
contract, and the purchaser will realize a loss. Stock index futures contracts
expire on a fixed date, currently one to seven months from the date of the
contract, and are settled upon expiration of the contract.
The Funds intend to utilize stock index futures contracts only for the
purpose of attempting to protect the value of their common stock portfolios in
the event of a decline in stock prices and, therefore, usually will be sellers
of stock index futures contracts. This risk management strategy is an
alternative to selling securities in the portfolio and investing in money market
instruments. Also, stock index futures contracts may be purchased to protect a
Fund against an increase in prices of stocks which the Fund intends to purchase.
If the Fund is unable to invest its cash (or cash equivalents) in stock in an
orderly fashion, the Fund could purchase a stock index futures contract which
may be used to offset any increase in the price of the stock. However, it is
possible that the market may decline instead, resulting in a loss on the stock
index futures contract. If the Fund then concludes not to invest in stock at
that time, or if the price of the securities to be purchased remains constant or
increases, the Fund will realize a loss on the stock index futures contract that
is not offset by a reduction in the price of securities purchased. The Fund also
may buy or sell stock index futures contracts to close out existing futures
positions.
<PAGE> 64
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.
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.
<PAGE> 65
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 Options Transactions (All Funds). The purchase and writing of
options involves certain risks. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity to
profit from a price increase in the underlying securities above the exercise
price, but as long as its obligation as a writer continues, has retained the
risk of loss should the price of the underlying security decline. The writer of
an option has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. If a put or call option purchased by a Fund is
not sold when it has remaining value, and if the market price of the underlying
security, in the case of a put, remains equal to or greater than the exercise
price, or in the case of a call, remains less than or equal to the exercise
price, the Fund will lose its entire investment in the option. Also, where a put
or call option on a particular security is purchased to hedge against price
movements in a related security, the price of the put or call option may move
more or less than the price of the related security. There can be no assurance
that a liquid market will exist when a Fund seeks to close out an option
position. Furthermore, if trading restrictions or suspensions are imposed on the
options market, a Fund may be unable to close out a position. If a Fund cannot
effect a closing transaction, it will not be able to sell the underlying
security while the previously written option remains outstanding, even if it
might otherwise be advantageous to do so. Options transactions involve,
additionally, risks similar to those described below in "Risks of Futures and
Related Options Transactions.
Risks of Futures and Related Options Transactions (All Funds). 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 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
<PAGE> 66
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.
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 (All
Funds). Each Fund will use financial futures contracts and related options only
for "bona fide hedging" purposes, as such term is defined in applicable
regulations of the CFTC, or, with respect to positions in financial futures and
related options that do not qualify as "bona fide hedging" positions, will enter
such non-hedging positions only to the extent that aggregate initial margin
deposits plus premiums paid by it for open futures option positions, less the
amount by which any such positions are "in-the-money," would not exceed 5% of
the Fund's total assets.
Brady Bonds (ESC Strategic Income). "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
<PAGE> 67
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 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.
Mortgage-Related Securities (ESC Strategic Income 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 the Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost. Like other
fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
decline, the value of mortgage-related securities with prepayment features may
not increase as much as other fixed-income securities. In recognition of this
prepayment risk to investors, the Public Securities Association (the "PSA")
<PAGE> 68
has standardized the method of measuring the rate of mortgage loan principal
prepayments. The PSA formula, the Constant Prepayment Rate (the "CPR"), or other
similar models that are standard in the industry will be used by the Fund in
calculating maturity for purposes of its investment in mortgage-related
securities. Because the average life of mortgage - related securities may
lengthen with increases in interest rates, the portfolio-weighted average life
of the securities in which the Fund is invested may at times lengthen due to
this effect. Under these circumstances, the Manager may, but is not required to,
sell securities in order to maintain an appropriate portfolio-weighted average
life.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (such as securities guaranteed by
the Government National Mortgage Association ("GNMA"); or guaranteed by agencies
or instrumentalities of the U.S. Government (such as securities guaranteed by
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), 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.
The Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
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, the 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 Manager will, consistent with the Fund's
investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related 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 "10" 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
<PAGE> 69
asset pool. The cash flows and yields on 10 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.
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 (ESC Strategic Income Fund). Parallel
pay CMOs and REMICs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, that must be retired by its stated maturity date or final
distribution date but may be retired earlier. Planned Amortization Class CMOs
("PAC Bonds") generally require payments of a specified amount of principal on
each payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment on such securities having the highest priority after interest
has been paid to all classes.
The Fund may also invest in Stripped Mortgage-Backed Securities. ("SMBS"),
derivative multi-class mortgage securities issued by U.S. Government agencies or
instrumentalities or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and their special purpose subsidiaries.
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 (ESC Strategic Income Fund). 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.
<PAGE> 70
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 (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 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.
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 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-
<PAGE> 71
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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). 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 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
<PAGE> 72
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 (ESC Strategic
Income Fund). 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.
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 the 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.
Custodial Receipts (ESC Strategic Income Fund). 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
<PAGE> 73
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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). The Fund may invest
in equity-linked securities, including, among others, PERCS, ELKS or LYONs,
which are securities that are convertible into, or the value of which is based
upon the value of, equity securities upon certain terms and conditions. The
amount received by an investor at maturity of such securities is not fixed but
is based on the price of the underlying common stock. It is impossible to
predict whether the price of the underlying common stock will rise or fall.
Trading prices of the underlying common stock will be influenced by the issuer's
operational results, by complex, interrelated political, economic, financial or
other factors affecting the capital markets, the stock exchanges on which the
underlying common stock is traded and the market segment of which the issuer is
a part. In addition, it is not possible to predict how equity-linked securities
will trade in the secondary market. The market for such securities may be
shallow, and high volume trades may be possible only with discounting. In
addition to the foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of the
underlying securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.
<PAGE> 74
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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). Liquid Yield Option Notes ("LYONs")
differ from ordinary debt securities, in that the amount received prior to
maturity is not fixed but is based on the price of the issuer's common stock.
LYONs are zero-coupon notes that sell at a large discount from face value. For
an investment in LYONs, the Fund will not receive any interest payments until
the notes mature, typically in 15 to 20 years, when the notes are redeemed at
face, or par value. The yield on LYONs, typically, is lower-than-market rate for
debt securities of the same maturity, due in part to the fact that the LYONs are
convertible into common stock of the issuer at any time at the option of the
holder of the LYONs. Commonly, the LYONs are redeemable by the issuer at any
time after an initial period or if the issuer's common stock is trading at a
specified price level or better, or, at the option of the holder, upon certain
fixed dates. The redemption price typically is the purchase price of the LYONs
plus accrued original issue discount to the date of redemption, which amounts to
the lower-than-market yield. The Fund will receive only the lower-than-market
yield unless the underlying common stock increases in value at a substantial
rate. LYONs are attractive to investors, like the Fund, when it appears that
they will increase in value due to the rise in value of the underlying common
stock.
Arbitrage (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). 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
<PAGE> 75
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 (ESC Strategic Income Fund). 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 (ESC Strategic Income Fund). The Fund may invest in
leveraged buyout limited partnerships and funds that, in turn, invest in
leveraged buyout transactions ("LBOs"). An LBO, generally, is an acquisition of
an existing business by a newly formed corporation financed largely with debt
assumed by such newly formed corporation to be later repaid with funds generated
from the acquired company. Since most LBOs are by nature highly leveraged
(typically with debt to equity ratios of approximately 9 to 1), equity
investments in LBOs may appreciate substantially in value given only modest
growth in the earnings or cash flow of the acquired business. Investments in LBO
partnerships and funds, however, present a number of risks. Investments in LBO
limited partnerships and funds will normally lack liquidity and may be subject
to intense competition from other LBO limited partnerships and funds.
Additionally, if the cash flow of the acquired company is insufficient to
service the debt assumed in the LBO, the LBO limited partnership or fund could
lose all or part of its investment in such acquired company.
Non-Publicly Traded Securities; Rule 144A Securities (All Funds). A 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 a 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 a 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 a 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.
<PAGE> 76
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
a 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 a 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. A 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, with respect to 75% of its
total assets, purchase more than 10% of the voting securities of any one issuer
or invest more than 5% of the value of such assets in the securities or
instruments of any one issuer, except securities or instruments issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
(2) Borrow money except that a Fund may borrow from banks up to 10% of the
current value of its total net assets for temporary or emergency purposes,
provided that a Fund may make no purchases if its outstanding borrowings exceed
5% of its total assets;
(3) Invest in real estate, provided that a Fund may invest in readily
marketable securities (except limited partnership interests) of issuers that
deal in real estate and securities secured by real estate or interests therein
and a Fund may hold and sell real estate (a) used principally for its own office
space or (b) acquired as a result of a Fund's ownership of securities.
(4) Engage in the business of underwriting securities of other issuers,
except to the extent that the purchase of securities directly from the issuer
(either alone or as one of a group of bidders) or the disposal of an investment
position may technically cause it to be considered an underwriter as that term
is defined under the Securities Act of 1933;
(5) Make loans, except that a Fund may (a) lend its portfolio securities,
(b) enter into repurchase agreements and (c) purchase the types of debt
instruments described in the Prospectus or the SAI;
(6) Purchase securities or instruments which would cause 25% or more of the
market value of the Fund's total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is no
limit with respect to investments in the U.S. Government, its agencies and
instrumentalities;
(7) Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that collateral
arrangements with respect to forward contracts, futures contracts or options,
including deposits of initial and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction; or
<PAGE> 77
(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) Invest in the securities of other investment companies in violation of
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder;
(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) Invest more than 5% of the current value of its total assets in the
securities of companies which, including predecessors, have a record of less
than three years' continuous operation;
(i) Invest more than 15% of the value of its net assets in investments
which are illiquid, or not readily marketable (including repurchase agreements
having maturities of more than seven calendar days and variable and floating
rate demand and master demand notes not requiring receipt of the principal note
amount within seven days' notice); or
(j) Invest in oil, gas or other mineral exploration or development
programs, although it may invest in issuers that own or invest in such programs.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of the
Company for the past five years are listed below. The address of each, unless
otherwise indicated, is 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.
<PAGE> 78
<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: 41
NAME, ADDRESS AND AGE POSITION WITH COMPANY PRINCIPAL OCCUPATION
- --------------------- --------------------- --------------------
J. Bransford Wallace Director Willis Coroon Corporations
26 Century Boulevard (insurance)-- Vice Chairman
Nashville, TN 37214 (1994); Chairman (1992-93);
Age: 67 various positions since prior to
1989.
Brownlee O. Currey, Jr. Director Osborn Communications, Inc.--
1100 Broadway Chairman; Nashville Banner
Nashville, TN 37203 Publishing Company--
Age: 71 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: 46 Officer (1993-1996); Massey
Burch Investment Group venture
capital) Principal (1985-1993).
John L. McAllister Vice President SunTrust Equitable Securities
Age: 36 -- Senior Vice President (1990-
present); Copyright Management,
Inc. - Analyst (1988-1989).
R. Jeffrey Young President Employee of BISYS Fund Services
Age: 34
Martin R. Dean Treasurer Employee of BISYS Fund Services
Age: 35
</TABLE>
Directors of the Company not affiliated with the Adviser, any Manager or
the Administrator receive from the Company an annual retainer of $2,000 and a
fee of $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, 1999)
<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 July 20, 1999, officers and Directors of the Company, as a group,
owned less than one percent of the outstanding shares of the Funds.
<PAGE> 79
THE 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 1.00% 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 ESC Strategic Small Cap II 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 -- Westcap Investors, LLC; Brandes
Investment Partners, L.P.; and Atlantic Capital Management, LLC.
-- ESC Strategic International Equity Fund --Murray Johnstone International
Limited.
<PAGE> 80
-- ESC Strategic Income Fund -- Cincinnati Asset Management, Inc.
-- ESC Small Cap Fund -- Equitable Asset Management, Inc. (a division of
the Adviser's subsidiary, Equitable Trust Company).
-- ESC Strategic Small Cap II 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:
<PAGE> 81
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ESC STRATEGIC APPRECIATION FUND:
Aggregate fees to Adviser $419,329 .99% $ 482,226 1.00% $ 318,584 1.00%
Aggregate fees to Manager* $271,888 .64% $ 301,106 .62% $ 246,344 0.25%
Fees retained by Adviser $147,441 .35% $ 181,120 .38% $ 72,240 0.75%
Fees paid to Equitable
Asset Management** $ 66,053 .16% $ 147,424 .03% $ 0 0%
**EAM was terminated as a Manager of this Fund effective January 2, 1998.
ESC STRATEGIC INTERNATIONAL EQUITY FUND:
Aggregate fees to Adviser $207,116 .99% $ 189,362 1.00% $ 125,548 1.00%
Aggregate fees to Manager* $104,400 .50% $ 102,120 .54% $ 61,739 .49%
Fees retained by Adviser $102,716 .49% $ 87,242 .46% $ 63,809 .51%
ESC STRATEGIC SMALL CAP FUND
Aggregate fees (Net) to Adviser $652,644 .95% $1,387,887 1.00% $1,252,991 1.00%
Aggregate fees to Manager* $502,819 .73% $1,043,570 .75% $ 343,373 .27%
Fees retained by Adviser $149,825 .22% $ 344,317 .25% $ 909,618 .73%
ESC STRATEGIC INCOME FUND
Aggregate fees (Net) to Adviser $380,147 1.00% $ 285,164 1.00% $ 167,336 1.00%
Aggregate fees to Manager* $ 94,515 .25% $ 102,117 .36% $ 127,793 .76%
Fees retained by Adviser $285,632 .75% $ 183,047 .64% $ 39,543 .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.
<PAGE> 82
<TABLE>
<CAPTION>
INCEPTION DATE (1/28/97)
THROUGH
FISCAL YEAR ENDED MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1999
-------------- -------------- --------------
ESC STRATEGIC SMALL CAP II FUND
<S> <C> <C> <C> <C> <C> <C>
Aggregate fees to Adviser $ 0 0% $199,592 1.00% $382,702 1.25%
Aggregate fees to Manager $4,177 .12% $ 84,478 .42% $382,702 1.25%
Fees retained by Adviser $ 0 0% $115,114 .58% $ 0 0%
</TABLE>
For the period ended March 31, 1999, pursuant to an agreement to limit Fund
expenses, the Adviser waived fees of $2,255, $12,791, $82,843 and $47,061 for
the Appreciation, International Equity, Small Cap II and Income Fund,
respectively. The Adviser, net of these waivers, received fees of $316,329,
$112,757, $1,252,991, $299,859, and $120,275, from the Appreciation,
International Equity, Small Cap, Small Cap II and Income Fund, respectively. For
the period ended March 31, 1999, the Adviser also reimbursed the Income Fund a
total of $6,412.
For the period ended March 31, 1998, pursuant to an agreement to limit Fund
expenses, the Adviser waived fees of $109,801 for the Small Cap II Fund. No
reimbursements were necessary for the Appreciation, International Equity, Small
Cap, Small Cap II or Income Funds. The Adviser received fees of $482,226,
$189,362, $1,387,887, $285,164, and $199,592 from the Appreciation,
International Equity, Small Cap, Income, and Small Cap II 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 Small Cap II Fund. The
Adviser waived its fees entirely with respect to the Small Cap II 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.
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 Westcap Investors, LLC with respect to ESC Strategic
Appreciation Fund was approved by the Directors, including a majority of the
independent Directors, at a meeting held May 11, 1999. 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 Small Cap II 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. The other Portfolio Management Agreements for each Fund
were approved by the Board of
<PAGE> 83
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. Except for the Portfolio Management Agreement with Westcap Investors,
LLC, the Portfolio Management Agreements were re-approved at the October 20,
1997 Special Board of Directors Meeting. Each Portfolio Management Agreement may
be terminated at any time without penalty (a) by the Adviser, by the Fund upon
vote of a majority of the Directors, or by vote of a majority of the Fund's
outstanding voting securities, each upon sixty days' written notice to the
Manager; or (b) by the Manager upon sixty days' notice to the Company or the
Adviser. A Portfolio Management Agreement will also terminate automatically in
the event of its assignment. The Company has received exemptive relief that
permits the Board of Directors, without shareholder approval, to approve and
cause the Company to enter into new Portfolio Management Agreements in the event
a new Manager is retained or an existing Portfolio Management Agreement is
amended, unless the Agreement is with a Manager affiliated with the Adviser.
DISTRIBUTION OF FUND SHARES
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 Small Cap II 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.
<PAGE> 84
For the year ended March 31, 1999, the Distributor received $40,024,
$25,557, $241,928, $64,288 and $54,274 for the Income, International Equity,
Small Cap, Appreciation and Small Cap II Funds, respectively pursuant to Class A
Plans. For the year ended March 31, 1999, the Distributor received $5,428,
$17,490, $213,957, $46,073, and $66,798, for the Income, International Equity,
Small Cap, Appreciation and Small Cap II Funds, respectively pursuant to Class D
Plans.
For the period ended March 31, 1998, the Distributor received $69,082,
$36,835, $265,118, $106,750 and $27,168 for the Income, International Equity,
Small Cap, Appreciation and Small Cap II, respectively pursuant to Class A
Plans. For the period ended March 31, 1998 the Distributor received $6,626,
$31,515, $245,556, $41,418 and $38,252 for the Income, International Equity,
Small Cap, Appreciation and Small Cap II 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 Small Cap II 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 and Small Cap
II 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, 1999, BISYS was entitled to fees in the
amount of $25,100; $18,832; $187,949; $47,788 and $45,924; from the Income,
International Equity, Small Cap, Appreciation, Small Cap II Funds, respectively.
For the year ended March 31, 1998, BISYS was entitled to fees in the amount
of $42,775; $28,404; $208,183; $72,334 and $23,951 from the Income,
International Equity, Small Cap, Appreciation and Small Cap II Funds,
respectively. BISYS voluntarily waived fees of $18,729 for the Small Cap II Fund
for the year ended March 31, 1998 from the Income, International Equity, Small
Cap and Appreciation Funds, respectively. For the 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 Small Cap II 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 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
<PAGE> 85
penalty, at any time, by vote of a majority of the Directors or, with respect to
a Fund, by vote of the holders of a majority of the shares of the Fund, each
upon not more than 60 days written notice to the Administrator, and upon 60 days
notice, by the Administrator.
SERVICE ORGANIZATIONS
The Company may also contract with banks, trust companies, broker-dealers
or other financial organizations ("Service Organizations") to provide certain
administrative services for the Funds. Services provided by Service
Organizations may include among other things: providing necessary personnel and
facilities to establish and maintain certain shareholder accounts and records;
assisting in processing purchase and redemption transactions; arranging for the
wiring of funds; transmitting and receiving funds in connection with client
orders to purchase or redeem shares; verifying and guaranteeing client
signatures in connection with redemption orders, transfers among and changes in
client-designating accounts; providing periodic statements showing a client's
account balance and, to the extent practicable, integrating such information
with other client transactions; furnishing periodic and annual statements and
confirmations of all purchases and redemptions of shares in a client's account;
transmitting proxy statements, annual reports, and updating prospectuses and
other communications from the Funds to clients; and 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.
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
<PAGE> 86
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 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, 1999 the International Equity, Small
Cap, Appreciation and Small Cap II Funds paid total brokerage commissions of
$1,185, $13,662, $39,262 and $6,564, respectively to Equitable Securities
Corporation.
For the fiscal year ended March 31, 1998, the Income, International Equity,
Small Cap, Appreciation and Small Cap II Funds paid total brokerage commissions
of $309, $85,306, $228,380, $109,329, and $48,666, respectively to Equitable
Securities Corporation.
For the fiscal year ended March 31, 1997, the Appreciation Fund, Small Cap
Fund 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,
<PAGE> 87
$212,117, $18,063 and $74,807 were paid to the Adviser from the Income,
International Equity, Small Cap, Appreciation and Small Cap II 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, 1999 was 95%, 123%, 57%, 96%, 58% for the
Income, International Equity, Small Cap, Appreciation, Small Cap II ,
respectively. The portfolio turnover rate for the fiscal year ended March 31,
1998 was 130%, 79%, 67%, 67% and 86% for the Income, International Equity, Small
Cap, Appreciation and Small Cap II Funds, respectively. The portfolio turnover
rate for the fiscal year ended March 31, 1997 was 123%, 94%, 65% and 71% 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
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.
<PAGE> 88
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 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.
<PAGE> 89
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.
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
<PAGE> 90
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.
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
<PAGE> 91
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.
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
<PAGE> 92
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.
CAPITALIZATION
The Company is a Maryland corporation established under Articles of
Incorporation dated November 24, 1993 and currently consists of five separately
managed portfolios. The Funds currently offer two classes of shares. The
capitalization of the Company consists solely of 650 million shares of common
stock with a par value of $0.001 per share. The Board of Directors may establish
additional Funds (with different investment objectives and fundamental
policies), or additional classes of shares, at any time in the future.
Establishment and offering of additional Funds or classes will not alter the
rights of the Company's shareholders. When issued, shares are fully paid,
non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In any liquidation of a Fund or class,
each shareholder is entitled to receive his pro rata share of the net assets of
that Fund or class.
Expenses incurred in connection with each Fund's organization and the
public offering of its shares for the period ended March 31, 1999 was $8,528 for
Income, $8,414 for International Equity, $11,470 for Small Cap, $8,414 for
Appreciation and $0 for Small Cap II. Costs incurred in connection with the
organization and initial registration of the Funds, with the exception of the
Small Cap II Fund, have been deferred and are being amortized on a straight-line
basis over sixty months beginning with each Fund's commencement of operations.
PRINCIPAL SHAREHOLDERS
As of June 22, 1999, 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 80,978 6.42%
FBO 495-77607-15
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 416,858 33.07%**
FBO 495-20895-16
P.O. Box 1346
Baltimore, MD 21203-1346
ESC STRATEGIC APPRECIATION FUND - CLASS D
BT Alex Brown Incorporated 21,840 6.22%
FBO 495-26977-14
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC INTERNATIONAL EQUITY FUND - CLASS A
Equitable Trust Company 93,741 15.39%
Nashville, TN 37219-1729
** Beneficial ownership of shares is disclaimed by record account holder.
ESC STRATEGIC INTERNATIONAL EQUITY FUND - CLASS D
BT Alex Brown Incorporated 10,390 7.17%
FBO 495-10192-17
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 8,314 5.74%
FOB 495-21134-15
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 28,841 19.90%
FOB 495-21923-10
P.O. Box 1346
Baltimore, MD 21203-1346
SHAREHOLDER SHARES OWNED PERCENTAGE
ESC STRATEGIC SMALL CAP FUND - CLASS A
Equitable Trust Company 331,358 8.32%
Nashville, TN 37219-1729
ESC STRATEGIC INCOME FUND - CLASS A
Homesure of America 251,667 35.59%
P.O. Box 221210
Ft. Lauderdale, FL 33355
ESC STRATEGIC INCOME FUND - CLASS D
BT Alex Brown Incorporated 3,164 5.92%
FBO 495-17376-10
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
BT Alex Brown Incorporated 9,719 18.16%
FBO 495-25434-13
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 3,106 5.81%
FBO 495-27194-19
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 6,729 12.58%
FBO 495-18067-12
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 6,837 12.78%
FBO 495-17976-14
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 2,897 5.42%
FBO 495-17506-13
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 3,581 6.69%
FBO 495-17667-18
P.O. Box 1346
Baltimore, MD 21203-1346
BT Alex Brown Incorporated 3,435 6.42%
FBO 495-07153-10
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
SHAREHOLDER SHARES OWNED PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
ESC STRATEGIC SMALL CAP II FUND - CLASS A
SouthTrust Asset Management 115,029 6.36%
The Blumenthal Foundation
6525 Morrison Blvd., Suite 400
Charlotte, NC 28211
ESC STRATEGIC SMALL CAP II FUND - CLASS D none
</TABLE>
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. For the period ended March 31, 1999, BFSI, as Transfer
Agent, was entitled to and received fees in the amount of $24,911, $26,408,
$41,052, $197,205 and $81,518 for the Income, International Equity,
Appreciation, Small Cap and Small Cap II Funds, 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
<PAGE> 96
described therein, for an annual fee of $30,000 per Fund plus out-of-pocket
expenses. For the period ended March 31, 1999, BFSI, as Fund Accountant, earned
for fund accounting services excluding out-of-pocket expenses for each of the
Income, International Equity, Small Cap, Appreciation and Small Cap II Funds.
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, 1999 was 6.77% and 6.48%
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 May 4, 1994, May 12, 1994, June 8, 1994, July 6, 1994,
January 28, 1997 and May 7, 1997 (commencement of operations), respectively
through March 31, 1999, the average annual total returns for Class A shares were
as follows: 5.26% for the Income Fund, 7.20% for the International Equity Fund,
14.83% for the Small Cap Fund, 11.40% for the Appreciation Fund, and (1.71)% for
the Small Cap II Fund.
For the period May 4, 1994, May 12, 1994, June 8, 1994, July 6, 1994, and
January 28, 1997 and May 7, 1997 (commencement of operations), respectively
through March 31, 1999, the average annual total returns for Class D shares were
as follows: 5.40% for the Income Fund, 7.38% for the International Equity Fund,
15.14% for the Small Cap Fund, 11.73% for the Appreciation Fund and (0.72)% for
the Small Cap II Fund.
For year ended March 31, 1999, the annual total return for Class A shares
were as follows: 5.64% for the Income Fund, (2.22)% for the International Equity
Fund, (24.97% for the Small Cap Fund, (22.43)% for the Appreciation Fund and
(29.75)% for the Small
1
<PAGE> 97
Cap II Fund. For the year ended March 31, 1999, the annual total return for
Class D shares were as follows: 5.23% for the Income Fund, (2.73)% for the
International Equity Fund, (25.40)% for the Small Cap Fund, (22.82)% for the
Appreciation Fund and (30.05)% for the Small Cap II Fund.
In connection with communicating its yields or total return to current or
prospective unit holders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Funds' results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund.
Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Service Organization may be charged one or more of the
following types of fees as agreed upon by the Service Organization and the
investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and average
annual total return of the Funds for those investors.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the independent accountants for the
Company. PricewaterhouseCoopers 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.
<PAGE> 98
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, 1999
(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).
<PAGE> 99
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:
- - -- 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.
<PAGE> 100
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.
<PAGE> 101
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a)(1) Articles of Incorporation of Registrant (1)
(a)(2) Certificate of Correction (1)
(a)(3) Articles of Amendment (Small Cap II) (5)
(b) By-laws of Registrant (1)
(c) Specimen certificates of shares of common stock of Registrant (1)
(d)(1) Investment Advisory Agreement*
(d)(2) (a) Portfolio Management Agreement for ESC Strategic Appreciation Fund -
Westcap Investors*
(b) Portfolio Management Agreement for ESC Strategic Appreciation Fund -
Atlantic Capital*
(c) Portfolio Management Agreement for ESC Strategic Appreciation Fund -
Brandes Investment*
(d)(3) Portfolio Management Agreement for ESC Strategic International Equity
Fund (formerly the ESC Strategic Global Equity Fund)*
(d)(4) Portfolio Management Agreement for ESC Strategic Small Cap Fund*
(d)(5) Portfolio Management Agreement for ESC Strategic Small Cap II Fund
(formerly the ESC Strategic Growth Fund)*
(d)(6) Portfolio Management Agreement for ESC Strategic Income Fund*
(e)(1) Master Distribution Contract*
(e)(2) Form of Dealer and Selling Group Agreement*
(e)(3) Form of Escrow Agreement (1)
(f) N/A
(g) Custody Agreement (2)
(h)(1) Administrative Services Contract*
(a) Amendment*
(h)(2) Transfer Agency Agreement*
(a) Amendment*
(h)(3) Accounting Agent Contract*
(a) Amendment*
(h)(4) Form of Services Agreement (1)
(i) Opinion of Counsel (1)
(j) Consent of Independent Accountants*
(k) N/A
(l)(1) Purchase Agreement (2)
(l)(2) Purchase Agreement for ESC Strategic Small Cap II (5)
(m) Form of Master Distribution Plan*
(n) Financial Data Schedules*
(o) Multi-Class Plan, as amended January 14, 1997 (5)
(p) Power of Attorney in favor of Jeffrey L. Steele
- -------------------------------------------------------------------------------
* Filed herewith.
(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.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
None.
1
<PAGE> 102
ITEM 25. IDEMNIFICATION.
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 26. BUSINESS AND OTHER CONNECTIONS OF THE 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)
<TABLE>
<CAPTION>
BUSINESS AND
NAME TITLE OTHER CONNECTIONS
- ---- ----- -------------
<S> <C> <C>
William H. Cammack, Sr. Chairman, Managing Position with
Director and Director Equitable Securities Corporation,
1972 to present; Director and
President ESC Strategic Funds,
Inc., 1994 to present.
Katie H. Gambill President, Head of Position with
Equity Capital Equitable
Markets, Managing Securities
Director and Director Corporation, 1972 to present.
William P. Johnston Chief Executive Position with
Officer, Managing Equitable
Director and Director Securities Corporation, 1987 to
present.
Hershel L. Smith, Jr. Chief Financial Position with
Officer, Chief Equitable
Operations Officer Securities
and Managing Director Corporation, 1986 to present.
Tom R. Steele Managing Director and Position with
Director Equitable Securities Corporation,
1988 to present.
W. Howard Cammack, Jr. Managing Director and Position with
Director Equitable Securities Corporation,
1979 to present; Director and
Treasurer, ESC Strategic Funds,
Inc., 1994 to present.
</TABLE>
2
<PAGE> 103
<TABLE>
<CAPTION>
BUSINESS AND
NAME TITLE OTHER CONNECTIONS
- ---- ----- -------------
<S> <C> <C>
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 27. PRINCIPAL UNDERWRITER
(a). BISYS Fund Services Limited Partnership acts as Distributor/
Underwriter for other registered investment companies:
Allianz Funds
Alpine Equity Trust
American Performance Funds
AmSouth Mutual Funds
The BB&T Mutual Funds Group
The Coventry Group
Eureka Funds
Governor Funds
Fifth Third Funds
Hirtle Callaghan Trust
HSBC Funds Trust and HSBC Mutual Funds Trust
INTRUST Funds Trust
The Infinity Mutual Funds, Inc.
The Kent Funds
Magna Funds
Meyers Investment Trust
Mercantile Mutual Funds
MMA Praxis Mutual Funds
M.S.D.& T. Funds
Pacific Capital Funds
The Parkstone Advantage Fund
Puget Sound Alternative Investment Series Trust
Republic Advisor Funds Trust
Republic Funds Trust
Sefton Funds Trust
SSgA International Liquidity Fund
Summit Investment Trust
Variable Insurance Funds
The Victory Portfolios
The Victory Variable Insurance Funds
Vintage Mutual Funds, Inc.
3
<PAGE> 104
(b) Officers and Directors.
<TABLE>
<CAPTION>
Name and Principal Positions and Position
Business Address Offices with Registrant with Underwriter
- ---------------- ----------------------- ----------------
<S> <C> <C>
BISYS Fund Services, Inc. None Sole General Partner
3435 Stelzer Road
Columbus, Ohio 43219
WC Subsidiary Corporation None Sole Limited Partner
150 Clove Road
Little Falls, New Jersey
</TABLE>
(c) No person affiliated with the principal underwriter holds any position or
offices with the Trust.
ITEM 28. 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) Dechert, Price & Rhoads, 1775 Eye Street NW, Washington, DC 20006-2401
(Registrant's Agreement and Declaration of Trust, and Code of Regulations).
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. 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.
4
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to the Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933, as amended, and has duly caused this Post-Effective Amendment No. 13 to
Registrant's Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Columbus, Ohio on the 30th
day of July, 1999.
ESC STRATEGIC FUNDS, INC.
By:
--------------------------
R. Jeffrey Young
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No.13 to Registrant's Registration Statement has
been signed by the following persons in the capacities indicated on the date
indicated.
SIGNATURE TITLE
- --------- -----
By:
- ----------------------
R. Jeffrey Young President
By:
- ----------------------
Martin R. Dean Treasurer
/s/ *
- ----------------------
William H. Cammack, Jr. Director
/s/ *
- ----------------------
J. Bransford Wallace Director
/s/ *
- ----------------------
Brownlee O. Currey, Jr. Director
/s/ *
- ----------------------
E. Townes Duncan Director
*By:
- --------------------------
Jeffrey L. Steele
Attorney-in-Fact
5
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, effective commencing on January 1, 1998, between SunTrust
Equitable Securities (the "Adviser") and ESC Strategic Funds, Inc. (the
"Company").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Company wishes to retain the Adviser to render investment
advisory services to the Company with respect to each of its present and future
series ("Funds"), unless otherwise specifically indicated by the Company, and
the Adviser is willing to furnish such services to the Company;
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Company and the Adviser as follows:
1. Appointment. The Company hereby appoints the Adviser to act as
investment adviser for the Funds for the periods and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth, for the compensation herein provided.
2. Investment Advisory Duties. Subject to the supervision of the
Directors of the Company, the Adviser will have the sole and exclusive
responsibility for providing, or arranging for others to provide, (a) the
management for the Funds' assets in accordance with each Fund's investment
objectives, policies and limitations as stated in its prospectus and Statement
of Additional Information included as part of the Company's Registration
Statement filed with the Securities and Exchange Commission, as they may be
amended from time to time, copies of which shall be provided to the Adviser by
the Company; and (b) the placement of orders to purchase and sell securities for
the Funds. The Adviser, subject to approval in each case by the Directors of the
Company, shall be authorized to retain one or more subadvisers (the "Portfolio
Managers") for each of the Funds, and to direct that such Portfolio Managers
shall exercise full discretion in furnishing investment advice to the Funds and
arranging for the execution of portfolio transactions for the Funds, subject
only to general oversight by the Adviser. The Adviser shall be responsible for
monitoring, or arranging for others to monitor, compliance by the Portfolio
Managers with the investment policies and restrictions of the respective Funds
and with such other limitations or directions as the Board of Directors of the
Company may from time to time prescribe. The Adviser shall report to the Board
of Directors of the Company regularly at such times and in such detail as the
Board may from time to time determine to be appropriate, in order to permit the
Board to determine the adherence of the Adviser and Portfolio Managers to the
investment policies of the Funds.
The Adviser further agrees that, in performing its duties hereunder, it
will directly, or assure that the Portfolio Managers will,:
<PAGE> 2
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Funds so that they will each
qualify, and continue to qualify, as regulated investment companies under
Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investments of the Funds directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to each Fund and in accordance with applicable legal requirements;
(d) furnish to the Company whatever statistical information the Company
may reasonably request with respect to the Funds' assets or contemplated
investments; keep the Company and the Directors informed of developments
materially affecting the Funds' portfolios; and, on the Adviser's or Portfolio
Managers' own initiative, furnish to the Company from time to time whatever
information the Adviser or Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator (the
"Administrator"), and the Company, promptly upon their request, such copies of
its investment records and ledgers with respect to the Funds as may be required
to assist the Administrator and the Company in their compliance with applicable
laws and regulations. The Adviser will furnish the Directors with such periodic
and special reports regarding the Funds as they may reasonably request;
(f) immediately notify the Company in the event that the Adviser or any
of its affiliates: (1) becomes aware that it is subject to a statutory
disqualification that prevents the Adviser from serving as investment adviser
pursuant to this Agreement; or (2) becomes aware that it is the subject of an
administrative proceeding or enforcement action by the Securities and Exchange
Commission ("SEC") or other regulatory authority. The Adviser further agrees to
notify the Company immediately of any material fact known to the Adviser
respecting or relating to the Adviser that is not contained in the Company's
Registration Statement regarding the Funds, or any amendment or supplement
thereto, but that is required to be disclosed therein, and of any statement
contained therein that becomes untrue in any material respect;
(g) in making investment decisions with respect to the Funds, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Adviser seek to obtain any such information.
3. Allocation of Charges and Expenses. Except as otherwise
specifically provided in this section 3, the Adviser shall pay the compensation
and expenses of all its directors, officers and employees who serve as
directors, officers and executive employees of the Company (including the
Company's share of payroll taxes) and shall pay all fees payable pursuant to
portfolio management agreements with any Portfolio Managers it may retain. The
Adviser shall make available, without expense to the Funds, the services of its
directors, officers and employees who may be duly elected officers or directors
of the Company, subject to their individual consent to serve and to any
limitations imposed by law.
The Adviser shall not be required to pay any expenses of the Company or
the Funds other than those specifically allocated to the Adviser in this section
3. In particular, but without limiting the
2
<PAGE> 3
generality of the foregoing, the Adviser shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Adviser whose services may be involved, for the
following expenses of the Company or the Funds: organization and certain
offering expenses of the Company and the Funds (including out-of-pocket
expenses, but not including the Adviser's overhead and employee costs); fees
payable to the Adviser; legal expenses; auditing and accounting expenses;
interest expenses; telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; fees, dues and expenses incurred by or
with respect to the Company or the Funds in connection with membership in
investment company trade organizations; costs of insurance; fees and expenses of
the Company's Administrator or of any custodian, subcustodian, transfer agent,
registrar, or dividend disbursing agent of the Company or the Funds; payments
for portfolio pricing or valuation services to pricing agents, accountants,
bankers and other specialists, if any; expenses of preparing and printing share
certificates; other expenses in connection with the issuance, offering,
distribution, redemption or sale of securities issued by the Funds; expenses
relating to investor and public relations; expenses of registering and
qualifying shares of the Funds for sale; freight, insurance and other charges in
connection with the shipment of the Funds' portfolio securities; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
or other assets of the Funds, or of entering into other transactions or engaging
in any investment practices with respect to the Funds; expenses of printing and
distributing prospectuses, Statements of Additional Information, reports,
notices and dividends to stockholders; costs of preparing, printing and filing
documents with regulatory agencies; costs of stationery and other office
supplies; any litigation or other extraordinary expenses; costs of stockholders'
and other meetings; the compensation and all expenses (specifically including
travel expenses relating to the business of the Company or a Fund) of officers,
directors and employees of the Company who are not interested persons of the
Adviser; and travel expenses (or an appropriate portion thereof) of officers or
directors of the Company who are officers, directors or employees of the Adviser
to the extent that such expenses relate to attendance at meetings of the Board
of Directors of the Company, or any committees thereof or advisory group thereto
or other business of the Company or the Funds.
4. Compensation. As compensation for the services provided and expenses
assumed by the Adviser under this Agreement, the Company will arrange for the
Funds to pay the Adviser at the end of each calendar month an investment
advisory fee computed daily at an annual rate equal to the percentage of each
Fund's average daily net assets specified in Schedule A hereto. The "average
daily net assets" of a Fund shall mean the average of the values placed on the
Fund's net assets as of the time at which, and on such days as, Fund lawfully
determines the value of its net assets in accordance with the prospectus or
otherwise. The value of net assets of the Fund shall always be determined
pursuant to the applicable provisions of the Articles and the Registration
Statement. If, pursuant to such provisions, the determination of net asset value
for a Fund is suspended for any particular business day, then for the purposes
of this section 4, the value of the net assets of the Fund as last determined
shall be deemed to be the value of its net assets as of the close of the New
York Stock Exchange, or as of such other time as the value of the net assets of
the Fund's portfolio may lawfully be determined, on that day. If the
determination of the net asset value of the shares of a Fund has been so
suspended for a period including any month end when the Adviser's compensation
is payable pursuant to this section, then the Adviser's compensation payable at
the end of such month shall be computed on the basis of the value of the net
assets of the Fund as last determined (whether during or prior to such month).
If a Fund determines the value of the net assets of its portfolio more than once
on any day, then the last such determination thereof on that day shall be deemed
to be the sole determination thereof on that day for the purposes of this
section 4.
3
<PAGE> 4
5. Books and Records. The Adviser agrees to maintain such books and
records with respect to its services to the Company and the Funds as are
required by Section 31 under the 1940 Act, and rules adopted thereunder, and by
other applicable legal provisions, and to preserve such records for the periods
and in the manner required by that Section, and those rules and legal
provisions. The Adviser also agrees that records it maintains and preserves
pursuant to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection
with its services hereunder are the property of the Company and will be
surrendered promptly to the Company upon its request. And the Adviser further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Funds are being conducted in accordance with applicable laws and
regulations.
6. Standard of Care and Limitation of Liability. The Adviser shall
exercise its best judgment in rendering the services provided by it under this
Agreement. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Company or a Fund or the holders of a
Fund's shares in connection with the matters to which this Agreement relates,
provided that nothing in this Agreement shall be deemed to protect or purport to
protect the Adviser against any liability to the Company, a Fund or to holders
of a Fund's shares to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Adviser's reckless disregard of
its obligations and duties under this Agreement. As used in this Section 6, the
term "Adviser" shall include any officers, directors, employees or other
affiliates of the Adviser performing services with respect to the Company or a
Fund.
7. Services Not Exclusive. It is understood that the services of the
Adviser are not exclusive, and that nothing in this Agreement shall prevent the
Adviser from providing similar services to other investment companies or to
other series of investment companies (whether or not their investment objectives
and policies are similar to those of a Fund) or from engaging in other
activities, provided such other services and activities do not, during the term
of this Agreement, interfere in a material manner with the Adviser's ability to
meet its obligations to the Company and the Funds hereunder. When the Adviser
recommends the purchase or sale of a security for other investment companies and
other clients, and at the same time the Adviser recommends the purchase or sale
of the same security for a Fund, it is understood that in light of its fiduciary
duty to the Fund, such transactions will be executed on a basis that is fair and
equitable to the Fund. In connection with purchases or sales of portfolio
securities for the account of a Fund, neither the Adviser nor any of its
directors, officers or employees shall act as a principal or agent or receive
any commission. If the Adviser provides any advice to its clients concerning the
shares of the Funds, the Adviser shall act solely as investment counsel for such
clients and not in any way on behalf of the Company or a Fund.
8. Duration and Termination. This Agreement shall continue until
January 1, 2000 and thereafter shall continue automatically, with respect to all
or fewer than all the Funds, as applicable, for successive annual periods,
provided such continuance is specifically approved at least annually by (i) the
Directors or, (ii) with respect to each Fund, by vote of a "majority" (as
defined in the 1940 Act) of the Fund's outstanding voting securities (as defined
in the 1940 Act), provided that in either event the continuance is also approved
by a majority of the Directors who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. Notwithstanding the foregoing, this Agreement may be
terminated: (a) at any time without penalty by the Company or a Fund upon the
vote of a majority of the Directors (with respect to the Company or a Fund) or,
with respect to a Fund, by vote of the majority of the Fund's outstanding voting
securities, upon sixty (60) days' written notice to the Adviser or (b) by the
Adviser at any time without penalty, upon sixty (60) days' written notice to the
Company. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
4
<PAGE> 5
9. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
with respect to a Fund until approved by an affirmative vote of (i) a majority
of the outstanding voting securities of the Fund, and (ii) a majority of the
Directors, including a majority of Directors who are not interested persons of
any party to this Agreement, cast in person at a meeting called for the purpose
of voting on such approval, if such approval is required by applicable law.
10. Proxies. Unless the Company gives written instructions to the
contrary, the Adviser shall vote all proxies solicited by or with respect to the
issuers of securities in which assets of the Funds may be invested, provided,
that the Adviser may delegate this responsibility with respect to one or more
Funds to Portfolio Managers pursuant to a portfolio management agreement. The
Adviser (or Portfolio Manager) shall use its best good faith judgment to vote
such proxies in a manner which best serves the interests of the particular
Fund's shareholders.
11. Name Reservation. The Company acknowledges and agrees that the
Adviser has property rights relating to the use of the term "ESC Strategic" and
has permitted the use of such term by the Company and its Funds. The Company
agrees that: (i) it will use the term "ESC Strategic" only as a component of the
names of the Company and the Funds and for no other purposes; (ii) it will not
purport to grant to any third party any rights in such term; (iii) at the
request of the Adviser, the Company will take such action as may be required to
provide its consent to use of the term by the Adviser, or any affiliate of the
Adviser to whom the Adviser shall have granted the right to such use; and (iv)
the Adviser may use or grant to others the right to use the term as all or a
portion of a corporate or business name or for any commercial purpose, including
a grant of such right to any other investment company. Upon termination of this
Agreement as to the Company or any Fund, the Company shall, upon request of the
Adviser, cease to use the term "ESC Strategic" as part of the name of the
Company and its Funds, or of any Fund as to which the Agreement is terminated,
as applicable. In the event of any such request by the Adviser that use of the
term "ESC Strategic" shall cease, the Company shall cause its officers,
directors and stockholders to take any and all such actions which the Adviser
may request to effect such request and to reconvey to the Adviser any and all
rights to the term "ESC Strategic."
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Adviser as an
agent of the Company or any Fund.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
ESC STRATEGIC FUNDS, INC.
By ______________________________
President
SUNTRUST EQUITABLE SECURITIES
By ______________________________
President
6
<PAGE> 7
SCHEDULE A
Fees payable to the Adviser pursuant to paragraph 4 hereof shall be at
the following annual rates for each Fund:
ESC Strategic Appreciation Fund 1.00%
ESC Strategic Global Equity Fund 1.00%
ESC Strategic Small Cap Fund 1.00%
ESC Strategic Growth Fund 1.25%
ESC Strategic Income Fund 1.00%
ESC Strategic Value Fund 1.25%
7
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on May 24, 1999 among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Westcap Investors, LLC (the "Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic
Appreciation Fund (the "Fund") and the Portfolio Manager is willing to furnish
such services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion, with respect to only such portion of
the Fund's assets (and not other portions) as shall be allocated to it by the
Adviser for management pursuant to this Agreement from time to time (the
"Assets"), for (a) the management of the Assets in accordance with the Fund's
investment objectives, policies and limitations as stated in its prospectus and
Statement of Additional Information included as part of the Company's
registration statement filed with the Securities and Exchange Commission
("SEC"), as they may be amended from time to time, ("Registration Statement")
copies of which shall be provided to the Portfolio Manager by the Adviser; and
(b) the placement of orders to purchase and sell securities for the Fund. At the
request of the Directors or the Adviser, the Portfolio Manager shall report to
the Board of Directors of the Company regularly at such times and in such detail
as the Board may from time to time determine to be appropriate, in order to
permit the Board to determine the adherence of the Portfolio Manager to the
investment policies of the Fund.
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<PAGE> 2
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser and any other portfolio manager of the Fund, so that
the Fund will qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company, the Adviser and any other portfolio manager
whatever statistical information the Company, the Adviser or such other
portfolio manager may reasonably request with respect to the Assets or
contemplated investments; keep the Adviser and the Directors and, as
appropriate, other portfolio managers informed of developments materially
affecting the Fund's portfolio; and, on the Portfolio Manager's own initiative,
furnish to the Company, the Adviser or other portfolio manager from time to time
whatever information the Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
notify the Company and the Adviser immediately of any material fact known to the
Portfolio Manager respecting or relating to the Portfolio Manager that is not
contained in the Company's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed therein,
and of any statement contained therein that becomes untrue in any material
respect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom the Fund will authorize to act
upon instructions from properly authorized representatives of the Portfolio
2
<PAGE> 3
Manager, in connection with its services hereunder, directing the Custodian(s)
to pay, deliver or receive cash and securities in settlement of transactions
authorized by the Portfolio Manager on the Fund's behalf. The Fund's
agreement(s) with such Custodian(s) will require the Custodian(s) to settle all
transactions directed by the Portfolio Manager on the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of other portfolio managers or consultants; legal
expenses; auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Fund in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Fund; payments for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing and printing share certificates; other expenses in connection with
the issuance, offering, distribution, redemption or sale of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate equal to 0.50% of the average daily net value
of the Assets. The "average daily net value of the Assets" shall mean the
average of the values
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<PAGE> 4
placed on the net Assets as of the time at which, and on such days as, the Fund
lawfully determines the value of its net assets in accordance with the
prospectus or otherwise. The value of the net Assets, and of the net assets of
the Fund, shall always be determined pursuant to the applicable provisions of
the Articles and the Registration Statement. If, pursuant to such provisions,
the determination of net asset value for a Fund is suspended for any particular
business day, then for the purposes of this section 5, the value of the net
Assets as last determined shall be deemed to be the value of the net Assets as
of the close of the New York Stock Exchange, or as of such other time as the
value of the net assets of the Fund's portfolio may lawfully be determined, on
that day. If the determination of the net asset value of the shares of the Fund
has been so suspended for a period including any month end when the Portfolio
Manager's compensation is payable pursuant to this section, then the Portfolio
Manager's compensation payable at the end of such month shall be computed on the
basis of the value of the net Assets as last determined (whether during or prior
to such month). If the Fund determines the value of the net assets of its
portfolio more than once on any day, then the last such determination thereof
with respect to the net Assets on that day shall be deemed to be the sole
determination thereof on that day with respect to the net Assets for the
purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. It is also
understood that, in performing investment advisory services for clients other
than the Fund, the Portfolio Manager may give advice and take action which may
differ in nature and/or timing from its advice or action with respect to the
Fund.
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<PAGE> 5
When the Portfolio Manager recommends the purchase or sale of a security for
other investment companies and other clients, and at the same time the Portfolio
Manager recommends the purchase or sale of the same security for the Fund, it is
understood that in light of its fiduciary duty to the Fund, such transactions
will be executed on a basis that is fair and equitable to the Fund. In
connection with purchases or sales of portfolio securities for the account of
the Fund, neither the Portfolio Manager nor any of its directors, officers or
employees shall act as a principal or agent or receive any commission. If the
Portfolio Manager provides any advice to its clients concerning the shares of
the Fund or other funds of the Company, the Portfolio Manager shall act solely
as investment counsel for such clients and not in any way on behalf of the
Company, the Fund or another fund of the Company.
9. Duration and Termination. This Agreement shall continue until May
24, 2001 and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically approved at least annually by
(i) the Directors or (ii) by vote of a "majority" (as defined in the 1940 Act)
of the Fund's outstanding voting securities (as defined in the 1940 Act),
provided that in either event the continuance is also approved by a majority of
the Directors who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. Notwithstanding
the foregoing, this Agreement may be terminated: (a) at any time without penalty
(i) by the Adviser, (ii) by the Company upon the vote of a majority of the
Directors or (iii) by vote of the majority of the Fund's outstanding voting
securities, each upon sixty (60) days' written notice to the Portfolio Manager;
or (b) by the Portfolio Manager at any time without penalty, upon sixty (60)
days' written notice to the Company or the Adviser. This Agreement will also
terminate automatically in the event of its assignment (as defined in the 1940
Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
5
<PAGE> 6
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of May 24, 1999.
SUNTRUST EQUITABLE SECURITIES
By
-----------------------------------
Chief Executive Officer
WESTCAP INVESTORS, LLC
By
-----------------------------------
6
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on January 1, 1998, among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Scott & Stringfellow Capital Management ("Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic
Appreciation Fund (the "Fund") and the Portfolio Manager is willing to furnish
such services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion, with respect to such portion of the
Fund's assets as shall be allocated to it by the Adviser for management pursuant
to this Agreement from time to time (the "Assets"), for (a) the management of
the Assets in accordance with the Fund's investment objectives, policies and
limitations as stated in its prospectus and Statement of Additional Information
included as part of the Company's registration statement filed with the
Securities and Exchange Commission ("SEC"), as they may be amended from time to
time, ("Registration Statement") copies of which shall be provided to the
Portfolio Manager by the Adviser; and (b) the placement of orders to purchase
and sell securities for the Fund. At the request of the Directors or the
Adviser, the Portfolio Manager shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Portfolio Manager to the investment policies of the Fund. The
Adviser has herewith furnished the Portfolio Manager copies of the Fund's
current Prospectus, Statement of Additional Information, Articles of
Incorporation and Bylaws and agrees during the continuance of this Agreement to
furnish the Portfolio Manager copies of any amendments or supplements thereto
before or at the time the amendments or supplements become effective. The
<PAGE> 2
Portfolio Manager will be entitled to rely on all such documents furnished to it
by the Adviser or the Company.
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser and any other portfolio manager of the Fund, so that
the Fund will qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company, the Adviser and any other portfolio manager
whatever statistical information the Company, the Adviser or such other
portfolio manager may reasonably request with respect to the Assets or
contemplated investments; keep the Adviser and the Directors and, as
appropriate, other portfolio managers informed of developments materially
affecting the Fund's portfolio; and, on the Portfolio Manager's own initiative,
furnish to the Company, the Adviser or other portfolio manager from time to time
whatever information the Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
notify the Company and the Adviser immediately of any material fact known to the
Portfolio Manager respecting or relating to the Portfolio Manager that is not
contained in the Company's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed therein,
and of any statement contained therein that becomes untrue in any material
respect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
Except as otherwise provided in this Agreement, the Portfolio Manager
shall not be responsible hereunder for compliance monitoring, reporting or
testing or for preparing or maintaining books and records for the Fund or
otherwise providing accounting services to the Fund and such services shall be
2
<PAGE> 3
provided by others retained by the Fund. The Portfolio Manager shall have access
to such reports and records to assist it in performing its services hereunder.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom the Fund will authorize to act
upon instructions from properly authorized representatives of the Portfolio
Manager, in connection with its services hereunder, directing the Custodian(s)
to pay, deliver or receive cash and securities in settlement of transactions
authorized by the Portfolio Manager on the Fund's behalf. The Fund's
agreement(s) with such Custodian(s) will require the Custodian(s) to settle all
transactions directed by the Portfolio Manager on the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of other portfolio managers or consultants; legal
expenses; auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Fund in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Fund; payments for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing and printing share certificates; other expenses in connection with
the issuance, offering, distribution, redemption or sale of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
3
<PAGE> 4
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate equal to 0.50% of the average daily net value
of the Assets. The "average daily net value of the Assets" shall mean the
average of the values placed on the net Assets as of the time at which, and on
such days as, the Fund lawfully determines the value of its net assets in
accordance with the prospectus or otherwise. The value of the net Assets, and of
the net assets of the Fund, shall always be determined pursuant to the
applicable provisions of the Articles and the Registration Statement. If,
pursuant to such provisions, the determination of net asset value for a Fund is
suspended for any particular business day, then for the purposes of this section
5, the value of the net Assets as last determined shall be deemed to be the
value of the net Assets as of the close of the New York Stock Exchange, or as of
such other time as the value of the net assets of the Fund's portfolio may
lawfully be determined, on that day. If the determination of the net asset value
of the shares of the Fund has been so suspended for a period including any month
end when the Portfolio Manager's compensation is payable pursuant to this
section, then the Portfolio Manager's compensation payable at the end of such
month shall be computed on the basis of the value of the net Assets as last
determined (whether during or prior to such month). If the Fund determines the
value of the net assets of its portfolio more than once on any day, then the
last such determination thereof with respect to the net Assets on that day shall
be deemed to be the sole determination thereof on that day with respect to the
net Assets for the purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
4
<PAGE> 5
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the purchase or sale of a security for other
investment companies and other clients, and at the same time the Portfolio
Manager recommends the purchase or sale of the same security for the Fund, it is
understood that in light of its fiduciary duty to the Fund, such transactions
will be executed on a basis that is fair and equitable to the Fund. In
connection with purchases or sales of portfolio securities for the account of
the Fund, neither the Portfolio Manager nor any of its directors, officers or
employees shall act as a principal or agent or receive any commission. If the
Portfolio Manager provides any advice to its clients concerning the shares of
the Fund or other funds of the Company, the Portfolio Manager shall act solely
as investment counsel for such clients and not in any way on behalf of the
Company, the Fund or another fund of the Company.
9. Duration and Termination. This Agreement shall continue until
January 1, 2000 and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Directors or (ii) by vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any time
without penalty (i) by the Adviser, (ii) by the Company upon the vote of a
majority of the Directors or (iii) by vote of the majority of the Fund's
outstanding voting securities, each upon sixty (60) days' written notice to the
Portfolio Manager; or (b) by the Portfolio Manager at any time without penalty,
upon sixty (60) days' written notice to the Company or the Adviser. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
5
<PAGE> 6
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State
of Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
c. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected hereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the
Portfolio Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
SUNTRUST EQUITABLE SECURITIES
By ______________________________
President
ATLANTIC CAPITAL MANAGEMENT LLC
By ______________________________
President
6
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on January 1, 1998 among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Brandes Investment Partners L.P. (the "Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic
Appreciation Fund (the "Fund") and the Portfolio Manager is willing to furnish
such services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion, with respect to such portion of the
Fund's assets as shall be allocated to it by the Adviser for management pursuant
to this Agreement from time to time (the "Assets"), for (a) the management of
the Assets in accordance with the Fund's investment objectives, policies and
limitations as stated in its prospectus and Statement of Additional Information
included as part of the Company's registration statement filed with the
Securities and Exchange Commission ("SEC"), as they may be amended from time to
time, ("Registration Statement") copies of which shall be provided to the
Portfolio Manager by the Adviser; and (b) the placement of orders to purchase
and sell securities for the Fund. At the request of the Directors or the
Adviser, the Portfolio Manager shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Portfolio Manager to the investment policies of the Fund.
1
<PAGE> 2
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser and any other portfolio manager of the Fund, so that
the Fund will qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company, the Adviser and any other portfolio manager
whatever statistical information the Company, the Adviser or such other
portfolio manager may reasonably request with respect to the Assets or
contemplated investments; keep the Adviser and the Directors and, as
appropriate, other portfolio managers informed of developments materially
affecting the Fund's portfolio; and, on the Portfolio Manager's own initiative,
furnish to the Company, the Adviser or other portfolio manager from time to time
whatever information the Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
notify the Company and the Adviser immediately of any material fact known to the
Portfolio Manager respecting or relating to the Portfolio Manager that is not
contained in the Company's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed therein,
and of any statement contained therein that becomes untrue in any material
respect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom
2
<PAGE> 3
the Fund will authorize to act upon instructions from properly authorized
representatives of the Portfolio Manager, in connection with its services
hereunder, directing the Custodian(s) to pay, deliver or receive cash and
securities in settlement of transactions authorized by the Portfolio Manager on
the Fund's behalf. The Fund's agreement(s) with such Custodian(s) will require
the Custodian(s) to settle all transactions directed by the Portfolio Manager on
the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of other portfolio managers or consultants; legal
expenses; auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Fund in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Fund; payments for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing and printing share certificates; other expenses in connection with
the issuance, offering, distribution, redemption or sale of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate equal to 1.00% of the average daily net
3
<PAGE> 4
value of the Assets. The "average daily net value of the Assets" shall mean the
average of the values placed on the net Assets as of 4:15 p.m. (Eastern time) on
each day on which the net asset value of the Fund is determined consistent with
the provision of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such other time. The value of the net Assets, and of the net assets
of the Fund, shall always be determined pursuant to the applicable provisions of
the Articles and the Registration Statement. If, pursuant to such provisions,
the determination of net asset value for a Fund is suspended for any particular
business day, then for the purposes of this section 5, the value of the net
Assets as last determined shall be deemed to be the value of the net Assets as
of the close of the New York Stock Exchange, or as of such other time as the
value of the net assets of the Fund's portfolio may lawfully be determined, on
that day. If the determination of the net asset value of the shares of the Fund
has been so suspended for a period including any month end when the Portfolio
Manager's compensation is payable pursuant to this section, then the Portfolio
Manager's compensation payable at the end of such month shall be computed on the
basis of the value of the net Assets as last determined (whether during or prior
to such month). If the Fund determines the value of the net assets of its
portfolio more than once on any day, then the last such determination thereof
with respect to the net Assets on that day shall be deemed to be the sole
determination thereof on that day with respect to the net Assets for the
purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the
4
<PAGE> 5
purchase or sale of a security for other investment companies and other clients,
and at the same time the Portfolio Manager recommends the purchase or sale of
the same security for the Fund, it is understood that in light of its fiduciary
duty to the Fund, such transactions will be executed on a basis that is fair and
equitable to the Fund. In connection with purchases or sales of portfolio
securities for the account of the Fund, neither the Portfolio Manager nor any of
its directors, officers or employees shall act as a principal or agent or
receive any commission. If the Portfolio Manager provides any advice to its
clients concerning the shares of the Fund or other funds of the Company, the
Portfolio Manager shall act solely as investment counsel for such clients and
not in any way on behalf of the Company, the Fund or another fund of the
Company.
9. Duration and Termination. This Agreement shall continue until
January 1, 2000 and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Directors or (ii) by vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any time
without penalty (i) by the Adviser, (ii) by the Company upon the vote of a
majority of the Directors or (iii) by vote of the majority of the Fund's
outstanding voting securities, each upon sixty (60) days' written notice to the
Portfolio Manager; or (b) by the Portfolio Manager at any time without penalty,
upon sixty (60) days' written notice to the Company or the Adviser. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
5
<PAGE> 6
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
SUNTRUST EQUITABLE SECURITIES
By
---------------------------------
Chief Executive Officer
BRANDES INVESTMENT PARTNERS L.P.
By
---------------------------------
6
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on January 1, 1998 among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Murray Johnstone International, Ltd. (the "Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic
Global Equity Fund (the "Fund") and the Portfolio Manager is willing to furnish
such services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion, with respect to such portion of the
Fund's assets as shall be allocated to it by the Adviser for management pursuant
to this Agreement from time to time (the "Assets"), for (a) the management of
the Assets in accordance with the Fund's investment objectives, policies and
limitations as stated in its prospectus and Statement of Additional Information
included as part of the Company's registration statement filed with the
Securities and Exchange Commission ("SEC"), as they may be amended from time to
time, ("Registration Statement") copies of which shall be provided to the
Portfolio Manager by the Adviser; and (b) the placement of orders to purchase
and sell securities for the Fund. At the request of the Directors or the
Adviser, the Portfolio Manager shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Portfolio Manager to the investment policies of the Fund.
1
<PAGE> 2
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser and any other portfolio manager of the Fund, so that
the Fund will qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company, the Adviser and any other portfolio manager
whatever statistical information the Company, the Adviser or such other
portfolio manager may reasonably request with respect to the Assets or
contemplated investments; keep the Adviser and the Directors and, as
appropriate, other portfolio managers informed of developments materially
affecting the Fund's portfolio; and, on the Portfolio Manager's own initiative,
furnish to the Company, the Adviser or other portfolio manager from time to time
whatever information the Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
notify the Company and the Adviser immediately of any material fact known to the
Portfolio Manager respecting or relating to the Portfolio Manager that is not
contained in the Company's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed therein,
and of any statement contained therein that becomes untrue in any material
respect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom
2
<PAGE> 3
the Fund will authorize to act upon instructions from properly authorized
representatives of the Portfolio Manager, in connection with its services
hereunder, directing the Custodian(s) to pay, deliver or receive cash and
securities in settlement of transactions authorized by the Portfolio Manager on
the Fund's behalf. The Fund's agreement(s) with such Custodian(s) will require
the Custodian(s) to settle all transactions directed by the Portfolio Manager on
the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of other portfolio managers or consultants; legal
expenses; auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Fund in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Fund; payments for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing and printing share certificates; other expenses in connection with
the issuance, offering, distribution, redemption or sale of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate equal to 0.50% of the average daily net
3
<PAGE> 4
value of the Assets. The "average daily net value of the Assets" shall mean the
average of the values placed on the net Assets as of 4:15 p.m. (Eastern time) on
each day on which the net asset value of the Fund is determined consistent with
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such other time. The value of the net Assets, and of the net assets
of the Fund, shall always be determined pursuant to the applicable provisions of
the Articles and the Registration Statement. If, pursuant to such provisions,
the determination of net asset value for a Fund is suspended for any particular
business day, then for the purposes of this section 5, the value of the net
Assets as last determined shall be deemed to be the value of the net Assets as
of the close of the New York Stock Exchange, or as of such other time as the
value of the net assets of the Fund's portfolio may lawfully be determined, on
that day. If the determination of the net asset value of the shares of the Fund
has been so suspended for a period including any month end when the Portfolio
Manager's compensation is payable pursuant to this section, then the Portfolio
Manager's compensation payable at the end of such month shall be computed on the
basis of the value of the net Assets as last determined (whether during or prior
to such month). If the Fund determines the value of the net assets of its
portfolio more than once on any day, then the last such determination thereof
with respect to the net Assets on that day shall be deemed to be the sole
determination thereof on that day with respect to the net Assets for the
purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the
4
<PAGE> 5
purchase or sale of a security for other investment companies and other clients,
and at the same time the Portfolio Manager recommends the purchase or sale of
the same security for the Fund, it is understood that in light of its fiduciary
duty to the Fund, such transactions will be executed on a basis that is fair and
equitable to the Fund. In connection with purchases or sales of portfolio
securities for the account of the Fund, neither the Portfolio Manager nor any of
its directors, officers or employees shall act as a principal or agent or
receive any commission. If the Portfolio Manager provides any advice to its
clients concerning the shares of the Fund or other funds of the Company, the
Portfolio Manager shall act solely as investment counsel for such clients and
not in any way on behalf of the Company, the Fund or another fund of the
Company.
9. Duration and Termination. This Agreement shall continue until
January 1, 2000 and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Directors or (ii) by vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any time
without penalty (i) by the Adviser, (ii) by the Company upon the vote of a
majority of the Directors or (iii) by vote of the majority of the Fund's
outstanding voting securities, each upon sixty (60) days' written notice to the
Portfolio Manager; or (b) by the Portfolio Manager at any time without penalty,
upon sixty (60) days' written notice to the Company or the Adviser. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
5
<PAGE> 6
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
SUNTRUST EQUITABLE SECURITIES
By
----------------------------------
Chief Executive Officer
MURRAY JOHNSTONE INTERNATIONAL, LTD.
By
----------------------------------
6
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on January 1, 1998 among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Equitable Asset Management, Inc. ("Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic Small
Cap Fund (the "Fund") and the Portfolio Manager is willing to furnish such
services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion, with respect to such portion of the
Fund's assets as shall be allocated to it by the Adviser for management pursuant
to this Agreement from time to time (the "Assets"), for (a) the management of
the Assets in accordance with the Fund's investment objectives, policies and
limitations as stated in its prospectus and Statement of Additional Information
included as part of the Company's registration statement filed with the
Securities and Exchange Commission ("SEC"), as they may be amended from time to
time, ("Registration Statement") copies of which shall be provided to the
Portfolio Manager by the Adviser; and (b) the placement of orders to purchase
and sell securities for the Fund. At the request of the Directors or the
Adviser, the Portfolio Manager shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Portfolio Manager to the investment policies of the Fund.
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
<PAGE> 2
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser and any other portfolio manager of the Fund, so that
the Fund will qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company, the Adviser and any other portfolio manager
whatever statistical information the Company, the Adviser or such other
portfolio manager may reasonably request with respect to the Assets or
contemplated investments; and keep the Adviser and the Directors and, as
appropriate, other portfolio managers informed of developments materially
affecting the Fund's portfolio;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
review information in the Company's Registration Statement describing the
Portfolio Manager and to notify the Company and the Adviser if the information
becomes incorrect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom the Fund will authorize to act
upon instructions from properly authorized representatives of the Portfolio
Manager, in connection with its services hereunder, directing the Custodian(s)
to pay, deliver or receive cash and securities in settlement of transactions
authorized by the Portfolio Manager on the Fund's behalf. The Fund's
agreement(s) with such Custodian(s) will require the Custodian(s) to settle all
transactions directed by the Portfolio Manager on the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and
2
<PAGE> 3
employees who serve as directors, officers and executive employees of the
Company (including the Company's share of payroll taxes), and the Portfolio
Manager shall make available, without expense to the Fund, the services of its
directors, officers and employees who may be duly elected officers or directors
of the Company, subject to their individual consent to serve and to any
limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of other portfolio managers or consultants; legal
expenses; auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Fund in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Fund; payments for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing and printing share certificates; other expenses in connection with
the issuance, offering, distribution, redemption or sale of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate based on the average daily net value of the
Assets as specified in the Fee Schedule attached hereto. The "average daily net
value of the Assets" shall mean the average of the values placed on the net
Assets as of the time at which, and on such days as, the Fund lawfully
determines the value of its net assets in accordance with the prospectus or
otherwise. The value of the net Assets, and of the net assets of the Fund, shall
always be determined pursuant to the applicable provisions of the Articles and
the Registration Statement. If, pursuant to such provisions, the determination
of net asset value for a Fund is suspended for any particular business day, then
for the purposes of this section 5, the value of the net Assets as last
determined shall be deemed to be the value of the net Assets as of the close of
the New York Stock Exchange, or as of such other time as the value of
3
<PAGE> 4
the net assets of the Fund's portfolio may lawfully be determined, on that day.
If the determination of the net asset value of the shares of the Fund has been
so suspended for a period including any month end when the Portfolio Manager's
compensation is payable pursuant to this section, then the Portfolio Manager's
compensation payable at the end of such month shall be computed on the basis of
the value of the net Assets as last determined (whether during or prior to such
month). If the Fund determines the value of the net assets of its portfolio more
than once on any day, then the last such determination thereof with respect to
the net Assets on that day shall be deemed to be the sole determination thereof
on that day with respect to the net Assets for the purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the purchase or sale of a security for other
investment companies and other clients, and at the same time the Portfolio
Manager recommends the purchase or sale of the same security for the Fund, it is
understood that in light of its fiduciary duty to the Fund, such transactions
will be executed on a basis that is fair and equitable to the Fund. In
connection with purchases or sales of portfolio securities for the account of
the Fund, neither the Portfolio Manager nor any of its directors, officers or
employees shall act as a principal or agent or receive any commission. If the
Portfolio Manager provides any advice to its clients concerning the shares of
the Fund or other funds of the Company, the Portfolio Manager shall act solely
as investment counsel for such clients and not in any way on behalf of the
Company, the Fund or another fund of the Company.
4
<PAGE> 5
9. Duration and Termination. This Agreement shall continue until
__________________ and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Directors or (ii) by vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any time
without penalty (i) by the Adviser, (ii) by the Company upon the vote of a
majority of the Directors or (iii) by vote of the majority of the Fund's
outstanding voting securities, each upon sixty (60) days' written notice to the
Portfolio Manager; or (b) by the Portfolio Manager at any time without penalty,
upon sixty (60) days' written notice to the Company or the Adviser. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Non-Competition. The Company acknowledges that the Portfolio
Manager as a firm, and not any particular employee or managing director of the
Portfolio Manager (a "Portfolio Manager Employee"), is being retained by the
Company as portfolio manager for the Fund. The Company agrees not to employ or
otherwise receive portfolio management services from any Portfolio Manager
Employee, directly or indirectly through the engagement of any person or entity
which employs or to which such services are provided by any Portfolio Manager
Employee, at any location within the States of Michigan, Ohio, Tennessee,
Kentucky or Indiana, for the 24 (twenty-four) consecutive months after the
termination of the Portfolio Manager Employee's employment. The Company
acknowledges that this provision is not contained in the investment advisory or
portfolio management agreements of all investment advisors or portfolio
managers.
13. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
5
<PAGE> 6
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
SUNTRUST EQUITABLE SECURITIES
By
-------------------------------
President
EQUITABLE ASSET MANAGEMENT, INC.
By
-------------------------------
Title:
------------------------
6
<PAGE> 7
FEE SCHEDULE
Fees payable to the Portfolio pursuant to paragraph 5 hereof shall be
at the following annual rates:
ESC Strategic Small Cap Fund 0.50% on the first $5 million
0.75% on the excess over $5 million
7
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on January 1, 1998 among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Equitable Asset Management, Inc. ("Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic
Growth Fund (the "Fund") and the Portfolio Manager is willing to furnish such
services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion for (a) the management of the Fund's
assets ("Assets") in accordance with the Fund's investment objectives, policies
and limitations as stated in its prospectus and Statement of Additional
Information included as part of the Company's registration statement filed with
the Securities and Exchange Commission ("SEC"), as they may be amended from time
to time, ("Registration Statement") copies of which shall be provided to the
Portfolio Manager by the Adviser; and (b) the placement of orders to purchase
and sell securities for the Fund. At the request of the Directors or the
Adviser, the Portfolio Manager shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Portfolio Manager to the investment policies of the Fund.
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
<PAGE> 2
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser so that the Fund will qualify, and continue to
qualify, as a regulated investment company under Subchapter M of the Code and
regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company and the Adviser whatever statistical
information the Company or the Adviser may reasonably request with respect to
the Assets or contemplated investments; and keep the Adviser and the Directors
informed of developments materially affecting the Fund's portfolio;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
review information in the Company's Registration Statement describing the
Portfolio Manager and to notify the Company and the Adviser if the information
becomes incorrect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom the Fund will authorize to act
upon instructions from properly authorized representatives of the Portfolio
Manager, in connection with its services hereunder, directing the Custodian(s)
to pay, deliver or receive cash and securities in settlement of transactions
authorized by the Portfolio Manager on the Fund's behalf. The Fund's
agreement(s) with such Custodian(s) will require the Custodian(s) to settle all
transactions directed by the Portfolio Manager on the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
2
<PAGE> 3
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of consultants; legal expenses; auditing and accounting
expenses; interest expenses; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by or with respect to the Company or the Fund in connection with
membership in investment company trade organizations; costs of insurance; fees
and expenses of the Company's Administrator or of any custodian, subcustodian,
transfer agent, registrar, or dividend disbursing agent of the Company or the
Fund; payments for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing and
printing share certificates; other expenses in connection with the issuance,
offering, distribution, redemption or sale of securities issued by the Fund;
expenses relating to investor and public relations; expenses of registering and
qualifying shares of the Fund for sale; freight, insurance and other charges in
connection with the shipment of the Fund's portfolio securities; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
or other assets of the Fund, or of entering into other transactions or engaging
in any investment practices with respect to the Fund; expenses of printing and
distributing prospectuses, Statements of Additional Information, reports,
notices and dividends to stockholders; costs of preparing, printing and filing
documents with regulatory agencies; costs of stationery and other office
supplies; any litigation or other extraordinary expenses; costs of stockholders'
and other meetings; the compensation and all expenses (specifically including
travel expenses relating to the business of the Company or the Fund) of
officers, directors and employees of the Company who are not interested persons
of the Portfolio Manager; and travel expenses (or an appropriate portion
thereof) of officers or directors of the Company who are officers, directors or
employees of the Portfolio Manager to the extent that such expenses relate to
attendance at meetings of the Board of Directors of the Company, or any
committees thereof or advisory group thereto or other business of the Company or
the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate based on the average daily net value of the
Assets as specified in the Fee Scheduled attached hereto. The "average daily net
value of the Assets" shall mean the average of the values placed on the net
Assets as of the time at which, and on such days as, the Fund lawfully
determines the value of its net assets in accordance with the prospectus or
otherwise. The value of the net Assets, and of the net assets of the Fund, shall
always be determined pursuant to the applicable provisions of the Articles and
the Registration Statement. If, pursuant to such provisions, the determination
of net asset value for a Fund is suspended for any particular business day, then
for the purposes of this section 5, the value of the net Assets as last
determined shall be deemed to be the value of the net Assets as of the close of
the New York Stock Exchange, or as of such other time as the value of the net
assets of the Fund's portfolio may lawfully be determined, on that day. If the
determination of the net asset value of the shares of the Fund has been so
suspended for a period including any month end when the Portfolio Manager's
compensation is payable pursuant to this section, then the Portfolio Manager's
compensation payable at the end of such month shall be computed on the basis of
the value of the net Assets as last determined (whether during or prior to such
month). If the Fund determines the value of the net assets of its portfolio more
than once on any day, then the last such
3
<PAGE> 4
determination thereof with respect to the net Assets on that day shall be deemed
to be the sole determination thereof on that day with respect to the net Assets
for the purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the purchase or sale of a security for other
Portfolios of the Company, other investment companies or other clients, and at
the same time the Portfolio Manager recommends the purchase or sale of the same
security for the Fund, it is understood that in light of its fiduciary duty to
the Fund, such transactions will be executed on a basis that is fair and
equitable to the Fund. In connection with purchases or sales of portfolio
securities for the account of the Fund, neither the Portfolio Manager nor any of
its directors, officers or employees shall act as a principal or agent or
receive any commission. If the Portfolio Manager provides any advice to its
clients concerning the shares of the Fund or other funds of the Company, the
Portfolio Manager shall act solely as investment counsel for such clients and
not in any way on behalf of the Company, the Fund or another fund of the
Company.
9. Duration and Termination. This Agreement shall continue until
January 1, 2000 and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Directors or (ii) by vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this
4
<PAGE> 5
Agreement or "interested persons" (as defined in the 1940 Act) of any party to
this Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. Notwithstanding the foregoing, this Agreement may be
terminated: (a) at any time without penalty (i) by the Adviser, (ii) by the
Company upon the vote of a majority of the Directors or (iii) by vote of the
majority of the Fund's outstanding voting securities, each upon sixty (60) days'
written notice to the Portfolio Manager; or (b) by the Portfolio Manager at any
time without penalty, upon sixty (60) days' written notice to the Company or the
Adviser. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
SUNTRUST EQUITABLE SECURITIES
By:
----------------------------
President
EQUITABLE ASSET MANAGEMENT, INC.
By:
----------------------------
Title:
----------------------------
6
<PAGE> 7
FEE SCHEDULE
Fees payable to the Portfolio Manager pursuant to paragraph 5 hereof
shall be at the following annual rates:
ESC Strategic Growth Fund 0.65% on the first $50 million
0.60% on the next $50 million
0.55% on the next $100 million
0.50% on assets in excess of $200 million
7
<PAGE> 1
ESC STRATEGIC FUNDS, INC.
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT, effective commencing on January 1, 1998 among SunTrust
Equitable Securities (the "Adviser"), ESC Strategic Funds, Inc. (the "Company")
and Cincinnati Asset Management Corporation (the "Portfolio Manager").
WHEREAS, the Company is a Maryland corporation of the series type
organized under Articles of Incorporation dated November 24, 1993, (the
"Articles") and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end, management series-type investment
company;
WHEREAS, the Adviser has been appointed by the Company, pursuant to an
investment advisory agreement dated January 1, 1998 ("Investment Advisory
Agreement"), to act as investment adviser to the Company with respect to each of
its present and future series ("Funds");
WHEREAS, the Adviser wishes to retain the Portfolio Manager to render
portfolio management services to the Company with respect to ESC Strategic
Income Fund (the "Fund") and the Portfolio Manager is willing to furnish such
services to the Fund;
WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Adviser and the Portfolio Manager as
follows:
1. Appointment. Pursuant to authority granted in the Investment
Advisory Agreement and with the approval of the Directors, the Adviser hereby
appoints the Portfolio Manager to act as portfolio manager for the Fund for the
periods and on the terms set forth in this Agreement. The Portfolio Manager
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
2. Portfolio Management Duties. Subject to the overall supervision of
the Directors of the Company and the Adviser, the Portfolio Manager is hereby
granted full responsibility and discretion, with respect to such portion of the
Fund's assets as shall be allocated to it by the Adviser for management pursuant
to this Agreement from time to time (the "Assets"), for (a) the management of
the Assets in accordance with the Fund's investment objectives, policies and
limitations as stated in its prospectus and Statement of Additional Information
included as part of the Company's registration statement filed with the
Securities and Exchange Commission ("SEC"), as they may be amended from time to
time, ("Registration Statement") copies of which shall be provided to the
Portfolio Manager by the Adviser; and (b) the placement of orders to purchase
and sell securities for the Fund. At the request of the Directors or the
Adviser, the Portfolio Manager shall report to the Board of Directors of the
Company regularly at such times and in such detail as the Board may from time to
time determine to be appropriate, in order to permit the Board to determine the
adherence of the Portfolio Manager to the investment policies of the Fund.
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<PAGE> 2
The Portfolio Manager further agrees that, in performing its duties
hereunder, it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, the Internal Revenue Code (the "Code") and all other
applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Directors;
(b) use reasonable efforts to manage the Assets, and to coordinate its
activities with the Adviser and any other portfolio manager of the Fund, so that
the Fund will qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Code and regulations issued thereunder;
(c) place orders for the investment of the Assets directly with the
issuer, or with any broker or dealer, in accordance with applicable policies
expressed in the prospectus and/or Statement of Additional Information with
respect to the Fund and in accordance with applicable legal requirements;
(d) furnish to the Company, the Adviser and any other portfolio manager
whatever statistical information the Company, the Adviser or such other
portfolio manager may reasonably request with respect to the Assets or
contemplated investments; keep the Adviser and the Directors and, as
appropriate, other portfolio managers informed of developments materially
affecting the Fund's portfolio; and, on the Portfolio Manager's own initiative,
furnish to the Company, the Adviser or other portfolio manager from time to time
whatever information the Portfolio Manager believes appropriate for this
purpose;
(e) make available to the Company's administrator (the
"Administrator"), the Company or the Adviser, promptly upon their request, such
copies of its investment records and ledgers with respect to the Fund as may be
required to assist the Administrator, the Company and the Adviser in their
compliance with applicable laws and regulations. The Portfolio Manager will
furnish the Directors with such periodic and special reports regarding the Fund
as the Directors may reasonably request;
(f) immediately notify the Company and the Adviser in the event that
the Portfolio Manager or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Portfolio Manager from
serving as a portfolio manager pursuant to this Agreement; or (2) becomes aware
that it is the subject of an administrative proceeding or enforcement action by
the SEC or other regulatory authority. The Portfolio Manager further agrees to
notify the Company and the Adviser immediately of any material fact known to the
Portfolio Manager respecting or relating to the Portfolio Manager that is not
contained in the Company's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed therein,
and of any statement contained therein that becomes untrue in any material
respect;
(g) in making investment decisions with respect to the Assets, use no
inside information that may be in its possession or in the possession of any of
its affiliates, nor will the Portfolio Manager seek to obtain any such
information.
3. Banking and Custody Accounts. The Portfolio Manager shall not be
required to provide or arrange for banking accounts for the Fund or to hold
money or assets on the Fund's behalf. The Portfolio Manager shall not be
required to act as the registered holder of any investment or to provide or
procure any custody or settlement services in connection with its services
hereunder. The Fund has entered into one or more agreements with providers of
banking and custody services (Custodians) whom
2
<PAGE> 3
the Fund will authorize to act upon instructions from properly authorized
representatives of the Portfolio Manager, in connection with its services
hereunder, directing the Custodian(s) to pay, deliver or receive cash and
securities in settlement of transactions authorized by the Portfolio Manager on
the Fund's behalf. The Fund's agreement(s) with such Custodian(s) will require
the Custodian(s) to settle all transactions directed by the Portfolio Manager on
the Fund's behalf.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, the Portfolio Manager shall pay the compensation and
expenses of all its directors, officers and employees who serve as directors,
officers and executive employees of the Company (including the Company's share
of payroll taxes), and the Portfolio Manager shall make available, without
expense to the Fund, the services of its directors, officers and employees who
may be duly elected officers or directors of the Company, subject to their
individual consent to serve and to any limitations imposed by law.
The Portfolio Manager shall not be required to pay any expenses of the
Company or the Fund other than those specifically allocated to the Portfolio
Manager in this section 4. In particular, but without limiting the generality of
the foregoing, the Portfolio Manager shall not be responsible, except to the
extent of the reasonable compensation of such of the Company's employees as are
officers or employees of the Portfolio Manager whose services may be involved,
for the following expenses of the Company or the Fund: organization and certain
offering expenses of the Company and the Fund (including out-of-pocket expenses,
but not including the Portfolio Manager's overhead and employee costs); fees
payable to or expenses of other portfolio managers or consultants; legal
expenses; auditing and accounting expenses; interest expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by or with respect to the Company or the
Fund in connection with membership in investment company trade organizations;
costs of insurance; fees and expenses of the Company's Administrator or of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Company or the Fund; payments for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing and printing share certificates; other expenses in connection with
the issuance, offering, distribution, redemption or sale of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering and qualifying shares of the Fund for sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities or other assets of the Fund, or of entering into other
transactions or engaging in any investment practices with respect to the Fund;
expenses of printing and distributing prospectuses, Statements of Additional
Information, reports, notices and dividends to stockholders; costs of preparing,
printing and filing documents with regulatory agencies; costs of stationery and
other office supplies; any litigation or other extraordinary expenses; costs of
stockholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the business of the Company
or the Fund) of officers, directors and employees of the Company who are not
interested persons of the Portfolio Manager; and travel expenses (or an
appropriate portion thereof) of officers or directors of the Company who are
officers, directors or employees of the Portfolio Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors of the
Company, or any committees thereof or advisory group thereto or other business
of the Company or the Funds.
5. Compensation. As compensation for the services provided and expenses
assumed by the Portfolio Manager under this Agreement, the Adviser, out of its
fees from the Fund pursuant to the Investment Advisory Agreement, will pay the
Portfolio Manager at the end of each calendar month an investment management fee
computed daily at an annual rate equal to 0.25% of the average daily net
3
<PAGE> 4
value of the Assets. The "average daily net value of the Assets" shall mean the
average of the values placed on the net Assets as of the time at which, and on
such days as, the Fund lawfully determines the value of its net assets in
accordance with the prospectus or otherwise. The value of the net Assets, and of
the net assets of the Fund, shall always be determined pursuant to the
applicable provisions of the Articles and the Registration Statement. If,
pursuant to such provisions, the determination of net asset value for a Fund is
suspended for any particular business day, then for the purposes of this section
5, the value of the net Assets as last determined shall be deemed to be the
value of the net Assets as of the close of the New York Stock Exchange, or as of
such other time as the value of the net assets of the Fund's portfolio may
lawfully be determined, on that day. If the determination of the net asset value
of the shares of the Fund has been so suspended for a period including any month
end when the Portfolio Manager's compensation is payable pursuant to this
section, then the Portfolio Manager's compensation payable at the end of such
month shall be computed on the basis of the value of the net Assets as last
determined (whether during or prior to such month). If the Fund determines the
value of the net assets of its portfolio more than once on any day, then the
last such determination thereof with respect to the net Assets on that day shall
be deemed to be the sole determination thereof on that day with respect to the
net Assets for the purposes of this section 5.
6. Books and Records. The Portfolio Manager agrees to maintain such
books and records with respect to its services to the Fund as are required by
Section 31 under the 1940 Act, and rules adopted thereunder, and by other
applicable legal provisions, and to preserve such records for the periods and in
the manner required by that Section, and those rules and legal provisions. The
Portfolio Manager also agrees that records it maintains and preserves pursuant
to Rules 31a-1 and 31a-2 under the 1940 Act and otherwise in connection with its
services hereunder are the property of the Company and will be surrendered
promptly to the Company upon its request. And the Portfolio Manager further
agrees that it will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its services hereunder
which may be requested in order to determine whether the operations of the
Company and the Fund are being conducted in accordance with applicable laws and
regulations.
7. Standard of Care and Limitation of Liability. The Portfolio Manager
shall exercise its best judgment in rendering the services provided by it under
this Agreement. The Portfolio Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Company or the Fund
or the holders of the Fund's shares in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Portfolio Manager against any liability to the
Company, the Fund or to holders of the Fund's shares to which the Portfolio
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Portfolio Manager's reckless disregard of its obligations and duties under
this Agreement. As used in this Section 7, the term "Portfolio Manager" shall
include any officers, directors, employees or other affiliates of the Portfolio
Manager performing services with respect to the Company or the Fund.
8. Services Not Exclusive. It is understood that the services of the
Portfolio Manager are not exclusive, and that nothing in this Agreement shall
prevent the Portfolio Manager from providing similar services to other
investment companies or to other series of investment companies (whether or not
their investment objectives and policies are similar to those of the Fund or
another fund of the Company) or from engaging in other activities, provided such
other services and activities do not, during the term of this Agreement,
interfere in a material manner with the Portfolio Manager's ability to meet its
obligations to the Company, the Adviser and the Fund hereunder. When the
Portfolio Manager recommends the purchase or sale of a security for other
investment companies and other clients, and at the same time the
4
<PAGE> 5
Portfolio Manager recommends the purchase or sale of the same security for the
Fund, it is understood that in light of its fiduciary duty to the Fund, such
transactions will be executed on a basis that is fair and equitable to the Fund.
In connection with purchases or sales of portfolio securities for the account of
the Fund, neither the Portfolio Manager nor any of its directors, officers or
employees shall act as a principal or agent or receive any commission. If the
Portfolio Manager provides any advice to its clients concerning the shares of
the Fund or other funds of the Company, the Portfolio Manager shall act solely
as investment counsel for such clients and not in any way on behalf of the
Company, the Fund or another fund of the Company.
9. Duration and Termination. This Agreement shall continue until
January 1, 1998 and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Directors or (ii) by vote of a "majority" (as defined in the
1940 Act) of the Fund's outstanding voting securities (as defined in the 1940
Act), provided that in either event the continuance is also approved by a
majority of the Directors who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any time
without penalty (i) by the Adviser, (ii) by the Company upon the vote of a
majority of the Directors or (iii) by vote of the majority of the Fund's
outstanding voting securities, each upon sixty (60) days' written notice to the
Portfolio Manager; or (b) by the Portfolio Manager at any time without penalty,
upon sixty (60) days' written notice to the Company or the Adviser. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
10. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) a majority of the outstanding
voting securities of the Fund, and (ii) a majority of the Directors, including a
majority of Directors who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, if such approval is required by applicable law.
11. Proxies and Rights. Unless the Company or the Adviser gives written
instructions to the contrary, the Portfolio Manager shall (a) vote all proxies
solicited by or with respect to the issuers of securities in which the Assets
are invested, using its best good faith judgment to vote such proxies in a
manner which best serves the interests of the Fund's shareholders, and (b)
exercise all other rights attaching to or arising with respect to the Assets,
subject to the Fund's investment objectives, policies and limitations as stated
in its Registration Statement, directing the Custodian to make any required
payment or settlement in connection therewith.
12. Miscellaneous.
a. This Agreement shall be governed by the laws of the State of
Tennessee, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
b. The captions of this Agreement are included for convenience only and
in no way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
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<PAGE> 6
c. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
d. Nothing herein shall be construed as constituting the Portfolio
Manager as an agent of the Company or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of January 1, 1998.
SUNTRUST EQUITABLE SECURITIES
By
--------------------------------
Chief Executive Officer
CINCINNATI ASSET MANAGEMENT CORPORATION
By
--------------------------------
6
<PAGE> 1
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of January, 1998, between ESC STRATEGIC
FUNDS, INC. (the "Company"), a Maryland corporation having its principal place
of business at 3435 Stelzer Road, Columbus, Ohio 43219, and BISYS FUND SERVICES
LIMITED PARTNERSHIP d/b/a BISYS FUND SERVICES ("Distributor"), having its
principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219.
WHEREAS, the Company is an open-end management investment company,
organized as a Maryland corporation and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
shares of common stock ("Shares") of each of the investment portfolios of the
Company (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Distributor.
1.1 Distributor will act as agent for the distribution of the
Shares covered by the registration statement and prospectus of the Company then
in effect under the Securities Act of 1933, as amended (the "Securities Act").
As used in this Agreement, the term "registration statement" shall mean Parts A
(the prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term "prospectus"
shall mean each form of prospectus and Statement of Additional Information used
by the Funds for delivery to shareholders and prospective shareholders after the
effective dates of the above referenced registration statements, together with
any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit
orders for the sale of the Shares and will undertake such advertising and
promotion as it believes reasonable in connection with such solicitation. The
Company understands that Distributor is now and may in the future be the
distributor of the shares of several investment companies or series (together,
"Investment Companies") including Companies having investment objectives similar
to those of the Company. The Company further understands that investors and
potential investors in the Company may invest in shares of such other Investment
Companies. The Company agrees that Distributor's duties to such Investment
Companies shall not be deemed in conflict with its duties to the Company under
this paragraph 1.2.
<PAGE> 2
Distributor shall, at its own expense, finance appropriate
activities which it deems reasonable, which are primarily intended to result in
the sale of the Shares, including, but not limited to, advertising, compensation
of underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current Shareholders, and the printing and mailing of
sales literature.
1.3 In its capacity as distributor of the Shares, all
activities of Distributor and its partners, agents, and employees shall comply
with all applicable laws, rules and regulations, including, without limitation,
the 1940 Act, all rules and regulations promulgated by the Commission thereunder
and all rules and regulations adopted by any securities association registered
under the Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during
normal business hours, to respond to telephone questions with respect to the
Company.
1.5 Distributor will transmit any orders received by it for
purchase or redemption of the Shares to the transfer agent and custodian for the
Funds.
1.6 Whenever in their judgment such action is warranted by
unusual market, economic or political conditions, or by abnormal circumstances
of any kind, the Company's officers may decline to accept any orders for, or
make any sales of, the Shares until such time as those officers deem it
advisable to accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal
if it chooses to enter into selling agreements with selected dealers or others.
1.8 The Company agrees at its own expense to execute any and
all documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9 The Company shall furnish from time to time, for use in
connection with the sale of the Shares, such information with respect to the
Funds and the Shares as Distributor may reasonably request; and the Company
warrants that the statements contained in any such information shall fairly show
or represent what they purport to show or represent. The Company shall also
furnish Distributor upon request with: (a) unaudited semi-annual statements of
the Funds' books and accounts prepared by the Company, (b) a monthly itemized
list of the securities in the Funds, (c) monthly balance sheets as soon as
practicable after the end of each month, and (d) from time to time such
additional information regarding the financial condition of the Funds as
Distributor may reasonably request.
1.10 The Company represents to Distributor that, with respect
to the Shares, all registration statements and prospectuses filed by the Company
with the Commission under the
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<PAGE> 3
Securities Act have been prepared in conformity with requirements of said Act
and rules and regulations of the Commission thereunder. The registration
statement and prospectus contain all statements required to be stated therein in
conformity with said Act and the rules and regulations of said Commission and
all statements of fact contained in any such registration statement and
prospectus are true and correct. Furthermore, neither any registration statement
nor any prospectus includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of the Shares. The Company may,
but shall not be obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or supplements to
any prospectus as, in the light of future developments, may, in the opinion of
the Company's counsel, be necessary or advisable. If the Company shall not
propose such amendment or amendments and/or supplement or supplements within
fifteen days after receipt by the Company of a written request from Distributor
to do so, Distributor may, at its option, terminate this Agreement. The Company
shall not file any amendment to any registration statement or supplement to any
prospectus without giving Distributor reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any way
limit the Company's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus, of whatever
character, as the Company may deem advisable, such right being in all respects
absolute and unconditional.
1.11 The Company authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Company agrees to indemnify, defend and hold Distributor, its
several partners and employees, and any person who controls Distributor within
the meaning of Section 15 of the Securities Act free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Distributor, its partners
and employees, or any such controlling person, may incur under the Securities
Act or under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be stated in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading; provided, however, that the
Company's agreement to indemnify Distributor, its partners or employees, and any
such controlling person shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of any statements or representations as are
contained in any prospectus and in such financial and other statements as are
furnished in writing to the Company by Distributor and used in the answers to
the registration statement or in the corresponding statements made in the
prospectus, or arising out of or based upon any omission or alleged omission to
state a material fact in connection with the giving of such information required
to be stated in such answers or necessary to make the answers not misleading;
and further provided that the Company's agreement to indemnify Distributor and
the Company's representations and warranties hereinbefore set forth in paragraph
1.10 shall not be deemed to cover any liability to the Company or its
Shareholders to which Distributor would otherwise be subject by reason of
willful misfeasance, bad faith or negligence in the performance of its duties,
or by reason of Distributor's reckless disregard of its obligations and duties
under this Agreement. The
3
<PAGE> 4
Company's agreement to indemnify Distributor, its partners and employees and any
such controlling person, as aforesaid, is expressly conditioned upon the Company
being notified of any action brought against Distributor, its partners or
employees, or any such controlling person, such notification to be given by
letter or by telegram addressed to the Company at its principal office in
Columbus, Ohio and sent to the Company by the person against whom such action is
brought, within 10 days after the summons or other first legal process shall
have been served. The failure to so notify the Company of any such action shall
not relieve the Company from any liability which the Company may have to the
person against whom such action is brought by reason of any such untrue, or
allegedly untrue, statement or omission, or alleged omission, otherwise than on
account of the Company's indemnity agreement contained in this paragraph 1.11.
The Company will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but, in such case, such defense
shall be conducted by counsel of good standing chosen by the Company and
approved by Distributor, which approval shall not be unreasonably withheld. In
the event the Company elects to assume the defense of any such suit and retain
counsel of good standing approved by Distributor, the defendant or defendants in
such suit shall bear the fees and expenses of any additional counsel retained by
any of them; but in case the Company does not elect to assume the defense of any
such suit, or in case Distributor reasonably does not approve of counsel chosen
by the Company, the Company will reimburse Distributor, its partners and
employees, or the controlling person or persons named as defendant or defendants
in such suit, for the fees and expenses of any counsel retained by Distributor
or them. The Company's indemnification agreement contained in this paragraph
1.11 and the Company's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of Distributor, its partners and employees, or any
controlling person, and shall survive the delivery of any Shares.
This Agreement of indemnity will inure exclusively to
Distributor's benefit, to the benefit of its several partners and employees,
and their respective estates, and to the benefit of the controlling persons and
their successors. The Company agrees promptly to notify Distributor of the
commencement of any litigation or proceedings against the Company or any of its
officers or Directors in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold the
Company, its several officers and Directors and any person who controls the
Company within the meaning of Section 15 of the Securities Act free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands, or
liabilities and any counsel fees incurred in connection therewith) which the
Company, its officers or Directors or any such controlling person, may incur
under the Securities Act or under common law or otherwise, but only to the
extent that such liability or expense incurred by the Company, its officers or
Directors or such controlling person resulting from such claims or demands,
shall arise out of or be based upon any untrue, or alleged untrue, statement of
a material fact contained in information furnished in writing by Distributor to
the Company and used in the answers to any of the items of the registration
statement or in the corresponding statements made in the prospectus, or shall
arise out of or be based upon any omission, or alleged omission, to state a
material fact in connection with such information
4
<PAGE> 5
furnished in writing by Distributor to the Company required to be stated in such
answers or necessary to make such information not misleading. Distributor's
agreement to indemnify the Company, its officers and Directors, and any such
controlling person, as aforesaid, is expressly conditioned upon Distributor
being notified of any action brought against the Company, its officers or
Directors, or any such controlling person, such notification to be given by
letter or telegram addressed to Distributor at its principal office in Columbus,
Ohio, and sent to Distributor by the person against whom such action is brought,
within 10 days after the summons or other first legal process shall have been
served. Distributor shall have the right of first control of the defense of such
action, with counsel of its own choosing, satisfactory to the Company, if such
action is based solely upon such alleged misstatement or omission on
Distributor's part, and in any other event the Company, its officers or
Directors or such controlling person shall each have the right to participate in
the defense or preparation of the defense of any such action. The failure to so
notify Distributor of any such action shall not relieve Distributor from any
liability which Distributor may have to the Company, its officers or Directors,
or to such controlling person by reason of any such untrue or alleged untrue
statement, or omission or alleged omission, otherwise than on account of
Distributor's indemnity agreement contained in this paragraph 1.12.
1.13 No Shares shall be offered by either Distributor or the
Company under any of the provisions of this Agreement and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Company if and so
long as the effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act or if and so long as a current prospectus as required by
Section 10(b)(2) of said Act is not on file with the Commission; provided,
however, that nothing contained in this paragraph 1.13 shall in any way restrict
or have an application to or bearing upon the Company's obligation to repurchase
Shares from any Shareholder in accordance with the provisions of the Company's
prospectus, Articles of Incorporation, or Bylaws.
1.14 The Company agrees to advise Distributor as soon as
reasonably practical by a notice in writing delivered to Distributor or its
counsel:
(a) of any request by the Commission for
amendments to the registration statement or
prospectus then in effect or for additional
information;
(b) in the event of the issuance by the
Commission of any stop order suspending the
effectiveness of the registration statement
or prospectus then in effect or the
initiation by service of process on the
Company of any proceeding for that purpose;
(c) of the happening of any event that makes
untrue any statement of a material fact made
in the registration statement or prospectus
then in effect or which requires the making
of a change in such registration statement
or prospectus in order to make the
statements therein not misleading; and
5
<PAGE> 6
(d) of all action of the Commission with respect
to any amendment to any registration
statement or prospectus which may from time
to time be filed with the Commission.
For purposes of this section, informal requests by or
acts of the Staff of the Commission shall not be deemed actions of or
requests by the Commission.
1.15 Distributor agrees on behalf of itself and its partners
and employees to treat confidentially and as proprietary information of the
Company all records and other information relative to the Company and its prior,
present or potential Shareholders, and not to use such records and information
for any purpose other than performance of its responsibilities and duties
hereunder, except, after prior notification to and approval in writing by the
Company, which approval shall not be unreasonably withheld and may not be
withheld where Distributor may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Company.
1.16 This Agreement shall be governed by the laws of the State
of Ohio.
1.17 In the event Distributor purchases the initial shares of
the Company for purposes of satisfying the minimum net worth requirements set
forth in Section 14 (a) of the 1940 Act, and a notice of termination is
subsequently given or this Agreement is otherwise terminated pursuant to Section
6 herein for any reason prior to the time that organizational expenses incurred
by the Company have been fully amortized, then the Company shall either (i)
cause the successor distributor of the shares (the "Successor Distributor") to
pay to Distributor, within ten (10) days prior to the termination of this
Agreement, an amount of cash that is sufficient to purchase the initial shares
that are held by Distributor or (ii) enable Distributor to redeem the initial
shares of the Company that it holds by causing the Successor Distributor to
contribute to the Company, within ten (10) days prior to the termination of this
Agreement, any unamortized organizational costs in the same proportion as the
number of initial shares being redeemed bears to the number of initial shares
outstanding at the time of such contribution. In the latter case, Distributor
shall be entitled to redeem any or all of the initial shares that it holds and
receive redemption proceeds without any reduction in the amount of such
proceeds, prior to the termination of this Agreement.
2. Fee.
Distributor shall receive from the Funds identified in the
Distribution and Shareholder Service Plan attached as Schedule A hereto (the
"Distribution Plan Funds") a distribution fee at the rate and upon the terms and
conditions set forth in such Plan. The distribution fee shall be accrued daily
and shall be paid on the first business day of each month, or at such time(s) as
the Distributor shall reasonably request.
6
<PAGE> 7
3. Sale and Payment.
Shares of a Fund may be subject to a sales load and may be
subject to the imposition of a distribution fee pursuant to the Distribution and
Shareholder Service Plan referred to above. To the extent that Shares of a Fund
are sold at an offering price which includes a sales load or at net asset value
subject to a contingent deferred sales load with respect to certain redemptions
(either within a single class of Shares or pursuant to two or more classes of
Shares), such Shares shall hereinafter be referred to collectively as "Load
Shares" (in the case of Shares that are sold with a front-end sales load or
Shares that are sold subject to a contingent deferred sales load), "Front-End
Load Shares" or "CDSL Shares" and individually as a "Load Share," a "Front-End
Load Share" or a "CDSL Share." A Fund that contains Front-End Load Shares shall
hereinafter be referred to collectively as "Load Funds" or "Front-End Load
Funds" and individually as a "Load Fund" or a "Front-end Load Fund." A Fund that
contains CDSL Shares shall hereinafter be referred to collectively as "Load
Funds" or "CDSL Funds" and individually as a "Load Fund" or a "CDSL Fund." Under
this Agreement, the following provisions shall apply with respect to the sale
of, and payment for, Load Shares.
3.1 Distributor shall have the right to purchase Load Shares
at their net asset value and to sell such Load Shares to the public against
orders therefor at the applicable public offering price, as defined in Section 4
hereof. Distributor shall also have the right to sell Load Shares to dealers
against orders therefor at the public offering price less a concession
determined by Distributor, which concession shall not exceed the amount of the
sales charge or underwriting discount, if any, referred to in Section 4 below.
3.2 Prior to the time of delivery of any Load Shares by a Load
Fund to, or on the order of, Distributor, Distributor shall pay or cause to be
paid to the Load Fund or to its order an amount in Boston or New York clearing
house funds equal to the applicable net asset value of such Shares. Distributor
may retain so much of any sales charge or underwriting discount as is not
allowed by Distributor as a concession to dealers.
4. Public Offering Price.
The public offering price of a Load Share shall be the net
asset value of such Load Share, plus any applicable sales charge, all as set
forth in the current prospectus of the Load Fund. The net asset value of Shares
shall be determined in accordance with the provisions of the Articles of
Incorporation and Bylaws of the Company and the then-current prospectus of the
Load Fund.
5. Issuance of Shares.
The Company reserves the right to issue, transfer or sell Load
Shares at net asset value (a) in connection with the merger or consolidation of
the Company or the Load Fund(s) with any other investment company or the
acquisition by the Company or the Load Fund(s) of all or substantially all of
the assets or of the outstanding Shares of any other investment company; (b) in
7
<PAGE> 8
connection with a pro rata distribution directly to the holders of Shares in the
nature of a stock dividend or split; (c) upon the exercise of subscription
rights granted to the holders of Shares on a pro rata basis; (d) in connection
with the issuance of Load Shares pursuant to any exchange and reinvestment
privileges described in any then-current prospectus of the Load Fund; and (e)
otherwise in accordance with any then-current prospectus of the Load Fund.
6. Term, Duration and Termination.
This Agreement shall become effective with respect to each
Fund listed on Schedule A hereof as of the date first written above (or, if a
particular Fund is not in existence on such date, on the date an amendment to
Schedule A to this Agreement relating to that Fund is executed) and, unless
sooner terminated as provided herein, shall continue until December 31, 1998.
Thereafter, if not terminated, this Agreement shall continue with respect to a
particular Fund automatically for successive one-year terms, provided that such
continuance is specifically approved at least annually by (a) by the vote of a
majority of those members of the Company's Board of Directors who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting for the purpose of voting on such approval and (b) by the
vote of the Company's Board of Directors or the vote of a majority of the
outstanding voting securities of such Fund. This Agreement is terminable without
penalty, on not less than sixty days' prior written notice, by the Company's
Board of Directors, by vote of a majority of the outstanding voting securities
of the Company or by Distributor. This Agreement will also terminate
automatically in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities," "interested persons" and
"assignment" shall have the same meanings as ascribed to such terms in the 1940
Act.)
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
written above.
ESC STRATEGIC FUNDS, INC. BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
/s/ /s/ J. David Huber
By: By:
-------------------------- ----------------------------------
Title: Title:
-------------------------- ----------------------------------
Date: Date:
-------------------------- ----------------------------------
8
<PAGE> 9
Dated: ______________
SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
A-1
<PAGE> 1
EX-(e)(2)
BISYS FUND SERVICES LIMITED PARTNERSHIP, DISTRIBUTOR
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
DEALER AGREEMENT
Ladies and Gentlemen:
As the principal underwriter of the shares ("Shares") of each investment company
portfolio ("Fund") listed in Exhibit A attached hereto, which may be amended
from time to time, BISYS Fund Services Limited Partnership ("BISYS") hereby
agrees with you as follows:
1. You hereby represent that you are a member in good standing of the
National Association of Securities Dealers, Inc. ("NASD") and that you
are a broker-dealer properly registered and qualified under all
applicable federal, state and local laws to engage in the business and
transactions described in this Agreement. You also represent that you
are a member in good standing of the Securities Investor Protection
Corporation ("SIPC"). We both agree to abide by the Rules of Fair
Practice of the NASD and all applicable laws, rules and regulations,
including applicable federal and state securities laws, rules and
regulations that are now or may become applicable to transactions
hereunder. You agree that it is your responsibility to determine the
suitability of any Fund Shares as investments for your customers, and
that BISYS has no responsibility for such determination. You further
agree to maintain all records required by applicable law or otherwise
reasonably requested by BISYS relating to Fund transactions that you
have executed. In addition, you agree to notify us immediately in the
event your status as a SIPC member changes.
2. We have furnished you with a list of the states or other jurisdictions
in which necessary filings have been made to permit Fund Shares to be
offered and sold. Such list appears in Exhibit B attached hereto.
Necessary filings may be made from time to permit Shares of the Fund to
be offered and sold in states or jurisdictions other than those listed
in Exhibit B. Those states or jurisdictions are incorporated into
Exhibit B by reference. You agree to indemnify us and/or the Funds for
any claim, liability, expense or loss in any way arising out of a sale
of Shares in any state or jurisdiction in which necessary filings have
not been made to permit such Shares to be offered and sold.
3. In all sales of Fund Shares, you shall act as agent for your customers
or as principal for your own bona fide investment. In no transaction
shall you act as our agent or as agent for any Fund or the Funds'
Transfer Agent. As agent for your customers, you are hereby authorized
to: (i) place orders directly with the investment company (the
"Company") for the purchase of Shares and (ii) tender Shares to the
Company for redemption, in each case subject to the terms and
conditions set forth in the applicable prospectus ("Prospectus") and
the operating procedures and policies established by us. The minimum
dollar purchase of Shares shall be the applicable minimum amount set
forth in the applicable Prospectus, and no order for less than such
amount shall be accepted by you. The procedures relating to the
handling of orders shall be subject to instructions which we shall
forward to you from time to time. All orders are subject to acceptance
or rejection by BISYS in its sole discretion. No person is authorized
to make any representations concerning Shares of any Fund except such
representations contained in the relevant then-current Prospectus and
statement of additional information ("Statement of Additional
Information") and in such supplemental information that may be supplied
to you by us for a Fund. If you should make such an unauthorized
representation, you agree to indemnify the Funds and us from and
against any and all claims, liability, expense or
<PAGE> 2
loss in any way arising out of or in any way connected with such
representation. You are specifically authorized to distribute the
Prospectus and Statement of Additional Information and sales material
received from us. No person is authorized to distribute any other sales
material relating to a Fund without our prior written approval. You
further agree to deliver, upon our request, copies of any relevant
amended Prospectus and Statement of Additional Information to
shareholders of the Fund to whom you have sold Shares. As agent for
your customers, you shall not withhold placing customers' orders for
any Shares so as to profit yourself as a result of such withholding and
shall not purchase any Shares from us except for the purpose of
covering purchase orders already received.
If any Shares purchased by you are repurchased by a Fund or by us for
the account of a Fund, or are tendered for redemption within seven
business days after confirmation by us of the original purchase order
for such Shares, (i) you agree forthwith to refund to us the full
concession allowed to you on the original sale and (ii) we shall
forthwith pay to such Fund that part of the discount retained by us on
the original sale. Notice will be given to you of any such repurchase
or redemption within ten days of the date on which the tender of Shares
for redemption is delivered to us or to the Fund. Neither party to this
Agreement shall purchase any Shares from a record holder at a price
lower than the net asset value next computed by or for the issuer
thereof. Nothing in this subparagraph shall prevent you from selling
Shares for the account of a record holder to us or the issuer and
charging the investor a fair commission for handling the transaction.
Any order placed by you for the repurchase of Shares of a Fund is
subject to the timely receipt by the Company of all required documents
in good order. If such documents are not received within a reasonable
time after the order is placed, the order is subject to cancellation,
in which case you agree to be responsible for any loss resulting to the
Fund or to us from such cancellation.
4. We will furnish you, upon request, with offering prices for the Shares
in accordance with the then-current Prospectuses for the Funds, and you
agree to quote such prices subject to confirmation by us on any Shares
offered to you for sale. The public offering price shall equal the net
asset value per Share of a Fund plus a front-end sales load, if
applicable. For Funds with a front-end sales load, you will receive a
discount from the public offering price as outlined in the current
Prospectus. For Funds with a contingent deferred sales load, you will
receive from us, or a paying agent appointed by us, a commission in the
amount shown in Exhibit C. We reserve the right to waive sales charges.
Each price is always subject to confirmation, and will be based upon
the net asset value next computed after receipt by us of an order that
is in good form. You acknowledge that it is your responsibility to date
and time stamp all orders received by you and to transmit such orders
promptly to us. You further acknowledge that any failure to promptly
transmit such orders to us that causes a purchaser of Shares to be
disadvantaged, based upon the pricing requirements of Rule 22c-1 under
the 1940 Act, shall be your sole responsibility. We reserve the right
to cancel this Agreement at any time without notice if any Shares shall
be offered for sale by you at less than the then-current offering price
determined by or for the applicable Fund.
5. Your customer will be entitled to a front-end sales load reduction with
respect to purchases made under a letter of intent ("Letter of Intent")
or right of accumulation ("Right of Accumulation") described in the
Prospectuses. In such case, your dealer's concession will be based upon
such reduced sales load; however, in the case of a Letter of Intent
signed by your customer, an adjustment to a higher dealer's concession
will thereafter be made to reflect actual purchases by your customer if
he or she should fail to fulfill the Letter of Intent. Your customer
will be entitled to an additional front-end sales load reduction in
those instances in which the customer makes purchases that exceed the
dollar amount indicated in the Letter of Intent and qualifies for an
additional front-end sales load reduction pursuant to the appropriate
Prospectus. In such case, your dealer's concession will be reduced to
reflect such additional
2
<PAGE> 3
sales load reduction. When placing wire trades, you agree to advise us
of any Letter of Intent signed by your customer or of any Right of
Accumulation available to such customer of which he or she has made you
aware. If you fail to so advise us, you will be liable for the return
of any commissions plus interest thereon.
6. With respect to orders that are placed for the purchase of Fund Shares,
unless otherwise agreed, settlement shall be made with the Company
within three (3) business days after our acceptance of the order. If
payment is not so received or made, we reserve the right to cancel the
sale, or, at our option, to sell the Shares to the Funds at the then
prevailing net asset value. In this event or in the event that you
cancel the trade for any reason, you agree to be responsible for any
loss resulting to the Funds or to us from your failure to make payments
as aforesaid. You shall not be entitled to any gains generated thereby.
7. You shall be responsible for the accuracy, timeliness and completeness
of any orders transmitted by you on behalf of your customers by wire or
telephone for purchases, exchanges or redemptions, and shall indemnify
us against any claims by your customers as a result of your failure to
properly transmit their instructions. In addition, you agree to
guarantee the signatures of your customers when such guarantee is
required by the Prospectus of a Fund. In that connection, you agree to
indemnify and hold harmless all persons, including us and the Funds'
Transfer Agent, against any and all loss, cost, damage or expense
suffered or incurred in reliance upon such signature guarantee.
8. No advertisement or sales literature with respect to a Fund (as such
terms are defined in the NASD's Rules of Fair Practice) shall be used
by you without first having obtained our approval.
9. Neither of us shall be liable to the other except for (1) acts or
failures to act which constitute a lack of good faith or negligence and
(2) obligations expressly assumed under this Agreement. In addition,
you agree to indemnify us and hold us harmless from any claims or
assertions relating to the lawfulness of your participation in this
Agreement and the transactions contemplated hereby or relating to any
activities of any persons or entities affiliated with your organization
which are performed in connection with the discharge of your
responsibilities under this Agreement. If such claims are asserted, we
shall have the right to manage our own defense, including the selection
and engagement of legal counsel, and all costs of such defense shall be
borne by you.
10. This Agreement will automatically terminate in the event of its
assignment. This Agreement may be terminated by either of us, without
penalty, upon ten days' prior written notice to the other party. This
Agreement may also be terminated at any time without penalty; with
respect to the Company or a Fund, by the vote of a majority of the
members of the Company's Board of Directors who are not "interested
persons" (as such term is defined in the 1940 Act), or (with respect to
a Fund) by a vote of a majority of the outstanding voting securities of
that Fund on ten days' written notice.
11. All communications to us shall be sent to the address set forth on page
1 hereof or at such other address as we may designate in writing. Any
notice to you shall be duly given if mailed or telecopied to you at the
address set forth below or at such other address as you may provide in
writing.
-------------------------------------
-------------------------------------
-------------------------------------
12. You hereby represent that all requisite corporate proceedings have been
undertaken to authorize
3
<PAGE> 4
you to enter into this Agreement and to perform the services
contemplated herein. You further represent that the individual that has
signed this Agreement below is a duly elected officer that has been
empowered to act for and on behalf of your organization with respect to
the execution of this Agreement.
13. This Agreement supersedes any other agreement between us with respect
to the offer and sale of Shares and relating to any other matters
discussed herein. All covenants, agreements, representations and
warranties made herein shall be deemed to have been material and relied
on by each party. The invalidity or unenforceability of any term or
provision hereof shall not affect the validity or enforceability of any
other term or provision thereof. This Agreement may be executed in any
number of counterparts, which together shall constitute one instrument,
and shall be governed by and construed in accordance with the laws
(other than the conflict of laws rules) of the State of Ohio and shall
bind and insure to the benefit of the parties hereto and their
respective successors and assigns.
If the foregoing corresponds with your understanding of our agreement, please
sign this document and the accompanying copies thereof in the appropriate space
below and return the same to us, whereupon this Agreement shall be binding upon
each of us, effective as of the date of execution.
BISYS FUND SERVICES LIMITED PARTNERSHIP The foregoing Agreement is hereby
BY: BISYS FUND SERVICES, INC., GENERAL accepted:
PARTNER
---------------------------------
Company Name
By By
--------------------------------------- ------------------------------
Authorized Officer Date Authorized Officer Date
Title:
--------------------------
4
<PAGE> 5
BISYS FUND SERVICES LIMITED PARTNERSHIP
3435 STELZER ROAD
COLUMBUS, OHIO 43219
EXHIBIT A
<TABLE>
INVESTMENT PORTFOLIOS OF
ESC STRATEGIC MUTUAL FUNDS
<CAPTION>
FUND TYPE CUSIP SYMBOL
- ---- ---- ----- ------
<S> <C> <C> <C>
ESC Strategic Appreciation Fund Class A Stock 269050100 ESSAX
ESC Strategic Int'l Equity Fund Class A Intl Stock 269050308 ESGAX
ESC Strategic Income Fund Class A Bond 269050506 ESIAX
ESC Strategic Value Fund Class A Stock 269050811 ESVAX
ESC Strategic Small Cap II Class A Stock 269050837 EGRAX
ESC Strategic Small Cap Class A* Stock 269050704 ESCAX
ESC Strategic Appreciation Fund Class D Stock 269050209 ESSDX
ESC Strategic Int'l Equity Fund Class D Intl Stock 269050407 ESGDX
ESC Strategic Income Fund Class D Bond 269050605 ESIDX
ESC Strategic Value Fund Class D Stock 269050795 N/A
ESC Strategic Small Cap II Fund Class D Stock 269050829 N/A
ESC Strategic Small Cap Class D* Stock 269050803 ESCDX
*PLEASE NOTE, THE ESC STRATEGIC SMALL CAP FUND (CLASS A & D) IS CLOSED TO NEW ACCOUNTS.
</TABLE>
5
<PAGE> 6
BISYS FUND SERVICES LIMITED PARTNERSHIP
3435 STELZER ROAD
COLUMBUS, OHIO 43219
EXHIBIT B
ESC STRATEGIC MUTUAL FUNDS
BLUE SKY INFORMATION
APPRECIATION FUND
INTERNATIONAL EQUITY FUND
SMALL CAP II FUND
INCOME FUND
SMALL CAP FUND
VALUE FUND
CLASS A & D SHARES
BLUE SKY STATES
AS OF DECEMBER 31, 1998
All 50 States including District of Columbia, Guam,
Puerto Rico and the Virgin Islands,
Except New Jersey
6
<PAGE> 7
BISYS FUND SERVICES LIMITED PARTNERSHIP
3435 STELZER ROAD
COLUMBUS, OHIO 43219
EXHIBIT C
ESC STRATEGIC MUTUAL FUNDS
COMMISSION AMOUNT PAYABLE FOR FUNDS
CHARGING A CONTINGENT DEFERRED SALES LOAD
1. percent of the public offering price
----- -----
X 2. Not Applicable
-----
(Place a check next to the appropriate category)
7
<PAGE> 1
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of this 1st day of October, 1996, by and
between ESC STRATEGIC FUNDS, INC., a Maryland corporation (the "Company"), and
BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a BISYS FUND SERVICES (the
"Administrator"), an Ohio limited partnership.
WHEREAS, the Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of several series of shares of common stock ("Shares"); and
WHEREAS, the Company desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such series of the Company as the Company and the Administrator may agree on
("Portfolios") and as listed on Schedule A attached hereto and made a part of
this Agreement, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Company and the Administrator hereby agree as
follows:
ARTICLE 1. Retention of the Administrator; Conversion to the Services.
The Company hereby engages the Administrator to act as the administrator of the
Portfolios and to furnish the Portfolios with the management and administrative
services as set forth in Article 2 below (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to the Administrator's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with the Administrator to
provide the Administrator with all necessary information and assistance required
to successfully convert to the BISYS System. The Administrator shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." The Administrator hereby accepts such engagement and agrees
to perform the Services commencing, with respect to each individual Service, on
the date that the conversion of such Service to the BISYS System has been
completed. The Administrator shall determine in accordance with its normal
acceptance procedures when the applicable Service has been successfully
converted.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Company in any way and shall
not be deemed an agent of the Company.
ARTICLE 2. Administrative Services. The Administrator shall perform or
supervise the performance by others of other administrative services in
connection with the operations of the Portfolios, and, on behalf of the Company,
will investigate, assist in the selection of and conduct
<PAGE> 2
relations with custodians, depositories, accountants, legal counsel,
underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and
persons in any other capacity deemed to be necessary or desirable for the
Portfolios' operations. The Administrator shall provide the Directors of the
Company with such reports regarding investment performance as they may
reasonably request but shall have no responsibility for supervising the
performance by any investment adviser or sub-adviser of its responsibilities.
The Administrator shall provide the Company with regulatory reporting,
all necessary office space, equipment, personnel, compensation and facilities
(including facilities for meetings of shareholders ("Shareholders") and
directors of the Company) for handling the affairs of the Portfolios and such
other services as the Administrator shall, from time to time, determine to be
necessary to perform its obligations under this Agreement. In addition, at the
request of the Board of Directors, the Administrator shall make reports to the
Company's Directors concerning the performance of its obligations hereunder.
Without limiting the generality of the foregoing, the Administrator
shall:
(a) calculate contractual Company expenses and control all
disbursements for the Company, and as appropriate compute the
Company's yields, total return, expense ratios, portfolio
turnover rate and, if required, portfolio average
dollar-weighted maturity;
(b) assist Company counsel with the preparation of prospectuses,
statements of additional information, registration statements
and proxy materials;
(c) prepare such reports, applications and documents (including
reports regarding the sale and redemption of Shares as may be
required in order to comply with Federal and state corporate
and securities law) as may be necessary or desirable to
register the Company's Shares with state and securities
authorities, monitor the sale of Company Shares for compliance
with state corporate and securities laws, and file with the
appropriate state securities authorities the registration
statements and reports for the Company and the Company's
Shares and all amendments thereto, as may be necessary or
convenient to register and keep effective the Company and the
Company's Shares with state securities authorities to enable
the Company to make a continuous offering of its Shares;
(d) develop and prepare, with the assistance of the Company's
investment adviser, communications to Shareholders, including
the annual report to Shareholders, coordinate the mailing of
prospectuses, notices, proxy statements, proxies and other
reports to Shareholders, and supervise and facilitate the
proxy solicitation process for all shareholder meetings,
including the tabulation of shareholder votes;
2
<PAGE> 3
(e) administer contracts on behalf of the Company with, among
others, the Company's investment adviser, distributor,
custodian, transfer agent and fund accountant;
(f) supervise the Company's transfer agent with respect to the
payment of dividends and other distributions to Shareholders;
(g) calculate performance data of the Portfolios for dissemination
to information services covering the investment company
industry;
(h) coordinate and supervise the preparation and filing of the
Company's tax returns;
(i) examine and review the operations and performance of the
various organizations providing services to the Company or any
Portfolio of the Company, including, without limitation, the
Company's investment adviser, distributor, custodian, fund
accountant, transfer agent, outside legal counsel and
independent public accountants, and at the request of the
Board of Directors, report to the Board on the performance of
organizations;
(j) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and
printing of the Company's semi-annual and annual reports to
Shareholders;
(k) assist with the design, development, and operation of the
Portfolios, including new classes, investment objectives,
policies and structure;
(l) provide individuals reasonably acceptable to the Company's
Board of Directors to serve as officers of the Company, who
will be responsible for the management of certain of the
Company's affairs as determined by the Company's Board of
Directors;
(m) advise the Company and its Board of Directors on matters
concerning the Company and its affairs;
(n) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the
Company in accordance with the requirements of Rules 17g-1 and
17d-1(7) under the 1940 Act as such bonds and policies are
approved by the Company's Board of Directors;
(o) monitor and advise the Company and its Portfolios on their
registered investment company status under the Internal
Revenue Code of 1986, as amended;
(p) perform all administrative services and functions of the
Company and each Portfolio to the extent administrative
services and functions are not provided to the Company or such
Portfolio pursuant to the Company's or such Portfolio's
investment advisory
3
<PAGE> 4
agreement, distribution agreement, custodian agreement,
transfer agent agreement and fund accounting agreement;
(q) furnish advice and recommendations with respect to other
aspects of the business and affairs of the Portfolios as the
Company and the Administrator shall determine desirable; and
(r) prepare and file with the SEC the semi-annual report for the
Company on Form N-SAR and all required notices pursuant to
Rule 24f-2.
The Administrator shall perform such other services for the Company
that are mutually agreed upon by the parties from time to time. Such services
may include performing internal audit examinations; mailing the annual reports
of the Portfolios; preparing an annual list of Shareholders; and mailing notices
of Shareholders' meetings, proxies and proxy statements, for all of which the
Company will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. Allocation of Charges and Expenses.
(A) The Administrator. The Administrator shall furnish at its own
expense the executive, supervisory and clerical personnel necessary to perform
its obligations under this Agreement. The Administrator shall also provide the
items which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Company as well as all Directors of the
Company who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Company retained by the Directors of the
Company to perform services on behalf of the Company.
(B) The Company. The Company assumes and shall pay or cause to be paid
all other expenses of the Company not otherwise allocated herein, including,
without limitation, organization costs, taxes, expenses for legal and auditing
services, the expenses of preparing (including typesetting), printing and
mailing reports, prospectuses, statements of additional information, proxy
solicitation material and notices to existing Shareholders, all expenses
incurred in connection with issuing and redeeming Shares, the costs of custodial
services, the cost of initial and ongoing registration of the Shares under
Federal and state securities laws, fees and out-of-pocket expenses of Directors
who are not affiliated persons of the Administrator or the Investment Adviser to
the Company or any affiliated corporation of the Administrator or the Investment
Adviser, insurance, interest, brokerage costs, litigation and other
extraordinary or nonrecurring expenses, and all fees and charges of investment
advisers to the Company.
ARTICLE 4. Compensation of the Administrator.
(A) Administration Fee. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Company shall pay to the
4
<PAGE> 5
Administrator compensation at an annual rate specified in Schedule A attached
hereto. Such compensation shall be calculated and accrued daily, and paid to the
Administrator monthly.
If the Conversion Date occurs subsequent to the first day of a
month or termination of this Agreement occurs before the last day of a month,
the Administrator's compensation for that part of the month in which this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. Payment of the Administrator's
compensation for the preceding month shall be made promptly.
(B) Survival of Compensation Rights. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 5. Limitation of Liability of the Administrator. The duties of
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or modified
hereby. (As used in this Article 5, the term "Administrator" shall include
partners, officers, employees and other agents of the Administrator as well as
the Administrator itself.)
So long as the Administrator acts in good faith and with due diligence
and without negligence, the Company assumes full responsibility and shall
indemnify the Administrator and hold it harmless from and against any and all
actions, suits and claims, whether groundless or otherwise, and from and against
any and all losses, damages, costs, charges, reasonable counsel fees and
disbursements, payments, expenses and liabilities (including reasonable
investigation expenses) arising directly or indirectly out of the
Administrator's actions taken or nonactions with respect to the performance of
services hereunder. The indemnity and defense provisions set forth herein shall
indefinitely survive the termination of this Agreement.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case the Company may be asked to indemnify or hold the
Administrator harmless, the Company shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Administrator will use all reasonable care to identify and
notify the Company promptly concerning any situation which presents or appears
likely to present the probability of such a claim for indemnification against
the Company, but failure to do so in good faith shall not affect the rights
hereunder.
The Company shall be entitled to participate at its own expense or, if
it so elects, to assume the defense of any suit brought to enforce any claims
subject to this indemnity provision. If the
5
<PAGE> 6
Company elects to assume the defense of any such claim, the defense shall be
conducted by counsel chosen by the Company and satisfactory to the
Administrator, whose approval shall not be unreasonably withheld. In the event
that the Company elects to assume the defense of any suit and retain counsel,
the Administrator shall bear the fees and expenses of any additional counsel
retained by it. If the Company does not elect to assume the defense of a suit,
it will reimburse the Administrator for the reasonable fees and expenses of any
counsel retained by the Administrator.
The Administrator may apply to the Company at any time for instructions
and may consult counsel for the Company or its own counsel and with accountants
and other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with such
instruction or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. The Administrator will not be held to have
notice of any change of authority of any officers, employees or agents of the
Company until receipt of written notice thereof from the Company.
ARTICLE 6. Activities of the Administrator. The services of the
Administrator rendered to the Company are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that directors, officers, employees
and Shareholders are or may be or become interested in the Administrator, as
officers, employees or otherwise and that partners, officers and employees of
the Administrator and its counsel are or may be or become similarly interested
in the Company, and that the Administrator may be or become interested in the
Company as a Shareholder or otherwise.
ARTICLE 7. Duration of this Agreement. The Term of this Agreement shall
be as specified in Schedule A hereto.
ARTICLE 8. Assignment. This Agreement shall not be assignable by either
party without the written consent of the other party; provided, however, that
the Administrator may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder. The
Administrator shall not, however, be relieved of any of its obligations under
this Agreement by the appointment of such subcontractor and provided further,
that the Administrator shall be responsible, to the extent provided in Article 5
hereof, for all acts of such subcontractor as if such acts were its own. This
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
ARTICLE 9. Amendments. This Agreement may be amended by the parties
hereto only if such amendment is specifically approved (i) by the vote of a
majority of the Directors of the Company, and (ii) by the vote of a majority of
the Directors of the Company who are not parties to this Agreement or interested
persons of any such party, cast in person at a Board of Directors meeting called
for the purpose of voting on such approval.
6
<PAGE> 7
For special cases, the parties hereto may amend such procedures set
forth herein as may be appropriate or practical under the circumstances, and the
Administrator may conclusively assume that any special procedure which has been
approved by the Company does not conflict with or violate any requirements of
its Articles of Incorporation, Bylaws or then current prospectuses, or any rule,
regulation or requirement of any regulatory body.
ARTICLE 10. Certain Records. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Company shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Company and will be made
available to or surrendered promptly to the Company on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Company and follow the
Company's instructions as to permitting or refusing such inspection; provided
that the Administrator may exhibit such records to any person in any case where
it is advised by its counsel that it may be held liable for failure to do so,
unless (in cases involving potential exposure only to civil liability) the
Company has agreed to indemnify the Administrator against such liability.
ARTICLE 11. Definitions of Certain Terms. The terms "interested person"
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 12. Notice. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the following address or such other address that may subsequently
be furnished: if to the Company, at 800 Nashville City Center, Nashville,
Tennessee 37219-1743, Attn: John McAllister, Equitable Securities Corporation;
and if to BISYS at 3435 Stelzer Road, Columbus, Ohio 43219.
ARTICLE 13. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of Ohio and the applicable provisions of
the 1940 Act. To the extent that the applicable laws of the State of Ohio, or
any of the provisions herein, conflict with the applicable provisions of the
1940 Act, the latter shall control.
ARTICLE 14. Multiple Originals. This Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ESC STRATEGIC FUNDS, INC.
By:
-----------------------------------
Attest:
-------------------------------
BISYS FUND SERVICES LIMITED
PARTNERSHIP
BY: BISYS FUND SERVICES,
GENERAL PARTNER
By:
-----------------------------------
Attest:
-------------------------------
8
<PAGE> 9
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
DATED AS OF OCTOBER 1, 1996
BETWEEN ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
Portfolios: This Agreement shall apply to all Portfolios of the Company,
either now or hereafter created (collectively, the
"Portfolios"). The current Portfolios of the Company are
set forth below:
ESC Strategic Appreciation Fund;
ESC Strategic Small Cap Fund;
ESC Strategic Asset Preservation Fund;
ESC Strategic Income Fund; and
ESC Strategic Global Equity Fund.
Fees: Pursuant to Article 4, in consideration of services rendered
and expenses assumed pursuant to this Agreement, the Company
will pay the Administrator on the first business day of each
month, or at such time(s) as the Administrator shall request
and the parties hereto shall agree, a fee computed daily at
the annual rate of:
.15% of each Portfolio's average daily net assets
The fee for the period from the day of the month upon which
the Conversion Date occurs until the end of that month shall
be prorated according to the proportion which such period
bears to the full monthly period. Upon any termination of this
Agreement before the end of any month, the fee for such part
of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
For purposes of determining the fees payable to the
Administrator, the value of the net assets of a particular
Portfolio shall be computed in the manner described in the
Company's Articles of Incorporation or in the Prospectus or
Statement of Additional Information respecting that Portfolio
as from time to time is in effect for the computation of the
value of such net assets in connection with the determination
of the liquidating value of the shares of such Portfolio.
The parties hereby confirm that the fees payable hereunder
shall be applied to each Portfolio as a whole, and not to
separate classes of shares within the Portfolios.
A-1
<PAGE> 10
Term: The initial term of this Agreement (the "Initial Term") shall
be for a period commencing on the date this Agreement is
executed by both parties and ending on the date that is twelve
(12) months after the Conversion Date. This Agreement shall be
renewed automatically for successive periods of one year after
the Initial Term, unless written notice of nonrenewal is
provided by either party not less than 90 days prior to the
end of the then-current term. In the event of a material
breach of this Agreement by either party, the non-breaching
party shall notify the breaching party in writing of such
breach and upon receipt of such notice, the breaching party
shall have 45 days to remedy the breach. In the event the
breach is not remedied within such time period, the
nonbreaching party may immediately terminate this Agreement.
Notwithstanding the foregoing, after such termination for so
long as the Administrator, with the written consent of the
Company, in fact continues to perform any one or more of the
services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including
without limitation the provisions dealing with
indemnification, shall continue in full force and effect.
Compensation due the Administrator and unpaid by the Company
upon such termination shall be immediately due and payable
upon and notwithstanding such termination. The Administrator
shall be entitled to collect from the Company, in addition to
the compensation described in this Schedule A, the amount of
all of the Administrator's cash disbursements for services in
connection with the Administrator's activities in effecting
such termination, including without limitation, the delivery
to the Company and/or its designees of the Company's property,
records, instruments and documents, or any copies thereof.
Subsequent to such termination, for a reasonable fee, the
Administrator will provide the Company with reasonable access
to any Company documents or records remaining in its
possession.
If, for any reason, other than a material breach of this
Agreement, the Administrator is replaced as fund manager and
administrator, or if a third party is added to perform all or
a part of the services provided by the Administrator under
this Agreement (excluding any sub-administrator appointed by
the Administrator as provided in Article 7 hereof), then the
Company shall make a one-time cash payment, as liquidated
damages, to the Administrator equal to the balance due the
Administrator for the remainder of the term of this Agreement,
assuming for purposes of calculation of the payment that the
asset level of the Company on the date the Administrator is
replaced, or a third party is added, will remain constant for
the balance of the contract term.
A-2
<PAGE> 1
AMENDMENT TO
ADMINISTRATION AGREEMENT
This Amendment is made as of October 1, 1997, between ESC Strategic
Funds, Inc. (the "Company") and BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services (the "Administrator"). The parties hereby amend the
Administration Agreement (the "Agreement") between the Company and the
Administrator, dated as of October 1, 1996, as set forth below.
WHEREAS, the parties hereto wish to modify the portion of Schedule A to
the Agreement entitled "Term" by extending the initial term set forth therein.
NOW THEREFORE, in consideration of the foregoing and the mutual
premises and covenants herein set forth, the parties agree as follows:
1. Capitalized terms not otherwise defined herein shall have the
same meaning as in the Agreement.
2. Schedule A to the Agreement shall be amended by replacing the
first sentence of the first paragraph of the section entitled
"Term" with the following:
The initial term of this Agreement (the "Initial
Term") shall be for a period commencing on the date
this Agreement is executed by both parties and ending
on September 30, 1999.
3. This Amendment may be executed in one or more counterparts,
each of which will be deemed an original, but all of which
together shall constitute one and the same instrument.
4. Except as specifically set forth herein, all other provisions
of the Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
ESC STRATEGIC FUNDS, INC
By:
----------------------------
Title:
----------------------------
BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By:
----------------------------
Title:
----------------------------
2
<PAGE> 1
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between ESC STRATEGIC
FUNDS, INC. (the "Company"), a Maryland corporation, and BISYS FUND SERVICES,
INC. ("BISYS"), a Delaware corporation.
WHEREAS, the Company desires that BISYS perform certain services for
each series of the Company (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Retention of BISYS; Conversion to the Services.
The Company hereby engages BISYS to act as the transfer agent
for the Funds to perform (i) the transfer agent services set forth in Schedule A
hereto (the "Initial Services"), (ii) such special services (the "Special
Services") incidental to the performance of such services as may be agreed to by
the parties from time to time (for such fees as the parties may agree as
aforesaid) and (iii) such additional services (collectively with the Initial
Services and the Special Services, the "Services"), as may be agreed to by the
parties from time to time and set forth in an amendment to said Schedule A (for
such fees as the parties may agree as aforesaid), and, in connection therewith,
the Company agrees to convert to BISYS' data processing systems and software
(the "BISYS System") as necessary in order to receive the Services. The Company
shall cooperate with BISYS to provide BISYS with all necessary information and
assistance required to successfully convert to the BISYS System. BISYS shall
provide the Company with a schedule relating to such conversion and the parties
agree that the conversion may progress in stages. The date upon which all
Initial Services shall have been converted to the BISYS System shall be referred
to herein as the "Conversion Date." BISYS hereby accepts such engagement and
agrees to perform the Services commencing, with respect to each individual
Service, on the date that the conversion of such Service to the BISYS System has
been completed. BISYS shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
BISYS may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the
Company (individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the
Company or such Fund, and that BISYS shall be fully responsible for the acts of
such Sub-transfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Sub-transfer Agent.
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<PAGE> 2
2. Fees.
The Company shall pay BISYS for the services to be provided by
BISYS under this Agreement in accordance with, and in the manner set forth in,
Schedule B hereto. Fees for any additional services to be provided by BISYS
pursuant to an amendment to Schedule A hereto shall be subject to mutual
agreement at the time such amendment to Schedule A is proposed.
3. Reimbursement of Expenses.
In addition to paying BISYS the fees described in Section 2
hereof, the Company agrees to reimburse BISYS for BISYS' out-of-pocket expenses
in providing services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges
incurred by BISYS in delivering materials to and from the
Company and in delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy
or other electronic transmission expenses incurred by
BISYS in communication with the Company, the Company's
investment adviser or custodian, dealers, shareholders or
others as required for BISYS to perform the services to be
provided hereunder;
(c) Costs of postage, couriers, stock computer paper,
statements, labels, envelopes, checks, reports, letters,
tax forms, proxies, notices or other form of printed
material which shall be required by BISYS for the
performance of the services to be provided hereunder;
(d) The cost of microfilm or microfiche of records or
other materials; and
(e) Any expenses BISYS shall incur at the written direction of
an officer of the Company thereunto duly authorized.
4. Effective Date.
This Agreement shall become effective as of the date first
written above (the "Effective Date").
5. Term.
The initial term of this Agreement (the "Initial Term") shall be
for a period commencing on the date this Agreement is executed by both parties
and ending on the date that is twelve (12) months after the Conversion Date.
Thereafter, it shall be renewed automatically for successive one-year terms
unless written notice not to renew is given by the non-renewing party to
2
<PAGE> 3
the other party at least 60 days prior to the expiration of the then-current
term; provided, however, that after such termination, for so long as BISYS, with
the written consent of the Company, in fact continues to perform any one or more
of the services contemplated by this Agreement or any Schedule or exhibit
hereto, the provisions of this Agreement, including without limitation the
provisions dealing with indemnification, shall continue in full force and
effect. Fees and out-of-pocket expenses incurred by BISYS but unpaid by the
Company upon such termination shall be immediately due and payable upon and
notwithstanding such termination. BISYS shall be entitled to collect from the
Company, in addition to the fees and disbursements provided by Sections 2 and 3
hereof, the amount of all of BISYS' costs in connection with BISYS' activities
in effecting such termination, including without limitation, the delivery to the
Company and/or its distributor or investment adviser and/or other parties, of
the Company's property, records, instruments and documents, or any copies
thereof. To the extent that BISYS may retain in its possession copies of any
Company documents or records subsequent to such termination which copies had not
been requested by or on behalf of the Company in connection with the termination
process described above, BISYS will provide the Company with reasonable access
to such copies; provided, however, that, in exchange therefor, the Company will
reimburse BISYS for all costs reasonably incurred in connection therewith.
In the event of a material breach of this Agreement by either
party, the non-breaching party shall notify the breaching party in writing of
such breach and, upon receipt of such notice, the breaching party shall have 45
days to remedy the breach. In the event the breach is not remedied within such
time period, the nonbreaching party may immediately terminate this Agreement.
If, for any reason, other than a material breach of this
Agreement, BISYS is replaced as transfer agent, or if a third party is added to
perform all or a part of the services provided by BISYS under this Agreement
(excluding any sub-transfer agent appointed by BISYS as provided in Section 1
hereof), then the Company shall make a one-time cash payment, as liquidated
damages to, BISYS equal to the balance due BISYS for the remainder of the term
of this Agreement, assuming for purposes of calculation of the payment that the
asset level of the Company on the date BISYS is replaced, or a third party is
added, will remain constant for the balance of the contract term.
6. Maintenance of Systems and Equipment; Uncontrollable Events.
BISYS shall maintain adequate and reliable computer and other
equipment necessary or appropriate to carry out its obligations under this
Agreement. In the event of computer or other equipment failures beyond its
reasonable control, BISYS shall use its best efforts to minimize service
interruptions. BISYS represents and warrants that the various procedures and
systems which it has implemented with regard to safekeeping from loss or damage
attributable to fire, theft or any other cause of the records, data, equipment,
facilities and other property used in the performance of its obligations
hereunder are adequate and that it will make such changes therein from time to
time as are required for the secure performance of its obligations hereunder.
Notwithstanding the
3
<PAGE> 4
foregoing, BISYS assumes no responsibility hereunder, and shall not be liable
for any damage, loss of data, delay or any other loss whatsoever caused by
events beyond its reasonable control.
7. Legal Advice.
BISYS shall notify the Company at any time BISYS believes that
it is in need of the advice of counsel (other than counsel in the regular employ
of BISYS or any affiliated companies) with regard to BISYS' responsibilities and
duties pursuant to this Agreement; and after so notifying the Company, BISYS, at
its discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Company or
Funds unless relating to a matter involving BISYS' willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and BISYS shall in no event be liable to
the Company or any Fund or any shareholder or beneficial owner of the Company
for any action reasonably taken pursuant to such advice.
8. Instructions.
Whenever BISYS is requested or authorized to take action
hereunder pursuant to instructions from a shareholder, or a properly authorized
agent of a shareholder ("shareholder's agent"), concerning an account in a Fund,
BISYS shall be entitled to rely upon any certificate, letter or other instrument
or communication, believed by BISYS to be genuine and to have been properly
made, signed or authorized by an officer or other authorized agent of the
Company or by the shareholder or shareholder's agent, as the case may be, and
shall be entitled to receive as conclusive proof of any fact or matter required
to be ascertained by it hereunder a certificate signed by an officer of the
Company or any other person authorized by the Company's Board of Directors or by
the shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Company relating to the Funds to the extent that such
services are described therein unless BISYS receives written instructions to the
contrary in a timely manner from the Company.
9. Standard of Care; Reliance on Records and Instructions;
Indemnification.
BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information,
4
<PAGE> 5
records, instructions or requests given or made to BISYS by the Company, the
investment adviser and on any records provided by any fund accountant or
custodian thereof; provided that this indemnification shall not apply to actions
or omissions of BISYS in cases of its own bad faith, willful misfeasance,
negligence or from reckless disregard by it of its obligations and duties; and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, BISYS shall give the Company written notice of
and reasonable opportunity to defend against said claim in its own name or in
the name of BISYS.
10. Record Retention and Confidentiality.
BISYS shall keep and maintain on behalf of the Company all books
and records which the Company or BISYS is, or may be, required to keep and
maintain pursuant to any applicable statutes, rules and regulations, including
without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of
1940, as amended (the "1940 Act"), relating to the maintenance of books and
records in connection with the services to be provided hereunder. BISYS further
agrees that all such books and records shall be the property of the Company and
to make such books and records available for inspection by the Company or by the
Securities and Exchange Commission (the "Commission") at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder has either a legal or beneficial
interest or when requested by the Company, the shareholder, or shareholder's
agent, or the dealer of record as to such account.
11. Reports.
BISYS will furnish to the Company and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Company in writing,
such reports at such times as are prescribed in Schedule C attached hereto, or
as subsequently agreed upon by the parties pursuant to an amendment to Schedule
C. The Company agrees to examine each such report or copy promptly and will
report or cause to be reported any errors or discrepancies therein not later
than three business days from the receipt thereof. In the event that errors or
discrepancies, except such errors and discrepancies as may not reasonably be
expected to be discovered by the recipient within three days after conducting a
diligent examination, are not so reported within the aforesaid period of time, a
report will for all purposes be accepted by and be binding upon the Company and
any other recipient, and BISYS shall have no liability for errors or
discrepancies therein and shall have no further responsibility with respect to
such report except to perform reasonable corrections of such errors and
discrepancies within a reasonable time after requested to do so by the Company.
5
<PAGE> 6
12. Rights of Ownership.
All computer programs and procedures developed to perform
services required to be provided by BISYS under this Agreement are the property
of BISYS. All records and other data except such computer programs and
procedures are the exclusive property of the Company and all such other records
and data will be furnished to the Company in appropriate form as soon as
practicable after termination of this Agreement for any reason.
13. Return of Records.
BISYS may at its option at any time, and shall promptly upon the
Company's demand, turn over to the Company and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longer needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Company, such documents and
records will be retained by BISYS for six years from the year of creation. At
the end of such six-year period, such records and documents will be turned over
to the Company unless the Company authorizes in writing the destruction of such
records and documents.
14. Bank Accounts.
The Company and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Company, as are
necessary in order that BISYS may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
BISYS directly to disburse amounts for payment of dividends, redemption proceeds
or other purposes, the Company and Funds shall provide such bank or banks with
all instructions and authorizations necessary for BISYS to effect such
disbursements.
15. Representations of the Company.
The Company certifies to BISYS that this Agreement has been duly
authorized by the Company and, when executed and delivered by the Company, will
constitute a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
16. Representations of BISYS.
BISYS represents and warrants that: (a) BISYS has been in, and
shall continue to be in, substantial compliance with all provisions of law,
including Section 17A(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), required in connection with the performance of its duties under
this Agreement; and (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Company and BISYS' records,
6
<PAGE> 7
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder.
17. Insurance.
BISYS shall notify the Company should its insurance coverage
with respect to professional liability or errors and omissions coverage be
canceled or reduced. Such notification shall include the date of change and the
reasons therefor. BISYS shall notify the Company of any material claims against
it with respect to services performed under this Agreement, whether or not they
may be covered by insurance, and shall notify the Company from time to time as
may be appropriate of the total outstanding claims made by BISYS under its
insurance coverage.
18. Information to be Furnished by the Company and Funds.
The Company has furnished to BISYS the following:
(a) Copies of the Articles of Incorporation of the Company and
of any amendments thereto, certified by the proper
official of the state in which such Declaration has been
filed.
(b) Copies of the following documents:
1. The Company's By-Laws and any amendments thereto.
2. Certified copies of resolutions of the Board of
Directors covering the following matters:
A. Approval of this Agreement and authorization
of a specified officer of the Company to
execute and deliver this Agreement and
authorization for specified officers of the
Company to instruct BISYS hereunder; and
B. Authorization of BISYS to act as Transfer
Agent for the Company on behalf of the
Funds.
(c) A list of all officers of the Company, together with
specimen signatures of those officers, who are authorized
to instruct BISYS in all matters.
(d) Two copies of the following (if such documents are
employed by the Company):
1. Prospectuses and Statement of Additional
Information;
7
<PAGE> 8
2. Distribution Agreement; and
3. All other forms commonly used by the Company or its
Distributor with regard to their relationships and
transactions with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the
Company authorized, issued, and outstanding as of the
Effective Date of BISYS' appointment as Transfer Agent (or
as of the date on which BISYS' services are commenced,
whichever is the later date) and as to receipt of full
consideration by the Company for all shares outstanding,
such statement to be certified by the Treasurer of the
Company.
19. Information Furnished by BISYS.
BISYS has furnished to the Company the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' By-Laws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the
following matters:
1. Approval of this Agreement, and authorization of a
specified officer of BISYS to execute and deliver
this Agreement;
2. Authorization of BISYS to act as Transfer Agent
for the Company.
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed
with the Commission pursuant to Rule 17Ad-13 under the
Exchange Act.
20. Amendments to Documents.
The Company shall furnish BISYS written copies of any amendments
to, or changes in, any of the items referred to in Section 18 hereof forthwith
upon such amendments or changes becoming effective. In addition, the Company
agrees that no amendments will be made to the Prospectuses or Statement of
Additional Information of the Company which might have the effect of changing
the procedures employed by BISYS in providing the services agreed to hereunder
or which amendment might affect the duties of BISYS hereunder unless the Company
first obtains BISYS' approval of such amendments or changes.
8
<PAGE> 9
21. Reliance on Amendments.
BISYS may rely on any amendments to or changes in any of the
documents and other items to be provided by the Company pursuant to Sections 18
and 20 of this Agreement and the Company hereby indemnifies and holds harmless
BISYS from and against any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character which may result from actions or omissions on the
part of BISYS in reasonable reliance upon such amendments and/or changes.
Although BISYS is authorized to rely on the above-mentioned amendments to and
changes in the documents and other items to be provided pursuant to Sections 18
and 20 hereof, BISYS shall be under no duty to comply with or take any action as
a result of any of such amendments or changes unless the Company first obtains
BISYS' written consent to and approval of such amendments or changes.
22. Compliance with Law.
Except for the obligations of BISYS set forth in Section 10
hereof, the Company assumes full responsibility for the preparation, contents,
and distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of the Company's shares. The Company
represents and warrants that no shares of the Company will be offered to the
public until the Company's registration statement under the 1933 Act and the
1940 Act has been declared or becomes effective.
23. Notices.
Any notice required or permitted to be given by either party to
the other shall be deemed sufficient if sent by registered or certified mail,
postage prepaid, addressed by the party giving notice to the other party at the
following address or such other address that may subsequently be furnished: if
to the Company, at 800 Nashville City Center, Nashville, Tennessee 37219-1743,
Attn: John McAllister, Equitable Securities Corporation; and if to BISYS at 3435
Stelzer Road, Columbus, Ohio 43219.
24. Headings.
Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
25. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way affect
BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1
9
<PAGE> 10
hereof. This Agreement shall be binding upon, and shall inure to the benefit of,
the parties hereto and their respective successors and permitted assigns.
26. Governing Law.
This Agreement shall be governed by and provisions shall be
construed in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ESC STRATEGIC FUNDS, INC.
By:
--------------------------------
Attest:
-----------------------------
BISYS FUND SERVICES, INC.
By:
--------------------------------
Attest:
-----------------------------
10
<PAGE> 11
Dated: October 1, 1996
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENCY SERVICES
1. Shareholder Transactions
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10b-10 under the
Securities Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares,
through dividend reimbursement.
2. Shareholder Information Services
a. Provide toll-free lines for direct shareholder use and customer
liaison staff with on-line inquiry capacity.
b. Make information available to shareholder servicing unit and
other remote access units regarding trade date, share price,
current holdings, yields, and dividend information.
c. Produce detailed history of transactions through duplicate or
special order statements upon request.
d. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to current
shareholders.
A-1
<PAGE> 12
3. Compliance Reporting
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in
which the Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service
forms for corresponding Fund and shareholder income and capital
gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
a. Provide reports for tracking rights of accumulation and
purchases made under a Letter of Intent.
b. Account for separation of shareholder investments from
transaction sale charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and
marketing expenses.
d. Track sales and commission statistics by dealer and provide for
payment of commissions on direct shareholder purchases in a load
Fund.
5. Shareholder Account Maintenance
a. Maintain all shareholder records for each account in the
Company.
b. Issue customer statements on scheduled cycle, providing
duplicate second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
A-2
<PAGE> 13
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENT FEES
Effective as of the Conversion Date, the Transfer Agent shall receive
an account maintenance fee of $15.00 per year for each account which is in
existence at any time during the month for which payment is made, such fee to be
paid in equal monthly installments, plus out-of-pocket expenses, provided that
the minimum annual fee to be paid by each Fund is $10,000.00. The Transfer Agent
shall be entitled to this account maintenance fee on all accounts maintained in
its records during the year, including those accounts which have a zero balance
during any portion of the year.
Additional Services:
- --------------------
Additional services such as IRA processing, development of interface
capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps
between DDAs and mutual fund accounts and coordination of the printing and
distribution of prospectuses, annual reports and semi-annual reports are subject
to additional fees which will be quoted upon request. Programming costs or
database management fees for special reports or specialized processing will be
quoted upon request.
Out-of-pocket Expenses:
- -----------------------
BISYS shall be entitled to be reimbursed for all reasonable
out-of-pocket expenses including, but not limited to, the expenses set forth in
Section 3 of the Transfer Agency Agreement to which this Schedule B is attached.
B-1
<PAGE> 14
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC.
REPORTS
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Reports
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed
with the Securities and Exchange Commission pursuant to Rule 17Ad-13 of
the Securities Exchange Act of 1934, as amended.
C-1
<PAGE> 1
Exhibit h(2)(a)
AMENDMENT TO
TRANSFER AGENCY AGREEMENT
This Amendment is made as of October 1, 1997, between ESC Strategic
Funds, Inc. (the "Company") and BISYS Fund Services, Inc. ("BISYS"). The parties
hereby amend the Transfer Agency Agreement (the "Agreement") between the Company
and BISYS, dated as of October 1, 1996, as set forth below.
WHEREAS, the parties hereto wish to modify Section 5 of the Agreement,
entitled "Term," by extending the initial term set forth therein; and
WHEREAS, the parties wish to modify the fee schedule set forth in
Schedule B to the Agreement.
NOW THEREFORE, in consideration of the foregoing and the mutual
premises and covenants herein set forth, the parties agree as follows:
1. Capitalized terms not otherwise defined herein shall have the same
meaning as in the Agreement.
2. Section 5 of the Agreement shall be amended by replacing the first
sentence of such section with the following:
The initial term of this Agreement (the "Initial
Term") shall be for a period commencing on the date
this Agreement is executed by both parties and ending
on September 30, 1999.
3. Schedule B to the Agreement shall be amended by adding the
following sentence at the end of the first paragraph:
Effective as of October 1, 1997, the minimum annual
fee to be paid by each Fund shall be increased to
$15,000.00.
4. This Amendment may be executed in one or more counterparts, each
of which will be deemed an original, but all of which together
shall constitute one and the same instrument.
5. Except as specifically set forth herein, all other provisions of
the Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
ESC STRATEGIC FUNDS, INC.
By:_______________________________________
Title:____________________________________
BISYS FUND SERVICES, INC.
By:_______________________________________
Title:____________________________________
<PAGE> 1
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 1st day of October, 1996, between ESC STRATEGIC
FUNDS, INC. (the "Company"), a Maryland corporation, and BISYS FUND SERVICES,
INC. ("Fund Accountant"), a corporation organized under the laws of the State of
Delaware.
WHEREAS, the Company desires that Fund Accountant perform certain fund
accounting services for each investment portfolio of the Company, all as now or
hereafter may be established from time to time (individually referred to herein
as the "Fund" and collectively as the "Funds"); and
WHEREAS, Fund Accountant is willing to perform such services on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Fund Accountant; Conversion to Services.
The Company hereby engages Fund Accountant to perform fund accounting
services as set forth in this Section 1 (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to Fund Accountant's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with Fund Accountant to
provide Fund Accountant with all necessary information and assistance required
to successfully convert to the BISYS System. Fund Accountant shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." Fund Accountant hereby accepts such engagement and agrees to
perform the Services commencing, with respect to each individual Service, on the
date that the conversion of such Service to the BISYS System has been completed.
Fund Accountant shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
(a) Maintenance of Books and Records. Fund Accountant
will keep and maintain the following books and
records of each Fund pursuant to Rule 31a-1 under the
Investment Company Act of 1940 (the "Rule"):
(i) Journals containing an itemized daily record
in detail of all purchases and sales of
securities, all receipts and disbursements
of cash and all other debits and credits, as
required by subsection (b)(1) of the Rule;
<PAGE> 2
(ii) General and auxiliary ledgers reflecting all
asset, liability, reserve, capital, income
and expense accounts, including interest
accrued and interest received, as required
by subsection (b)(2)(I) of the Rule;
(iii) Separate ledger accounts required by
subsection (b)(2)(ii) and (iii) of the Rule;
and
(iv) A monthly trial balance of all ledger
accounts (except shareholder accounts) as
required by subsection (b)(8) of the Rule.
(b) Performance of Daily Accounting Services. In addition
to the maintenance of the books and records specified
above, Fund Accountant shall perform the following
accounting services daily for each Fund:
(i) Calculate the net asset value per share
utilizing prices obtained from the sources
described in subsection 1(b)(ii) below;
(ii) Obtain security prices from independent
pricing services, or if such quotes are
unavailable, then obtain such prices from
each Fund's investment adviser or its
designee, as approved by the Company's Board
of Directors;
(iii) Verify and reconcile with the Fund's
custodian all daily trade activity;
(iv) Compute, as appropriate, each Fund's net
income and capital gains, dividend payables,
dividend factors, 7-day yields, 7-day
effective yields, 30-day yields, and
weighted average portfolio maturity;
(v) Review daily the net asset value calculation
and dividend factor (if any) for each Fund
prior to release to shareholders, check and
confirm the net asset values and dividend
factors for reasonableness and deviations,
and distribute net asset values and yields
to NASDAQ;
(vi) Report to the Company the daily market
pricing of securities in any money market
Funds, with the comparison to the amortized
cost basis;
(vii) Determine unrealized appreciation and
depreciation on securities held in variable
net asset value Funds;
(viii) Amortize premiums and accrete discounts on
securities purchased at a price other than
face value, if requested by the Company;
2
<PAGE> 3
(ix) Update fund accounting system to reflect
rate changes, as received from a Fund's
investment adviser, on variable interest
rate instruments;
(x) Post Fund transactions to appropriate
categories;
(xi) Accrue expenses of each Fund according to
instructions received from the Company's
Administrator;
(xii) Determine the outstanding receivables and
payables for all (1) security trades, (2)
Fund share transactions and (3) income and
expense accounts;
(xiii) Provide accounting reports in connection
with the Company's regular annual audit and
other audits and examinations by regulatory
agencies; and
(xiv) Provide such periodic reports as the parties
shall agree upon, as set forth in a separate
schedule.
(c) Special Reports and Services.
(i) Fund Accountant may provide additional
special reports upon the request of the
Company or a Fund's investment adviser,
which may result in an additional charge,
the amount of which shall be agreed upon
between the parties.
(ii) Fund Accountant may provide such other
similar services with respect to a Fund as
may be reasonably requested by the Company,
which may result in an additional charge,
the amount of which shall be agreed upon
between the parties.
(d) Additional Accounting Services. Fund Accountant shall
also perform the following additional accounting
services for each Fund:
(i) Provide monthly a download (and hard copy
thereof) of the financial statements
described below, upon request of the
Company. The download will include the
following items:
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
3
<PAGE> 4
(ii) Provide accounting information for the
following:
(A) federal and state income tax
returns and federal excise tax
returns;
(B) the Company's semi-annual reports
with the Securities and Exchange
Commission ("SEC") on Form N-SAR;
(C) the Company's annual, semi-annual
and quarterly (if any) shareholder
reports;
(D) registration statements on Form
N-1A and other filings relating to
the registration of Shares;
(E) the Administrator's monitoring of
the Company's status as a regulated
investment company under Subchapter
M of the Internal Revenue Code, as
amended;
(F) annual audit by the Company's
auditors; and
(G) examinations performed by the SEC.
2. Subcontracting.
Fund Accountant may, at its expense, subcontract with any
entity or person concerning the provision of the services contemplated
hereunder; provided, however, that Fund Accountant shall not be relieved of any
of its obligations under this Agreement by the appointment of such subcontractor
and provided further, that Fund Accountant shall be responsible, to the extent
provided in Section 6 hereof, for all acts of such subcontractor as if such acts
were its own.
3. Compensation.
The Company shall pay Fund Accountant for the services to be
provided by Fund Accountant under this Agreement in accordance with, and in the
manner set forth in, Schedule A hereto, as such Schedule may be amended from
time to time.
4. Reimbursement of Expenses.
In addition to paying Fund Accountant the fees described in
Section 3 hereof, the Company agrees to reimburse Fund Accountant for its
out-of-pocket expenses in providing services hereunder, including without
limitation the following:
4
<PAGE> 5
(a) All freight and other delivery and bonding charges incurred by
Fund Accountant in delivering materials to and from the
Company;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by Fund
Accountant in communication with the Company, the Company's
investment advisor or custodian, dealers or others as required
for Fund Accountant to perform the services to be provided
hereunder;
(c) The cost of obtaining security market quotes pursuant to
Section l(b)(ii) above;
(d) The cost of microfilm or microfiche of records or other
materials;
(e) Any expenses Fund Accountant shall incur at the written
direction of an officer of the Company thereunto duly
authorized; and
(f) Any additional expenses reasonably incurred by Fund
Accountant, as agreed upon by the parties, in the performance
of its duties and obligations under this Agreement.
5. Effective Date.
This Agreement shall become effective with respect to a Fund
as of the date first written above.
6. Term.
The initial term of this Agreement (the "Initial Term") shall
be for a period commencing on the date this Agreement is executed by both
parties and ending on the date that is twelve (12) months after the Conversion
Date. This Agreement shall be renewed automatically for successive one-year
terms unless written notice not to renew is given by the non-renewing party to
the other party at least 60 days prior to the expiration of the then-current
term; provided, however, that after such termination for so long as Fund
Accountant, with the written consent of the Company, in fact continues to
perform any one or more of the services contemplated by this Agreement or any
schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due Fund Accountant and unpaid by the Company
upon such termination shall be immediately due and payable upon and
notwithstanding such termination. Fund Accountant shall be entitled to collect
from the Company, in addition to the compensation described under Section 3
hereof, the amount of all of Fund Accountant's cash disbursements for services
in connection with Fund Accountant's activities in effecting such termination,
including without limitation, the delivery to the Company and/or its designees
of the Company's property, records, instruments and documents, or any copies
thereof. Subsequent to such termination, for a reasonable fee, Fund Accountant
will provide the Company with reasonable access to any Company documents or
records remaining in its possession.
5
<PAGE> 6
In the event of a material breach of this Agreement by either
party, the non-breaching party shall notify the breaching party in writing of
such breach and, upon receipt of such notice, the breaching party shall have 45
days to remedy the breach. In the event the breach is not remedied within such
time period, the nonbreaching party may immediately terminate this Agreement.
If, for any reason, other than a material breach of this
Agreement, Fund Accountant is replaced as Fund Accountant, or if a third party
is added to perform all or a part of the services provided by Fund Accountant
under this Agreement (excluding any sub-accountant appointed by Fund Accountant
as provided in Section 2 hereof), then the Company shall make a one-time cash
payment, as liquidated damages, to Fund Accountant equal to the balance due Fund
Accountant for the remainder of the term of this Agreement, assuming for
purposes of calculation of the payment that the asset level of the Company on
the date Fund Accountant is replaced, or a third party is added, will remain
constant for the balance of the contract term.
7. Standard of Care; Reliance on Records and Instructions;
Indemnification.
Fund Accountant shall use its best efforts to insure the
accuracy of all services performed under this Agreement, but shall not be liable
to the Company for any action taken or omitted by Fund Accountant in the absence
of bad faith, willful misfeasance, negligence or from reckless disregard by it
of its obligations and duties. A Fund agrees to indemnify and hold harmless Fund
Accountant, its employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Fund Accountant's actions
taken or nonactions with respect to the performance of services under this
Agreement with respect to such Fund or based, if applicable, upon reasonable
reliance on information, records, instructions or requests with respect to such
Fund given or made to Fund Accountant by a duly authorized representative of the
Company other than a representative who is also an affiliated person of Fund
Accountant or its affiliates; provided that this indemnification shall not apply
to actions or omissions of Fund Accountant in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties, and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, Fund Accountant
shall give the Company written notice of and reasonable opportunity to defend
against said claim in its own name or in the name of Fund Accountant.
8. Record Retention and Confidentiality.
Fund Accountant shall keep and maintain on behalf of the
Company all books and records which the Company and Fund Accountant is, or may
be, required to keep and maintain pursuant to any applicable statutes, rules and
regulations, including without limitation Rules 31a-1 and 31a-2 under the
Investment Company Act of 1940, as amended (the "1940 Act"), relating to the
maintenance of books and records in connection with the services to be provided
hereunder. Fund Accountant further agrees that all such books and records shall
be the property of the Company and
6
<PAGE> 7
to make such books and records available for inspection by the Company or by the
Securities and Exchange Commission at reasonable times and otherwise to keep
confidential all books and records and other information relative to the Company
and its shareholders; except when requested to divulge such information by
duly-constituted authorities or court process.
9. Maintenance of Systems and Equipment; Uncontrollable Events.
Fund Accountant shall maintain adequate and reliable computer
and other equipment necessary or appropriate to carry out its obligations under
this Agreement. In the event of computer or other equipment failures beyond its
reasonable control, Fund Accountant shall use its best efforts to minimize
service interruptions. Fund Accountant represents and warrants that the various
procedures and systems which it has implemented with regard to safekeeping from
loss or damage attributable to fire, theft or any other cause of the records,
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder. Notwithstanding the foregoing, Fund Accountant assumes no
responsibility hereunder, and shall not be liable for any damage, loss of data,
delay or any other loss whatsoever caused by events beyond its reasonable
control.
10. Reports.
Fund Accountant will furnish to the Company and to its
properly authorized auditors, investment advisers, examiners, distributors,
dealers, underwriters, salesmen, insurance companies and others designated by
the Company in writing, such reports and at such times as are prescribed
pursuant to the terms and the conditions of this Agreement to be provided or
completed by Fund Accountant, or as subsequently agreed upon by the parties
pursuant to an amendment hereto. The Company agrees to examine each such report
or copy promptly and will report or cause to be reported any errors or
discrepancies therein no later than three business days from the receipt
thereof. In the event that errors or discrepancies, except such errors and
discrepancies as may not reasonably be expected to be discovered by the
recipient within ten days after conducting a diligent examination, are not so
reported within the aforesaid period of time, a report will for all purposes be
accepted by and binding upon the Company and any other recipient, and, except as
provided in Section 6 hereof, Fund Accountant shall have no liability for errors
or discrepancies therein and shall have no further responsibility with respect
to such report except to perform reasonable corrections of such errors and
discrepancies within a reasonable time after requested to do so by the Company.
11. Rights of Ownership.
All computer programs and procedures developed to perform
services required to be provided by Fund Accountant under this Agreement are the
property of Fund Accountant. All records and other data except such computer
programs and procedures are the exclusive property of the Company and all such
other records and data will be furnished to the Company in appropriate form as
soon as practicable after termination of this Agreement for any reason.
7
<PAGE> 8
12. Return of Records.
Fund Accountant may at its option at any time, and shall
promptly upon the Company's demand, turn over to the Company and cease to retain
Fund Accountant's files, records and documents created and maintained by Fund
Accountant pursuant to this Agreement which are no longer needed by Fund
Accountant in the performance of its services or for its legal protection. If
not so turned over to the Company, such documents and records will be retained
by Fund Accountant for six years from the year of creation. At the end of such
six-year period, such records and documents will be turned over to the Company
unless the Company authorizes in writing the destruction of such records and
documents.
13. Representations of the Company.
The Company certifies to Fund Accountant that this Agreement
has been duly authorized by the Company and, when executed and delivered by the
Company, will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
14. Representations of Fund Accountant.
Fund Accountant represents and warrants that: (1) the various
procedures and systems which Fund Accountant has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
the records, and other data of the Company and Fund Accountant's records, data,
equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder, and (2) this Agreement has been duly authorized by Fund Accountant
and, when executed and delivered by Fund Accountant, will constitute a legal,
valid and binding obligation of Fund Accountant, enforceable against Fund
Accountant in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
15. Insurance.
Fund Accountant shall notify the Company should any of its
insurance coverage be canceled or reduced. Such notification shall include the
date of change and the reasons therefor. Fund Accountant shall notify the
Company of any material claims against it with respect to services performed
under this Agreement, whether or not they may be covered by insurance, and shall
notify the Company from time to time as may be appropriate of the total
outstanding claims made by Fund Accountant under its insurance coverage.
8
<PAGE> 9
16. Information to be Furnished by the Company and Funds.
The Company has furnished to Fund Accountant the following:
(a) Copies of the Articles of Incorporation of the
Company and of any amendments thereto, certified by
the proper official of the state in which such
document has been filed.
(b) Copies of the following documents:
(i) The Company's Bylaws and any amendments
thereto; and
(ii) Certified copies of resolutions of the Board
of Directors covering the approval of this
Agreement, authorization of a specified
officer of the Company to execute and
deliver this Agreement and authorization for
specified officers of the Company to
instruct Fund Accountant thereunder.
(c) A list of all the officers of the Company, together
with specimen signatures of those officers who are
authorized to instruct Fund Accountant in all
matters.
(d) Two copies of the Prospectuses and Statements of
Additional Information for each Fund.
17. Information Furnished by Fund Accountant.
(a) Fund Accountant has furnished to the Company the
following:
(i) Fund Accountant's Articles of Incorporation;
and
(ii) Fund Accountant's Bylaws and any amendments
thereto.
(b) Fund Accountant shall, upon request, furnish
certified copies of corporate actions covering the
following matters:
(i) Approval of this Agreement, and
authorization of a specified officer of Fund
Accountant to execute and deliver this
Agreement; and
(ii) Authorization of Fund Accountant to act as
fund accountant for the Company and to
provide accounting services for the Company.
9
<PAGE> 10
18. Amendments to Documents.
The Company shall furnish Fund Accountant written copies of
any amendments to, or changes in, any of the items referred to in Section 16
hereof forthwith upon such amendments or changes becoming effective. In
addition, the Company agrees that no amendments will be made to the Prospectuses
or Statements of Additional Information of the Company which might have the
effect of changing the procedures employed by Fund Accountant in providing the
services agreed to hereunder or which amendment might affect the duties of Fund
Accountant hereunder unless the Company first obtains Fund Accountant's approval
of such amendments or changes.
19. Compliance with Law.
Except for the obligations of Fund Accountant set forth in
Section 8 hereof, the Company assumes full responsibility for the preparation,
contents and distribution of each prospectus of the Company as to compliance
with all applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the 1940 Act and any other laws, rules and regulations of
governmental authorities having jurisdiction. Fund Accountant shall have no
obligation to take cognizance of any laws relating to the sale of the Company's
Shares. The Company represents and warrants that no Shares of the Company will
be offered to the public until the Company's registration statement under the
Securities Act and the 1940 Act has been declared or becomes effective.
20. Notices.
Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or certified mail,
postage prepaid, addressed by the party giving notice to the other party at the
following address or such other address that may subsequently be furnished: if
to the Company, at 800 Nashville City Center, Nashville, Tennessee 37219-1743,
Attn: John McAllister, Equitable Securities Corporation; and if to Fund
Accountant at 3435 Stelzer Road, Columbus, Ohio 43219.
21. Headings.
Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
22. Assignment.
This Agreement and the rights and duties hereunder shall not
be assignable with respect to a Fund by either of the parties hereto except by
the specific written consent of the other party. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
10
<PAGE> 11
23. Governing Law.
This Agreement shall be governed by and provisions shall be
construed in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ESC STRATEGIC FUNDS, INC.
By:
----------------------------
Attest:
------------------------
BISYS FUND SERVICES, INC.
By:
----------------------------
Attest:
------------------------
11
<PAGE> 12
Dated: October 1, 1996
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN
ESC STRATEGIC FUNDS, INC.
AND
BISYS FUND SERVICES, INC..
FEES
Effective as of the Conversion Date, Fund Accountant shall be entitled to
receive a fee from each Fund in accordance with the following schedule:
$30,000 annually plus out-of-pocket expenses, as described in
Section 4
ESC STRATEGIC FUNDS, INC. BISYS FUND SERVICES, INC.
By: By:
---------------------------- -------------------------
A-1
<PAGE> 1
Exhibit h(3)(a)
AMENDMENT TO
FUND ACCOUNTING AGREEMENT
This Amendment is made as of October 1, 1997 between ESC Strategic
Funds, Inc. (the "Company") and BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services (the "Administrator"). The parties hereby amend the Fund
Accounting Agreement (the "Agreement") between the Company and the
Administrator, dated as of October 1, 1996, as set forth below.
WHEREAS, the parties hereto wish to modify the portion of Schedule A to
the Agreement entitled "Term" by extending the initial term set forth therein.
NOW THEREFORE, in consideration of the foregoing and the mutual
premises and covenants herein set forth, the parties agree as follows:
1. Capitalized terms not otherwise defined herein shall have the
same meaning as in the Agreement.
2. Schedule A to the Agreement shall be amended by replacing the
first sentence of the first paragraph of the section entitled
"Term" with the following:
The initial term of this Agreement (the "Initial
Term") shall be for a period commencing on the date
this Agreement is executed by both parties and ending
on September 30, 1999.
3. This Amendment may be executed in one or more counterparts,
each of which will be deemed an original, but all of which
together shall constitute one and the same instrument.
4. Except as specifically set forth herein, all other provisions
of the Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first written above.
ESC STRATEGIC FUNDS, INC
By: __________________________________
Title:________________________________
BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By: __________________________________
Title:________________________________
2
<PAGE> 1
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A of ESC Strategic Funds, Inc.
of our report dated May 14, 1999 on our audits of the financial statements and
financial highlights of ESC Strategic Income Fund, ESC Strategic International
Equity Fund, ESC Strategic Small Cap Fund, ESC Strategic Appreciation Fund and
ESC Strategic Small Cap II Fund (separate portfolios constituting ESC Strategic
Funds, Inc.), which report is included in the Annual Report to Shareholders for
the year ended March 31, 1999. We also consent to the reference to our Firm
under the caption "Independent Accountants" in the Statement of Additional
Information relating to the ESC Strategic Funds, Inc. in this Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A of ESC Strategic
Funds, Inc.
PricewaterhouseCoopers LLP
Columbus, Ohio
July 29, 1999
<PAGE> 1
Exhibit M
MASTER DISTRIBUTION PLAN
WHEREAS, ESC Strategic Funds, Inc. (the "Company") is registered as an
open-end management investment company under the Investment Company Act of 1940
(the "Act") and is authorized to issue shares of common stock in separate
series with each such series representing interests in a separate portfolio of
securities and other assets (a "portfolio"), and is further authorized to issue
one or more classes of shares of each series ("Classes"); and
WHEREAS, the Company intends to engage Equitable Securities Corporation
(the "Adviser") to render investment management services with respect to such
separate investment portfolios (the "Funds") as the Directors shall establish
and designate from time to time; and
WHEREAS, the Company intends to employ Furman Selz Incorporated (the
"Administrator") to render certain administrative services necessary for the
operation of the Company and to employ Equitable Securities Corporation (the
"Distributor") to distribute securities of the Funds; and
WHEREAS, the Board of Directors of the Company has determined to adopt
this Distribution Plan (the "Plan") and has determined that there is a
reasonable likelihood that the Plan will benefit the Company and its
shareholders.
NOW THEREFORE, the Company hereby adopts the Plan on the following terms
and conditions:
1. The Plan shall pertain to such Funds and Classes as shall be designated
from time to time by the Directors of the Company in any Supplement to the Plan
("Supplement").
2. The Company will pay distribution expenses directly or will reimburse
the Distributor for costs and expenses incurred in connection with distribution
and marketing of shares of the Company. Such distribution costs and expenses
would include (i) advertising by radio, television, newspapers, magazines,
brochures, sales literature, direct mail or any other form of advertising, (ii)
expenses of sales employees or agents of the Distributor, including salary,
commissions, travel and related expenses, (iii) payments to broker-dealers and
financial institutions for services in connection with the distribution of
shares, including fees calculated with reference to the average daily net asset
value of shares held by shareholders who have a brokerage or other service
relationship with the broker-dealer or institution receiving such fees, (iv)
costs of printing prospectuses and other materials to be given or sent to
prospective investors, and (v) such other similar services as an executive
officer of the Company determines to be reasonably calculated to result in the
sale of shares of the Company.
<PAGE> 2
The Distributor will be reimbursed for such costs, expenses or payments on
a monthly basis, subject to an annual limit of the average daily net assets of
a Fund, or of each Class, as applicable, as shall be set forth in any
Supplement to the Plan with respect to a Fund or Class, and to such further
limits as may be applicable under rules of the National Association of
Securities Dealers. Payments made of or charged against the assets of the Fund
or Class, as applicable, must be in reimbursement for distribution services
rendered for or on behalf of the Fund or Class. The Distributor also may
receive and retain brokerage commissions with respect to portfolio transactions
for the Fund to the extent not prohibited by the Fund's Prospectus or Statement
of Additional Information.
3. The Company shall pay all costs and expenses in connection with
printing and distribution of the Company's prospectuses and the implementation
and operation of the Plan provided that expenses attributable to a Fund shall
be paid by that Fund and expenses attributable to a Class shall be paid by that
Class.
4. The Plan shall not take effect with respect to a Fund or Class until it
has been approved by a vote of at least a majority (as defined in the Act) of
the outstanding voting securities of that Fund or Class. With respect to the
submission of the Plan for such a vote, it shall have been effectively approved
with respect to a Fund or Class if a majority of the outstanding voting
securities of each Fund or Class, as applicable, votes for approval of the
Plan, notwithstanding that the matter has not been approved by a majority of
the outstanding voting securities of the Company (with respect to a Fund or
Class) or the Fund (with respect to a Class). The Plan shall take effect with
respect to any other Fund or Class established in the Company provided the Plan
is approved with respect to such Fund or Class as set forth in this paragraph
and provided the Directors have executed a Supplement as set forth in paragraph
1.
5. The Plan shall not take effect with respect to a Fund or Class until it
has been approved, together with any related Agreements and Supplements, by
votes of a majority of both (a) the Board of Directors of the Company and (b)
those Directors of the Company who are not "interested persons" of the Company
(as defined in the Act) and have no direct or indirect financial interest in
the operation of the Plan or any agreements related to it (the "Plan
Directors"), cast in person at a meeting (or meetings) called for the purpose
of voting on the Plan and such related agreements.
- 2 -
<PAGE> 3
6. The Plan shall continue in effect so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in paragraph 5.
7. Any person authorized to direct the disposition of monies paid or
payable by the Company pursuant to the Plan or any related agreement shall
provide to the Company's Board of Directors, and the Board shall review, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made.
8. Any agreement related to the Plan shall be in writing and shall
provide: (a) that such agreement may be terminated with respect to a Fund or
Class at any time, without payment of any penalty, by vote of a majority of the
Plan Directors or by vote of a majority of the outstanding voting securities of
a Fund or Class, as applicable, on not more than 60 days written notice to any
other party to the agreement; and (b) that such agreement shall terminate
automatically in the event of its assignment.
9. The Plan may be terminated at any time, without payment of any penalty,
with respect to each Fund or Class by vote of a majority of the Plan Directors
or by vote of a majority of the outstanding voting securities of that Fund or
Class, as applicable. With respect to any Fund or Class as to which the Plan is
not terminated, the Plan will continue in effect subject to the provisions
hereof.
10. The Plan may be amended at any time by the Board of Directors provided
that: (a) any amendment to increase materially the costs which a Fund or Class
may bear for distribution pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding voting securities of the
Fund or Class, as applicable, and upon compliance with conditions of applicable
exemptive orders issued by, or rules of, the Securities and Exchange
Commission; and (b) any material amendments of the terms of the Plan shall
become effective only upon approval as provided in paragraph 5 hereof.
11. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons (as defined in the Act) of the Company shall be
committed to the discretion of the Directors who are not interested persons.
- 3 -
<PAGE> 4
12. The Company shall preserve copies of the Plan and any related
agreements and all reports made pursuant to paragraph 7 hereof for a period of
not less than six years from the date of the Plan, the agreements or such
report, as the case may be, the first two years of which shall be in an easily
accessible place.
- 4 -
<PAGE> 5
ESC STRATEGIC FUNDS, INC.
AMENDED AND RESTATED
DISTRIBUTION PLAN SUPPLEMENT
FEBRUARY 10, 1998
WHEREAS, ESC Strategic Funds, Inc. ("Company") is an open-end investment
company registered under the Investment Company Act of 1940, is organized as a
Maryland corporation and consists of one or more separate investment
portfolios, as may be established and designated by the Company's Board of
Directors from time to time;
WHEREAS, a separate series of common stock of the Company is offered to
investors with respect to each investment portfolio and each investment
portfolio offers one or more classes of shares;
WHEREAS, the Board of Directors approved a Master Distribution Plan ("Plan")
for the Company on April 4, 1994, which Plan provides that it shall pertain to
such investment portfolios and classes of shares as shall be designated by the
Board of Directors from time to time in any Supplement to the Plan;
WHEREAS, the Board of Directors approved Supplements for each of the Company's
investment portfolios and their classes of shares on the following dates: ESC
Strategic Appreciation Fund, ESC Strategic Global Equity Fund, ESC Strategic
Small Cap Fund and ESC Strategic Income Fund -- April 4, 1994; ESC Strategic
Growth Fund -- October 23, 1996; and ESC Strategic Value Fund -- January 14,
1997 (the foregoing investment portfolios being hereinafter referred to, as
"Funds");
WHEREAS, the Board of Directors has determined to employ BISYS Fund Services
Limited Partnership d/b/a/ BISYS Fund Services ("Distributor") to distribute
shares of the Funds; and
WHEREAS, the Board of Directors has determined that it is desirable to amend
and restate the separate Supplements that have been adopted by them to apply
the Plan to the Funds and their classes of shares into a single Amended and
Restated Supplement with no substantive change in the terms of the Plan
applicable to any such Fund or class of shares;
NOW THEREFORE, the Board of Directors hereby amend and restate such separate
Supplements into a single Supplement as follows:
1. Pursuant to paragraph 1 of the Plan, the terms and conditions of which are
incorporated herein by reference, the Plan is applicable to each of the Funds
and their classes upon the terms contained in the following paragraph.
18
<PAGE> 6
2. As provided in paragraph 2 of the Plan, reimbursements by each of the Funds
shall be subject to the following annual limits with respect to its Class A
Shares and Class D Shares:
Class A Shares -- 0.25% of the average daily net assets attributable to
Class A Shares; provided that up to 0.25% of such average daily net assets may
be designated out of such reimbursements as a "service fee," as defined in
rules and policy statements of the National Association of Securities Dealers.
Class D Shares -- 0.75% of the average daily net assets attributable to
Class D Shares; provided that up to 0.25% of such average daily net assets may
be designated out of such reimbursements as a "service fee," as defined in
rules and policy statements of the National Association of Securities Dealers.
19
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 011
<NAME> ESC STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 7,666,404
<INVESTMENTS-AT-VALUE> 7,665,102
<RECEIVABLES> 191,515
<ASSETS-OTHER> 6,198
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,862,815
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,369
<TOTAL-LIABILITIES> 84,369
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,831,835
<SHARES-COMMON-STOCK> 740,072<F1>
<SHARES-COMMON-PRIOR> 2,187,766<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 52,883
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,302)
<NET-ASSETS> 7,778,446
<DIVIDEND-INCOME> 25,010
<INTEREST-INCOME> 1,149,476
<OTHER-INCOME> 0
<EXPENSES-NET> 322,727
<NET-INVESTMENT-INCOME> 851,759
<REALIZED-GAINS-CURRENT> 57,784
<APPREC-INCREASE-CURRENT> (193,923)
<NET-CHANGE-FROM-OPS> (715,620)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 759,547<F1>
<DISTRIBUTIONS-OF-GAINS> 104,773<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 926,359<F1>
<NUMBER-OF-SHARES-REDEEMED> 18,743,090<F1>
<SHARES-REINVESTED> 894,208<F1>
<NET-CHANGE-IN-ASSETS> (17,457,788)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 850,222
<OVERDISTRIB-NII-PRIOR> 174,854
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 167,336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 376,200
<AVERAGE-NET-ASSETS> 15,962,778<F1>
<PER-SHARE-NAV-BEGIN> 9.99<F1>
<PER-SHARE-NII> 0.51<F1>
<PER-SHARE-GAIN-APPREC> 0.04<F1>
<PER-SHARE-DIVIDEND> 0.57<F1>
<PER-SHARE-DISTRIBUTIONS> 0.15<F1>
<RETURNS-OF-CAPITAL> 0.05<F1>
<PER-SHARE-NAV-END> 9.77<F1>
<EXPENSE-RATIO> 1.91<F1>
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 012
<NAME> ESC STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 7,666,404
<INVESTMENTS-AT-VALUE> 7,665,102
<RECEIVABLES> 191,515
<ASSETS-OTHER> 6,198
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,862,815
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,369
<TOTAL-LIABILITIES> 84,369
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,831,835
<SHARES-COMMON-STOCK> 55,694<F1>
<SHARES-COMMON-PRIOR> 67,929<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 52,883
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,302)
<NET-ASSETS> 7,778,446
<DIVIDEND-INCOME> 25,010
<INTEREST-INCOME> 1,149,476
<OTHER-INCOME> 0
<EXPENSES-NET> 322,727
<NET-INVESTMENT-INCOME> 851,759
<REALIZED-GAINS-CURRENT> 57,784
<APPREC-INCREASE-CURRENT> (193,923)
<NET-CHANGE-FROM-OPS> (715,620)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 32,600<F1>
<DISTRIBUTIONS-OF-GAINS> 9,574<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 155,831<F1>
<NUMBER-OF-SHARES-REDEEMED> 460,910<F1>
<SHARES-REINVESTED> 40,511<F1>
<NET-CHANGE-IN-ASSETS> (17,457,788)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 850,222
<OVERDISTRIB-NII-PRIOR> 174,854
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 167,336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 376,200
<AVERAGE-NET-ASSETS> 722,908<F1>
<PER-SHARE-NAV-BEGIN> 9.99<F1>
<PER-SHARE-NII> 0.50<F1>
<PER-SHARE-GAIN-APPREC> 0.01<F1>
<PER-SHARE-DIVIDEND> 0.46<F1>
<PER-SHARE-DISTRIBUTIONS> 0.15<F1>
<RETURNS-OF-CAPITAL> 0.05<F1>
<PER-SHARE-NAV-END> 9.84<F1>
<EXPENSE-RATIO> 2.44<F1>
<FN>
<F1>Class D Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 021
<NAME> ESC STRATEGIC INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 7,791,483
<INVESTMENTS-AT-VALUE> 9,236,750
<RECEIVABLES> 663,046
<ASSETS-OTHER> 14,471
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,914,267
<PAYABLE-FOR-SECURITIES> 176,197
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,227
<TOTAL-LIABILITIES> 218,424
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,450,154
<SHARES-COMMON-STOCK> 727,019<F1>
<SHARES-COMMON-PRIOR> 988,484<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 26,128
<ACCUMULATED-NET-GAINS> 822,727
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,448,183
<NET-ASSETS> 9,695,843
<DIVIDEND-INCOME> 216,458
<INTEREST-INCOME> 35,505
<OTHER-INCOME> 0
<EXPENSES-NET> 318,497
<NET-INVESTMENT-INCOME> (66,534)
<REALIZED-GAINS-CURRENT> 1,024,996
<APPREC-INCREASE-CURRENT> (1,842,011)
<NET-CHANGE-FROM-OPS> (883,549)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 712,147<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,144,165<F1>
<NUMBER-OF-SHARES-REDEEMED> 5,735,950<F1>
<SHARES-REINVESTED> 582,876<F1>
<NET-CHANGE-IN-ASSETS> (6,366,125)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,680,000
<OVERDISTRIB-NII-PRIOR> 56,826
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 125,548
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 331,288
<AVERAGE-NET-ASSETS> 10,207,782<F1>
<PER-SHARE-NAV-BEGIN> 12.06<F1>
<PER-SHARE-NII> (0.06)<F1>
<PER-SHARE-GAIN-APPREC> (0.31)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> .94<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.75<F1>
<EXPENSE-RATIO> 2.45<F1>
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 022
<NAME> ESC STRATEGIC INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 7,791,483
<INVESTMENTS-AT-VALUE> 9,236,750
<RECEIVABLES> 663,046
<ASSETS-OTHER> 14,471
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,914,267
<PAYABLE-FOR-SECURITIES> 176,197
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,227
<TOTAL-LIABILITIES> 218,424
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,450,154
<SHARES-COMMON-STOCK> 179,858<F1>
<SHARES-COMMON-PRIOR> 219,971<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 26,128
<ACCUMULATED-NET-GAINS> 822,727
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,448,183
<NET-ASSETS> 9,695,843
<DIVIDEND-INCOME> 216,458
<INTEREST-INCOME> 35,505
<OTHER-INCOME> 0
<EXPENSES-NET> 318,497
<NET-INVESTMENT-INCOME> (66,534)
<REALIZED-GAINS-CURRENT> 1,024,996
<APPREC-INCREASE-CURRENT> (1,842,011)
<NET-CHANGE-FROM-OPS> (883,549)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 192,848<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 124,302<F1>
<NUMBER-OF-SHARES-REDEEMED> 885,822<F1>
<SHARES-REINVESTED> 192,848<F1>
<NET-CHANGE-IN-ASSETS> (6,366,125)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,680,000
<OVERDISTRIB-NII-PRIOR> 56,826
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 125,548
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 331,288
<AVERAGE-NET-ASSETS> 2,329,559<F1>
<PER-SHARE-NAV-BEGIN> 11.81<F1>
<PER-SHARE-NII> (.16)<F1>
<PER-SHARE-GAIN-APPREC> (.26)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> .94<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.45<F1>
<EXPENSE-RATIO> 2.95<F1>
<FN>
<F1>Class D Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 031
<NAME> ESC STRATEGIC SMALL CAP FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 113,770,637
<INVESTMENTS-AT-VALUE> 110,281,091
<RECEIVABLES> 251,827
<ASSETS-OTHER> 801
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 110,533,719
<PAYABLE-FOR-SECURITIES> 727,030
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,991,768
<TOTAL-LIABILITIES> 13,718,798
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 97,789,821
<SHARES-COMMON-STOCK> 4,504,805<F1>
<SHARES-COMMON-PRIOR> 5,338,747<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,508,784
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,489,546)
<NET-ASSETS> 96,814,921
<DIVIDEND-INCOME> 741,330
<INTEREST-INCOME> 763,213
<OTHER-INCOME> 63,322
<EXPENSES-NET> 2,385,765
<NET-INVESTMENT-INCOME> (817,900)
<REALIZED-GAINS-CURRENT> 2,508,888
<APPREC-INCREASE-CURRENT> (42,488,775)
<NET-CHANGE-FROM-OPS> (40,797,787)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 2,603,327<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 8,371,667<F1>
<NUMBER-OF-SHARES-REDEEMED> 28,936,985<F1>
<SHARES-REINVESTED> 2,359,265<F1>
<NET-CHANGE-IN-ASSETS> (57,856,716)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,644,322
<OVERDISTRIB-NII-PRIOR> 423,858
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,252,991
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,385,765
<AVERAGE-NET-ASSETS> 96,628,554<F1>
<PER-SHARE-NAV-BEGIN> 22.81<F1>
<PER-SHARE-NII> (0.12)<F1>
<PER-SHARE-GAIN-APPREC> (5.59)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0.51<F1>
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.59<F1>
<EXPENSE-RATIO> 1.79<F1>
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 032
<NAME> ESC STRATEGIC SMALL CAP FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 113,770,637
<INVESTMENTS-AT-VALUE> 110,281,091
<RECEIVABLES> 251,827
<ASSETS-OTHER> 801
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 110,533,719
<PAYABLE-FOR-SECURITIES> 727,030
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,991,768
<TOTAL-LIABILITIES> 13,718,798
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 97,789,821
<SHARES-COMMON-STOCK> 1,357,437<F1>
<SHARES-COMMON-PRIOR> 1,576,101<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,508,784
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,489,546)
<NET-ASSETS> 96,814,921
<DIVIDEND-INCOME> 741,330
<INTEREST-INCOME> 763,213
<OTHER-INCOME> 63,322
<EXPENSES-NET> 2,385,765
<NET-INVESTMENT-INCOME> (817,900)
<REALIZED-GAINS-CURRENT> 2,508,888
<APPREC-INCREASE-CURRENT> (42,488,775)
<NET-CHANGE-FROM-OPS> (40,797,787)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 765,335<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,473,645<F1>
<NUMBER-OF-SHARES-REDEEMED> 3,181,883<F1>
<SHARES-REINVESTED> 764,367<F1>
<NET-CHANGE-IN-ASSETS> (57,856,716)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,644,322
<OVERDISTRIB-NII-PRIOR> 423,858
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,252,991
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,385,765
<AVERAGE-NET-ASSETS> 28,483,222<F1>
<PER-SHARE-NAV-BEGIN> 22.50<F1>
<PER-SHARE-NII> (0.22)<F1>
<PER-SHARE-GAIN-APPREC> (5.51)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0.51<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 16.26<F1>
<EXPENSE-RATIO> 2.29<F1>
<FN>
<F1>Class D Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 041
<NAME> ESC STRATEGIC APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 23,200,213
<INVESTMENTS-AT-VALUE> 25,229,598
<RECEIVABLES> 285,943
<ASSETS-OTHER> 4,356
<OTHER-ITEMS-ASSETS> 2,093
<TOTAL-ASSETS> 25,521,990
<PAYABLE-FOR-SECURITIES> 528,455
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,677,142
<TOTAL-LIABILITIES> 2,205,597
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,167,910
<SHARES-COMMON-STOCK> 1,762,710<F1>
<SHARES-COMMON-PRIOR> 1,978,674<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,116,915
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,029,385
<NET-ASSETS> 23,316,393
<DIVIDEND-INCOME> 388,643
<INTEREST-INCOME> 80,019
<OTHER-INCOME> 10,606
<EXPENSES-NET> 651,620
<NET-INVESTMENT-INCOME> (172,352)
<REALIZED-GAINS-CURRENT> 1,116,912
<APPREC-INCREASE-CURRENT> (9,813,011)
<NET-CHANGE-FROM-OPS> (8,868,451)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 2,762,177<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,982,123<F1>
<NUMBER-OF-SHARES-REDEEMED> 10,175,152<F1>
<SHARES-REINVESTED> 2,596,704<F1>
<NET-CHANGE-IN-ASSETS> (11,975,137)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 7,076,924
<OVERDISTRIB-NII-PRIOR> 75,555
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 318,584
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 653,875
<AVERAGE-NET-ASSETS> 25,675,731<F1>
<PER-SHARE-NAV-BEGIN> 15.80<F1>
<PER-SHARE-NII> (0.06)<F1>
<PER-SHARE-GAIN-APPREC> (3.50)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 1.51<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.73<F1>
<EXPENSE-RATIO> 1.95<F1>
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 042
<NAME> ESC STRATEGIC APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 23,200,213
<INVESTMENTS-AT-VALUE> 25,229,598
<RECEIVABLES> 285,943
<ASSETS-OTHER> 4,356
<OTHER-ITEMS-ASSETS> 2,093
<TOTAL-ASSETS> 25,521,990
<PAYABLE-FOR-SECURITIES> 528,455
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,677,142
<TOTAL-LIABILITIES> 2,205,597
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,167,910
<SHARES-COMMON-STOCK> 420,184<F1>
<SHARES-COMMON-PRIOR> 483,086<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,116,915
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,029,385
<NET-ASSETS> 23,316,393
<DIVIDEND-INCOME> 388,643
<INTEREST-INCOME> 80,019
<OTHER-INCOME> 10,606
<EXPENSES-NET> 651,620
<NET-INVESTMENT-INCOME> (172,352)
<REALIZED-GAINS-CURRENT> 1,116,912
<APPREC-INCREASE-CURRENT> (9,813,011)
<NET-CHANGE-FROM-OPS> (8,868,451)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 692,033<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,227,616<F1>
<NUMBER-OF-SHARES-REDEEMED> 2,462,053<F1>
<SHARES-REINVESTED> 691,921<F1>
<NET-CHANGE-IN-ASSETS> (11,975,137)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 7,076,924
<OVERDISTRIB-NII-PRIOR> 75,555
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 318,584
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 653,875
<AVERAGE-NET-ASSETS> 6,134,831<F1>
<PER-SHARE-NAV-BEGIN> 15.54<F1>
<PER-SHARE-NII> (0.15)<F1>
<PER-SHARE-GAIN-APPREC> (3.41)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 1.51<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.47<F1>
<EXPENSE-RATIO> 2.45<F1>
<FN>
<F1>Class D Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 051
<NAME> ESC STRATEGIC SMALL CAP II FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 36,087,680
<INVESTMENTS-AT-VALUE> 31,662,385
<RECEIVABLES> 8,036
<ASSETS-OTHER> 8,643
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 31,679,064
<PAYABLE-FOR-SECURITIES> 263,377
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,903,133
<TOTAL-LIABILITIES> 4,166,510
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35,194,801
<SHARES-COMMON-STOCK> 2,090,287<F1>
<SHARES-COMMON-PRIOR> 2,040,409<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,259,824
<ACCUM-APPREC-OR-DEPREC> (4,425,295)
<NET-ASSETS> 27,512,554
<DIVIDEND-INCOME> 113,811
<INTEREST-INCOME> 220,516
<OTHER-INCOME> 13,279
<EXPENSES-NET> 657,231
<NET-INVESTMENT-INCOME> (309,625)
<REALIZED-GAINS-CURRENT> (2,810,903)
<APPREC-INCREASE-CURRENT> (8,261,391)
<NET-CHANGE-FROM-OPS> (11,381,919)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 14,824,338<F1>
<NUMBER-OF-SHARES-REDEEMED> 6,663,800<F1>
<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> (2,118,645)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 12,671
<OVERDIST-NET-GAINS-PRIOR> 1,118,690
<GROSS-ADVISORY-FEES> 382,702
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 740,074
<AVERAGE-NET-ASSETS> 21,710,119<F1>
<PER-SHARE-NAV-BEGIN> 13.68<F1>
<PER-SHARE-NII> (0.09)<F1>
<PER-SHARE-GAIN-APPREC> (3.98)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 9.61<F1>
<EXPENSE-RATIO> 2.00<F1>
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 052
<NAME> ESC STRATEGIC SMALL CAP II FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 36,087,680
<INVESTMENTS-AT-VALUE> 31,662,385
<RECEIVABLES> 8,036
<ASSETS-OTHER> 8,643
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 31,679,064
<PAYABLE-FOR-SECURITIES> 263,377
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,903,133
<TOTAL-LIABILITIES> 4,166,510
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35,194,801
<SHARES-COMMON-STOCK> 781,351<F1>
<SHARES-COMMON-PRIOR> 856,834<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,259,824
<ACCUM-APPREC-OR-DEPREC> (4,425,295)
<NET-ASSETS> 27,512,554
<DIVIDEND-INCOME> 113,811
<INTEREST-INCOME> 220,516
<OTHER-INCOME> 13,279
<EXPENSES-NET> 657,231
<NET-INVESTMENT-INCOME> (309,625)
<REALIZED-GAINS-CURRENT> (2,810,903)
<APPREC-INCREASE-CURRENT> (8,261,391)
<NET-CHANGE-FROM-OPS> (11,381,919)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 4,282,060<F1>
<NUMBER-OF-SHARES-REDEEMED> 3,179,324<F1>
<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> (2,118,645)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 126,971
<OVERDIST-NET-GAINS-PRIOR> 1,118,690
<GROSS-ADVISORY-FEES> 382,702
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 740,071
<AVERAGE-NET-ASSETS> 8,900,239<F1>
<PER-SHARE-NAV-BEGIN> 13.61<F1>
<PER-SHARE-NII> (0.16)<F1>
<PER-SHARE-GAIN-APPREC> (3.93)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 9.52<F1>
<EXPENSE-RATIO> 2.50<F1>
<FN>
<F1>Class D Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 061
<NAME> ESC STRATEGIC VALUE FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 8,189
<ASSETS-OTHER> 79,035
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 87,224
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 86,928
<TOTAL-LIABILITIES> 86,928
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,848,331
<SHARES-COMMON-STOCK> 0<F1>
<SHARES-COMMON-PRIOR> 1,199,696<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 32,301
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,817,327
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 99,218
<INTEREST-INCOME> 139,591
<OTHER-INCOME> 0
<EXPENSES-NET> 271,111
<NET-INVESTMENT-INCOME> (32,301)
<REALIZED-GAINS-CURRENT> (3,742,300)
<APPREC-INCREASE-CURRENT> (1,383,793)
<NET-CHANGE-FROM-OPS> (5,158,394)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,043<F1>
<DISTRIBUTIONS-OF-GAINS> 197,622<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 138,853<F1>
<NUMBER-OF-SHARES-REDEEMED> 1,362,609<F1>
<SHARES-REINVESTED> 3,961<F1>
<NET-CHANGE-IN-ASSETS> (12,887,444)
<ACCUMULATED-NII-PRIOR> 8,043
<ACCUMULATED-GAINS-PRIOR> 179,921
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 160,087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 348,849
<AVERAGE-NET-ASSETS> 9,708,938<F1>
<PER-SHARE-NAV-BEGIN> 11.51<F1>
<PER-SHARE-NII> 0<F1>
<PER-SHARE-GAIN-APPREC> (3.55)<F1>
<PER-SHARE-DIVIDEND> 0.20<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 0<F1>
<EXPENSE-RATIO> 1.99<F1>
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000915388
<NAME> ESC STRATEGIC FUNDS
<SERIES>
<NUMBER> 062
<NAME> ESC STRATEGIC VALUE FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 8,189
<ASSETS-OTHER> 79,035
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 87,224
<PAYABLE-FOR-SECURITIES> 6,928
<SENIOR-LONG-TERM-DEBT> 6,928
<OTHER-ITEMS-LIABILITIES> 86,928
<TOTAL-LIABILITIES> 8,692,831
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,848,331
<SHARES-COMMON-STOCK> 0<F1>
<SHARES-COMMON-PRIOR> 392,807
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 32,301
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,817,327
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 99,218
<INTEREST-INCOME> 139,591
<OTHER-INCOME> 0
<EXPENSES-NET> 271,111
<NET-INVESTMENT-INCOME> (32,301)
<REALIZED-GAINS-CURRENT> (3,742,300)
<APPREC-INCREASE-CURRENT> (1,383,793)
<NET-CHANGE-FROM-OPS> (5,158,394)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 57,326<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 46,314<F1>
<NUMBER-OF-SHARES-REDEEMED> 446,103<F1>
<SHARES-REINVESTED> 6,982<F1>
<NET-CHANGE-IN-ASSETS> (12,887,444)
<ACCUMULATED-NII-PRIOR> 8,043
<ACCUMULATED-GAINS-PRIOR> 179,921
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 160,087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 348,849
<AVERAGE-NET-ASSETS> 3,054,878<F1>
<PER-SHARE-NAV-BEGIN> 11.47<F1>
<PER-SHARE-NII> 0<F1>
<PER-SHARE-GAIN-APPREC> (3.48)<F1>
<PER-SHARE-DIVIDEND> 0.20<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 0<F1>
<EXPENSE-RATIO> 2.49<F1>
<FN>
<F1>Class D Shares
</FN>
</TABLE>
