<PAGE> 1
ESC STRATEGIC FUNDS
- --------------------------------------------------------------------------------
May 4, 1999
Dear Shareholder:
Put mildly, the twelve months ended March 31, 1999 were very trying ones indeed
for the small cap markets. In the first half of the period, uncertainty and, at
times, even fear rippled through the markets due to problems primarily in
markets abroad. Investors ran for cover and virtually all but the most
conservative securities were trampled underfoot. In the second half of the
period, the environment improved and investors returned. Stocks across the
spectrum rebounded but the clear favorites continued to be issues perceived to
offer some safety and the greatest liquidity.
The vast majority of stocks labored in the shadow of the biggest and best known
names among large cap companies. But, as the large cap stocks moved the Dow
Jones Industrial Average(1) over 10,000, the small caps struggled. Despite
strong fundamentals, growth rates projected to be above those of most larger cap
companies and extremely attractive valuations, investors continued to look
elsewhere. Smaller stocks began their sixth year of underperformance relative to
large cap stocks. Given the sheer fundamental strength of our portfolios'
holdings, the environment was extremely frustrating and returns disappointing.
ESC STRATEGIC VALUE FUND LIQUIDATES
The market's neglect of the small cap stocks in general and small cap value
stocks in particular took casualties, and regretfully, among them was the ESC
Strategic Value Fund. During its almost two years of existence, the Fund had not
attracted sufficient interest among prospective investors and, given sentiment
toward value stocks, was considered unlikely to do so in the near-term.
Furthermore, because of the Fund's declining asset size resulting from
significant redemptions from shareholders, our Board of Directors was concerned
that it could not operate on an ongoing basis, at a competitive expense ratio or
achieve economies for efficient management of the portfolio. Consequently,
effective March 26, 1999, the Fund was liquidated.
DIFFICULT MARKETS
Certainly, the past year was among the worst of times for all but the most
determined long-term investors in small cap stocks. With interest rates low,
inflation virtually non-existent and the economy strong, many companies in the
small cap sector are, we believe, operationally strong -- at the same time their
valuations have wilted. From the peaks reached in 1998 through the end of March
1999, companies with market caps between $250 million and $2 billion dropped
some 32% and companies with market caps below $250 million were down 51%.
Throughout the period, monies were drawn from sectors across the marketplace
toward a select few stocks regarded as symbols of a dawning information age.
Returns in these issues, particularly those related to the internet, made it
extremely difficult for investors to look beyond. We believe in the information
age, and its ensuing benefits too -- but, over the long-term, investment
fundamentals drive stock prices, not enthusiasm or euphoria.
(1) The Dow Jones Industrial Average is a price-weighted average based only on
the price performance of 30 blue chip stocks.
<PAGE> 2
FUNDAMENTALS DO COUNT
Many of the market's current internet favorites have yet to report a penny of
earnings, and may not do so for years. Last year, the largest stocks carried the
highest price-to-earning ratios, but reported slowing earnings growth. Yet,
these companies continued to appreciate, thereby driving their price-to-earning
ratios even higher, and defying investment fundamentals. The remainder of the
market declined, despite increasing earnings growth, thereby further compressing
price-to-earning ratios -- again, defying fundamentals. So, while this
environment is a challenging one for small cap investors, it is our opinion that
it will not, and can not last forever.
IN CLOSING
In the pages that follow, you will find a detailed discussion of the performance
of each of the ESC Strategic Funds during the twelve months ended March 31,
1999. We urge you to read this report closely.
Finally, we would like to thank you for your continued confidence in us. We look
forward to providing you with superior investment management and service to meet
your investment needs now and in the future. If you would like a prospectus,
have any questions or require any assistance, we can, as always, be reached at
1-800-372-3360.
Sincerely,
/s/ W. Howard Cammack, Jr.
W. Howard Cammack, Jr.
Chairman
ESC Strategic Funds
Shares of the ESC Strategic Funds are not deposits or obligations of, or
guaranteed or endorsed by SunTrust Bank, any of its affiliates or the
distributor. The ESC Strategic Funds are distributed by BISYS Fund Services.
Shares are NOT FDIC INSURED nor are they insured by any other government agency.
An investment in the funds involves investment risk, including possible loss of
principal.
For more complete information on any of the ESC Strategic Funds, including
on-going fees, expenses and sales charges, please call 1-800-372-3360 for a free
prospectus. Please read the prospectus carefully before investing or sending
money.
<PAGE> 3
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<PAGE> 4
ESC STRATEGIC INCOME FUND(1)
Very simply, the year ended March 31, 1999 was a turbulent one in the fixed
income markets. Troubles in economies abroad and anticipation that our own
economy was slowing roiled the markets in the first half of 1999. Investors fled
to quality -- and liquidity dried up in virtually all sectors of the market
except for Treasuries. In response to actions by monetary authorities abroad and
moves by the Federal Reserve at home to cut interest rates, sentiment improved
in the second half of 1999. Nonetheless, in the high yield sector, the result
was a bifurcated market -- one where investors showed a clear preference for the
strongest securities.
Focused on these issues and maintaining a strict emphasis on strong credit
fundamentals throughout the year, the Fund weathered the storms well. Also, in
early October, the portfolio's orientation was shifted away from the global
market and rebuilt with a pure high yield focus. North American securities were
emphasized -- a move that enabled us to scrutinize issues and monitor the
environment more closely. Due to the fact that this realignment and redeployment
of assets took place in the second half of the period, however, performance over
the year should not be considered as representative of the Fund's long-term
potential. For the year ended March 31, 1999, the Fund produced a total return
of 5.64%, (Class A without the sales charge) versus its benchmarks which
returned -0.38% for the Lehman Brothers High Yield Bond Index(2), and 2.56% for
the Lipper Global Income Fund Index(3).
QUALITY IS THE KEY
Given the current global situation and the fact that our own economy is
weakening, we expect the climate to be somewhat volatile in the high yield
market in the months ahead. In years past, high yield debt was issued primarily
by larger companies with solid asset bases and strong cash flows. In the
prosperous economy of the past several years, smaller, less established
companies with less predictable cash flows have entered the marketplace.
While these companies do pay a premium for cash, as the economy softens,
their downside potential for investors will increase. Consequently, our focus
remains firmly fixed on quality, investing in only issues rated B or better.
Also, assets are invested primarily in North American securities issued by
established companies with the cash flow to support their endeavors. Given the
environment, this type of paper is scarce but well worth the effort and patience
to find. At some point, we believe, although the Fund may invest in lower rated
instruments, the shoe will drop and those chasing yields may pay dearly for it.
<PAGE> 5
[INCOME FUND CLASS A GRAPH]
<TABLE>
<CAPTION>
LIPPER GLOBAL INCOME FUND LEHMAN BROTHERS HIGH
INCOME FUND CLASS A* INDEX 3 YIELD BOND INDEX 2
-------------------- ------------------------- --------------------
<S> <C> <C> <C>
5/4/94 9525.00 10000.00 10000.00
3/95 10057.00 10279.00 10771.00
3/96 10828.00 11557.00 12328.00
3/97 11852.00 12524.00 13640.00
3/98 12172.00 13514.00 15725.00
3/99 12858.00 13859.00 15784.00
</TABLE>
* Reflects the maximum sales charge of
4.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (5/4/94)
-------- ------ ---------------
<S> <C> <C> <C>
Income Fund*........................ 12,858 0.89% 5.26%
Lehman Brothers High Yield Bond
Index(2).......................... 15,784 0.38% 9.73%
Lipper Global Income Fund
Index(3).......................... 13,859 2.56% 6.86%
</TABLE>
[INCOME FUND CLASS D GRAPH]
<TABLE>
<CAPTION>
LIPPER GLOBAL INCOME LEHMAN BROTHERS HIGH
INCOME FUND CLASS D** INDEX 3 YIELD BOND INDEX 2
--------------------- -------------------- --------------------
<S> <C> <C> <C>
5/4/94 9820.00 10000.00 10000.00
3/95 10519.00 10279.00 10771.00
3/96 11052.00 11557.00 12328.00
3/97 11426.00 12524.00 13640.00
3/98 12299.00 13514.00 15725.00
3/99 12943.00 13859.00 15784.00
</TABLE>
** Reflects the maximum sales charge of
1.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (5/4/94)
-------- ------ ---------------
<S> <C> <C> <C>
Income Fund**....................... 12,943 3.68% 5.40%
Lehman Brothers High Yield Bond
Index(2).......................... 15,784 0.38% 9.73%
Lipper Global Income Fund
Index(3).......................... 13,859 2.56% 6.86%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return
and net asset value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
* The Fund's portfolio composition is subject to change.
(1) Although the Fund's yield may be significantly higher than that of other
fixed income funds that are based higher rated securities, that is generally
based upon greater risk that the Fund's share price will decline.
(2) Lehman Brothers High Yield Bond Index is generally representative of high
yield bonds. The index is unmanaged and does not reflect the expenses
associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for
these value added services.
(3) The Lipper Global Income Fund Index states by prospectus that it invests
primarily in U.S. dollar and non-U.S. dollar debt securities of issuers
located in at least three countries, one of which may be the United States.
<PAGE> 6
ESC STRATEGIC INTERNATIONAL EQUITY FUND(1)
Clearly, the year ended March 31, 1999 was a challenging one for
international investors. In the first half, turmoil in Asian markets, the
collapse of the Russian economy and the prospect of slowing growth in the U.S.,
dampened enthusiasm for international securities. In the second half, with the
exception of Europe where slower growth took the gloss off equities and
currencies, the environment in the global marketplace improved. Some of the best
returns were generated in Latin American markets when confidence improved and
investors began to warm to the region after a turbulent period. In Japan, there
was a feeling that the government was making progress in financial reform and
outside investors began to return to the region.
After lowering exposures in the Pacific region and Japan in the first half
of the year ended March 31, 1999, we moved quickly to increase exposures as
sentiment changed in the second half. Consequently, at the end of the year, the
Fund was marketweighted in Japan and overweighted in Hong Kong and Singapore.
For the twelve months ended March 31, 1999, the Fund produced a total return of
- -2.13%, (Class A without the sales charge), versus 6.06% produced by the Morgan
Stanley Capital International EAFE Index(2) (the "EAFE Index") over the same
period. The Fund's underperformance of its benchmark can be partly attributed to
the fact that the Fund has been invested solely in non-U.S. issues only since
July 17, 1998. Prior to July 17, 1998 its investments were diversified across
both domestic and international markets.
THE OUTLOOK IS POSITIVE
The direction of U.S. interest rates, the rate of growth in Europe and the
sustainability of Japan's rebound are the keys to progress in the months ahead.
Our own view is that growth in the U.S. will indeed slow through this year as a
result of rising imports and that this will allow the Federal Reserve to leave
rates as they currently stand. This will be important for Europe where slower
growth will probably require lower rates during the coming months. Turning to
Japan, the combination of government action and corporate restructuring leads us
to believe that the Japanese economy will continue to improve and corporate
profits will pick up. Moreover, stable growth and a continuation of low interest
rates in the U.S., will also help create a more positive environment in Japan
and surrounding economies.
As a result, we're optimistic about the prospects for the global markets in
the months ahead. As of March 31, 1999, the top five holdings in the Fund's
portfolio were: Cifra (4% of portfolio assets), Fomento Economico (4%), Telecom
Italia (3%), Telecom Italia Mobile (3%) and Aegon N.V. (3%).*
* The Fund's portfolio composition is subject to change.
<PAGE> 7
[INTERNATIONAL EQUITY FUND GRAPH]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND MORGAN STANLEY EAFE
CLASS A* LIPPER GLOBAL INDEX3 INDEX2
------------------------- -------------------- -------------------
<S> <C> <C> <C>
5/12/94 9561.00 10000.00 10000.00
3/95 9471.00 9857.00 10259.00
3/96 10835.00 11953.00 11315.00
3/97 11738.00 13367.00 11761.00
3/98 14349.00 16997.00 13987.00
3/99 14044.00 17623.00 14878.00
</TABLE>
* Reflects the maximum sales charge of
4.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (5/12/94)
-------- ------ ---------------
<S> <C> <C> <C>
International Equity Fund*.......... 14,044 -6.54% 7.20%
Morgan Stanley EAFE Index(2)........ 14,878 6.37% 8.57%
Lipper Global Index(3).............. 17,623 3.68% 12.44%
</TABLE>
[GLOBAL EQUITY FUND GRAPH]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND MORGAN STANLEY EAFE
CLASS D** LIPPER GLOBAL INDEX3 INDEX2
------------------------- -------------------- -------------------
<S> <C> <C> <C>
5/12/94 9862.00 10000.00 10000.00
3/95 9683.00 9857.00 10259.00
3/96 11039.00 11953.00 11315.00
3/97 11910.00 13367.00 11761.00
3/98 14541.00 16997.00 13987.00
3/99 14158.00 17623.00 14878.00
</TABLE>
** Reflects the maximum sales charge of
1.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (5/12/94)
-------- ------ ---------------
<S> <C> <C> <C>
International Equity Fund**.......... 14,158 -4.10% 7.38%
Morgan Stanley EAFE Index(2)......... 14,878 6.37% 8.57%
Lipper Global Index(3)............... 17,623 3.68% 12.44%
</TABLE>
Past performance is not predictive of future performance. Investment return
and net asset value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) International investing involves increased risk and volatility.
(2) The performance of the ESC Strategic International Equity Fund is measured
against the Morgan Stanley Capital International Europe, Australia and Far
East (EAFE) Index which generally represents the performance of the major
stock markets in those regions. The index is unmanaged and does not reflect
the deduction of fees associated with a mutual fund, such as investment
management and fund accounting fees. The performance of the Fund reflects
the deduction of fees for these value-added services.
(3) The Lipper Global Fund Index invests at least 25% of its portfolio in
securities traded outside of the U.S. and may own U.S. securities as well.
<PAGE> 8
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP FUND(1)
Size and "sizzle" were what counted in the market during the year ended
March 31, 1999. Throughout the period, sentiment overwhelmingly favored large
capitalization growth stocks and those that were internet-related. Virtually all
other sectors suffered from neglect -- and the small cap sector was among the
most neglected. Moreover, given investors' concerns with safety and liquidity,
the smaller a company's capitalization was, the bleaker the situation throughout
the year.
Consequently, the period was another frustrating one. Focused on companies
with strong fundamentals, solid long-term prospects and earnings growing at a
rate of 25% or better, the portfolio held positions in some 50 companies. The
average market cap of these holdings, however, was approximately $368 million
and that was the only number that seemed to count. So, for the twelve months
ended the Fund produced a total return of -24.97% (Class A without sales
charge). With an average market cap approximately twice that of our portfolio,
the Funds benchmark, the Russell 2000(2) produced a total return of -17.27% for
the same period.
PERSEVERANCE WINS OUT
All of which brings us to where we are today -- focused on solid values
that, given the environment, are now at low valuations. In fact, the average
small cap is still some 50% below its high of last spring. We are hopeful about
the prospects for small caps, but when the tide will turn and precisely when
investors will recognize and reward the values presented here is impossible to
predict.
As of March 31, 1999, the top five holdings in the fund's portfolio were:
Astec Industries (5% of the portfolio's assets), Intrawest (3%), Electro
Scientific (3%), Allied Capital Corporation (3%) and Speedway Motorsports, Inc.
(3%).*
* The Fund's portfolio composition is subject to change.
<PAGE> 9
ESC STRATEGIC FUNDS, INC. -- (CONTINUED)
[SMALL CAP CLASS A GRAPH]
<TABLE>
<CAPTION>
SMALL CAP FUND CLASS LIPPER SMALL CAP NASDAQ INDUSTRIAL
A* FUND INDEX 3 RUSSELL 2000 INDEX 2 INDEX 2
-------------------- ---------------- -------------------- -----------------
<S> <C> <C> <C> <C>
6/8/94 9417.00 10000.00 10000.00 10000.00
3/95 10987.00 11069.00 10462.00 10746.00
3/96 16027.00 14572.00 13269.00 13736.00
3/97 18430.00 14288.00 13745.00 13644.00
3/98 25920.00 20089.00 19289.00 18252.00
3/99 19449.00 17143.00 15958.00 18587.00
</TABLE>
* Reflects maximum sales charge of 4.50%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (6/8/94)
-------- ------- ---------------
<S> <C> <C> <C>
Small Cap Fund*..................... 19,449 -28.33% 14.83%
Russell 2000 w/out Income(2)........ 15,958 -17.27% 10.15%
NASDAQ Industrials Index(2)......... 18,587 1.83% 13.68%
Lipper Small Cap Fund Index(3)...... 17,143 -14.67% 11.80%
</TABLE>
[SMALL CAP FUND CLASS D GRAPH]
<TABLE>
<CAPTION>
SMALL CAP FUND CLASS LIPPER SMALL CAP NASDAQ INDUSTRIAL
D** FUND INDEX 3 RUSSELL 2000 INDEX 2 INDEX 2
-------------------- ---------------- -------------------- -----------------
<S> <C> <C> <C> <C>
6/8/94 9714.00 10000.00 10000.00 10000.00
3/95 11303.00 11069.00 10462.00 10746.00
3/96 16411.00 14572.00 13269.00 13736.00
3/97 18800.00 14288.00 13745.00 13644.00
3/98 26417.00 20089.00 19289.00 18252.00
3/99 19707.00 17143.00 15958.00 18587.00
</TABLE>
** Reflects maximum sales charge of 1.50%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (6/8/94)
-------- ------- ---------------
<S> <C> <C> <C>
Small Cap Fund**.................... 19,707 -26.51% 15.14%
Russell 2000 w/out Income(2)........ 15,958 -17.27% 10.15%
NASDAQ Industrials Index(2)......... 18,587 1.83% 13.68%
Lipper Small Cap Fund Index(3)...... 17,143 -14.67% 11.80%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return
and net asset value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) Small capitalization funds typically carry additional risks since smaller
companies generally have a higher risk of failure.
(2) The performance of the ESC Small Cap Fund is measured against the Russell
2000 Index which is generally representative of the performance of small
capitalization stocks and the Nasdaq Industrials Index which is a
price-weighted index that is representative of small capitalization stocks
which are classified as industrial companies. These indices are unmanaged
and do not reflect the expenses associated with a mutual fund, such as
investment management and fund accounting fees. The Fund's performance
reflects the deduction of fees for these value-added services.
(3) The Lipper Small Cap Fund Index is by prospectus language or portfolio
practice invested primarily in companies with market capitalizations less
than $1 billion at the time of purchase.
<PAGE> 10
ESC STRATEGIC FUNDS, INC. -- (CONTINUED)
ESC STRATEGIC APPRECIATION FUND
Due to investors' focus on safety and liquidity, small cap stocks took a
harder hit than larger caps in the tumultuous markets during the first half of
the year ended March 31, 1999. Then, in the second half, the sector rebounded.
Nevertheless, much as in the first half, market sentiment continued to favor the
biggest and best known names. Moreover, in what was essentially a two-tiered
market, investors were more willing to pay the price to chase the largest of
large caps higher. In our opinion, virtually all other stocks were ignored.
Consequently, at the end of the period, small caps continued to trade at a
significant discount to the larger cap issues.
Moreover, in general, the smaller the capitalization of a company, the
weaker its stock performance -- regardless of the strength of its balance sheet,
earnings growth and long-term prospects. As a result, despite the fact that many
of the companies we hold positions in strengthened operationally and have growth
rates in excess of the average larger capitalization issues, the period was a
discouraging one. For the twelve months ended March 31, 1999, the Fund produced
a total return of -22.43% (Class A without the sales charge), versus a return of
0.45% for its benchmark, the S&P MidCap 400(1).
REAL COMPANIES, REAL EARNINGS, OUTSTANDING POTENTIAL
Clearly, momentum rather than fundamentals has driven stock prices over the
past year, much to the detriment of small cap issues. But the pendulum should
swing. Looking at the frenzied activity among internet stocks and the fact that
the valuation gap between large and small cap stocks has widened to a historic
high, we hopefully have reached near this point. In our opinion, sentiment will
change so that investors once again value fundamentals rather than momentum.
Given the strength of our holdings, and particularly strong growth rates in
the near future and one year out, we believe the portfolio is well-positioned
for a shift in investor sentiment. Moreover, we continue to capitalize on the
environment. Many smaller technology companies, specifically well-established
software companies, are now astonishingly priced. Also, benefiting from the low
interest rate environment, consumer cyclical and housing as well as
housing-related stocks offer investors many attractive long-term opportunities.
As of March 31, 1999 the top five holdings in the Fund's portfolio were:
Elf Aquitane (3% of the portfolio assets), Telefonos De Mexico (2%), North
Central Bancshares, Inc. (2%), SDL, Inc. (2%) and Hutchinson Whampoa (2%).*
* The Fund's portfolio composition is subject to change
<PAGE> 11
ESC STRATEGIC FUNDS, INC. -- (CONTINUED)
[APPRECIATION FUND CLASS A GRAPH]
<TABLE>
<CAPTION>
LIPPER CAPITAL
APPRECIATION FUND APPRECIATION FUND S&P MIDCAP 400 INDEX S&P 500 STOCK INDEX
CLASS A* INDEX 2 1 1
----------------- ----------------- -------------------- -------------------
<S> <C> <C> <C> <C>
7/6/94 9685.00 10000.00 10000.00 10000.00
3/95 10249.00 11301.00 11253.00 11511.00
3/96 12819.00 14667.00 14459.00 15200.00
3/97 14646.00 15258.00 15994.00 18206.00
3/98 21490.00 21618.00 23838.00 26963.00
3/99 16669.00 24103.00 23945.00 31940.00
</TABLE>
* Reflects maximum sales charge of 4.50%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (7/6/94)
-------- ------- ---------------
<S> <C> <C> <C>
Appreciation Fund*.................. 16,669 -25.90% 11.40%
S&P Midcap 400 Index(1)............. 23,945 0.45% 20.18%
S&P 500 Stock Index(1).............. 31,940 18.46% 27.70%
Lipper Capital Appreciation Fund
Index(2).......................... 24,103 11.50% 20.35%
</TABLE>
[SMALL CAP II FUND CLASS D GRAPH]
<TABLE>
<CAPTION>
LIPPER CAPITAL
APPRECIATION FUND APPRECIATION FUND S&P MIDCAP 400 INDEX S&P 500 STOCK INDEX
CLASS D** INDEX 2 1 1
----------------- ----------------- -------------------- -------------------
<S> <C> <C> <C> <C>
7/6/94 9990.00 10000.00 10000.00 10000.00
3/95 10553.00 11301.00 11253.00 11511.00
3/96 13114.00 14667.00 14459.00 15200.00
3/97 14925.00 15258.00 15994.00 18206.00
3/98 21904.00 21618.00 23838.00 26963.00
3/99 16904.00 24103.00 23945.00 31940.00
</TABLE>
** Reflects maximum sales charge of 1.50%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (7/6/94)
-------- ------- ---------------
<S> <C> <C> <C>
Appreciation Fund**................. 16,904 -24.00% 11.73%
S&P Midcap 400 Index(1)............. 23,945 0.45% 20.18%
S&P 500 Stock Index(1).............. 31,940 18.46% 27.70%
Lipper Capital Appreciation Fund
Index(2).......................... 24,103 11.50% 20.35%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return
and net asset value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) The performance of the ESC Strategic Appreciation Fund is measured against
the Standard & Poor's Mid-Cap 400 Index and the Standard & Poor's 500 Stock
Index which generally is representative of the U.S. stock market as a whole.
Both indices are unmanaged and do not reflect the expenses associated with a
mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services.
(2) The Lipper Capital Appreciation Fund Index is by prospectus or portfolio
practice invested primarily in companies with market capitalizations less
than $5 billion at the time of purchase.
<PAGE> 12
ESC STRATEGIC FUNDS, INC. -- (CONTINUED)
ESC STRATEGIC SMALL CAP II FUND(1)
The year ended March 31, 1999 was a very strange one for small cap
investors. During the period, the Dow Jones Industrial average crested 10,000
and the valuations of larger capitalization companies moved to record
levels -- despite a softening profit picture and, in many cases, exposure to
turmoil in markets abroad. The vast majority of small caps, on the other hand,
continued to slump -- despite their extremely attractive valuations, rapidly
increasing earnings and relative insulation from events overseas. But, the
strength of any one company's balance sheet was simply not as important as its
size in investors' eyes.
Consequently, small caps in general lagged the market -- and those
investing in smaller small caps took the hardest hits. With holdings in some 65
to 70 companies with market capitalizations averaging approximately $493
million, the Fund was no exception. For the year ended March 31, 1999, the Fund
posted a total return of -29.75% (Class A without the sales charge). Focused on
the performance of companies slightly larger, the Funds benchmark, the Russell
2000 Index(2), posted a total return of -17.27% for the same period.
OPPORTUNITIES ARE BREATHTAKING
While it is difficult to remember in the face of investors' apparently
unlimited enthusiasm for large caps, all market cycles eventually end. The large
caps simply will not reign supreme forever. Currently, while their growth is
projected to be flat in the coming year, these stocks are selling at some 30
times projected earnings. On the other hand, small cap issues held in our
portfolio are, on average, selling at 15 times projected earnings -- and are
expected to grow approximately 27% over the coming year.+ As a result, we are
hopeful about the prospects for small caps, but, we do believe that sentiment
will shift, and probably sooner than later.
As of March 31, 1999, the top five holdings in the fund's portfolio were:
Electro Scientific (3% of the portfolio's assets), Astec Industries (3%),
Speedway Motor Sports, Inc. (3%), Acclaim Entertainment, Inc. (3%) and NCI
Building Systems, Inc. (2%).*
+ Source: WWW.IBES-Institutional Brokers Estimate System.com.
* The Fund's portfolio composition is subject to change.
<PAGE> 13
ESC STRATEGIC FUNDS, INC. -- (CONTINUED)
[SMALL CAP II CLASS A GRAPH]
<TABLE>
<CAPTION>
SMALL CAP II FUND CLASS LIPPER SMALL CAP FUND
A* INDEX3 RUSSELL 2000 INDEX2
----------------------- --------------------- -------------------
<S> <C> <C> <C>
1/28/97 9589.00 10000.00 10000.00
3/97 9207.00 8856.00 9272.00
3/98 13711.00 12452.00 13012.00
3/99 9632.00 10625.00 10766.00
</TABLE>
* Reflects maximum sales charge of 4.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------------
VALUE AT SINCE INCEPTION
3/31/99 1 YEAR (1/28/97)
-------- ------- ---------------
<S> <C> <C> <C>
Small Cap II Fund*.................. 9,632 -32.89% -1.71%
Russell 2000 Index w/out
Income(2)......................... 10,766 -17.27% 3.46%
Lipper Small Cap Fund Index(3)...... 10,625 -14.67% 2.84%
</TABLE>
[SMALL CAP II FUND CLASS D GRAPH]
<TABLE>
<CAPTION>
SMALL CAP II FUND CLASS LIPPER SMALL CAP FUND
D** INDEX3 RUSSELL 2000 INDEX2
----------------------- --------------------- -------------------
<S> <C> <C> <C>
1/28/97 9892.00 10000.00 10000.00
3/97 9488.00 8856.00 9272.00
3/98 14073.00 12452.00 13012.00
3/99 9844.00 10625.00 10766.00
</TABLE>
** Reflects maximum sales charge of 1.50%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------
VALUE AT SINCE INCEPTION
3/31/98 1 YEAR (1/28/97)
--------- ------- ---------------
<S> <C> <C> <C>
Small Cap II Fund**................ 9,844 -31.11% -0.72%
Russell 2000 Index w/out
Income(2)........................ 10,766 -17.27% 3.46%
Lipper Small Cap Fund Index(3)..... 10,625 -14.67% 2.84%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return
and net asset value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) Small capitalization funds typically carry additional risks since smaller
companies generally have a higher risk of failure.
(2) The performance of the ESC Small Cap II Fund is measured against the Russell
2000 Index which is generally representative of the performance of small
capitalization stocks. The index is unmanaged and does not reflect the
expenses associated with a mutual fund such as investment management and
fund accounting fees. The Fund's performance reflects the deduction of fees
for these value-added services.
(3) The Lipper Small Cap Fund Index is by prospectus language or Portfolio
Practice invested primarily in companies with market capitalizations less
than $1 billion at the time of purchase.
<PAGE> 14
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments -- March 31, 1999
<TABLE>
<CAPTION>
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 83.7%
BEVERAGES -- 1.7%
B1/B+ Canandaigua Brands,
Inc., 8.50%,
3/1/2009.......... $132,000 $ 134,640
-----------
CABLE -- 2.8%
B1/B+ Adelphia
Communications,
9.88%, 3/1/2007... 200,000 218,000
-----------
CONSUMER GOODS & SERVICES -- 2.5%
Ba3/B+ Finlay Fine Jewelry
Corp., 8.38%,
5/1/2008.......... 200,000 196,000
-----------
ENTERTAINMENT -- 3.7%
B2/B President Casinos,
Inc., 13.00%,
9/15/2001,
Callable 9/15/1999
@ 102............. 220,000 193,600
B3/B Regal Cinemas, Inc.,
9.50%, 6/1/2008,
Callable 6/1/2003
@ 104.75.......... 93,000 95,093
-----------
288,693
-----------
FOOD PRODUCTS -- 7.6%
B1/B+ Chiquita Brands,
9.63%,
1/15/2004......... 250,000 257,812
B3/B+ Fleming Co., 10.68%,
7/31/2007,
Callable 7/31/2002
@ 105.31.......... 200,000 184,500
B3/B Packaged Ice, Inc.,
9.75%, 2/1/2005,
Callable 2/1/2002
@ 104.875......... 148,000 148,000
-----------
590,312
-----------
GAMING -- 2.6%
B2/B Hollywood Park,
Inc., 9.50%,
8/1/2007.......... 200,000 205,000
-----------
</TABLE>
<TABLE>
<CAPTION>
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
<S> <C> <C> <C>
GENERAL INDUSTRIES &
MANUFACTURING -- 9.9%
B3/B Envirosource, Inc.,
9.75%,
6/15/2003......... $260,000 $ 208,000
B3/B- International Wire
Group, 11.75%,
6/1/2005.......... 250,000 264,375
B1/B+ Nortek, Inc., 9.13%,
9/1/2007, Callable
9/1/2002
@ 104.56.......... 290,000 300,874
-----------
773,249
-----------
HEALTH CARE -- 2.4%
B1/B+ NBTY, Inc., 8.63%,
9/15/2007,
Callable 9/15/2002
@ 104.313......... 200,000 187,000
-----------
INDUSTRIAL GOODS & SERVICES -- 2.1%
Nr/Nr Premiere
Technologies,
5.75%, 7/1/2004... 250,000 164,375
-----------
MANUFACTURING -- CONSUMER
GOODS -- 3.8%
B2/B Applied Extrusion
Tech., 11.50%,
4/1/2002.......... 200,000 204,000
B2/B Polymer Group, Inc.,
9.00%, 7/1/2007... 91,000 92,138
-----------
296,138
-----------
MEDIA -- CABLE -- 7.0%
B1/B Helicon Group, Inc.,
11.00%,
11/1/2003......... 250,000 263,438
B2/B Intermedia Capital
Partners, 11.25%,
8/1/2006.......... 250,000 281,250
-----------
544,688
-----------
</TABLE>
See accompanying notes to financial statements.
1
<PAGE> 15
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
MEDIA -- NON CABLE -- 5.3%
B3/B- Allbritton
Communications,
9.75%,
11/30/2007........ $185,000 $ 196,794
B3/B- Gray Communications
Systems, 10.63%,
10/1/2006,
Callable 10/1/2001
@ 105.31.......... 200,000 212,000
-----------
408,794
-----------
OIL & GAS -- 5.0%
B1/BB- Cliffs Drilling Co.,
10.25%,
5/15/2003......... 200,000 192,000
B2/B- Plains Resources,
Inc., 10.25%,
3/15/2006......... 200,000 198,000
-----------
390,000
-----------
PAPER PRODUCTS -- 2.5%
B2/B- Repap New Brunswick,
9.00%, 6/1/2004,
Callable 6/1/2002
@ 104.5........... 200,000 193,500
-----------
RETAIL -- 2.7%
B3/B- Tropical Sportswear
International,
11.00%,
6/15/2008......... 200,000 209,500
-----------
STEEL/IRON -- 2.5%
B2/B Weirton Steel Corp.,
11.38%, 7/1/2004,
Callable 7/1/2002
@ 105.69.......... 200,000 192,000
-----------
</TABLE>
<TABLE>
<CAPTION>
CREDIT PRINCIPAL
RATING # AMOUNT/ MARKET
(UNAUDITED) SHARES VALUE
- ----------- --------- ------
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 9.3%
B2/B Paging Network,
10.00%,
10/15/2008,
Callable
10/15/2001 @ 105.. $200,000 $ 170,000
Nr/Nr Pathnet, Inc.,
12.25%, 4/15/2008,
Callable 4/15/2003
@ 106.125......... 250,000 135,000
B3/B- Rural Cellular
Corp., 9.63%,
5/15/2008,
Callable 5/15/2003
@ 104.813......... 200,000 208,500
B3/B- USA Mobile
Communication,
9.50%, 2/1/2004,
Callable 2/1/1999
@ 104.75.......... 250,000 209,999
-----------
723,499
-----------
TEXTILES -- 6.0%
B3/B Hartmarx Corp.,
10.88%,
1/15/2002......... 250,000 257,500
B2/B+ Pillowtex Corp.,
10.00%,
11/15/2006........ 200,000 209,500
-----------
467,000
-----------
TRANSPORTATION -- 4.3%
Ba3/BBB Greyhound Lines,
11.50%,
4/15/2007......... 290,000 333,500
-----------
TOTAL CORPORATE
OBLIGATIONS....... 6,515,888
-----------
PREFERRED STOCKS -- 2.7%
PUBLISHING & PRINTING -- 2.7%
B2/B Primedia Corp.,..... 200,000 208,000
-----------
TOTAL PREFERRED
STOCKS............ 208,000
-----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 16
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INCOME FUND
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT/ MARKET
SHARES VALUE
--------- ------
<S> <C> <C> <C>
COMMON STOCKS -- 0.0%
OIL & GAS TRANSMISSION -- 0.0%
Star Gas Partner,
L.P. ............. 107 $ 856
-----------
TOTAL COMMON
STOCKS............ 856
-----------
RIGHTS & WARRANTS -- 0.0%
WARRANT -- 0.0%
Pathnet Warrants.... 250 3
-----------
TOTAL RIGHTS &
WARRANTS.......... 3
-----------
SHORT-TERM INVESTMENTS -- 12.1%
CASH SWEEP ACCOUNT -- 12.1%
Union Bank of
California........ $940,355 940,355
-----------
TOTAL SHORT-TERM
INVESTMENTS....... 940,355
-----------
TOTAL INVESTMENTS -- 98.5%
(COST $7,666,404)(1)........... 7,665,102
OTHER ASSETS AND LIABILITIES
(NET) -- 1.5%................ 113,344
-----------
NET ASSETS -- 100.0%.......... $ 7,778,446
===========
</TABLE>
Percentages indicated are based on net assets of $7,778,446.
(1) Cost for book and federal income tax purposes were substantially the same as
of March 31, 1999. Gross unrealized appreciation and depreciation on
investment securities, based on cost for Federal income tax purposes is as
follows:
<TABLE>
<S> <C>
Unrealized appreciation................. $ 145,712
Unrealized depreciation................. (147,014)
---------
Net unrealized depreciation............. $ (1,302)
=========
</TABLE>
# See page 17 for Credit Ratings.
See accompanying notes to financial statements.
3
<PAGE> 17
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INTERNATIONAL EQUITY FUND**
Portfolio of Investments -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---------- ----------
<C> <S> <C> <C>
COMMON STOCKS -- 92.5%
AEROSPACE & MILITARY TECHNOLOGY -- 0.6%
8,000 British Aerospace PLC... $ 64,724 $ 53,466
---------- ----------
BANKING -- 10.7%
4,000 Abbey National PLC...... 74,441 82,265
11,816 Allied Irish Banks
PLC................... 56,263 203,144
14,000 National Australia Bank
Ltd. ................. 194,318 253,294
14,000 Banco Frances Del Rio de
La Plata, S.A., ADR... 259,020 248,500
8,000 Bank of Scotland........ 81,392 106,286
13,000 Sanwa Bank.............. 103,184 141,054
---------- ----------
768,618 1,034,543
---------- ----------
BANKING & FINANCIAL SERVICES -- 1.5%
2,200 Alpha Credit Bank....... 96,466 145,973
---------- ----------
BEVERAGES -- 3.8%
12,000 Fomento Economico,
ADR................... 353,955 371,250
---------- ----------
BROADCASTING & PUBLISHING -- 2.0%
12,993 Elsevier ORD............ 210,220 193,573
---------- ----------
BUILDING MATERIALS -- 2.3%
2,504 Lafarge................. 261,153 225,724
---------- ----------
ENERGY -- 2.8%
5,000 British Petroleum Co.,
PLC................... 73,267 85,235
25,000 Companhia Paranaense De
Energia-Copel ADR..... 256,532 187,500
---------- ----------
329,799 272,735
---------- ----------
ENGINEERING -- 3.2%
1,583 Mannesmann AG........... 164,692 202,172
8,000 Nippon Comsys Co. ...... 99,772 112,134
---------- ----------
264,464 314,306
---------- ----------
FINANCIAL SERVICES -- 1.6%
10,000 Lloyds TSB Group PLC.... 127,356 152,551
---------- ----------
FOOD PRODUCTS -- 0.9%
6,000 Cadbury Schweppes PLC,
ORD................... 56,913 87,075
---------- ----------
FOREST PRODUCTS & PAPERS -- 1.4%
3,000 Uni-Charm Corp. ........ 129,615 134,763
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---------- ----------
<C> <S> <C> <C>
HEALTH & PERSONAL CARE -- 1.3%
4,000 Yamanouchi
Pharmaceutical Co.,
Ltd. ................. $ 132,902 $ 126,657
---------- ----------
INDUSTRIAL -- 2.7%
6,000 Bridgestone Corp. ORD... 141,584 153,002
16,000 Inax Corp. ............. 61,612 108,891
---------- ----------
203,196 261,893
---------- ----------
INDUSTRIAL HOLDING COMPANY -- 3.1%
23,000 Hutchison Whampoa
Ltd. ................. 110,782 181,043
3,000 Sonae
Investimentos-Sociedade
Gestora de
Paticipacoes Sicais,
S.A. ................. 91,573 116,854
---------- ----------
202,355 297,897
---------- ----------
INSURANCE -- 10.2%
2,841 Aegon N.V. ............. 255,615 259,324
262 Allianz AG Holdings..... 64,757 79,764
1,618 AXA..................... 84,600 214,503
183 Marschollek
Lautenshlaeger........ 65,073 98,979
18,500 Norwich Union PLC....... 126,605 128,268
324 Zurich Allied AG........ 213,894 207,296
---------- ----------
810,544 988,134
---------- ----------
LEISURE & GAMING -- 0.7%
15,000 Ladbroke Group PLC,
ORD................... 57,971 67,316
---------- ----------
MANUFACTURING -- 0.6%
3,975 Smiths Industries PLC... 51,069 58,265
---------- ----------
MANUFACTURING -- CONSUMER
GOODS -- 2.4%
3,000 Fuji Photo Film Ltd. ... 108,902 113,485
9,000 Olympus Optical ORD..... 100,015 118,551
---------- ----------
208,917 232,036
---------- ----------
MERCHANDISING -- 0.6%
379 Pinault Printemps
Redo.................. 59,367 60,474
---------- ----------
OFFICE/BUSINESS EQUIPMENT -- 1.5%
9,000 Fujitsu Ltd. ........... 98,038 144,541
---------- ----------
OIL & GAS TRANSMISSION -- 0.9%
4,000 Magyar Olaj-Es Gazipari
Reszvenytar -- GDR.... 65,000 85,000
---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 18
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC INTERNATIONAL EQUITY FUND**
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---------- ----------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL/GAS -- 1.8%
12,800 Petroleo Brasileiro
S.A., ADR............. $ 180,800 $ 178,299
---------- ----------
PHARMACEUTICALS -- 3.8%
2,520 Gedeon Richter, GDR..... 113,605 82,530
85 Novartis AG............. 92,051 137,882
10,000 SmithKline Beecham
PLC................... 113,570 146,336
---------- ----------
319,226 366,748
---------- ----------
PUBLISHING & PRINTING -- 3.3%
4,400 Pearson PLC............. 98,343 100,222
5,650 VNU-Verenigde
Nederlandse
Uitgeversbedrijven.... 71,300 220,198
---------- ----------
169,643 320,420
---------- ----------
REAL ESTATE -- 1.4%
27,000 City Development
Ltd. ................. 54,788 140,585
---------- ----------
RETAIL -- 3.5%
15,000 Brasil Distilevel ADR... 243,932 219,375
16,000 Makro Atacadista S.A.
ADR................... 144,750 121,280
---------- ----------
388,682 340,655
---------- ----------
RETAIL -- GENERAL MERCHANDISE -- 4.0%
25,000 Cifra SA ADR............ 303,125 386,835
---------- ----------
TELECOMMUNICATION EQUIPMENT -- 2.2%
2,000 Matsushita
Communications........ 62,753 135,270
5,800 SPT Telekom A.S. ....... 71,794 77,585
---------- ----------
134,547 212,855
---------- ----------
TELECOMMUNICATION SERVICES -- 3.3%
36,000 China Telecom Ltd. ..... 55,327 59,926
4,500 Hellenic
Telecommunication
Organization S.A. .... 105,829 109,123
15 Nippon Telehone &
Telegraph............. 128,149 146,922
---------- ----------
289,305 315,971
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL/ MARKET
SHARES COST VALUE
- ---------- ---------- ----------
<C> <S> <C> <C>
TELECOMMUNICATIONS -- 14.4%
7,600 British
Telecommunications
PLC................... $ 95,728 $ 124,036
2,000 Portugal Telecom
S.A. ................. 43,443 89,584
6,800 Telecom Argentina,
ADR*.................. 230,682 186,575
30,000 Telecom Corp. of New
Zealand Ltd. ......... 111,520 145,911
44,426 Telecom Italia Mobile
SpA................... 172,031 298,801
28,296 Telecom Italia SpA...... 191,823 300,591
3,653 Telefonica de Espana.... 176,339 154,949
5,100 Vodafone Group ORD...... 96,370 94,761
---------- ----------
1,117,936 1,395,208
---------- ----------
TOTAL COMMON STOCKS..... 7,510,694 8,965,748
---------- ----------
PREFERRED STOCKS -- 2.3%
ELECTRIC UTILITY -- 2.3%
10,000 Companhia Energetica de
Minas Gerais, ADR..... 232,813 223,026
---------- ----------
TOTAL PREFERRED
STOCKS................ 232,813 223,026
---------- ----------
SHORT TERM INVESTMENTS -- 0.5%
CASH SWEEP ACCOUNT -- 0.5%
$47,976 Union Bank of
California............ 47,976 47,976
---------- ----------
TOTAL SHORT TERM
INVESTMENTS........... 47,976 47,976
---------- ----------
TOTAL INVESTMENTS --
95.3%................. $7,791,483 9,236,750
==========
OTHER ASSETS AND
LIABILITIES (NET) --
4.7%.................. 459,093
----------
NET ASSETS -- 100.0%.... $9,695,843
==========
Percentages indicated are based on net assets of $9,695,843.
(1) Cost for book and federal income tax purposes were
substantially the same as of March 31, 1999. Gross
unrealized appreciation and depreciation on investment
securities, based on cost for Federal income tax
purposes is as follows:
</TABLE>
<TABLE>
<S> <C>
Unrealized appreciation.......... $1,759,493
Unrealized depreciation.......... (314,226)
----------
Net unrealized appreciation...... $1,445,267
==========
</TABLE>
* Represents non-income producing security.
** See page 17 for Concentration by Country.
ADR--American Depository Receipts.
GDR--Global Depository Receipts/Shares.
ORD--Ordinary.
PLC--Public Limited Company.
See accompanying notes to financial statements.
5
<PAGE> 19
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP FUND
Portfolio of Investments -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS -- 96.7%
AEROSPACE -- 1.4%
100,000 Armor Holdings,
Inc.
Delaware*....... $ 1,162,250 $ 1,368,750
------------ ------------
AUTO-RELATED -- 5.6%
104,400 Copart, Inc.*..... 1,468,125 2,166,300
70,000 Sonic Automotive,
Inc.*........... 617,320 1,085,000
132,000 Wynn's
International,
Inc. ........... 1,690,179 2,301,750
------------ ------------
3,775,624 5,553,050
------------ ------------
BUILDING MATERIALS -- 4.4%
204,800 Dal-Tile
International,
Inc.*........... 2,436,146 1,856,000
301,100 International
Comfort Products
Corp.*.......... 1,712,803 2,371,162
------------ ------------
4,148,949 4,227,162
------------ ------------
BUSINESS SERVICES -- 1.8%
111,600 Aaron Rents,
Inc.(a)......... 1,527,676 1,743,750
------------ ------------
COMMERCIAL SERVICES -- 7.0%
180,000 Group Maintenance
America
Corp.*.......... 2,520,000 2,047,500
90,000 Regis Corp. ...... 1,410,250 2,396,250
143,600 Wackenhut Corp.,
Class B......... 3,161,209 2,441,198
------------ ------------
7,091,459 6,884,948
------------ ------------
COMPUTER EQUIPMENT -- 1.7%
55,000 Apex PC Solutions,
Inc.*........... 701,043 766,563
125,200 Maxtor Corp.*..... 1,515,375 884,225
------------ ------------
2,216,418 1,650,788
------------ ------------
COMPUTER SOFTWARE -- 1.7%
130,000 Activision,
Inc.*........... 1,589,999 1,608,750
------------ ------------
COMPUTERS -- 2.0%
81,600 Zebra Technologies
Corp.*.......... 2,177,432 1,938,000
------------ ------------
CONSTRUCTION -- 2.6%
83,600 Benchmark
Electronics,
Inc.*........... 1,265,287 2,508,000
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COSMETICS/PERSONAL CARE -- 1.0%
29,600 Chattem, Inc.*.... $ 1,025,571 $ 925,000
------------ ------------
DISTRIBUTION -- 0.7%
113,700 Pameco Corp.*..... 1,919,021 653,775
------------ ------------
ELECTRICAL & ELECTRONICS -- 3.1%
64,200 Electro Scientific
Industries,
Inc.*........... 1,739,925 2,985,300
------------ ------------
ELECTRONIC COMPONENTS/ INSTRUMENTS -- 6.1%
100,000 Kulicke & Soffa
Industries,
Inc.*........... 1,661,087 2,525,000
125,300 PCD, Inc.*........ 2,341,738 1,135,531
36,100 Plexus Corp.*..... 746,521 1,006,287
193,000 Power-One,
Inc.*........... 2,448,748 1,302,750
------------ ------------
7,198,094 5,969,568
------------ ------------
ELECTRONICS -- 5.7%
150,000 ADE Corp.*(a)..... 3,153,936 1,425,000
192,100 FEI Co.*(a)....... 1,998,441 1,608,838
78,500 Power
Integrations,
Inc.*(a)........ 858,532 2,492,375
------------ ------------
6,010,909 5,526,213
------------ ------------
ENTERTAINMENT -- 2.6%
61,700 Speedway
Motorsports,
Inc.*........... 1,397,043 2,545,125
------------ ------------
ENVIRONMENTAL -- 2.5%
146,200 Newpark Resources,
Inc.*........... 1,590,485 1,059,950
100,000 Safety Kleen
Corp.*.......... 1,475,684 1,325,000
------------ ------------
3,066,169 2,384,950
------------ ------------
FINANCIAL SERVICES -- 1.7%
100,000 Amresco,
Inc.*(a)........ 1,884,019 768,750
16,340 Finova Group,
Inc.(a)......... 1,140,197 847,638
------------ ------------
3,024,216 1,616,388
------------ ------------
FOOD -- WHOLESALE -- 2.4%
100,000 United Natural
Foods, Inc.*.... 2,118,750 2,337,500
------------ ------------
FOOD SERVING -- 1.2%
105,666 Worthington Foods,
Inc. ........... 1,736,945 1,201,951
------------ ------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 20
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP FUND
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH & PERSONAL CARE -- 0.8%
120,000 Natrol,
Inc.*(a)........ $ 1,690,000 $ 727,500
------------ ------------
HEALTH CARE -- 1.2%
50,000 United Payors &
United
Providers,
Inc.*........... 993,500 1,153,125
------------ ------------
INSURANCE -- 2.1%
50,000 FPIC Insurance
Group, Inc.*.... 1,739,375 2,075,000
------------ ------------
INVESTMENT COMPANY -- 2.7%
139,800 Allied Capital
Corp. .......... 3,022,522 2,568,825
------------ ------------
MACHINE -- DIVERSIFIED -- 1.1%
167,600 CMI Corp., Class
A............... 1,241,681 1,047,500
------------ ------------
MACHINERY & EQUIPMENT -- 1.2%
20,000 Nordson Corp. .... 1,101,876 1,115,000
------------ ------------
MANUFACTURING -- 1.5%
108,100 Asyst
Technologies,
Inc.*........... 1,722,975 1,486,375
------------ ------------
MANUFACTURING -- CAPITAL GOODS -- 4.8%
150,000 Astec Industries,
Inc.*........... 2,490,000 4,631,250
------------ ------------
MEDICAL SUPPLIES -- 3.2%
130,000 Endosonics
Corp.*.......... 889,375 845,000
100,000 Res-Care,
Inc.*(a)........ 1,001,264 2,256,250
------------ ------------
1,890,639 3,101,250
------------ ------------
METALS -- DIVERSIFIED -- 1.2%
75,000 Quanex Corp.(a)... 2,209,864 1,162,500
------------ ------------
NUTRITION & VITAMIN PRODUCTS -- 1.4%
143,800 Twinlab Corp.*.... 1,902,932 1,348,125
------------ ------------
OIL/GAS EQUIPMENT -- 1.1%
90,000 National-Oilwell,
Inc.*........... 1,782,330 1,040,625
------------ ------------
OIL/GAS SERVICES -- 1.2%
10,000 Rowan Cos.,
Inc.*........... 142,459 126,875
71,500 Veritas DGC,
Inc.*........... 1,386,038 1,014,406
------------ ------------
1,528,497 1,141,281
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
PRINCIPAL COST VALUE
- --------- ---- ------
<C> <S> <C> <C>
PHARMACEUTICALS -- 3.8%
140,000 Dura
Pharmaceuticals,
Inc.*(a)........ $ 1,444,627 $ 1,977,500
57,300 Medicis
Pharmaceutical
Corp., Class
A*.............. 1,485,741 1,719,000
------------ ------------
2,930,368 3,696,500
------------ ------------
REAL ESTATE -- 3.2%
183,700 Intrawest
Corp. .......... 3,243,714 3,099,938
------------ ------------
REAL ESTATE INVESTMENT TRUST -- 2.0%
111,750 Prison Realty
Corp. .......... 3,052,135 1,948,641
------------ ------------
RETAIL -- 2.3%
311,000 Compucom Systems,
Inc.*........... 2,537,532 913,563
37,200 Whole Foods
Market,
Inc.*(a)........ 1,195,050 1,278,750
------------ ------------
3,732,582 2,192,313
------------ ------------
RETAIL -- DEPARTMENT STORE -- 0.5%
55,000 Elder-Beerman
Stores Corp.*... 1,029,688 474,375
------------ ------------
RETAIL -- GENERAL MERCHANDISE -- 1.3%
100,000 Cash America
International,
Inc. ........... 1,162,901 1,287,500
------------ ------------
RETAIL -- SPECIALTY LINE -- 2.0%
100,000 Rexall Sundown,
Inc.*(a)........ 1,530,145 1,918,750
------------ ------------
SERVICES -- 1.9%
67,800 Kroll-O'Gara
Co.*............ 1,579,438 1,839,075
------------ ------------
TECHNOLOGY -- 1.0%
110,000 Datastream
Systems,
Inc.*........... 1,353,813 948,750
------------ ------------
TOTAL COMMON
STOCKS.......... 97,122,712 93,633,166
------------ ------------
SHORT TERM INVESTMENTS -- 4.3%
CASH SWEEP ACCOUNT -- 4.3%
$4,180,116 Union Bank of
California...... 4,180,116 4,180,116
------------ ------------
TOTAL SHORT TERM
INVESTMENTS..... 4,180,116 4,180,116
------------ ------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 21
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP FUND
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
PRINCIPAL COST VALUE
- --------- ---- ------
<C> <S> <C> <C>
SHORT-TERM SECURITIES PURCHASED WITH CASH
COLLATERAL -- 12.9%
FLOATING RATE NOTE -- 2.6%
$2,500,000 Merrill Lynch &
Co., 5.40%,
2/28/2000,
MTN(b).......... $ 2,500,000 $ 2,500,000
------------ ------------
REPURCHASE AGREEMENT -- 10.3%
9,967,809 Lehman Brothers,
Lehman Brothers
Triparty
Agreement,
5.25%, 4/1/1999,
(See Significant
Accounting
Policies,
Securities
Lending in the
Notes to
Financial
Statements for
collateral
description).... 9,967,809 9,967,809
------------ ------------
TOTAL SHORT-TERM
SECURITIES
PURCHASED WITH
CASH
COLLATERAL...... 12,467,809 12,467,809
------------ ------------
TOTAL
INVESTMENTS --
113.9%.......... $113,770,637(1) 110,281,091
============
OTHER ASSETS AND LIABILITIES
(NET) -- (13.9)%.............. (13,466,170)
------------
NET ASSETS -- 100.0%............ $ 96,814,921
============
</TABLE>
Percentages indicated are based on net assets of $96,814,921.
(1) Reported cost for financial reporting purposes differs from cost basis for
federal income tax reporting by amount of losses recognized for financial
reporting in excess of amount recognized for federal income tax reporting by
approximately $95,494. Gross unrealized appreciation and depreciation on
investment securities, based on cost for Federal income tax purposes is as
follows:
<TABLE>
<S> <C>
Unrealized appreciation.......... $ 16,717,948
Unrealized depreciation.......... (20,302,988)
------------
Net unrealized depreciation...... $ (3,585,040)
============
</TABLE>
(a) All or a portion of this security has been loaned at March 31, 1999.
(b) Floating rate security-rate disclosed as of March 31, 1999.
* Represents non-income producing security.
MTN-Medium Term Note.
See accompanying notes to financial statements.
8
<PAGE> 22
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS -- 98.9%
AEROSPACE/DEFENSE -- 2.2%
6,200 Boeing Co.(a)....... $ 213,653 $ 211,575
5,100 Raytheon Co., Class
B................. 290,666 298,988
----------- -----------
504,319 510,563
----------- -----------
AIRLINES -- 1.6%
5,400 Atlantic Coast
Airlines Holdings,
Inc.*............. 123,627 151,875
7,700 Skywest, Inc........ 149,250 222,338
----------- -----------
272,877 374,213
----------- -----------
AUTO -- RELATED -- 1.4%
3,500 Arvin Industries,
Inc. ............. 115,779 117,906
13,200 Carey International,
Inc.*............. 302,390 214,500
----------- -----------
418,169 332,406
----------- -----------
BANKING -- 8.9%
10,000 Bostonfed Bancorp,
Inc. ............. 124,350 180,000
9,200 First Bell Bancorp,
Inc. ............. 85,450 156,400
14,600 FSF Financial
Corp. ............ 187,975 200,750
11,000 Georgia Financial,
Inc. ............. 121,660 162,250
360 HSBC Holdings PLC,
ADR............... 80,460 112,884
4,600 ING Groep N.V.,
ADR............... 224,678 252,712
30,400 North Central
Bancshares,
Inc. ............. 328,663 509,199
10,000 PFF Bancorp,
Inc.*............. 115,000 175,000
10,693 State Financial
Services Corp. ... 147,712 128,316
3,600 UnionBanCal
Corp. ............ 99,600 122,625
5,400 Westerfed Financial
Corp. ............ 73,224 91,294
----------- -----------
1,588,772 2,091,430
----------- -----------
BEVERAGES -- 0.3%
1,200 Adolph Coors Co.,
Class B........... 71,727 64,800
----------- -----------
BUILDING MATERIALS -- 1.1%
3,400 Lone Star
Industries,
Inc. ............. 120,122 105,400
2,900 USG Corp. .......... 108,563 148,988
----------- -----------
228,685 254,388
----------- -----------
BUSINESS & PUBLIC SERVICES --0.9%
4,855 Waste Management,
Inc. ............. 186,517 215,441
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
BUSINESS EQUIPMENT & SERVICES -- 0.4%
2,900 International
Integration,
Inc.*............. $ 64,174 $ 92,800
----------- -----------
CAPITAL GOODS -- 0.4%
4,200 Adaptec, Inc.*...... 92,488 96,075
----------- -----------
CHEMICALS -- 1.7%
5,800 Great Lakes Chemical
Corp. ............ 259,446 213,150
4,400 Imperial Chemical
Industries Corp.,
ADR............... 156,739 157,575
1,450 Octel Corp.*........ 38,152 17,763
----------- -----------
454,337 388,488
----------- -----------
CIRCUIT BOARDS -- 0.3%
5,700 Sipex Corp.*........ 153,571 74,456
----------- -----------
COMMERCIAL SERVICES -- 2.5%
5,500 AHL Services,
Inc.*............. 113,032 112,750
4,050 Apollo Group Inc. --
Class A*.......... 120,072 120,994
4,000 Meta Group, Inc.*... 81,500 61,500
26,600 Personnel Group of
America, Inc.*.... 359,650 191,187
10,200 Romac International,
Inc.*............. 183,583 86,700
----------- -----------
857,837 573,131
----------- -----------
COMPUTER EQUIPMENT -- 1.8%
2,800 Apple Computer
Inc.*(a).......... 73,655 100,625
1,200 Gateway 2000,
Inc.*............. 64,813 82,275
2,400 Micron Technology,
Inc.*............. 112,794 115,800
4,200 Seagate Technology,
Inc.*............. 149,387 124,163
----------- -----------
400,649 422,863
----------- -----------
COMPUTER SERVICES -- 0.6%
5,200 Mastech Corp.*...... 131,962 67,600
3,600 Security Dynamics
Technology,
Inc.*............. 94,901 67,050
----------- -----------
226,863 134,650
----------- -----------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 23
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
COMPUTER SOFTWARE -- 4.8%
15,700 Acclaim
Entertainment,
Inc.*............. $ 193,621 $ 140,318
2,200 BMC Software,
Inc.*(a).......... 106,226 81,538
2,600 Citrix Systems,
Inc.*............. 106,083 99,125
2,800 Compuware Corp.*.... 63,508 66,850
3,500 CSG Systems
International,
Inc.*............. 127,403 138,030
3,200 Novell, Inc.*....... 45,200 80,600
4,700 Nvidia Corp.*(a).... 112,125 99,288
4,100 Open Text Corp.*.... 89,220 129,149
1,900 Pixar, Inc.*........ 76,288 74,813
4,800 Sterling Software,
Inc.*............. 136,735 114,000
1,900 TSI International
Software Ltd.*.... 105,216 92,744
----------- -----------
1,161,625 1,116,455
----------- -----------
COMPUTERS -- 1.5%
1,400 Comverse Technology,
Inc.*............. 108,636 119,000
1,875 SCM Microsystems,
Inc.*(a).......... 144,749 113,906
3,800 Unisys Corp.*....... 81,925 105,213
----------- -----------
335,310 338,119
----------- -----------
CONSTRUCTION -- 1.1%
3,000 Centex Construction
Products, Inc. ... 115,359 104,438
4,300 Centex Corp. ....... 80,938 143,512
----------- -----------
196,297 247,950
----------- -----------
CONSUMER NON-DURABLE -- 3.2%
14,720 Archer-Daniels-Midland
Co. .............. 232,864 216,200
14,250 Central Garden & Pet
Co.*.............. 322,284 240,468
3,800 Department 56,
Inc.*............. 138,766 115,663
9,900 IBP, Inc. .......... 252,934 184,388
----------- -----------
946,848 756,719
----------- -----------
CONSUMER SERVICES -- 1.3%
3,800 Philip Morris Cos.,
Inc. ............. 147,241 133,713
6,800 U.S.T., Inc. ....... 226,083 177,650
----------- -----------
373,324 311,363
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
DISTRIBUTION -- 0.3%
4,600 United Stationers,
Inc.*............. $ 128,464 $ 70,150
----------- -----------
DIVERSIFIED -- 2.9%
21,000 BTR Siebe, ADR(a)... 142,824 186,961
10,000 Hutchison Whampoa,
ADR............... 282,669 393,571
3,100 Viad Corp. ......... 85,654 86,219
----------- -----------
511,147 666,751
----------- -----------
ELECTRIC UTILITY -- 2.3%
3,300 Baltimore Gas And
Electric Co. ..... 104,052 83,738
9,600 Centrais Electricas
Brasileiras,
ADR............... 76,651 93,478
3,500 Central & South West
Corp.(a).......... 98,861 82,031
3,200 Edison
International..... 85,581 71,200
3,300 P G & E Corp. ...... 103,612 102,506
2,200 Texas Utilities
Co. .............. 96,993 91,713
----------- -----------
565,750 524,666
----------- -----------
ELECTRICAL & ELECTRONICS -- 6.2%
1,780 Centrais Geradoras
Do Su, ADR*....... 15,025 7,161
6,800 Flextronics
International,
Ltd.*............. 142,954 346,800
700 Hitachi Ltd. ....... 47,817 50,925
1,000 Lexmark
International
Group*............ 42,090 111,750
6,200 Plexus Corp.*....... 186,535 172,825
4,600 SDL, Inc.*.......... 137,617 417,449
5,400 Semtech Corp.*...... 180,655 172,125
3,000 SLI, Inc.*.......... 73,830 63,000
2,200 Vitesse
Semiconductor
Corp.*............ 113,369 111,375
----------- -----------
939,892 1,453,410
----------- -----------
FINANCE -- BROKERS -- 0.6%
1,500 Merrill Lynch & Co.,
Inc. ............. 137,528 132,656
----------- -----------
FINANCIAL SERVICES -- 3.7%
2,310 Bear Stearns
Companies,
Inc. ............. 99,953 103,228
4,800 Concord EFS,
Inc.*............. 153,497 132,300
1,300 Countrywide Credit
Industries,
Inc. ............. 56,715 48,750
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 24
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
6,200 Doral Financial
Corp. ............ $ 122,444 $ 113,925
4,000 Investment
Technology
Group*(a)......... 192,346 202,999
1,500 Lehman Brothers
Holdings, Inc. ... 42,353 89,625
2,050 Telebanc Financial
Corp.*............ 136,005 163,488
----------- -----------
803,313 854,315
----------- -----------
FINANCIAL -- BANKING -- 0.5%
2,587 Union Planters
Corp. ............ 83,077 113,666
----------- -----------
FOOD -- 0.8%
2,300 Hormel Foods
Corp. ............ 85,134 81,938
2,800 Keebler Foods
Co.*.............. 105,633 102,200
----------- -----------
190,767 184,138
----------- -----------
FOOD PROCESSING -- 0.6%
4,300 Suiza Foods
Corp.*............ 181,006 144,856
----------- -----------
GAS & ELECTRIC UTILITY -- 0.3%
5,300 Northeast
Utilities*........ 78,862 73,538
----------- -----------
HEALTH & PERSONAL CARE -- 1.7%
8,750 Province Healthcare
Co.*.............. 225,820 161,875
5,100 Sunrise Assisted
Living,
Inc.*(a).......... 174,046 232,369
----------- -----------
399,866 394,244
----------- -----------
HEALTH CARE -- 2.0%
1,300 Allergan, Inc. ..... 103,638 114,238
5,500 Carematrix
Corp.*(a)......... 122,705 104,500
5,200 Lincare Holdings,
Inc.*............. 104,513 146,250
1,500 Pacificare Health
Systems, Inc.*.... 94,110 102,375
----------- -----------
424,966 467,363
----------- -----------
HOME FURNISHINGS -- 0.6%
2,000 Gemstar
International
Group, Ltd.*...... 125,178 150,500
----------- -----------
HOMEBUILDERS -- 1.8%
5,200 Champion
Enterprises,
Inc.*............. 127,427 100,750
6,100 D. R. Horton,
Inc. ............. 138,074 102,175
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
4,000 Kaufman & Broad Home
Corp. ............ $ 130,523 $ 90,250
5,600 Pulte Corp. ........ 138,611 116,550
----------- -----------
534,635 409,725
----------- -----------
INSURANCE -- 3.2%
1,900 Ambac, Inc. ........ 98,641 102,600
4,500 First American
Financial
Corp. ............ 133,535 71,156
2,300 Landamerica
Financial Group,
Inc. ............. 129,578 66,700
3,100 Safeco Corp. ....... 86,231 125,356
4,700 St. Paul Co. ....... 167,132 145,994
4,000 Tokio Marine & Fire,
ADR............... 217,250 224,500
----------- -----------
832,367 736,306
----------- -----------
LEISURE & GAMING -- 0.4%
1,800 Galileo
International,
Inc. ............. 89,135 87,075
----------- -----------
LIQUOR & TOBACCO -- 1.0%
13,300 British American
Tobacco -- SP
ADR............... 239,900 237,738
----------- -----------
MACHINERY & EQUIPMENT -- 1.0%
9,300 Case Corp........... 240,985 235,988
----------- -----------
MEDIA -- 0.3%
1,200 Metro Networks,
Inc.*............. 63,720 66,000
----------- -----------
MEDICAL -- BIOTECHNOLOGY -- 1.4%
800 Biogen, Inc.*....... 56,300 91,450
6,800 Pharmaceutical
Product
Development,
Inc.*............. 168,450 228,225
----------- -----------
224,750 319,675
----------- -----------
MEDICAL EQUIPMENT & SUPPLIES -- 0.4%
2,500 Becton Dickinson &
Co. .............. 100,832 95,781
----------- -----------
MINING -- 1.3%
8,500 Anglo American
Corp.(a).......... 243,313 295,375
----------- -----------
MULTI-INDUSTRY -- 1.2%
3,900 Loews Corp. ........ 223,988 291,038
----------- -----------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 25
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL/GAS -- 1.4%
13,900 Petroleo Brasileiro
S.A., ADR......... $ 203,741 $ 193,621
2,300 Plantronics,
Inc.*............. 117,817 143,894
----------- -----------
321,558 337,515
----------- -----------
OIL/GAS EXPLORATION -- 5.3%
10,100 Elf Aquitane, ADR... 358,446 679,855
12,750 Oceaneering
International,
Inc.*............. 229,359 192,844
11,400 YPF Sociedad
Anonima, ADR...... 221,847 359,813
----------- -----------
809,652 1,232,512
----------- -----------
PHARMACEUTICALS -- 1.5%
5,000 Barr Laboratories,
Inc.*............. 223,624 152,500
4,300 Priority Healthcare
Corp., Class B*... 100,513 194,575
----------- -----------
324,137 347,075
----------- -----------
PUBLISHING & PRINTING -- 2.5%
2,000 Knight Ridder,
Inc.(a)........... 105,046 100,000
5,000 Mail-Well Holdings,
Inc.*............. 69,650 66,875
1,300 Media General, Inc.,
Class A........... 63,171 60,775
7,100 Readers Digest
Assoc., Inc. ..... 199,738 223,206
2,700 Valassis
Communications,
Inc.*............. 62,919 139,725
----------- -----------
500,524 590,581
----------- -----------
REAL ESTATE -- 0.4%
4,200 Lennar Corp. ....... 119,614 93,975
----------- -----------
RESTAURANTS -- 0.8%
2,800 Brinker
International,
Inc.*............. 72,997 72,100
5,900 Darden Restaurants,
Inc. ............. 106,709 121,688
----------- -----------
179,706 193,788
----------- -----------
RETAIL -- 1.0%
4,100 K Mart, Inc.*....... 57,390 68,931
4,600 Pacific Sunwear of
California,
Inc.*............. 148,813 159,850
----------- -----------
206,203 228,781
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
RETAIL -- DEPARTMENT
STORE -- 0.7%
4,000 Marks & Spencer
PLC-SP ADR........ $ 178,156 $ 156,717
----------- -----------
RETAIL -- SPECIALTY LINE -- 0.5%
2,200 Best Buy, Inc.*..... 25,952 114,400
----------- -----------
TECHNOLOGY -- 2.5%
1,100 Computer Sciences
Corp.*............ 60,278 60,706
24,750 Datastream Systems,
Inc.*............. 251,735 213,470
6,300 Fore Systems
Inc.*............. 121,263 119,109
12,850 Inter-Tel, Inc. .... 71,478 199,978
----------- -----------
504,754 593,263
----------- -----------
TELECOMMUNICATION EQUIPMENT -- 0.3%
2,200 General Instrument
Corp.*............ 69,746 66,688
----------- -----------
TELECOMMUNICATION SERVICES -- 1.2%
7,000 Deutsche
Telecommunications,
ADR............... 195,545 283,063
----------- -----------
TELECOMMUNICATIONS -- 5.2%
1,000 Century Telephone
Enterprises,
Inc. ............. 49,310 70,249
2,100 Embratel
Participacoes,
ADR*.............. 33,536 35,044
210 Telecelular Sul
Participa, ADR.... 2,635 4,016
700 Telecentro Oeste
Celular, ADR...... 1,564 2,581
420 Telecentro Sul
Participa, ADR*... 18,915 19,399
3,500 Telecom Italia,
ADR............... 112,157 365,312
8,600 Telefonos De Mexico,
ADR............... 274,978 563,299
42 Teleleste Celular
Participa, ADR.... 855 1,344
105 Telemig Celular
Participa, ADR*... 2,146 2,750
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 26
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC APPRECIATION FUND**
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL/ MARKET
SHARES COST VALUE
- ---------- ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
105 Telenordeste Celular
Participa, ADR.... $ 1,166 $ 2,336
42 Telenorte Celular
Participa, ADR.... 498 1,250
2,100 Telenorte Leste
Participa, ADR*... 25,914 32,288
840 Telesp Celular
Participa, ADR.... 20,000 17,588
2,100 Telesp Participacoes
Sa, ADR........... 59,878 43,313
800 Tellabs, Inc.*...... 67,600 78,199
----------- -----------
671,152 1,238,968
----------- -----------
TELECOMMUNICATIONS -- EQUIPMENT -- 1.2%
12,200 Alcatel Alsthom Cge
SA ADR............ 288,733 278,313
----------- -----------
TEXTILES & APPAREL -- 1.9%
10,000 Reebok International
Ltd.*(a).......... 161,725 158,750
4,400 Ross Stores,
Inc. ............. 94,374 192,775
2,600 TJX Companies,
Inc. ............. 58,331 88,400
----------- -----------
314,430 439,925
----------- -----------
UTILITIES -- 2.0%
11,000 Entergy Corp. ...... 322,188 302,500
4,700 Unicom Corp. ....... 111,907 171,844
----------- -----------
434,095 474,344
----------- -----------
TOTAL COMMON
STOCKS............ 21,041,787 23,071,172
----------- -----------
SHORT TERM INVESTMENTS -- 2.5%
CASH SWEEP ACCOUNT -- 2.5%
$ 572,326 Union Bank of
California........ 572,326 572,326
----------- -----------
TOTAL SHORT TERM
INVESTMENTS....... 572,326 572,326
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL/ MARKET
SHARES COST VALUE
- ---------- ---- ------
<C> <S> <C> <C>
SHORT-TERM SECURITIES PURCHASED
WITH CASH COLLATERAL -- 6.8%
REPURCHASE AGREEMENT -- 6.8%
$1,586,100 Lehman Brothers,
Lehman Brothers
Triparty
Agreement, 5.25%,
4/1/1999, (See
Significant
Accounting
Policies,
Securities Lending
in the Notes to
Financial
Statements for
collateral
description)...... $ 1,586,100 $ 1,586,100
----------- -----------
TOTAL SHORT-TERM
SECURITIES
PURCHASED WITH
CASH COLLATERAL... 1,586,100 1,586,100
----------- -----------
TOTAL INVESTMENTS --
108.2%.......... $23,200,213(1) 25,229,598
===========
OTHER ASSETS AND
LIABILITIES
(NET) -- (8.2)%... (1,913,205)
-----------
NET
ASSETS -- 100.0%... $23,316,393
===========
</TABLE>
<TABLE>
<S> <C>
Percentages indicated are based on net assets of
$23,316,393.
(1) Reported cost for financial reporting purposes
differs from cost basis for federal income tax
reporting by amount of losses recognized for
financial reporting in excess of amount recognized
for federal income tax reporting by approximately
$6,864. Gross unrealized appreciation and
depreciation on investment securities, based on
cost for Federal income tax purposes is as
follows:
</TABLE>
<TABLE>
<S> <C>
$ 4,096,509
Unrealized appreciation...........
(2,073,988)
Unrealized depreciation...........
-----------
$ 2,022,521
Net unrealized appreciation.......
===========
</TABLE>
<TABLE>
<S> <C>
(a) All or a portion of this security has been loaned
at March 31, 1999.
* Represents non-income producing security.
** See page 17 for Concentration by Country.
ADR--American Depository Receipts.
PLC--Public Limited Company.
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 27
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP II FUND
Portfolio of Investments -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS -- 97.8%
AEROSPACE -- 2.1%
41,700 Armor Holdings,
Inc. Delaware*... $ 461,202 $ 570,769
----------- -----------
AIRLINES -- 1.9%
18,400 Skywest, Inc. ..... 365,400 531,300
----------- -----------
AUTO -- RELATED -- 1.7%
26,800 Wynn's
International,
Inc. ............ 485,557 467,325
----------- -----------
BIOTECHNOLOGY -- 0.4%
25,000 Embrex, Inc.*...... 131,250 106,250
----------- -----------
BUILDING MATERIALS -- 4.2%
21,500 Cameron Ashley
Building
Products,
Inc.*............ 328,625 196,188
49,500 International
Comfort Products
Corp.*........... 327,015 389,812
24,800 NCI Building
Systems, Inc.*... 619,100 582,799
----------- -----------
1,274,740 1,168,799
----------- -----------
BUSINESS SERVICES -- 1.1%
20,000 Aaron Rents,
Inc. ............ 239,950 312,500
----------- -----------
COMMERCIAL SERVICES -- 4.2%
29,600 Group Maintenance
America Corp.*... 424,619 336,700
19,400 Rent Way, Inc.*.... 504,317 465,599
35,000 Towne Services,
Inc.*............ 288,438 343,438
----------- -----------
1,217,374 1,145,737
----------- -----------
COMPUTER EQUIPMENT -- 1.7%
30,000 Komag, Inc.*....... 424,375 131,250
48,000 Maxtor Corp.*...... 441,091 339,000
----------- -----------
865,466 470,250
----------- -----------
COMPUTER SOFTWARE -- 5.4%
80,150 Acclaim
Entertainment,
Inc.*(a)......... 372,210 716,340
34,900 Activision,
Inc.*............ 425,949 431,887
46,300 Mecon, Inc.*....... 320,825 324,100
----------- -----------
1,118,984 1,472,327
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMPUTERS -- 3.2%
25,000 Evans & Sutherland
Computer
Corp.*........... $ 606,094 $ 300,000
72,100 WPI Group, Inc.*... 517,793 247,844
14,500 Zebra Technologies
Corp.*........... 407,198 344,375
----------- -----------
1,531,085 892,219
----------- -----------
CONSTRUCTION -- 0.9%
42,400 Schuff Steel
Co.*(a).......... 304,974 249,100
----------- -----------
DISTRIBUTION -- 0.5%
23,900 Pameco Corp.*...... 380,834 137,425
----------- -----------
ELECTRICAL & ELECTRONICS -- 3.3%
19,500 Electro Scientific
Industries,
Inc.*............ 775,404 906,750
----------- -----------
ELECTRONIC COMPONENTS/
INSTRUMENTS -- 8.7%
47,200 Adflex Solutions,
Inc.*............ 393,349 138,650
90,700 EFTC Corp.*........ 685,868 419,487
10,000 Etec Systems,
Inc.*............ 317,136 294,375
20,000 Kulicke & Soffa
Industries,
Inc.*............ 376,438 504,999
10,000 PCD, Inc.*......... 179,375 90,625
16,300 Photronics,
Inc.*............ 295,891 303,588
8,600 Plexus Corp.*...... 124,190 239,725
56,100 Power-One, Inc.*... 497,900 378,675
----------- -----------
2,870,147 2,370,124
----------- -----------
ELECTRONICS -- 3.8%
61,500 FEI Co.*(a)........ 664,933 515,063
19,500 Pittway Corp.,
Class A.......... 469,859 516,749
----------- -----------
1,134,792 1,031,812
----------- -----------
ENERGY -- 0.9%
9,200 Weatherford
International,
Inc.*............ 263,377 240,350
----------- -----------
ENTERTAINMENT -- 2.7%
18,100 Speedway
Motorsports,
Inc.*............ 419,830 746,625
----------- -----------
ENVIRONMENTAL -- 2.7%
22,800 Allied Waste
Industries,
Inc.*(a)......... 466,910 329,175
31,300 Safety Kleen
Corp.*........... 461,141 414,725
----------- -----------
928,051 743,900
----------- -----------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 28
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP II FUND
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH & PERSONAL CARE -- 0.9%
38,700 Physicians
Specialty
Corp.*........... $ 304,696 $ 261,225
----------- -----------
HEALTH CARE -- 1.5%
21,800 American Retirement
Corp.*(a)........ 334,682 313,375
50,000 Mariner Post-Acute
Network, Inc.*... 728,806 109,375
----------- -----------
1,063,488 422,750
----------- -----------
HOME FURNISHINGS -- 1.3%
20,500 Ladd Furniture,
Inc.*............ 380,188 351,063
----------- -----------
INSURANCE -- 1.5%
10,100 FPIC Insurance
Group, Inc.*..... 434,812 419,150
----------- -----------
INVESTMENT COMPANY -- 1.7%
25,050 Allied Capital
Corp. ........... 527,125 460,294
----------- -----------
MACHINERY & EQUIPMENT -- 1.3%
6,200 Nordson Corp. ..... 327,102 345,650
----------- -----------
MANUFACTURING -- 1.3%
25,100 Asyst Technologies,
Inc.*............ 520,434 345,125
----------- -----------
MANUFACTURING -- CAPITAL
GOODS -- 3.2%
28,200 Astec Industries,
Inc.*............ 432,957 870,675
----------- -----------
MEDICAL-HOSPITAL SERVICES --0.4%
16,666 Ramsay Youth
Services,
Inc.*............ 123,202 122,912
----------- -----------
NUTRITION & VITAMIN PRODUCTS -- 1.3%
39,500 Twinlab Corp.*..... 525,356 370,313
----------- -----------
OIL/GAS EQUIPMENT -- 1.2%
29,100 National-Oilwell,
Inc.*............ 585,176 336,469
----------- -----------
OIL/GAS EXPLORATION -- 2.7%
35,000 Marine Drilling
Cos., Inc.*...... 729,366 385,000
32,700 Varco
International,
Inc.*............ 308,027 363,788
----------- -----------
1,037,393 748,788
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
OIL/GAS SERVICES -- 5.6%
12,000 Carbo Ceramics,
Inc. ............ $ 350,970 $ 259,500
24,800 Nabors Industries,
Inc.*............ 643,301 451,050
42,800 Patterson Energy,
Inc.*............ 465,869 238,075
29,100 Rowan Cos.,
Inc.*............ 654,242 369,206
15,100 Veritas DGC,
Inc.*............ 388,783 214,231
----------- -----------
2,503,165 1,532,062
----------- -----------
PHARMACEUTICALS -- 3.2%
23,000 Dura
Pharmaceuticals,
Inc.*(a)......... 339,250 324,875
18,975 Medicis
Pharmaceutical
Corp., Class
A*............... 543,721 569,250
----------- -----------
882,971 894,125
----------- -----------
RAILROADS -- 1.2%
11,600 Trinity Industries,
Inc.*............ 421,921 340,750
----------- -----------
REAL ESTATE -- 1.6%
25,300 Intrawest Corp. ... 425,664 426,938
----------- -----------
REAL ESTATE INVESTMENT TRUST -- 1.7%
27,600 Prison Realty
Corp. ........... 843,871 481,275
----------- -----------
RETAIL -- 4.6%
34,600 Avado Brands,
Inc. ............ 517,837 205,438
40,000 Compucom Systems,
Inc.*............ 304,541 117,500
32,100 O'Charley's,
Inc.*............ 409,274 435,355
20,000 Pier One Imports,
Inc. ............ 191,200 162,500
10,000 Whole Foods Market,
Inc.*(a)......... 318,571 343,750
----------- -----------
1,741,423 1,264,543
----------- -----------
RETAIL -- DEPARTMENT STORE -- 0.6%
19,900 Elder-Beerman
Stores Corp.*.... 430,338 171,638
----------- -----------
RETAIL -- GENERAL MERCHANDISE -- 2.6%
30,000 Blue Rhino
Corp.*(a)........ 345,038 393,750
24,200 Cash America
International,
Inc. ............ 358,127 311,575
----------- -----------
703,165 705,325
----------- -----------
RETAIL -- SPECIALTY LINE -- 1.5%
21,000 Rexall Sundown,
Inc.*(a)......... 322,875 402,938
----------- -----------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE> 29
ESC STRATEGIC FUNDS, INC.
ESC STRATEGIC SMALL CAP II FUND
Portfolio of Investments (continued) -- March 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL/ MARKET
SHARES COST VALUE
- ---------- ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
RIGHTS -- FOREIGN -- 1.5%
50,000 Intercept Group,
Inc.*(a)......... $ 347,180 $ 425,000
----------- -----------
STEEL/IRON -- 1.3%
21,700 Northwest Pipe
Co.*............. 387,888 358,050
----------- -----------
TELECOMMUNICATIONS -- 1.2%
29,100 Premiere
Technologies,
Inc.*(a)......... 336,853 331,013
----------- -----------
TEXTILES -- 1.6%
15,800 Westpoint Stevens,
Inc.*............ 439,425 437,463
----------- -----------
TEXTILES & APPAREL -- 0.5%
20,000 Dixie Group,
Inc. ............ 164,306 142,500
----------- -----------
WHOLESALE -- 1.4%
21,300 ScanSource,
Inc.*............ 356,238 380,738
----------- -----------
TOTAL COMMON
STOCKS........... 31,337,629 26,912,334
----------- -----------
SHORT TERM INVESTMENTS -- 3.6%
CASH SWEEP ACCOUNT -- 3.6%
$ 979,251 Union Bank of
California....... 979,251 979,251
----------- -----------
TOTAL SHORT TERM
INVESTMENTS...... 979,251 979,251
----------- -----------
SHORT-TERM SECURITIES PURCHASED
WITH CASH COLLATERAL -- 13.7%
REPURCHASE AGREEMENT -- 13.7%
$3,770,800 Lehman Brothers,
Lehman Brothers
Triparty
Agreement, 5.25%,
4/1/1999, (See
Significant
Accounting
Policies,
Securities
Lending in the
Notes to
Financial
Statements for
collateral
description)..... 3,770,800 3,770,800
----------- -----------
TOTAL SHORT-TERM
SECURITIES
PURCHASED WITH
CASH
COLLATERAL....... 3,770,800 3,770,800
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
COST VALUE
---- ------
<C> <S> <C> <C>
TOTAL
INVESTMENTS --
115.1%........... $36,087,680(1) $31,662,385
===========
OTHER ASSETS AND
LIABILITIES
(NET) --
(15.1)%.......... (4,149,831)
-----------
NET ASSETS --
100.0%........... $27,512,554
===========
Percentages indicated are based on net assets of
$27,512,554.
(1) Reported cost for financial reporting purposes differs
from cost basis for federal income tax reporting by
amount of losses recognized for financial reporting in
excess of amount recognized for federal income tax
reporting by approximately $10,202. Gross unrealized
appreciation and depreciation on investment securities,
based on cost for Federal income tax purposes is as
follows:
</TABLE>
<TABLE>
<S> <C> <C>
Unrealized appreciation........... $ 2,707,959
Unrealized depreciation........... (7,143,456)
-----------
Net unrealized depreciation....... $(4,435,497)
===========
(a) All or a portion of this security has been loaned at
March 31, 1999.
* Represents non-income producing security.
</TABLE>
See accompanying notes to financial statements.
16
<PAGE> 30
ESC STRATEGIC FUNDS, INC.
Concentration by Country
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND APPRECIATION FUND
COUNTRY MARKET VALUE MARKET VALUE
- ------- ------------------------- -----------------
<S> <C> <C>
Argentina................................................... 4.7% 1.4%
Australia................................................... 2.7% --
Brazil...................................................... 4.5% 1.0%
Czech Republic.............................................. 0.8% --
France...................................................... 5.4% 3.8%
Germany..................................................... 4.1% --
Greece...................................................... 2.8% --
Hong Kong................................................... 2.6% --
Hungary..................................................... 1.8% --
Italy....................................................... 6.5% --
Japan....................................................... 15.6% 0.2%
Mexico...................................................... -- 2.3%
Netherlands................................................. 7.3% --
New Zealand................................................. 1.6% --
Portugal.................................................... 2.2% --
Singapore................................................... 1.5% --
Spain....................................................... 1.7% --
Switzerland................................................. 3.7% --
United Kingdom.............................................. 16.1% 0.6%
United States............................................... 14.4% 90.7%
---- ----
Total Investments........................................... 100% 100%
==== ====
</TABLE>
# CREDIT RATINGS (unaudited)
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
------- -----------------
<C> <C> <S>
Aaa AAA Instrument judged to be of the highest quality
and carrying the smallest amount of investment
risk.
Aa AA Instrument judged to be of high quality by all
standards.
A A Instrument judged to be adequate by all
standards.
Baa BBB Instrument judged to be of moderate quality by
all standards.
Ba-B BB-B Instrument judged to have speculative elements,
and generally lack desirable characteristics.
Caa-C CCC-C Instrument judged to be predominately
speculative with respect to pay interest and
repay principal in accordance with terms of
obligation.
NR NR Not Rated. In the opinion of the Investment
Adviser, instrument judged to be of comparable
investment quality to rated securities which
may be purchased by the Fund.
</TABLE>
For items possessing the strongest investment attributes of their
category, Moody's gives that letter rating followed by a number. The
Standard & Poor's ratings may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
U.S. Government issues have an assumed rating of AAA/Aaa.
17
<PAGE> 31
ESC STRATEGIC FUNDS, INC.
Statements of Assets and Liabilities
March 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $7,666,404;
$7,791,483; $103,802,828; $21,614,113; and
$32,316,880 respectively)...................... $7,665,102 $9,236,750 $100,313,282 $23,643,498 $27,891,585
Repurchase Agreements, at cost................... -- -- 9,967,809 1,586,100 3,770,800
---------- ---------- ------------ ----------- -----------
Total Investments.......................... 7,665,102 9,236,750 110,281,091 25,229,598 31,662,385
---------- ---------- ------------ ----------- -----------
Foreign Currency (cost $0; $7,094; $0; $0; and $0
respectively).................................. -- 7,092 -- -- --
Interest and dividends receivable................ 191,515 22,986 33,484 40,325 8,036
Receivable for securities sold................... -- 622,767 205,343 245,618 --
Witholding tax reclaim receivable................ -- 17,293 -- -- --
Receivable for fund shares sold.................. -- -- 13,000 -- --
Unamortized organizational expense............... 739 934 657 2,093 --
Prepaid expenses................................. 5,459 6,445 144 4,356 8,643
---------- ---------- ------------ ----------- -----------
Total Assets............................... 7,862,815 9,914,267 110,533,719 25,521,990 31,679,064
---------- ---------- ------------ ----------- -----------
LIABILITIES
Payable for return of collateral received........ -- -- 12,467,809 1,586,100 3,770,800
Income distribution payable...................... 52,883 -- -- -- --
Payable for fund shares repurchased.............. -- -- 347,225 36,040 75,161
Payable for securities purchased................. -- 176,197 727,030 528,455 263,377
Payable for currency contract.................... -- 7 -- -- --
Advisory fee payable............................. 2,549 6,233 85,758 18,371 19,318
Administration fee payable....................... 161 194 1,992 475 564
12b-1 Distribution fee payable................... 1,890 2,761 31,024 6,956 9,167
Professional fees payable........................ 19,643 19,022 39,928 21,041 20,866
Other accrued expenses........................... 7,243 14,010 18,032 8,159 7,257
---------- ---------- ------------ ----------- -----------
Total Liabilities.......................... 84,369 218,424 13,718,798 2,205,597 4,166,510
---------- ---------- ------------ ----------- -----------
NET ASSETS................................. $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554
========== ========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE> 32
ESC STRATEGIC FUNDS, INC.
Statements of Assets and Liabilities -- (Continued)
March 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II
FUND FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Assets Consist of:
Shares, at par ($0.001).......................... $ 796 $ 907 $ 5,862 $ 2,183 $ 2,872
Additional paid-in capital....................... 7,831,835 7,450,154 97,789,821 20,167,910 35,194,801
Undistributed (distributions in excess of) net
investment income.............................. (52,883) (26,128) -- -- --
Accumulated net realized gain/(loss) on
investments and foreign currency
transactions................................... -- 822,727 2,508,784 1,116,915 (3,259,824)
Net unrealized appreciation/(depreciation) on
investments and foreign currency
translations................................... (1,302) 1,448,183 (3,489,546) 2,029,385 (4,425,295)
---------- ---------- ------------ ----------- -----------
NET ASSETS....................................... $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554
========== ========== ============ =========== ===========
Class A.......................................... $7,230,434 $7,815,990 $ 74,739,484 $18,916,483 $20,077,441
Class D.......................................... $ 548,012 $1,879,853 $ 22,075,437 $ 4,399,910 $ 7,435,113
---------- ---------- ------------ ----------- -----------
$7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554
========== ========== ============ =========== ===========
SHARES OF BENEFICIAL INTEREST
Class A
Shares of beneficial interest issued and
outstanding.................................. 740,072 727,019 4,504,805 1,762,710 2,090,287
========== ========== ============ =========== ===========
Net Asset Value and redemption price per share
outstanding.................................. $ 9.77 $ 10.75 $ 16.59 $ 10.73 $ 9.61
========== ========== ============ =========== ===========
Maximum Offering Price per share ($9.77/.955,
$10.75/.955, $16.59/.955, $10.73/.955,
$9.61/.955 respectively)..................... $ 10.23 $ 11.26 $ 17.37 $ 11.24 $ 10.06
========== ========== ============ =========== ===========
Class D
Shares of beneficial interest issued and
outstanding.................................. 55,694 179,858 1,357,437 420,184 781,351
========== ========== ============ =========== ===========
Net Asset Value and redemption price per share
outstanding.................................. $ 9.84 $ 10.45 $ 16.26 $ 10.47 $ 9.52
========== ========== ============ =========== ===========
Maximum Offering Price per share ($9.84/.985,
$10.45/.985, $16.26/.985, $10.47/.985,
$9.52/.985 respectively)..................... $ 9.99 $ 10.61 $ 16.51 $ 10.63 $ 9.66
========== ========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 33
ESC STRATEGIC FUNDS, INC.
Statements of Operations
For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
INCOME INTERNATIONAL SMALL CAP APPRECIATION SMALL CAP II
FUND EQUITY FUND FUND FUND FUND
---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Investment Income
Interest............................... $1,149,476 $ 35,505 $ 763,213 $ 80,019 $ 220,516
Dividend (net of withholding tax of $0;
$13,441; $0; $4,748 and $0,
respectively)........................ 25,010 216,458 741,330 388,643 113,811
Income from Securities Lending
Activities........................... -- -- 63,322 10,606 13,279
---------- ----------- ------------ ----------- ------------
Total income........................... 1,174,486 251,963 1,567,865 479,268 347,606
---------- ----------- ------------ ----------- ------------
Expenses
Advisory............................... 167,336 125,548 1,252,991 318,584 382,702
Administration......................... 25,100 18,832 187,949 47,788 45,924
Fund accounting........................ 36,948 39,734 34,549 35,894 33,144
Professional fees...................... 21,824 16,107 57,254 25,149 21,886
Custodian.............................. 6,147 32,746 17,166 6,135 5,780
Transfer agent fees and expenses....... 24,911 26,408 197,205 41,052 81,518
12b-1 Distribution fees--Class A....... 40,024 25,557 241,928 64,288 54,274
12b-1 Distribution fees--Class D....... 5,428 17,490 213,957 46,073 66,798
Directors fees......................... 1,809 592 21,858 3,187 3,180
Amortization of organizational costs... 8,528 8,414 11,470 8,414 --
Miscellaneous.......................... 38,145 19,860 149,438 57,311 44,868
---------- ----------- ------------ ----------- ------------
Total expenses before waivers.......... 376,200 331,288 2,385,765 653,875 740,074
Less: expenses waived/reimbursed....... (53,473) (12,791) -- (2,255) (82,843)
---------- ----------- ------------ ----------- ------------
Net expenses........................... 322,727 318,497 2,385,765 651,620 657,231
---------- ----------- ------------ ----------- ------------
Net investment income/(loss)............. 851,759 (66,534) (817,900) (172,352) (309,625)
---------- ----------- ------------ ----------- ------------
Net realized gain/(loss) on investments
and foreign currency transactions...... 57,784 1,024,996 2,508,888 1,116,912 (2,810,903)
Net change unrealized
appreciation/(depreciation) of
investments and foreign currency
translations........................... (193,923) (1,842,011) (42,488,775) (9,813,011) (8,261,391)
---------- ----------- ------------ ----------- ------------
Net realized and unrealized
gain/(loss)............................ (136,139) (817,015) (39,979,887) (8,696,099) (11,072,294)
---------- ----------- ------------ ----------- ------------
Net increase/(decrease) in net assets
resulting from operations.............. $ 715,620 $ (883,549) $(40,797,787) $(8,868,451) $(11,381,919)
========== =========== ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE> 34
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
INCOME FUND INTERNATIONAL EQUITY FUND
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income/(loss)......... $ 851,759 $ 1,494,331 $ (66,534) $ (115,193)
Net realized gain/(loss) on
investments and foreign currency
transactions....................... 57,784 315,559 1,024,996 2,620,302
Net change unrealized appreciation/
(depreciation) of investments and
foreign currency translations...... (193,923) 506,910 (1,842,011) 1,602,799
------------ ------------ ----------- ------------
Net increase in net assets resulting
from operations...................... 715,620 2,316,800 (883,549) 4,107,908
------------ ------------ ----------- ------------
Dividends and Distributions to
Shareholders:
From net investment income
Class A............................ (759,547) (1,452,325) -- --
Class D............................ (32,600) (42,035) -- --
------------ ------------ ----------- ------------
(792,147) (1,494,360) -- --
------------ ------------ ----------- ------------
From tax return of capital
Class A............................ (76,574) -- -- --
Class D............................ (3,289) -- -- --
------------ ------------ ----------- ------------
(79,863) -- -- --
------------ ------------ ----------- ------------
From net realized gains
Class A............................ (104,773) -- (712,147) (1,988,043)
Class D............................ (9,574) -- (192,848) (658,846)
------------ ------------ ----------- ------------
(114,347) -- (904,995) (2,646,889)
------------ ------------ ----------- ------------
Change in net assets resulting from
dividends and distributions to
shareholders....................... (986,357) (1,494,360) (904,995) (2,646,889)
------------ ------------ ----------- ------------
Capital Share Transactions:
Proceeds from sales of shares
Class A............................ 926,359 1,530,230 1,144,165 1,271,346
Class D............................ 155,831 172,805 124,302 162,830
------------ ------------ ----------- ------------
1,082,190 1,703,035 1,268,467 1,434,176
------------ ------------ ----------- ------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................ 894,208 1,298,541 582,876 1,337,906
Class D............................ 40,551 36,502 192,848 658,846
------------ ------------ ----------- ------------
934,759 1,335,043 775,724 1,996,752
------------ ------------ ----------- ------------
Net asset value of shares redeemed:
Class A............................ (18,743,090) (11,722,261) (5,735,950) (8,953,584)
Class D............................ (460,910) (827,987) (885,822) (2,362,618)
------------ ------------ ----------- ------------
(19,204,000) (12,550,248) (6,621,772) (11,316,202)
------------ ------------ ----------- ------------
Change in net assets from capital
share transactions................. (17,187,051) (9,512,170) (4,577,581) (7,885,274)
------------ ------------ ----------- ------------
Total change in net assets............. (17,457,788) (8,689,730) (6,366,125) (6,424,255)
Net Assets:
Beginning of Period.................. 25,236,234 33,925,964 16,061,968 22,486,223
------------ ------------ ----------- ------------
End of Period........................ $ 7,778,446 $ 25,236,234 $ 9,695,843 $ 16,061,968
============ ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE> 35
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND APPRECIATION FUND
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income/(loss)......... $ (817,900) $ (409,168) $ (172,352) $ (219,043)
Net realized gain/(loss) on
investments and foreign currency
transactions....................... 2,508,888 13,586,328 1,116,912 12,458,936
Net change unrealized appreciation/
(depreciation) of investments and
foreign currency translations...... (42,488,775) 30,415,943 (9,813,011) 6,933,791
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations...................... (40,797,787) 43,593,103 (8,868,451) 19,173,684
------------ ------------ ------------ ------------
Dividends and Distributions to
Shareholders:
From net realized gains
Class A............................ (2,603,327) (8,972,632) (2,762,177) (9,402,699)
Class D............................ (765,335) (2,767,599) (692,033) (1,466,362)
------------ ------------ ------------ ------------
(3,368,662) (11,740,231) (3,454,210) (10,869,061)
------------ ------------ ------------ ------------
Capital Share Transactions:
Proceeds from sales of shares
Class A............................ 8,371,667 35,090,045 2,982,123 6,480,292
Class D............................ 1,473,645 8,450,667 1,227,616 2,468,392
------------ ------------ ------------ ------------
9,845,312 43,540,712 4,209,739 8,948,684
------------ ------------ ------------ ------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A............................ 2,359,265 8,110,200 2,596,704 8,381,574
Class D............................ 764,367 2,759,244 691,921 1,440,941
------------ ------------ ------------ ------------
3,123,632 10,869,444 3,288,625 9,822,515
------------ ------------ ------------ ------------
Net asset value of shares redeemed:
Class A............................ (28,936,985) (12,927,511) (10,175,152) (34,006,037)
Class D............................ (8,181,883) (3,084,106) (2,462,053) (1,113,196)
------------ ------------ ------------ ------------
(37,118,868) (16,011,617) (12,637,205) (35,119,233)
------------ ------------ ------------ ------------
Change in net assets from capital
share transactions................. (24,149,924) 38,398,539 (5,138,841) (16,348,034)
------------ ------------ ------------ ------------
Total change in net assets............. (68,316,373) 70,251,411 (17,461,502) (8,043,411)
Net Assets:
Beginning of Period.................. 165,131,294 94,879,883 40,777,895 48,821,306
------------ ------------ ------------ ------------
End of Period........................ $ 96,814,921 $165,131,294 $ 23,316,393 $ 40,777,895
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE> 36
ESC STRATEGIC FUNDS, INC.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
--------------------------------
YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Operations:
Net investment income/(loss).............................. $ (309,625) $ (83,519)
Net realized gain/(loss) on investments................... (2,810,903) 601,246
Net change unrealized appreciation/(depreciation) of
investments............................................. (8,261,391) 3,963,507
------------ -----------
Net increase/(decrease) in net assets resulting from
operations................................................ (11,381,919) 4,481,234
------------ -----------
Dividends and Distributions to Shareholders:
Distributions from net realized gains
Class A................................................. -- (388,459)
Class D................................................. -- (187,036)
------------ -----------
-- (575,495)
------------ -----------
Distributions in excess of realized gains
Class A................................................. -- (271,796)
Class D................................................. -- (130,865)
------------ -----------
-- (402,661)
------------ -----------
Change in net assets resulting from dividends and
distributions to shareholders........................... -- (978,156)
------------ -----------
Capital Share Transactions:
Proceeds from sales of shares
Class A................................................. 14,824,338 14,983,054
Class D................................................. 4,282,060 7,349,742
------------ -----------
19,106,398 22,332,796
------------ -----------
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. -- 610,656
Class D................................................. -- 312,261
------------ -----------
-- 922,917
------------ -----------
Net asset value of shares redeemed:
Class A................................................. (6,663,800) (934,557)
Class D................................................. (3,179,324) (348,585)
------------ -----------
(9,843,124) (1,283,142)
------------ -----------
Change in net assets from capital share transactions...... 9,263,274 21,972,571
------------ -----------
Total change in net assets.................................. (2,118,645) 25,475,649
Net Assets:
Beginning of Period....................................... 29,631,199 4,155,550
------------ -----------
End of Period............................................. $ 27,512,554 $29,631,199
============ ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 37
ESC STRATEGIC FUNDS, INC.
Financial Highlights
<TABLE>
<CAPTION>
INCOME FUND
----------------------------------------------------------------------------------
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.
24
<PAGE> 38
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INCOME FUND
----------------------------------------------------------------------------------
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.
25
<PAGE> 39
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------------------------
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.
26
<PAGE> 40
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------------------------
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.
27
<PAGE> 41
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND
----------------------------------------------------------------------------------
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... -- -- -- -- (0.24)
From realized gains.......... (0.51) (1.73) (0.74) (0.48) --
------- -------- ------- ------- ------
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.
28
<PAGE> 42
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP FUND
----------------------------------------------------------------------------------
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... -- -- -- -- (0.24)
From realized gains.......... (0.51) (1.73) (0.74) (0.48) --
------- ------- ------- ------ ------
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.
29
<PAGE> 43
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION FUND
----------------------------------------------------------------------------------
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.
30
<PAGE> 44
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
APPRECIATION FUND
----------------------------------------------------------------------------------
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.
31
<PAGE> 45
ESC STRATEGIC FUNDS, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
SMALL CAP II FUND
-------------------------------------------------------------------------------
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.
32
<PAGE> 46
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements -- March 31, 1999
1. DESCRIPTION. ESC Strategic Funds, Inc. (the "Company") was
incorporated in Maryland on November 24, 1993. The Company currently comprises
five portfolios: ESC Strategic Income Fund, ESC Strategic International Equity
Fund (formerly ESC Strategic Global Equity Fund), ESC Strategic Small Cap Fund,
ESC Strategic Appreciation Fund, and ESC Strategic Small Cap II Fund (formerly
ESC Strategic Growth Fund), (individually a "Fund"; collectively the "Funds").
The Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. Each Fund, with
the exception of ESC Strategic Small Cap Fund, operates as a diversified fund.
ESC Strategic Small Cap Fund operates as a non-diversified fund. The Company's
Articles of Incorporation authorize the issuance of two classes of common stock
designated as Class A and Class D for each Fund. Class A shares are offered with
a maximum front-end sales charge of 4.50% which may be reduced or waived in
certain cases. Class A shares are also subject to a Service and Distribution Fee
calculated at an annual rate of up to 0.25% of the average daily net asset value
of Class A shares. Class D shares are offered with a front-end sales charge of
1.50% and are subject to a Service and Distribution Fee at an annual rate of up
to 0.75% based on the average daily net asset value of Class D shares. The
Company's Board of Directors may, in the future, authorize the issuance of
additional classes of capital stock for the Funds.
The Funds' investment objectives are as follows:
ESC Strategic Income Fund -- To seek a high level of current income,
with a secondary objective of total return. The Fund seeks to achieve its
investment objective by investing primarily in high yield debt instruments
of U.S. and foreign issuers that are rated below investment grade. (Prior
to September 30, 1998, this Fund primarily invested in a diversified
portfolio of corporate, government and other debt instruments of U.S.
issuers.)
ESC Strategic International Equity Fund -- To seek long-term capital
appreciation. The Fund seeks to achieve its investment objective by
primarily investing in a diversified portfolio of publicly traded common
stocks and securities convertible into or exchangeable for common stock of
non-U.S. issuers. (Prior to July 17, 1998, this Fund's investments were
diversified across both domestic and international markets.)
ESC Strategic Small Cap Fund -- To seek a high level of capital
appreciation. The Fund pursues its objective by investing primarily in
equity securities of domestic and foreign issuers.
ESC Strategic Appreciation Fund -- To seek long-term capital
appreciation. The Fund seeks to achieve its investment objective by
primarily investing in a diversified portfolio of U.S. based companies
publicly traded common stocks and securities convertible into or
exchangeable for common stock.
ESC Strategic Small Cap II Fund -- To seek a high level of capital
appreciation. The Fund pursues its objective by investing primarily in
equity securities of domestic and foreign issuers believed to offer
superior opportunities for growth.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies followed by the Funds in the preparation of
their financial statements. The policies are in conformity with generally
accepted accounting principles. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts and disclosures. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION. Investments in securities are valued at the
last sales price on the securities exchange or the NASDAQ National Market
System on which such securities are primarily traded or, if there are no
33
<PAGE> 47
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
trades, at the current bid price, as of 4:00 p.m. eastern time.
Over-the-counter securities, or securities for which there were no
transactions, are valued at the closing bid price. Bid price is used when
no asked price is available. Bonds and other fixed income securities are
valued by using market quotations, and may be valued on the basis of prices
provided by a pricing service. Securities for which market quotations are
not readily available are valued at fair value as determined in good faith
by or at the direction of the Board of Directors. Short-term securities
which mature in 60 days or less are valued at amortized cost, if their
terms to maturity at purchase were 60 days or less, or by amortizing their
value on the 61st day prior to maturity, if their original term to maturity
at purchase exceeded 60 days.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities
transactions are recorded on a trade date basis. Realized gains and losses
from securities transactions are recorded on the identified cost basis.
Dividend income is recognized on the ex-dividend date and interest income,
including amortization of premium and accretion of discount on investments,
is accrued daily as earned.
C. DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS TO
SHAREHOLDERS. Distributions to shareholders are recorded on the
ex-dividend date. The amount of dividends and distributions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These "book/tax" differences are
considered either temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. Dividends and distributions
which exceed net investment income and net realized capital gains for
financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of
net realized capital gains.
For the year ended March 31, 1999, the reclassification arising from
permanent book/tax differences resulted in increases (decreases) to the
components of net assets as follows:
<TABLE>
<CAPTION>
INTERNATIONAL SMALL
INCOME EQUITY CAP
-------- ------------- --------
<S> <C> <C> <C>
Undistributed net investment income/(loss) on
investments......................................... $142,222 $ 68,577 $817,900
Accumulated net realized gain/(loss) on investments... (57,616) (63,848) --
Additional paid-in capital............................ (84,606) (4,729) (817,900)
</TABLE>
<TABLE>
<CAPTION>
SMALL
APPRECIATION CAP II
------------ --------
<S> <C> <C>
Undistributed net investment income/(loss) on investments... $ 172,580 $309,625
Accumulated net realized gain/(loss) on investments......... (228) --
Additional paid-in capital.................................. (172,352) (309,625)
</TABLE>
Permanent book/tax differences are primarily attributable to
non-deductible organization costs, foreign exchange gains/losses, realized
gains on passive foreign investment companies and net operating losses.
D. REPURCHASE AGREEMENTS. The Funds may purchase instruments from
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). The seller under a repurchase agreement is
required to maintain the value of the securities subject to the agreement
at not less than the repurchase price. Default by the seller would,
however, expose
34
<PAGE> 48
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
the relevant Funds to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreements. Accordingly, the Funds could receive
less than the repurchase price upon the sale of collateral securities.
E. FEDERAL INCOME TAXES. It is the policy of each of the Funds to
continue to qualify as a Regulated Investment Company under Subchapter M of
the Internal Revenue Code of 1986, as amended. By so qualifying, the Funds
will not be subject to Federal income taxes to the extent that they
distribute all of their taxable and tax-exempt income for the fiscal year.
The Funds also intend to meet the distribution requirements to avoid the
payment of an excise tax. Accordingly, no provision for taxes is recorded.
F. ORGANIZATIONAL COSTS. 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. In the event any of the initial shares of the
Funds are redeemed during the amortization period, the redemption proceeds
will be reduced by a pro rata portion of any unamortized organization
expenses in the proportion as the number of shares being redeemed bears to
the number of initial shares outstanding at the time of redemption.
G. DETERMINATION OF NET ASSET VALUE AND CALCULATION OF
EXPENSES. Expenses directly attributable to a Fund are charged to that
Fund. Other expenses of the Company are allocated proportionately among the
Funds in relation to the net assets of each Fund or on another reasonable
basis. In calculating net asset value per share of each class, investment
income, realized and unrealized gains and losses, and expenses other than
class specific expenses are allocated daily to each class of shares based
upon the proportion of net assets of each class at the beginning of each
day. Distribution expenses are solely borne by the class incurring the
expense.
H. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Funds
are maintained in U.S. dollars; non-U.S. dollar denominated amounts are
translated into U.S. dollars as follows with the resultant exchange gains
and losses recorded in the Statement of Operations:
(i) market value of investment securities and other assets and
liabilities: at the exchange rate on the valuation date,
(ii) purchases and sales of investment securities, income and
expenses, at the exchange rate prevailing on the respective date of such
transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities at period
end. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. However, the Funds do isolate the effect of
fluctuations in foreign exchange rates when determining the gain or loss
upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. Federal income tax regulations. Such amounts are
categorized as foreign exchange gain or loss for financial reporting
purposes and ordinary gain or loss for income tax reporting purposes.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, currency gains and losses
realized between the trade and settlement dates on securities transactions,
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Funds' books, and the
35
<PAGE> 49
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the
value of the assets and liabilities, other than investments in securities
at period end, resulting from changes in the foreign exchange rate.
I. FORWARD FOREIGN EXCHANGE CONTRACTS. A forward foreign exchange
contract is a commitment to buy or sell a foreign currency at a future date
at a negotiated exchange rate. The Funds bear the market risk which arises
from possible changes in foreign exchange values. Risks may arise from the
potential inability of counterparties to meet the terms of their contracts
and from unanticipated movements in the value of the foreign currency
relative to the U.S. dollar. The gain or loss from the difference between
the cost of original contracts and the amount realized upon the closing of
such contracts is included in net realized gains on foreign exchange
transactions.
J. OFF-BALANCE SHEET RISK. The Funds may invest in various financial
instruments with off-balance sheet risk. These financial instruments
include taking positions in forward foreign exchange contracts. During the
period the forward contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at
the end of the day's trading. When the forward contract is closed, the Fund
records a realized gain or loss between the proceeds from (or cost of) the
closing transaction and the Fund's basis in the contract. The Funds enter
into such contracts for the purpose of hedging exposure to change in
foreign currency exchange rates on their portfolio holdings. A lack of
correlation between the price of the security and the underlying contract
could result in a loss to the Funds. The amount of such loss could exceed
related amounts in the statements of assets and liabilities. At March 31,
1999, the International Equity Fund had the following open forward foreign
exchange contract:
LONG CONTRACT:
<TABLE>
<CAPTION>
SETTLEMENT MARKET UNREALIZED
AMOUNT/CURRENCY DATE COST VALUE GAIN
- --------------- ---------- ---- ------ ----------
<S> <C> <C> <C> <C>
45,223/Japanese Yen............................... 4/1/99 $375 $382 $7
</TABLE>
K. CREDIT AND MARKET RISK. Funds that invest in high yield
instruments are subject to certain credit and market risks. The yields of
high yield debt obligations reflect, among other things, perceived credit
risk. The Funds' investment in securities rated below investment grade
typically involve risks not associated with higher rated securities
including, among others, greater risk of timely and ultimate payment of
interest and principal, greater market price volatility and less liquid
secondary market trading.
L. SECURITIES LENDING. To increase current income, each Fund may
lend its portfolio securities worth up to one-third of that Fund's total
assets to brokers, dealers and financial institutions, provided: (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,
therefore not considered to be illiquid investments; and (3) the Funds will
receive any interest or dividends paid on the loaned securities while
simultaneously seeking to earn interest on the investment of collateral.
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. The cash or subsequent short-term investments are
recorded as assets of the Funds, offset by a corresponding liability to
repay the cash at the termination of the loan. In addition,
36
<PAGE> 50
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
the short-term securities purchased with the cash collateral are included
in the accompanying schedules of portfolio investments. In connection with
lending securities, the Funds may pay reasonable finders, administrative
and custodial fees. Loans of securities involve risk that the borrower may
fail to return the securities or may fail to provide additional collateral.
As of March 31, 1999, the following Funds had securities with the
following market values on loan:
<TABLE>
<CAPTION>
MARKET VALUE MARKET VALUE
OF COLLATERAL OF LOANED SECURITIES
------------- --------------------
<S> <C> <C>
Small Cap..................................... $12,467,809 $11,976,699
Appreciation.................................. $ 1,586,100 $ 1,545,928
Small Cap II.................................. $ 3,770,800 $ 3,687,688
</TABLE>
The loaned securities were fully collateralized by cash which was
invested in floating rate securities and repurchase agreements at March 31,
1999.
As disclosed in the schedules of portfolio investments, the Small Cap,
Appreciation and Small Cap II Funds collectively invested cash collateral
in a Lehman Brothers Repurchase Agreement with an interest rate of 5.25%
and a maturity of 4/1/1999 which was collateralized by $15,855,000
Commercial Mortgage Asset Trust, Series 99-C1, Class A3, due 4/17/2003 with
a market value of $16,088,633.
3. RELATED PARTY TRANSACTIONS. The Company has entered into an investment
advisory agreement (the "Investment Advisory Agreement") with SunTrust Equitable
Securities Corporation ("STES" or the "Adviser"). The Investment Advisory
Agreement provides for the Adviser to be paid a fee calculated and accrued daily
and paid monthly at the annual rate of 1.25% of average daily net assets for ESC
Strategic Small Cap II Fund and 1.00% of such net assets for each of the other
Funds. The Adviser provides portfolio management supervision and certain
administrative, clerical and bookkeeping services for the Company. The Adviser
has entered into agreements with various portfolio managers (the "Managers") to
provide portfolio management services for the Funds. Equitable Asset Management,
a wholly-owned subsidiary of the Adviser, provides portfolio management services
for Small Cap and Small Cap II Funds and approximately one-third of the assets
of the Appreciation Fund. The Adviser has retained various other Managers to
advise the International Equity Fund, Income Fund and the remaining assets of
the Appreciation Fund. The Adviser pays any fees payable under these agreements
with the Managers. For the year ended March 31, 1999, the Adviser voluntarily
waived fees of $47,061, $12,791, $2,255, and $82,843, for the Income Fund,
International Equity Fund, Appreciation Fund and Small Cap II Fund,
respectively. The Adviser did not waive any fee for the Small Cap Fund.
BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services
("BISYS") and BISYS Fund Services, Inc ("BFSI") are each a wholly-owned
subsidiary of the BISYS Group, Inc. BISYS serves as Administrator subject to the
supervision of the Company's Board of Directors and officers pursuant to the
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement include day-to-day administration of matters
related to the corporate existence of the Company, maintenance of its records,
preparation of reports, supervision of the Funds' arrangement with their
custodian and assistance in the preparation of the Company's Registration
Statement under federal and state laws. Pursuant to the Administration
Agreement, BISYS is entitled to a fee calculated and accrued daily and paid
monthly at the annual rate of 0.15% of the average daily net assets of each
Fund.
37
<PAGE> 51
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
BFSI serves as transfer agent and fund accountant for the Company. Pursuant
to a Transfer Agent 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. Pursuant to the 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 for an annual fee of $30,000 per Fund plus out-of-pocket expenses.
STES has voluntarily agreed to reimburse the Funds to the extent that their
ratios of expenses to average net assets exceed certain percentages as follows:
Income -- 2.00% (Class A), 2.50% (Class D); International Equity -- 2.50% (Class
A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D);
Appreciation -- 2.00% (Class A), 2.50% (Class D), and Small Cap II -- 2.00%
(Class A), 2.50% (Class D). Accordingly, STES has reimbursed expenses of the
Income Fund in the amount of $6,412, under this voluntary agreement. No
reimbursements were necessary for the International Equity, Small Cap,
Appreciation or Small Cap II Funds.
BISYS acts as Distributor for the Funds pursuant to a Distribution
Contract. Each Fund has adopted a service and distribution plan ("Plan") with
respect to each class of its shares. The Plans provide that Class A shares will
pay the Distributor a fee up to an annual rate of 0.25% of the value of average
daily net assets of Class A shares in return for financing certain distribution
and shareholder service activities related to Class A shares. The Plans provide
that Class D shares will pay the Distributor amounts up to an annual rate of
0.75% of the average daily net assets of Class D shares to finance certain
distribution and shareholder services activities related to Class D shares. For
the year ended March 31, 1999 for the Small Cap Fund, Small Cap II Fund,
Appreciation Fund, Income Fund, International Equity Fund, BISYS received
$12,037, $21,039, $82,075, $83,309 and $351,653 respectively, in commissions
from sales of shares of the Funds of which $12,037, $21,039, $82,075, $83,300
and $335,688 respectively, was reallowed to other brokers and dealers.
During the year ended March 31, 1999, the International Equity, Small Cap,
Appreciation and Small Cap II Funds paid brokerage commissions of $1,185,
$13,662, $39,262, and $6,564 to the Adviser's subsidiary, SunTrust Equitable
Securities Corporation.
4. SECURITIES TRANSACTIONS.
A. PURCHASE AND SALE TRANSACTIONS. The aggregate amount of purchases
and sales of investment securities, other than short-term securities, for
the year ended March 31, 1999 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Income.................................... $12,433,508 $26,262,194
International Equity...................... $14,517,293 $19,576,274
Small Cap................................. $61,805,758 $68,684,662
Appreciation.............................. $28,968,161 $35,689,782
Small Cap II.............................. $26,210,433 $15,159,160
</TABLE>
38
<PAGE> 52
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650
million shares of capital stock with a par value $0.001 each. Transactions in
each class of shares of the Funds for the year ended March 31, 1999, and the
year ended March 31, 1998, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
---------------------------------------
INTERNATIONAL
INCOME EQUITY SMALL CAP
---------- ------------- ----------
<S> <C> <C> <C>
CLASS A
Beginning Balance.......................................... 2,443,891 1,101,884 5,561,203
---------- --------- ----------
Shares Sold................................................ 93,649 105,770 460,985
Shares issued in reinvestment of net dividends and
distributions............................................ 90,228 59,843 145,457
Shares redeemed............................................ (1,887,696) (540,478) (1,662,840)
---------- --------- ----------
Net increase/(decrease) in shares.......................... (1,703,819) (374,865) (1,056,398)
---------- --------- ----------
Ending Balance............................................. 740,072 727,019 4,504,805
========== ========= ==========
CLASS D
Beginning Balance.......................................... 82,351 234,924 1,701,274
---------- --------- ----------
Shares Sold................................................ 15,648 11,007 80,387
Shares issued in reinvestment of net dividends and
distributions............................................ 4,096 20,321 47,983
Shares redeemed............................................ (46,401) (86,394) (472,207)
---------- --------- ----------
Net increase/(decrease) in shares.......................... (26,657) (55,066) (343,837)
---------- --------- ----------
Ending Balance............................................. 55,694 179,858 1,357,437
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
---------------------------
APPRECIATION SMALL CAP II
------------ ------------
<S> <C> <C>
CLASS A
Beginning Balance........................................... 2,114,008 1,458,113
--------- ---------
Shares Sold................................................. 232,330 1,267,171
Shares issued in reinvestment of net dividends and
distributions............................................. 243,822 0
Shares redeemed............................................. (827,450) (634,997)
--------- ---------
Net increase/(decrease) in shares........................... (351,298) 632,174
--------- ---------
Ending Balance.............................................. 1,762,710 2,090,287
========= =========
CLASS D
Beginning Balance........................................... 475,250 711,840
--------- ---------
Shares Sold................................................. 86,439 374,754
Shares issued in reinvestment of net dividends and
distributions............................................. 66,467 0
Shares redeemed............................................. (207,972) (305,243)
--------- ---------
Net increase/(decrease) in shares........................... (55,066) 69,511
--------- ---------
Ending Balance.............................................. 420,184 781,351
========= =========
</TABLE>
39
<PAGE> 53
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
--------------------------------------
INTERNATIONAL
INCOME EQUITY SMALL CAP
---------- ------------- ---------
<S> <C> <C> <C>
CLASS A
Beginning Balance........................................... 3,339,466 1,568,551 4,129,592
---------- --------- ---------
Shares Sold................................................. 155,058 102,868 1,661,014
Shares issued in reinvestment of net dividends and
distributions............................................. 131,084 122,744 384,551
Shares redeemed............................................. (1,181,717) (692,279) (613,954)
---------- --------- ---------
Net increase/(decrease) in shares........................... (895,575) (466,667) 1,431,611
---------- --------- ---------
Ending Balance.............................................. 2,443,891 1,101,884 5,561,203
========== ========= =========
CLASS D
Beginning Balance........................................... 145,898 366,560 1,290,948
---------- --------- ---------
Shares Sold................................................. 17,012 13,339 428,750
Shares issued in reinvestment of net dividends and
distributions............................................. 3,690 61,747 132,655
Shares redeemed............................................. (84,249) (206,722) (151,079)
---------- --------- ---------
Net increase/(decrease) in shares........................... (63,547) (131,636) 410,326
---------- --------- ---------
Ending Balance.............................................. 82,351 234,924 1,701,274
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
----------------------------
APPRECIATION SMALL CAP II
------------ ------------
<S> <C> <C>
CLASS A
Beginning Balance........................................... 3,190,643 295,961
---------- ---------
Shares Sold................................................. 402,557 1,186,062
Shares issued in reinvestment of net dividends and
distributions............................................. 595,282 48,311
Shares redeemed............................................. (2,074,474) (72,221)
---------- ---------
Net increase/(decrease) in shares........................... (1,076,635) 1,162,152
---------- ---------
Ending Balance.............................................. 2,114,008 1,458,113
========== =========
CLASS D
Beginning Balance........................................... 292,678 135,392
---------- ---------
Shares Sold................................................. 154,004 579,982
Shares issued in reinvestment of net dividends and
distributions............................................. 104,039 24,782
Shares redeemed............................................. (75,471) (28,316)
---------- ---------
Net increase/(decrease) in shares........................... 182,572 576,448
---------- ---------
Ending Balance.............................................. 475,250 711,840
========== =========
</TABLE>
6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager
Strategy for certain of the Funds from time to time. Under this strategy, the
Adviser allocates portions of a Fund's assets among multiple specialist Managers
with dissimilar investment styles and security selection disciplines. The
Adviser monitors the performance of both the total Fund portfolio and of each
Manager. The Adviser will reallocate Fund assets among individual managers or
40
<PAGE> 54
ESC STRATEGIC FUNDS, INC.
Notes to Financial Statements (continued) -- March 31, 1999
recommend to the Company that it employ or terminate particular managers to the
extent the Adviser deems appropriate to achieve the overall objectives of the
particular Fund.
Effective September 30, 1998, the Income Fund's sole Manager is Cincinnati
Asset Management, Inc. Llama Asset Management Company, L.P. and Murray Johnstone
International Limited are no longer Managers for the Income Fund. Effective July
17, 1998, the International Equity Fund's sole Manager is Murray Johnstone
International Limited; Globeflex Capital, L.P. is no longer a Manager for the
International Equity Fund.
As of March 31, 1999, the Managers are as follows:
ESC Strategic Income Fund -- Cincinnati Asset Management, Inc.
ESC Strategic International Equity Fund -- Murray Johnstone
International Limited.
ESC Strategic Small Cap Fund -- Equitable Asset Management, Inc.
ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.; Brandes
Investment Partners, L.P., and Atlantic Capital Management, LLC.
ESC Strategic Small Cap II Fund -- Equitable Asset Management, Inc.
Equitable Asset Management, Inc. is an affiliate of the Adviser.
Effective May 24, 1999, Westcap Investors, LLC has been appointed as a
Manager of the ESC Strategic Appreciation Fund and GlobeFlex Capital L.P. is no
longer a Manager.
7. FEDERAL INCOME TAXES (Unaudited). Capital losses and foreign currency
losses incurred after October 31, 1998 through March 31, 1999, are deemed to
arise on the first business day of the following fiscal year. Such losses may be
deferred and treated as occurring on the first day of the following fiscal year.
The Small Cap II Fund incurred and will elect to defer post October capital
losses of approximately $1,890,515. The International Fund incurred foreign
currency losses and will elect to defer these post October losses of
approximately $26,128.
For the taxable year ended March 31, 1999, 7.36% of the income dividend
paid by the Appreciation Fund qualifies for the dividends received deduction
available for corporations.
As of March 31, 1999, for federal income tax purposes, the following Fund
had a capital loss carry forward available to offset future capital gains, if
any:
<TABLE>
<CAPTION>
AMOUNT EXPIRES
---------- -------
<S> <C> <C>
Small Cap II.......................................... $1,359,180 3/31/07
</TABLE>
The carry forward will reduce the Fund's taxable income arising from future
net realized gain on investments, if any, to the extent permitted by the Code,
and thus will reduce the amount of the distributions to shareholders which would
otherwise be necessary to relieve the Fund of any liability for federal tax.
The following table presents capital gain dividend distributions from
long-term capital gains for the following Funds for the year ended March 31,
1999:
<TABLE>
<CAPTION>
FUND AMOUNT
- ---- ----------
<S> <C>
Income...................................................... $ 139,189
International Equity........................................ 904,995
Small Capital............................................... 3,368,662
Appreciation................................................ 2,386,021
</TABLE>
41
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
ESC Strategic Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and changes in net assets and the financial highlights present
fairly, in all material respects, the financial position 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 the ESC Strategic Funds, Inc., hereafter referred to as
the "Funds") at March 31, 1999, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which include correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
May 14, 1999
<PAGE> 56
[ESC Strategic Funds Graphic]
ESC STRATEGIC FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219-8006
GENERAL AND ACCOUNT INFORMATION:
(800) 261-FUND(3863)
INVESTMENT ADVISER
- ---------------------
SunTrust Equitable Securities
800 Nashville City Center
Nashville, Tennessee 37219-1743
ADMINISTRATOR AND DISTRIBUTOR
- ---------------------------------
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
COUNSEL
- --------
Dechert Price & Rhoads
1775 I Street, N.W.
Washington, D.C. 20006
INDEPENDENT ACCOUNTANTS
- ---------------------------
PricewaterhouseCoopers LLP
100 East Broad Street
Suite 2100
Columbus, Ohio 43215
5/99
ESC Strategic INCOME Fund
ESC Strategic INTERNATIONAL EQUITY Fund
ESC Strategic SMALL CAP Fund
ESC Strategic APPRECIATION Fund
ESC Strategic SMALL CAP II Fund
ANNUAL REPORT
MARCH 31, 1999
