<PAGE> 1
As filed with the U.S. Securities and Exchange Commission on September 30, 1997
Registration No. 33-76250
File No. 811-8406
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
--
Post-Effective Amendment No. 6 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 8
(Check appropriate box or boxes.)
SUMMIT INVESTMENT TRUST
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, OH 43219
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(800) 272-3442
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Scott A. Englehart
Craig C. Rudesill
Summit Investment Trust
3435 Stelzer Road
Columbus, OH 43219
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Bruce G. Leto, Esq.
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square, Suite 2600
Philadelphia, PA 19103
(215) 564-8115
It is proposed that this filing will become effective (check appropriate box):
X Immediately upon filing pursuant to paragraph (b)
- --
On September 30, 1997 pursuant to paragraph (b)
- --
60 days after filing pursuant to paragraph (a)(1)
- --
On (__________________) pursuant to paragraph (a)(1)
- --
75 days after filing pursuant to paragraph (a)(2)
- --
On (__________________) pursuant to paragraph (a)(2) of Rule 485.
- --
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
- -- previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of common
stock of the Summit Investment Trust under the Securities Act of 1933 pursuant
to Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant
filed a Notice pursuant to Rule 24f-2 for the fiscal period ended May 31, 1997
on July 28, 1997.
<PAGE> 2
SUMMIT INVESTMENT TRUST
CROSS REFERENCE SHEET PURSUANT TO RULE 481(a)
This Amendment to the Registration Statement of SUMMIT INVESTMENT TRUST,
which consists of one portfolio, Summit High Yield Fund, is comprised of the
following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
<TABLE>
<CAPTION>
ITEM PROSPECTUS HEADING
NO. (RULE 495(c) CROSS REFERENCE)
- ---- -----------------------------
<S> <C> <C>
1. Cover Page. Cover Page.
2. Synopsis. About the Summit High Yield Fund ---
Transaction Costs and Fund Expenses.
3. Condensed Financial Information. About the Summit High Yield Fund --- Financial Highlights;
About the Summit High Yield Fund --- Fund and Market
Characteristics/Risk Factors; The Trust and the Fund ---
Understanding Performance Information.
4. General Description of Registrant. The Trust and the Fund --- Organization of the Trust
and the Fund; Investment Policies, Practices and Risks;
About the Summit High Yield Fund --- Fund and Market
Characteristics/Risk Factors.
5. Management of the Fund. The Trust and the Fund --- Management of the Trust and
the Fund; The Trust and the Fund --- Management-Related
Services; The Trust and the Fund --- Fund Expenses;
The Trust and the Fund --- Distribution Expenses.
5A. Management's Discussion of Information is contained in Registrant's annual report
Fund Performance to shareholders dated July 30, 1997.
6. Capital Stock and Other Securities. The Trust and the Fund --- Organization of the Trust and
the Fund; The Trust and the Fund --- Management of the
Trust and the Fund; Investing with Summit Investment Trust
--- Distributions and Taxes; Investing with Summit
Investment Trust --- Obtaining Information on Your Investment.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM PROSPECTUS HEADING
NO. (RULE 495(c) CROSS REFERENCE)
- ---- -----------------------------
<S> <C> <C>
7. Purchase of Securities Being Offered. Investing with Summit Investment Trust --- How to
Purchase Shares; Investing with Summit Investment Trust
--- Share Price and Sales Charges; The Trust and the
Fund --- Distribution Expenses; Investing with
Summit Investment Trust --Shareholder Services; Investing
with Summit Investment Trust --- Additional Shareholder
Privileges; The Trust and the Fund --- Net Asset Value.
8. Redemption or Repurchase. Investing with Summit Investment Trust --- Share Price
and Sales Charges; Investing with Summit Investment Trust
--- General Methods of Redeeming Shares; Investing with
Summit Investment Trust --- Shareholder Services; Investing
with Summit Investment Trust --- Additional Shareholder
Privileges.
9. Pending Legal Proceedings. Not Applicable.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
STATEMENT OF ADDITIONAL INFORMATION HEADING
(RULE 495(c) CROSS REFERENCE)
--------------------------------------------
10. Cover Page. Cover Page.
11. Table of Contents. Table of Contents.
12. General Information and History. Not Applicable.
13. Investment Objectives and Policies. Investment Objective and Policies; Risk Factors;
Investment Program; Investment Restrictions;
Portfolio Transactions.
</TABLE>
<PAGE> 4
PROSPECTUS
SUMMIT HIGH YIELD FUND
SUMMIT INVESTMENT TRUST - 3435 STELZER ROAD - COLUMBUS, OHIO 43219 -
1-800-272-3442
Summit Investment Trust (the "Trust") is organized as an open-end,
management investment company (a mutual fund). The Trust is authorized to
provide a range of investment objectives through a series of separate investment
portfolios or funds. This prospectus relates to the SUMMIT HIGH YIELD FUND (the
"Fund"), a diversified investment portfolio of the Trust. The Fund is the only
portfolio of the Trust currently available.
FACTS AT A GLANCE
INVESTMENT OBJECTIVE:
High current income with capital appreciation a secondary goal. As with any
mutual fund, there is no assurance that the Fund will achieve its objective.
STRATEGY:
Investing primarily in lower-quality (lower-rated), intermediate to
long-term corporate bonds, often called high yield, high risk bonds. The
portfolio will be actively managed to take advantage of relative values of
various issuers and industry sectors of the high yield market. Emphasis will
be given to issuers and sectors whose credit fundamentals and technical
trading factors provide attractive risk reward characteristics.
RISKS OF HIGH YIELD, HIGH RISK BONDS:
The Fund may invest up to 100% of its assets in high yield, high risk bonds
that entail greater risks, including default risks, than those found in
higher-rated bonds or debt securities. The Fund may also invest in
lower-rated foreign debt securities that entail special additional risks.
Investors should carefully consider these risks before investing. See "Risk
Factors," "Fund and Market Characteristics/Risk Factors," "Foreign Sovereign
Debt Securities" and "Foreign Securities" in this prospectus and "Special
Risks of Investing in High Yield, High Risk Bonds," "Foreign Sovereign Debt
Securities" and "Foreign Securities" in the Statement of Additional
Information. An investment in the Fund should be considered speculative.
INVESTOR PROFILE:
A risk-oriented investor seeking the highest level of current income, paid
monthly, who is willing to accept the possibility of significant
fluctuations in principal value. The Fund should represent only a portion of
such an investor's overall investment program, not the only investment. When
sold, Fund shares may be worth more or less than when purchased.
FEES AND CHARGES:
Shares of the Fund are offered to the public at their net asset value plus a
front end sales charge of 4.50%, reduced on investments of $100,000 or more
and subject to certain discounts and exceptions. The Fund pays various
advisory, service and distribution fees.
INVESTMENT ADVISER/FUND ADMINISTRATOR:
First Summit Capital Management ("FSCM" or the "Adviser") is the investment
adviser to the Fund. The Administrator of the Fund is BISYS Fund Services,
Limited Partnership ("BISYS Fund Services" or the "Administrator").
------------------------
Shares of the Trust are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation or any other government agency. An investment in
the Fund involves investment risk, including the possible loss of principal.
------------------------
This prospectus sets forth information you should know before making an
investment decision. You should read this prospectus and keep it for future
reference. A Statement of Additional Information ("SAI") about the Fund, dated
September 30, 1997, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference in this prospectus. To obtain a free
copy, write the Trust at the above address or call 1-800-272-3442.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is September 30, 1997.
<PAGE> 5
RISK FACTORS -- SPECIAL SUMMARY
Because of its investment policies, the Fund may not be suitable or
appropriate for all investors. The Fund is designed for long-term investors who
can accept the risks entailed in seeking a high level of current income
available from investments in intermediate to long-term, high yield, high risk
medium and lower-quality (lower-rated), fixed income securities. Investors
should carefully consider these risks before investing. The terms "fixed income
securities" and "debt securities" are used interchangeably in this prospectus
and in the SAI.
SPECIAL RISKS OF INVESTING IN HIGH YIELD, HIGH RISK BONDS
The Fund may invest up to 100% of its assets in lower-rated high yield,
high risk debt securities or "junk" bonds that entail greater risks, including
default risks, than those found in higher-rated debt securities. Lower-rated
debt securities include debt securities that are rated "Ba" or lower by Moody's
Investors Service, Inc. ("Moody's") or "BB" or lower by Standard & Poor's
Ratings Group ("Standard & Poor's") or that are not rated but are judged by the
Adviser to be comparable in quality to such rated debt securities. The following
special considerations are additional risk factors associated with the Fund's
investments in lower-rated debt securities:
YOUTH AND GROWTH OF THE LOWER-RATED DEBT SECURITIES MARKET. The market for
lower-rated debt securities is relatively new and its growth has paralleled a
long economic expansion. Past experience may not, therefore, provide an accurate
indication of future performance of this market, particularly during periods of
economic recession. An economic downturn or increase in interest rates is likely
to have a greater negative effect on this market, the value of lower-rated debt
securities in the Fund's portfolio, the Fund's net asset value and the ability
of the bonds' issuers to repay principal and interest, meet projected business
goals and obtain additional funding, than on higher-rated securities. These
circumstances also may result in a higher incidence of defaults than with
respect to higher-rated securities. An investment in the Fund is more
speculative than investment in shares of a fund which invests only in
higher-rated debt securities.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The prices of
lower-rated debt securities may be more sensitive to adverse economic changes or
corporate developments than higher-rated investments. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities. Market prices of
lower-rated debt securities structured as zero-coupon or pay-in-kind securities
are affected to a greater extent by interest rate changes and may be more
volatile than securities which pay interest periodically and in cash. Where the
Fund deems it appropriate and in the best interests of Fund shareholders, the
Fund may incur additional expenses to seek recovery on a debt security on which
the issuer has defaulted and to pursue litigation to protect the interests of
security holders of its portfolio companies.
LIQUIDITY AND VALUATION. Because the market for lower-rated securities may
be thinner and less active than for higher-rated securities, there may be market
price volatility for these securities and limited liquidity in the resale
market. Non-rated securities are usually not as attractive to as many buyers as
rated securities are, a factor which may make non-rated securities less
marketable. These factors may have the effect of
2
<PAGE> 6
limiting the availability of the securities for purchase by the Fund and may
also limit the ability of the Fund to sell such securities at their fair value
either to meet redemption requests or in response to changes in the economy or
the financial markets. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of
lower-rated debt securities, especially in a thinly-traded market. To the extent
the Fund owns or may acquire illiquid or restricted lower-rated securities,
these securities may involve special registration responsibilities, liabilities
and costs, and liquidity and valuation difficulties. Changes in values of debt
securities which the Fund owns will affect its net asset value per share. If
market quotations are not readily available for the Fund's lower-rated debt
securities, these securities will be valued by a method that the Board of
Trustees (the "Trustees") believes accurately reflects fair value. Judgment
plays a greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available.
TAXATION. Special tax considerations are associated with investing in
lower-rated debt securities structured as zero-coupon or pay-in-kind securities.
The Fund accrues income on these securities prior to the receipt of cash
payments. The Fund must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax laws and may,
therefore, have to dispose of its portfolio securities to satisfy distribution
requirements.
PAYMENT EXPECTATIONS. High yield, high risk fixed-income securities
frequently have call or buy-back features which permit an issuer to call or
repurchase the securities from the Fund. Although such securities are typically
not callable for a period from three to five years after their issuance, if a
call were exercised by the issuer during periods of declining interest rates,
the Fund would likely have to replace such called securities with lower-yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders. The premature disposition of a high yield, lower-rated, fixed
income security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may also make it more difficult for the
Fund to manage the timing of its receipt of income, which may have tax
implications.
LEGISLATIVE PROPOSALS. There are a variety of legislative actions which
have been taken or which are considered from time to time by the United States
Congress which could adversely affect the market for high yield, high risk
bonds. For example, congressional legislation limited the deductibility of
interest paid on certain high yield bonds used to finance corporate
acquisitions. Also, Congressional legislation has, with some exceptions,
generally prohibited federally-insured savings banks from investing in high
yield, fixed income securities. Regulatory actions have also effected the high
yield market. For example, many insurance companies have restricted or
eliminated their purchases of high yield bonds as a result of, among other
factors, actions taken by the National Association of Insurance Commissioners.
If similar legislative and regulatory actions are taken in the future, they
could result in further tightening of the secondary market for high yield
issues, could reduce the number of new high yield, high risk securities being
issued and could make it more difficult for the Fund to attain its investment
objective.
OTHER RISKS
The Fund may invest in derivative securities, such as mortgage-backed and
asset-backed securities and options and futures contracts. For risks relating to
investing in foreign securities and futures contracts and
3
<PAGE> 7
options, see "Fund and Market Characteristics/Risk Factors," "Foreign Sovereign
Debt Securities" and "Foreign Securities" in this prospectus, and "Special Risks
of Investing in High Yield Bonds, High Risk," "Foreign Sovereign Debt
Securities" and "Foreign Securities" in the SAI. Risks associated with certain
investment policies are discussed in the prospectus under the caption
"Investment Policies, Practices and Risks."
1. ABOUT THE SUMMIT HIGH YIELD FUND
TRANSACTION COSTS AND FUND EXPENSES
Shares of the Fund are sold subject to a sales charge, Rule 12b-1
distribution fees and the other expenses of the Fund's operation as set forth in
the following table:
FEE TABLE
TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)................................................. 4.50%(1)
Maximum Sales Load Imposed on Reinvested Dividends................ None
Maximum Deferred Sales Load....................................... None(2)
Redemption Fees................................................... None
Exchange Fees..................................................... None
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average daily net assets)
<TABLE>
<S> <C>
Management Fees (after fee waivers)............................... 0.41%(3)
12b-1 Fees........................................................ 0.25%
Other Administrative and Servicing Expenses....................... 0.94%
-----
Total Fund Operating Expenses..................................... 1.60%
</TABLE>
- ---------------
(1) Reduced on investments of $100,000 or more and subject to certain discounts
and exceptions. See "4. Investing With Summit Investment Trust -- Share
Price and Sales Charges."
(2) A deferred sales charge may be applicable on investments of $500,000 or
more. See "4. Investing with Summit Investment Trust -- Shareholder
Services."
(3) This fee may vary between 0.35% and 1.15%; however, the Adviser has agreed
to waive a portion of its advisory fee so as to confine the Fund's total
annual expenses to 1.60%. (See "Management of the Trust and the Fund -- The
Advisory Fee.")
4
<PAGE> 8
The foregoing Fee Table should help you understand the kinds of expenses
you will bear directly or indirectly as a Fund shareholder. "Transaction
Expenses" shows the maximum you pay as direct costs in buying shares of the
Fund. Because a portion of the 12b-1 fees is considered an asset-based sales
charge by the National Association of Securities Dealers, Inc. ("NASD"),
long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by the Conduct Rules of the NASD. "Annual
Operating Expenses" is restated based on actual expenses for the fiscal year
ended May 31, 1997 and is intended to represent how much it will cost to operate
the Fund for a year. These are costs paid indirectly by shareholders of the Fund
because they are deducted from the Fund's total assets before the daily share
price is calculated and before dividends and other distributions are made.
EXAMPLE:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return, whether or
not redeemed at the end of each time period:........ $ 61 $93 $ 128 $226
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL FUND EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
The "Annual Operating Expenses" set forth above are:
-- MANAGEMENT FEES: the percent of the average daily net assets of the
Fund paid to the Fund's investment adviser; this fee is a performance fee which
is based on the performance of the Fund in relation to the change in the Salomon
Brothers High Yield Market Index; the fee may be as high as 1.15% or as low as
.35% annually; for the fiscal year ended May 31, 1997, the Fund paid a
management fee of 0.41%; absent waivers the Fund would have paid a management
fee of 1.08%.
-- 12b-1 FEES: a monthly charge to the Fund to finance certain activities
relating to the distribution of shares of the Fund to investors; and
-- OTHER ADMINISTRATIVE AND SERVICING EXPENSES: expenses for
administration of the Fund and servicing of shareholder accounts, such as
providing statements and reports, disbursing dividends, and providing custodial
services.
For further details on Fund expenses, see "Management of the Trust and the
Fund -- The Advisory Fee," "Management of the Trust and the Fund -- The
Sub-Advisory Fee," "Management-Related Services" and "Distribution Expenses."
5
<PAGE> 9
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Fund for each of
the periods presented. The Fund's financial highlights for each of the periods
presented have been audited by Coopers & Lybrand L.L.P., independent auditors,
whose unqualified report thereon is included in the SAI. The Fund's financial
statements, notes to financial statements and report of independent accountants
are included in the SAI and are also included in the Fund's Annual Report to
Shareholders (the "Annual Report"). Additional performance information for the
Fund is included in the Annual Report. The Annual Report and the SAI are
available at no cost from the Fund at the address and telephone number noted on
the cover page of this Prospectus. The following information should be read in
conjunction with the financial statements and notes thereto.
On January 19, 1996, the Fund issued a second class of shares designated as
the Institutional Service Shares class (the "Service Class"). On July 31, 1997,
the Fund exchanged all of the Service Class shares into shares of the High Yield
Shares class of the Fund, the only class of the Fund currently offered, and
terminated the Service Class.
SUMMIT HIGH YIELD FUND
For a share of the Fund outstanding throughout each period.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FOR THE PERIOD
MAY 31, MAY 31, FROM JUNE 27, 1994
1997 1996 TO MAY 31, 1995(a)
------------ ------------ ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.......................... $ 11.05 $ 10.11 $ 10.00
------- ------- -------
INVESTMENT ACTIVITIES:
Net investment income......................................... 0.99 1.01 0.83
Net realized and unrealized gains (losses) on investments..... 0.90 0.95 0.11
------- ------- -------
Total from Investment Activities...................... 1.89 1.96 0.94
------- ------- -------
DISTRIBUTIONS:
Net investment income......................................... (0.99) (1.01) (0.83)
In excess of net investment income............................ (0.13) -- --
Net realized gains............................................ (0.50) (0.01) --
------- ------- -------
Total Distributions................................... (1.62) (1.02) (0.83)
------- ------- -------
Net Asset Value, End of period................................ $ 11.32 $ 11.05 $ 10.11
======= ======= =======
Total Return (excludes sales charges)......................... 18.15% 20.34% 9.97% (b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000)............................. $ 34,707 $ 28,628 $ 27,676
Ratio of expenses to average net assets....................... 1.60% 1.60% 1.56% (c)
Ratio of net investment income to average net assets.......... 8.73% 9.42% 9.13% (c)
Ratio of expenses to average net assets*...................... 2.32% 2.24% 1.61% (c)
Ratio of net investment income to average net assets*......... 8.01% 8.78% 9.08% (c)
Portfolio turnover (d)........................................ 271.68% 187.61% 158.36%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
6
<PAGE> 10
FUND AND MARKET CHARACTERISTICS/RISK FACTORS
WHAT IS A HIGH YIELD, HIGH RISK BOND?
A bond that is rated "Ba" or lower by Moody's, "BB" or lower by Standard &
Poor's, or comparably rated by another nationally recognized statistical rating
organization ("NRSRO") (or an unrated bond judged by the Adviser to be of
comparable quality), because the bond is believed to represent greater risk of
default than more creditworthy bonds -- hence such a lower-rated bond is
commonly referred to as a "junk bond." (Default is the failure to make timely
interest or principal payments.) To compensate an investor for this risk, these
bonds must offer high yields. The market for high yield, high risk debt
securities is relatively new and its growth has paralleled a long economic
expansion. Past experience may not, therefore, provide an accurate indication of
future performance of this market, particularly during periods of economic
recession. An investment in the Fund is more speculative than investment in a
fund investing only in higher-rated debt securities.
The debt security ratings of several NRSROs are set forth in Appendix I to
this prospectus.
WHO ISSUES HIGH YIELD, HIGH RISK BONDS?
Typically, corporations in one of several categories: small and medium-size
companies that lack the history or capital strength to merit "investment-grade"
status; former blue-chip companies that have been downgraded due to financial
difficulties; companies electing to borrow heavily to finance (or avoid) a
takeover or buyout; and highly indebted ("leveraged") companies seeking to
refinance their debt at lower rates. With high yield, high risk securities,
there is a greater possibility of a default or the bankruptcy of the issuer,
circumstances that might increase the expense of the Fund in seeking recovery
from such an issuer.
DOES THE FUND INVEST ONLY IN HIGH YIELD, HIGH RISK BONDS?
No, but such bonds will generally represent a significant portion of the
Fund's assets. The portfolio may also include loan participations, convertible
securities -- preferred stocks and bonds which may be converted at some future
point into common stock -- and substantial holdings of foreign securities. When,
in the opinion of the Adviser, market or economic conditions warrant a temporary
defensive posture, the Fund may place all or a portion of its assets in high
quality, fixed-income securities, short-term debt obligations or cash.
WHY SHOULD THE INVESTOR IN THIS FUND BE PREPARED FOR GREATER PRICE SWINGS THAN
IN HIGH
QUALITY BOND FUNDS?
For two main reasons:
Greater credit risk. Companies issuing high yield, high risk bonds are not
as strong financially as those with higher credit ratings and their bonds are
often viewed as speculative investments. High yield bond issuers are more
vulnerable to real or perceived business setbacks and to changes in the economy,
such as a recession or an increase in interest rates, that might impair their
ability to make timely interest and principal payments
7
<PAGE> 11
and thus adversely affect the value of their securities held by the Fund. As a
result, the Fund will rely heavily on proprietary credit research and
experienced portfolio management when selecting investments. (See "Management of
the Trust and the Fund -- Portfolio Managers.")
Reduced market liquidity. The high yield, high risk bond market is
generally less "liquid" than the market for higher quality bonds, meaning that
there may be no public market or only inactive trading markets for some of the
securities in which the Fund invests. Large purchases or sales of certain issues
may thus cause significant changes in their prices, and the Fund may be required
to retain certain investments for indefinite periods or sell them at substantial
losses. A lack of liquidity or low trading volume also means that judgement,
rather than sales or bid prices, may play a significant role in valuing the
securities.
HOW MIGHT INTEREST RATES AND THE FUND'S AVERAGE MATURITY AFFECT ITS PRICE?
The Fund's average maturity (expected to be more than five years but less
than ten years, although it may vary if market conditions warrant) makes its
share price more sensitive to broad changes in interest rate movements than
shorter-term bond funds. In comparison to higher quality bond funds having a
similar average maturity, the Fund's share price is likely to be more sensitive
to credit conditions and somewhat less sensitive to interest rate changes.
HOW DO SHARE PRICE CHANGES AFFECT OVERALL RETURN?
Your total return for any given period has two parts:
Income, which, if any, will always be positive, and
Change in share price, which can be positive or negative. If the Fund's
income return was 10% during a year, for example, and the price declined 15%,
your total return would be approximately -5%. A price increase of 5% would have
given you a return of approximately 15%. Always remember that the Fund's yield
does not indicate its total return. (Also see "Understanding Performance
Information.")
HOW DOES THE FUND ADDRESS THE SPECIAL RISKS OF HIGH YIELD BOND INVESTING?
The Fund employs a number of approaches which may mitigate, but cannot
eliminate, risk: (1) thorough credit research; (2) technical analysis of trading
and ownership patterns of targeted securities; (3) extensive diversification,
intended to limit the Fund's exposure to any one industry, issuer or category of
issuer or security; and (4) detailed analysis of contractual obligations to
lenders relating to specific securities.
2. INVESTMENT POLICIES, PRACTICES AND RISKS
This section takes a detailed look at the types of securities the Fund may
hold in its portfolio and the various kinds of investment practices that may be
used in day-to-day portfolio management. Certain
8
<PAGE> 12
FUNDAMENTAL POLICIES and current OPERATING POLICIES of the Fund are noted where
applicable. The Fund's FUNDAMENTAL POLICIES (as with its investment objective
stated on page 1) may not be changed without shareholder approval. Such approval
requires a vote of the lesser of (i) 67% or more of the shares of the Fund
represented at a meeting at which more than 50% of the outstanding shares of the
Fund are represented or (ii) more than 50% of the outstanding shares of the
Fund. The Fund's OPERATING POLICIES can be changed by the Trustees without
shareholder approval. Unless otherwise specified, the investment program and
restrictions of the Fund are not fundamental policies.
The Fund's investment program is subject to further restrictions and risks
described in the Fund's SAI. Certain of those restrictions are fundamental
policies. Reference should be made to the discussion under "Investment
Restrictions" in the SAI.
TYPES OF PORTFOLIO SECURITIES
As an operating policy, the Fund seeks to meet its investment objective of
high income and, secondarily, capital appreciation by investing its assets in a
widely diversified portfolio consisting primarily of high yield, high risk
bonds, loan participations, convertible securities and preferred stocks. Under
normal circumstances, at least 65% of the Fund's total assets will be invested
in high yield debt securities. These and the other securities the Fund may
purchase are described below. The Fund is allowed to buy securities on a
when-issued basis.
FUNDAMENTAL POLICY: The Fund will not purchase securities of any
issuer (other than obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities) if, as a result, it would own more than
10% of the outstanding voting securities of any issuer or have more than 5%
of its total assets invested in the securities of a single issuer, except
that up to 25% of the Fund's total assets may be invested without regard to
these restrictions.
DEBT SECURITIES.
BONDS. A bond is an interest-bearing debt security issued by a corporation
or governmental unit. The issuer has a contractual obligation to pay interest at
a stated rate on specific dates and to repay principal (the bond's face value)
on a specified date. An issuer may have the right to redeem ("call") a bond
before maturity, and, if the bond is called before maturity, the investor may
have to reinvest the proceeds at lower market rates.
While the bond's annual interest income, established by the coupon rate,
may be fixed for the life of the bond, its yield (income as a percent of current
price) will reflect current interest rate levels. The bond's price rises and
falls so that its yield remains reflective of current market conditions. Bond
prices usually rise when interest rates fall, and vice versa. High yield, high
risk bond prices are less directly responsive to interest rate changes than
investment-grade issues and may not always follow this pattern.
Bonds may be secured (backed by specified collateral) or unsecured (backed
by the issuer's general creditworthiness). Most high yield, high risk bonds are
unsecured.
9
<PAGE> 13
Bond Ratings and High Yield Bonds. Larger bond issues are evaluated by
NRSROs such as Moody's and Standard & Poor's on the basis of the issuer's
ability to meet all required interest and principal payments. Other things being
equal, lower-rated bonds have higher yields due to greater risk. High yield,
high risk bonds are those rated below "Baa" by Moody's or "BBB" by Standard &
Poor's or those that are not rated but judged by the Adviser to be of comparable
quality.
The table below shows the weighted average of the ratings of the bonds in
the Fund's portfolio during the fiscal year ended May 31, 1997. The credit
rating categories are those provided by Standard & Poor's. The percentages in
the column titled "Rated" reflect the percentage of bonds in the portfolio which
received a rating from at least one NRSRO. The percentages in the column titled
"Not Rated" reflect the percentage of bonds in the portfolio which are not rated
but which the Adviser has judged to be comparable in quality to the
corresponding rated bonds.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL
MARKET VALUE OF BOND HOLDINGS
------------------------------
CREDIT RATING RATED NOT RATED TOTAL
------------------------------------------- ----- --------- ------
<S> <C> <C> <C>
BB......................................... 7.66 0.00 7.66
B.......................................... 85.82 5.54 91.36
CC & CCC................................... 0.98 0.00 0.98
----- --------- ------
94.46 5.54 100.00
===== ========= ======
</TABLE>
The debt security ratings of several NRSROs are set forth in Appendix I to
this prospectus.
Some specific types of bonds the Fund may hold from time to time are set
forth below. For additional information with respect to certain of these
instruments, reference should be made to the SAI.
MORTGAGE-BACKED OR ASSET-BACKED SECURITIES. The Fund may invest up to 10%
of its total assets in both mortgage-backed securities and asset-backed
securities. Mortgage-backed securities are securities representing interests in
a pool of mortgages. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the Fund. Asset-backed
securities, which may be classified either as pass-through certificates or
collateralized obligations, represent fractional interests in pools of secured
or unsecured assets. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are pledged
to a trustee or custodian for the benefit of the holders thereof. The issuers
generally hold no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments on such
asset-backed securities are obligations of the issuers, in the event of defaults
on the underlying assets not covered by any credit support, the issuers are
unlikely to have sufficient assets to satisfy their obligations on the related
asset-backed securities. The actual prepayment experience of a pool of mortgage
loans or other obligations may cause the yield realized by the Fund to differ
from the yield calculated on the basis of the average life of the pool. In
addition, for mortgage-backed or asset-backed securities purchased at a premium,
the premium may be lost in the event of early
10
<PAGE> 14
prepayment which may result in a loss to the Fund. The Fund may invest in
asset-backed securities that are either pass-through certificates or
collateralized obligations. Such securities may be of short maturity, such as
commercial paper, or longer, such as bonds, and may be issued with only one
class of security or have more than one class with some classes having rights to
payments on the asset-backed security subordinate to the rights of the other
classes. These subordinated classes will take the risk of default before the
classes to which they are subordinated. It is anticipated that asset-backed
securities other than those described above will be issued in the future. The
Fund may invest in such securities in the future if such investment is otherwise
consistent with the Fund's investment objective and policies.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND STRIPPED MORTGAGE-BACKED
SECURITIES. CMOs are debt securities that are fully collateralized by a
portfolio of mortgages or mortgage-backed securities. CMOs generally are issued
in multiple classes. The principal of and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
The general goal sought to be achieved in allocating cash flows on the
underlying mortgages is to create tranches on which the expected cash flows have
a higher degree of predictability than the underlying mortgages. As part of the
process of creating more predictable cash flows on some of the tranches, one or
more tranches generally must be created that absorb most of the volatility in
the cash flows on the underlying mortgages. The yields on these tranches are
relatively higher than on tranches with more predictable cash flows. The Fund
may invest in these subordinated, higher-yielding tranches which take the risk
of default first. Because of the uncertainty of the cash flows on these
tranches, and the sensitivity thereof to changes in prepayment rates on the
underlying mortgages, the market prices of and yield on these tranches tend to
be highly volatile.
Stripped mortgage-backed securities are created by separating the interest
and principal payments generated by a pool of mortgage-backed instruments to
create two classes of securities. One class receives interest-only payments
("IOs") and one, principal-only payments ("POs"). CMOs, IOs, and POs are acutely
sensitive to interest rate changes and the rate of principal prepayments on the
underlying mortgages serving as collateral. For example, declining interest
rates may result in prepayments and thus termination of a stream of IO interest
payments, in which event the Fund may fail to recoup its investment. Moreover,
the proceeds of prepayments may have to be reinvested at the lower interest
rates. IOs, POs, and certain CMOs are very volatile in price and may have
reduced liquidity.
ZERO-COUPON AND PAY-IN-KIND BONDS. The Fund may invest up to 25% of its
total assets in zero-coupon bonds. A zero-coupon security has no cash coupon
payments. Instead, the issuer sells the security at a substantial discount from
its maturity value. The interest received by the investor from holding this
security to maturity is the difference between the maturity value and the
purchase price. The advantage to the investor is that the reinvestment risk of
the income received during the life of the bond is eliminated. However,
zero-coupon bonds, like other bonds, retain interest rate and credit risk and
usually display more price volatility than securities that pay a cash coupon.
Since there are no periodic interest payments made to the holder of a
zero-coupon security, when interest rates rise, the value of such a security
will fall more dramatically than a bond paying out interest on a current basis.
When interest rates fall, however, zero-coupon
11
<PAGE> 15
securities rise more rapidly in value because the bonds have locked in a
specific rate of return which becomes more attractive the further interest rates
fall.
The Fund may invest up to 25% of its total assets in pay-in-kind bonds.
Pay-in-kind ("PIK") bonds are securities that pay interest in either cash or
additional securities, at the issuer's option, for a specified period. PIKs,
like zero-coupon bonds, are designed to give an issuer flexibility in managing
cash flow. PIK bonds can be either senior or subordinated debt and trade flat
(i.e., without accrued interest). The price of PIK bonds is expected to reflect
the market value of the underlying debt plus an amount representing accrued
interest since the last payment. PIKs are usually less volatile than zero-coupon
bonds, but more volatile than securities that pay in cash. PIK bonds may provide
an attractive yield on the Fund's investment even when the interest paid is in
the form of additional securities of the issuer instead of cash.
The Fund is required to distribute to shareholders income imputed to any
zero-coupon or PIK investments. Such distributions could reduce the Fund's cash
position.
OTHER SECURITIES.
Other types of securities and investments the Fund may buy are:
CONVERTIBLES. These corporate securities, usually bonds or preferred
stocks, are exchangeable for a specified number of shares of common stock, at a
pre-stated price. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have several unique characteristics such as: (1) higher
yields than common stocks but lower yields than comparable nonconvertible
securities; (2) a lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics; and (3) the potential for
capital appreciation if the market price of the underlying stock increases.
Although investments in convertible securities will be consistent with the
Fund's secondary objective of capital appreciation, because of their basically
lower yields than comparable nonconvertible securities, such investments will
not be treated as "high yield" for purposes of the Fund's policy of normally
having 65% of its assets invested in high yield securities.
EQUITIES: COMMON AND PREFERRED STOCK; WARRANTS. Each share of common and
preferred stock represents ownership or "equity" in a corporation, but usually
only common stockholders have the right to elect company directors and vote on
other matters. Preferred stock may have various preferences over common stock,
such as a prior right to payment of dividends. Warrants are options to buy a
stated number of shares of common stock at a specified price at any time during
the life of the warrant, usually one or two years. The common and preferred
stocks in which the Fund may invest may be traded either on a national
securities exchange or in the "over-the-counter" market, and the issuers of such
stocks may be unseasoned issuers with relatively smaller capitalizations. Such
issuers may or may not have outstanding issues of higher-yielding debt
securities. As an OPERATING POLICY, the Fund may not invest more than 10% of
total assets in common stocks (including up to 5% in warrants).
12
<PAGE> 16
PRIVATE PLACEMENTS. Securities sold directly to a small number of
investors, usually institutions, without registration under the Securities Act
of 1933, as amended (the "1933 Act"), are called private placements. Privately
placed securities are considered "restricted securities" and may not be readily
marketable. Selling these securities pursuant to a registration statement may
involve substantial delays and additional costs. As an OPERATING POLICY, the
Fund will not invest more than 15% of its net assets in illiquid securities.
Some restricted securities are eligible for purchase and sale under Rule 144A
under the 1933 Act. This rule permits "qualified institutional buyers," such as
the Fund, to trade in certain privately placed securities even though such
securities are not registered under the 1933 Act. The Trustees may determine,
when appropriate, that such securities, although restricted, are nevertheless
liquid and therefore not subject to the 15% limitation. A security is illiquid
if it cannot be sold or disposed of in the ordinary course of business within
seven days at approximately the value at which the Fund has valued the
investment.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Large loans to corporations or to
governments, including governments of less developed countries ("LDCs"), may be
shared or syndicated among several lenders, usually banks. The Fund's
investments in loans are expected in most instances to be in the form of
participations therein or assignments of all or a portion thereof from third
parties. In a participation, the Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon the lender's receipt of payments from
the borrower. As a result, the Fund may be subject to the credit risk of both
the borrower and the lender. In an assignment, the Fund acquires direct rights
against the borrower on a loan, although such rights may differ from and be more
limited than those held by the assigning lender. The Fund may have difficulty
disposing of assignments or participations where disposition involves assigning
such interests to third parties. These investments are treated as securities,
not as the making of loans subject to the Fund's investment restriction relating
to loans. Since these investments may not be readily marketable, they may be
subject to the Fund's policy against investing more than 15% of the Fund's net
assets in illiquid securities. Participations in or assignments of loans to
governments of LDCs may involve risks in addition to those attendant on
investments in foreign securities generally (see "Foreign Sovereign Debt
Securities" and "Foreign Securities" below).
FOREIGN SOVEREIGN DEBT SECURITIES. The Fund expects to invest in foreign
sovereign debt securities, including those of LDCs. Such securities will include
Brady Bonds. Brady Bonds are debt securities issued under the framework of the
Brady Plan, an initiative announced by U.S. Treasury Secretary Nicholas F. Brady
in 1989 as a mechanism for debtor nations to restructure their outstanding
external indebtedness. The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt, some or all of which may have
gone into default, for newly-issued bonds. Multilateral institutions such as the
International Bank for Reconstruction and Development (the "World Bank") and the
International Monetary Fund (the "IMF") support the restructurings by providing
funds pursuant to loan agreements or other arrangements which enable the debtor
nation to collateralize the new Brady Bonds or to repurchase outstanding bank
debt at a discount. Under these arrangements, debtor nations have been required
to agree to the implementation of various domestic monetary and fiscal reforms
intended to promote economic growth and development. Investors should recognize
that Brady Bonds have been issued somewhat recently, and accordingly, do not
13
<PAGE> 17
have a long payment history. Moreover, the financial packages offered by each
country differ. Countries that have issued or are about to issue Brady Bonds
include Argentina, Brazil, Costa Rica, the Dominican Republic, Mexico, Nigeria,
the Philippines, Poland, Uruguay and Venezuela. The Fund may purchase Brady
Bonds issued by any of these countries, and it reserves the right to acquire
Brady Bonds that may be issued by other countries in the future.
Investing in foreign sovereign debt securities will expose the Fund to the
direct or indirect consequences of political, social or economic changes in the
LDCs that issue the securities. The ability and willingness of sovereign
obligors in LDCs, or the governmental authorities that control repayment of
their external debt, to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which the Fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the size of its debt service burden relative to the economy as a
whole, and its government's policy towards the IMF, the World Bank and other
international agencies.
Sovereign obligors in LDCs are among the world's largest debtors to
commercial banks, other governments, international financial organizations and
other financial institutions. Some of these obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, leading to defaults on certain obligations and the restructuring of
certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Fund's holdings. Brady Bonds issued to date are
generally purchased and sold in secondary markets through U.S. securities
dealers and maintained through European transnational securities depositories.
FOREIGN SECURITIES. These are securities denominated in non-U.S. dollar
currencies that are issued and principally traded outside the U.S. Investments
in foreign securities broaden the Fund's holdings and thus may reduce the risk
of loss associated with a decline in the value of investments within U.S.
markets. They also involve some special risks: exposure to potentially adverse
local political and economic developments; nationalization or expropriation of
assets; imposition of currency exchange controls; the chance that fluctuations
in foreign exchange rates will decrease the investment's value (favorable
changes can increase its value); confiscatory taxation; potentially lower
liquidity and higher volatility; and possible problems arising from accounting,
disclosure, settlement, and regulatory practices that differ from U.S.
standards. Additional risks pertain to investments in LDCs (see "Foreign
Sovereign Debt Securities" above) or in countries which have recently changed
from, but could revert back to, centrally-planned communist or closed economies.
As
14
<PAGE> 18
an OPERATING POLICY, the Fund may invest up to 20% of its net assets in non-U.S.
dollar-denominated fixed-income securities principally traded in financial
markets outside the United States and may invest without limit in U.S.
dollar-denominated securities of foreign issuers in developed countries. The
Fund may also invest in securities of foreign branches of U.S. banks as long as
such investments do not exceed 25% of the Fund's total assets.
WHEN-ISSUED SECURITIES. The Fund may from time to time purchase securities
on a "when-issued" basis ("forward commitments"). The price of such securities,
which may be expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment take place at a later settlement
date. Normally, the settlement date occurs within 90 days of the purchase.
During the period between purchase and settlement, no payment is made by the
Fund to the issuer, and no interest accrues to the Fund. Forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in value of the Fund's other assets. When-issued securities may be sold prior to
the settlement date. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The Fund does not
believe that its net asset value or income will be adversely affected by its
purchase of securities on a when-issued basis. The Fund will segregate cash,
U.S. government securities or other liquid securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. Except as may
be imposed by these segregation factors, there is no limit on the percentage of
the Fund's total assets that may be committed to such transactions.
TYPES OF FUND MANAGEMENT PRACTICES
TEMPORARY OR DEFENSIVE INVESTMENTS. When, in the opinion of the Adviser,
changes in economic, financial, political or market conditions so warrant, the
Fund may, for temporary defensive purposes, reduce its holdings in high yield
securities and invest all or a portion of its assets in cash, high quality
fixed-income securities or high quality short-term debt obligations, including
certificates of deposit, commercial paper, notes, obligations issued or
guaranteed by the United States government or any of its agencies or
instrumentalities and repurchase agreements involving such government
securities. The Fund may also invest in such instruments to maintain liquidity
or pending selection of investments in accordance with its policies.
BORROWING MONEY AND TRANSFERRING ASSETS. The Fund can borrow money from
banks subject to the fundamental policy set forth below. Such borrowings may be
collateralized with Fund assets.
FUNDAMENTAL POLICY: The Fund will not borrow money, except the Fund
may borrow from banks as a temporary measure for extraordinary or emergency
purposes in amounts not exceeding 15% of its total assets valued at market.
The Fund will not borrow in order to increase income (leveraging), but only
to facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities. The Fund will not purchase additional
securities when money borrowed exceeds 5% of total
15
<PAGE> 19
assets. For purposes of the above restriction, entering into futures
contracts or reverse repurchase agreements will not be deemed a borrowing.
The Fund may not enter into reverse repurchase agreements if the total
investment in such agreements would exceed 5% of the total assets of the Fund.
As an OPERATING POLICY, the Fund will not mortgage, pledge, hypothecate or,
in any other manner, transfer as security for indebtedness any security owned by
the Fund, except as may be necessary in connection with permissible borrowings,
in which event such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's net assets valued at market. For purposes of this restriction,
collateral arrangements with respect to options and futures transactions shall
not be deemed to involve a pledge.
INVESTMENT COMPANY SECURITIES. Investing in securities of other investment
companies will result in an additional layer of certain fees. The Fund may
invest in securities of money market funds and in securities of other investment
companies of any type, but only under arrangements that will ensure that there
will be no duplication of investment management or advisory fees. As an
OPERATING POLICY, the Fund will not purchase securities of other investment
companies if the purchase would cause more than 10% of the value of the Fund's
total assets to be invested in investment company securities, provided that: (i)
no investment will be made in the securities of any one investment company if
immediately after such investment more than 3% of the outstanding voting
securities of such company would be owned by the Fund or more than 5% of the
value of the Fund's total assets would be invested in such company; and (ii) no
restrictions shall apply to a purchase of investment company securities in
connection with a merger, consolidation or reorganization. For purposes of this
restriction, privately issued collateralized mortgage obligations will not be
treated as investment company securities if issued by "Exemptive Issuers."
Exemptive Issuers are defined as unmanaged, fixed-asset issuers that: (i) invest
primarily in mortgage-backed securities; (ii) do not issue redeemable securities
as defined in section 2(a)(32) of the Investment Company Act of 1940, as amended
(the "1940 Act"); (iii) operate under general exemptive orders exempting them
from "all provisions" of the 1940 Act; and (iv) are not registered or regulated
under the 1940 Act as investment companies.
FUTURES CONTRACTS AND OPTIONS. Futures contracts are often used to manage
risk because they enable the investor to buy or sell an asset in the future at a
price agreed upon in the present. Options give the investor the right (or
option) to buy or sell an asset at a predetermined price in the future. A put
option gives the purchaser of the option, upon payment of a premium, the right
to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. The Fund may buy and sell futures contracts (and options on such
contracts) to manage its exposure to changes in interest rates, stock or bond
prices, and foreign currencies; to adjust its overall exposure to certain
markets; and also to adjust the portfolio's duration. The Fund may write covered
call and covered put options, buy puts and calls, and buy and sell covered
spread options on securities, financial indices, and foreign currencies. (A
spread option gives the Fund the right to sell
16
<PAGE> 20
an asset at a fixed dollar or yield spread in relation to a benchmark security.
The Fund will not commit more than 5% of its total assets to premiums when
purchasing spread options.)
Futures contracts and options may not always be successful hedges. The
prices of futures contracts are volatile and are influenced by, among other
things, actual and anticipated changes in market and interest rates which in
turn are influenced by fiscal and monetary policies and national and
international policies and economic events. Futures trading involves an
extremely high degree of leverage because of the low margin deposits required.
As a result, a relatively small price movement in a futures contract may result
in substantial loss (or gain) to the investor. Further risk arises because of
the imperfect correlation between movements in the prices of futures contracts
and movements in the prices of the underlying instruments which are the subject
of the hedge.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time such use will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for purchases of
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.
In connection with the purchase of futures contracts and certain options or
the writing of certain options, the Fund will maintain an amount of cash, U.S.
government securities or other liquid securities, equal to the market value of
the futures contracts and options (less any related margin deposits) in a
segregated account with the Fund's custodian to cover the position, or
alternative cover will be employed, thereby insuring that the use of such
contracts and options is unleveraged. See "Futures Contracts" and "Options" in
the SAI.
DEALER OPTIONS. The Fund may engage in transactions involving dealer
options. Dealer options are options purchased from or sold to securities
dealers, financial institutions or other parties through direct bilateral
agreements with such parties. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanisms, all of the terms
of a dealer option are determined by negotiation of the parties. Certain risks
are specific to dealer options as opposed to exchange-traded options. For
example, the Fund must rely on performance by the dealer from whom it purchased
the option if the option is exercised and will generally be able to realize the
value of a dealer option only by exercising it or reselling it to the dealer who
issued it. Similarly, when the Fund writes a dealer option, it generally will be
able to close out the option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the option. There can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Consistent
with a position taken by
17
<PAGE> 21
the staff of the SEC, the Fund will treat dealer options as subject to the
Fund's limitation prohibiting investment of more than 15% of its net assets in
illiquid securities.
As OPERATING POLICIES, the Fund will not engage in transactions in futures
contracts and options thereon for speculation, and the Fund will not write a
covered call option if, as a result, the aggregate market value of all portfolio
securities or currencies covering call options exceeds 25% of the market value
of the Fund's net assets. In addition, the Fund will not enter into futures
contracts or options thereon if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial margin and premiums on such contracts or options
thereon, provided, however, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount, as defined in certain
Commodity Futures Trading Commission regulations, may be excluded in computing
such 5% limit. The SAI should be consulted for a more complete description of
the special risks relating to futures contracts and options.
MANAGING FOREIGN EXCHANGE RISK. Investors in non-U.S. dollar securities
may "hedge" their exposure to potentially unfavorable currency changes by
purchasing a forward foreign currency exchange contract to exchange one currency
for another on some future date at the exchange rate prevailing on the date such
contract is purchased (a "forward contract"). In certain circumstances, a "proxy
currency" may be substituted for the currency in which the investment is
denominated, a strategy know as "proxy hedging." In such a case, the amount of
the foreign currency to be sold may exceed the value of the Fund's securities
denominated in such currency. The Fund may also maintain a net exposure to
forward contracts in excess of the value of the Fund's assets to which the
forward contracts relate in order to avoid excess transactions and transaction
costs. In either case, any such excess amount must be "covered" by liquid
securities, denominated in any currency, at least equal at all times to the
amount of such excess. Although foreign currency transactions will be used
primarily to protect the Fund's foreign securities from adverse currency
movements, they involve the risk that anticipated currency movements will not be
accurately predicted and the Fund's total return could be adversely affected as
a result. As an OPERATING POLICY, the Fund will normally conduct its foreign
exchange transactions in cash or by entering into forward contracts (not
exceeding 20% of net assets) expiring in less than one year.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
well-established securities dealers or banks that are members of the Federal
Reserve System. Any such dealer or bank will have been deemed creditworthy in
accordance with guidelines approved by the Trustees. In a repurchase agreement,
the Fund buys a security from a seller that has agreed to repurchase it at a
specified future date and at an agreed upon price. Repurchase agreements, which
may be viewed as loans made by the Fund which are collateralized by the
securities subject to repurchase, are generally entered into for a short period
of time, often less than a week. The Fund will not enter into a repurchase
agreement which does not provide for payment within seven days if, as a result,
more than 15% of the value of its net assets would then be invested in illiquid
securities. The Fund may enter into repurchase agreements without any limit if
the repurchase agreements provide for payment within seven days. In the event of
a bankruptcy or other default of a seller in a repurchase agreement, the Fund
could experience both delays in liquidating the underlying security and losses,
18
<PAGE> 22
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights.
SHORT SALES. The Fund may sell a security short as a hedge against
portfolio holdings whose credit is deteriorating. In short sales, investors sell
borrowed securities in hopes of buying them back later at a lower price.
However, if the price rises instead of falls, the investor will lose money when
repurchasing the security. The Fund may be required to recognize gain (but not
loss) when it enters into a short sale of the same or substantially identical
property owned by the Fund. As an OPERATING POLICY, the Fund's short sales are
limited to situations where the Fund owns a debt security of a company and sells
short a different type of security issued by the same company, such as common or
preferred stock or a senior or junior debt security. Securities sold short will
be limited to securities listed on a national securities exchange. No securities
will be sold short if, after giving effect to such short sale, the total market
value of all securities sold short would exceed 2% of the Fund's net assets.
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, the Fund may
lend securities to broker-dealers or other institutions to earn additional
income. The principal risk is the potential default, whether through insolvency
or otherwise, of such a borrower in its obligation to return borrowed securities
in a timely manner. In this event, the Fund could experience delays in
recovering its securities and possibly capital losses.
FUNDAMENTAL POLICY: The Fund may lend portfolio securities provided
that no such loan may be made if, as a result, the aggregate of such loans
would exceed one-third of the value of the Fund's total assets.
PORTFOLIO TRANSACTIONS. Although the Fund will not generally trade for
short-term profits, circumstances may warrant a sale without regard to the
length of time a security was held. A high turnover rate may increase
transaction costs and result in increased taxable gains.
3. THE TRUST AND THE FUND
ORGANIZATION OF THE TRUST AND THE FUND
HOW ARE THE TRUST AND THE FUND ORGANIZED?
The Trust is a diversified, open-end, management investment company,
commonly known as a mutual fund. The Trust was organized as a business trust
under the laws of the Commonwealth of Massachusetts on March 8, 1994. Pursuant
to the Trust's Agreement and Declaration of Trust, as amended (the "Declaration
of Trust"), and By-Laws, the Trust is authorized to issue an unlimited number of
shares which may be offered in separate series of shares corresponding to
separate investment portfolios or funds having different investment objectives.
The Trust is also authorized to offer shares of a series in separate classes.
19
<PAGE> 23
The Fund is a separate investment portfolio or series of shares of the
Trust which became available to investors on June 27, 1994. This prospectus
relates to the Fund which is the only series of the Trust currently available.
The Fund is designed for purchase by both retail investors and institutional
investors.
WHAT IS MEANT BY "SHARES"?
As with all mutual funds, investors receive "shares" when they invest money
in the Fund. These shares are part of the Trust's authorized capital stock. All
shares in the Fund are issued without a par value, have equal voting rights and
have no pre-emptive or conversion rights. Each share or fractional share
entitles the shareholder to receive a proportional interest in the Fund's income
and capital gain distributions, and to cast one vote per share on certain
matters, including the election of Trustees, changes in fundamental investment
policies and changes in the Fund's Investment Advisory Agreement and Investment
Sub-Advisory Agreement. The Fund does not issue share certificates.
DOES THE TRUST HAVE ANNUAL SHAREHOLDER MEETINGS?
The Trust is not required to hold annual meetings of shareholders. The
Trustees or the President may, however, call meetings for action by shareholder
vote. If the Trustees or President fail to call a meeting for a 30-day period
after being requested in writing to do so by the holders of 10% or more of the
outstanding shares of the Trust, then such shareholders may call such meeting.
If a meeting is held and you cannot attend, you can vote by proxy. Well before
the meeting, the Trust will send you proxy materials explaining the issues to be
decided and including a voting card for you to complete and mail back to the
Trust.
Under Massachusetts law, shareholders of a business trust may, in certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust pursuant to which the Trust was organized, however,
contains an express disclaimer of shareholder liability for acts or obligations
of each portfolio of the Trust and requires that notice of such disclaimer be
given in each instrument entered into or executed by the Trust. The Declaration
of Trust also provides for indemnification out of a portfolio's property for any
shareholder of such portfolio held personally liable for any of the portfolio's
obligations. Thus, the risk of a shareholder being personally liable for
obligations of a portfolio is limited to the unlikely circumstance in which the
portfolio itself would be unable to meet its obligations.
As of September 2, 1997, The Union Central Life Insurance Company was a
"control person" of the Fund by virtue of its ownership of shares of the Fund.
Pursuant to the 1940 Act, a "control person" possesses the ability to control
the outcome of matters submitted for shareholder vote.
20
<PAGE> 24
MANAGEMENT OF THE TRUST AND THE FUND
HOW ARE THE TRUST AND THE FUND MANAGED?
Trustees. Under Massachusetts law and the Declaration of Trust and
By-Laws, the business and affairs of the Trust are managed under the direction
of its Trustees.
Investment Management. First Summit Capital Management ("FSCM" or the
"Adviser"), a joint venture having its principal offices at 1876 Waycross Road,
Cincinnati, Ohio 45240, is the investment adviser to the Fund. FSCM was
organized on January 4, 1994, principally for purposes of sponsoring and
managing the Trust pursuant to a Joint Venture Agreement (the "Joint Venture
Agreement") between Carillon Advisers, Inc. ("Carillon" or the "Sub-Adviser"),
an Ohio corporation, and Freeman Holding Company, Inc. ("Freeman"), a Delaware
corporation. Under the Joint Venture Agreement, Carillon serves as the general
manager of the Adviser and is responsible for maintaining its books of account
and other financial records and for preparing its quarterly financial
statements. Carillon has full authority to act on behalf of the Adviser except
with respect to matters involving single commitments in excess of $10,000 which
must be approved by both Carillon and Freeman. Each of Carillon and Freeman is
authorized to appoint two representatives (each, a "Representative") to serve,
in effect, as officers of the Adviser. Carillon is a wholly-owned subsidiary of
The Union Central Life Insurance Company ("Union Central Life"), an Ohio mutual
insurance company. Freeman is the parent corporation of Freeman Securities
Company, Inc., a New Jersey corporation which is registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a
member of the NASD. The Adviser is registered under the Investment Advisers Act
of 1940, as amended ("the Advisers Act").
Portfolio Managers. Since May 21, 1996, Steven R. Sutermeister has been
primarily responsible for the day-to-day management of the Fund's investment
portfolio. The portfolio manager has extensive experience in managing high yield
investment portfolios. Mr. Sutermeister has been a Representative of FSCM since
its organization in January 1994, and has also been a Vice President and
Director of the Fixed Income Group of Carillon since September, 1990. In that
capacity, Mr. Sutermeister oversees the management of over $3.5 billion in fixed
income assets, and is personally responsible for the investment of nearly $400
million in high yield assets for various clients. In addition, Mr. Sutermeister
serves as the portfolio manager of Carillon Bond Fund, another registered
investment company that is advised by Carillon.
THE ADVISORY AGREEMENT
The Adviser serves pursuant to an Investment Advisory Agreement with the
Trust dated June 27, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser, subject to the supervision of the Trustees, provides a
continuous investment program for the Fund, including investment research and
management with respect to all securities, investments and cash equivalents, in
accordance with the Fund's investment objective, policies and restrictions as
set forth in this prospectus, the SAI and the resolutions of the Trustees. The
Adviser is responsible for effecting all security transactions on behalf of the
Fund, including the
21
<PAGE> 25
allocation of principal business and portfolio brokerage and the negotiation of
commissions. The Adviser also maintains books and records with respect to the
securities transactions of the Fund and furnishes to the Trustees such periodic
or other reports as the Trustees may request.
During the term of the Advisory Agreement, the Adviser pays all expenses
incurred by it in connection with its activities thereunder except the cost of
securities (including brokerage commissions, if any) purchased for the Fund. The
advisory services furnished by the Adviser under the Advisory Agreement are not
exclusive, and the Adviser is free to perform similar services for others.
THE ADVISORY FEE
As full compensation for services furnished to the Fund and expenses of the
Fund assumed by the Adviser, the Adviser is entitled to receive from the Fund an
advisory fee which increases or decreases based on the total return investment
performance of the Fund for the prior twelve-month period relative to the
percentage change in the Salomon Brothers High Yield Market Index (the "Index")
for the same period (the "Index Return"). A general description of the Index is
set forth in Appendix II to this prospectus.
The advisory fee is paid monthly at an annual rate which varies between
0.35% and 1.15% of the Fund's average daily net assets. The advisory fee is
structured so that it will be 0.75% of the Fund's average daily net assets if
the Fund's investment performance for the preceding twelve months (net of all
fees and expenses, including the advisory fee) equals the Index Return. The
advisory fee increases or decreases from the "fulcrum fee" of 0.75% by 4% of the
difference between the Fund's investment performance during the preceding twelve
months and the Index Return during that period, up to the maximum fee of 1.15%
of average daily net assets or down to the minimum fee of 0.35%. The following
table shows examples of the advisory fees
22
<PAGE> 26
which would be applicable at the stated levels of the Fund's performance
relative to the Index Return for a particular twelve-month period:
<TABLE>
<CAPTION>
ADVISORY FEE
(AS % OF AVERAGE
FUND PERFORMANCE DAILY NET
(NET OF FEES AND EXPENSES) ASSETS)
------------------------------------------------------ ----------------
<S> <C>
Index Return + 10 percentage points or more........... 1.15%
Index Return + 9..................................... 1.11
Index Return + 8..................................... 1.07
Index Return + 7..................................... 1.03
Index Return + 6..................................... 0.99
Index Return + 5..................................... 0.95
Index Return + 4..................................... 0.91
Index Return + 3..................................... 0.87
Index Return + 2..................................... 0.83
Index Return + 1..................................... 0.79
Index Return 0.................................... 0.75
Index Return - 1..................................... 0.71
Index Return - 2..................................... 0.67
Index Return - 3..................................... 0.63
Index Return - 4..................................... 0.59
Index Return - 5..................................... 0.55
Index Return - 6..................................... 0.51
Index Return - 7..................................... 0.47
Index Return - 8..................................... 0.43
Index Return - 9..................................... 0.39
Index Return - 10 percentage points or more........... 0.35
</TABLE>
For the fiscal year ended May 31, 1997, the Adviser received an investment
advisory fee of $139,821 (0.41%), following certain voluntary waivers. Absent
the voluntary waivers undertaken by the Adviser, the Adviser would have been
entitled to receive an advisory fee of $367,253 (1.08%), based on the Fund's
performance for the fiscal year ended May 31, 1997, pursuant to the performance
schedule above. Under the provisions of the Advisory Agreement, the Adviser is
entitled to receive one-twelfth of the performance-related portion of the fee
computed for the preceding twelve-month period. At the present time, the Adviser
has agreed to waive a portion of its advisory fee so as to confine the Fund's
total annual expenses to 1.60%.
The advisory fee paid by the Fund may exceed the advisory fees paid by most
other investment companies, even if the investment performance of the Fund is
less than the Index Return. In addition, the "fulcrum fee" of 0.75% is higher
than the fees paid by most other investment companies, although it is not
necessarily higher than the fees paid by most fund portfolios having the same
investment objective and policies as the Fund. Investors may pay higher advisory
fees under the performance arrangement even though the Fund's performance may
have declined. For example, if the market declined and the Index dropped by 27
23
<PAGE> 27
percentage points, and the Fund's performance declined by 17 percentage points,
the Adviser would be entitled to be paid by the Fund the maximum advisory fee,
absent any voluntary waivers.
THE SUB-ADVISER
Carillon, an Ohio corporation with offices at 1876 Waycross Road,
Cincinnati, Ohio 45240, is registered as an investment adviser under the
Advisers Act. The Sub-Adviser is a wholly-owned subsidiary of Union Central
Life. Carillon and its affiliates currently act as an investment adviser to the
Carillon Group of Mutual Funds, which consist of the Carillon Fund, Inc. and the
Carillon Investment Trust.
THE SUB-ADVISORY AGREEMENT
The Sub-Adviser serves pursuant to an Investment Sub-Advisory Agreement
with the Adviser dated September 18, 1996 (the "Sub-Advisory Agreement").
Under the Sub-Advisory Agreement, Carillon provides, subject to the
Adviser's direction, a portion of the investment advisory services for which the
Adviser is responsible pursuant to the Advisory Agreement relating to the Fund.
The Sub-Adviser provides investment research and advice with respect to
securities, investments and cash equivalents in the Fund. Research services
provided by the Sub-Adviser include information, analytical reports, computer
screening studies, statistical data and factual resumes pertaining to high yield
securities. Such supplemental research may be subject to additional analysis by
the Adviser.
Under the Sub-Advisory Agreement, the Sub-Adviser receives from FSCM an
annual fee in the amount of $150,000 per year. If the Sub-Adviser renders
services to the Adviser under the Sub-Advisory Agreement for a period that is
less than twelve months in length, the Sub-Adviser is entitled to a pro-rata
portion of such fee, or such other fee as shall be agreed to by the Adviser and
the Sub-Adviser, not to exceed the equivalent of the pro-rata portion of such
fee. In the event that the amount payable as the Sub-Adviser's fees exceeds the
amount of advisory fees paid to the Adviser pursuant to the Advisory Agreement,
the difference will be shared equally by the Adviser's general partners, Freeman
and Carillon, or paid by FSCM.
Prior to the implementation of the Sub-Advisory Agreement, the Adviser had
entered into an Investment Service Agreement (the "Service Agreement") with the
Trust and Union Central Life, which permitted the Adviser to have access to and
to utilize Union Central Life's advisory personnel, administrative services,
supplies and equipment in the performance of its advisory services and functions
under the Advisory Agreement. In consideration for such services, the Adviser
paid Union Central Life for the costs, direct or indirect, fairly attributable
thereto, but in no event less than $65,000 per year or such other amount as was
agreed to by the Adviser and Union Central Life. For the fiscal year ended May
31, 1997, the Adviser paid Union Central Life $30,018 pursuant to the Service
Agreement. The Service Agreement was terminated on September 18, 1996.
24
<PAGE> 28
THE TERMS OF THE ADVISORY AGREEMENTS
The Advisory Agreement and the Sub-Advisory Agreement are renewable
annually for successive periods not to exceed one year each (i) by a vote of the
Trustees or by a vote of a majority of the outstanding voting shares of the
Fund, and (ii) by the vote of a majority of the Trustees of the Trust who are
not parties to the Sub-Advisory Agreement or "interested persons" (as such term
is defined in the 1940 Act) thereof, cast in person at a meeting called for the
purpose of voting on such approval.
The Advisory Agreement may be terminated at any time, without payment of
any penalty, by the Trustees or by a vote of a majority of the outstanding
voting securities of the Fund, upon sixty days' written notice to the Adviser
and by the Adviser upon sixty days' written notice to the Trust. The
Sub-Advisory Agreement may be terminated at any time, without payment of any
penalty, by the Trustees or by a vote of a majority of the outstanding voting
securities of the Fund, upon sixty days' written notice to the Adviser and
Carillon, and by the Adviser or Carillon, upon ninety days' written notice to
the other party and the Fund. The Advisory Agreement and the Sub-Advisory
Agreement shall terminate automatically in the event of any transfer or
assignment thereof, as defined in the 1940 Act, and the Sub-Advisory Agreement
shall terminate automatically in the event of any act or event that terminates
the Advisory Agreement.
A more comprehensive description of the Advisory Agreement and Sub-Advisory
Agreement is contained in the SAI, and a copy of each agreement is on file with
and may be obtained from the SEC.
MANAGEMENT-RELATED SERVICES
BISYS SERVICE AGREEMENTS. The Trust has entered into three
management-related service agreements with affiliates of BISYS Fund Services,
Inc., a Delaware corporation which is a wholly owned subsidiary of The BISYS
Group, Inc. BISYS Fund Services, Limited Partnership ("BISYS Fund Services"), an
Ohio limited partnership of which BISYS Fund Services, Inc. is the General
Partner, serves as administrator of the Fund (the "Administrator"). BISYS Fund
Services Ohio, Inc. ("BISYS"), an Ohio corporation and also a wholly-owned
subsidiary of The BISYS Group, Inc., serves as Fund accountant (the "Fund
Accountant") and as the Trust's transfer and dividend disbursing agent (the
"Transfer Agent"). BISYS Fund Services acts also as the Fund's distributor or
principal underwriter (the "Distributor") (see "Distribution Expenses -- The
Distributor").
Each of the "BISYS Companies" named herein has its principal offices at
3435 Stelzer Road, Columbus, Ohio 43219. The three service agreements between
the Trust and the BISYS Companies are described immediately below. They are more
fully described in the SAI, and copies of such agreements are on file with and
available from the SEC. The Distribution Agreement between the Fund and BISYS
Fund Services is described below under the caption "Distribution Expenses -- The
Distributor."
ADMINISTRATOR. Pursuant to a Management and Administration Agreement with
the Trust (the "Administration Agreement"), the Administrator, BISYS Fund
Services, subject to the direction and control
25
<PAGE> 29
of the Trustees, supervises all aspects of the operation of the Fund except
those performed by the Fund's investment advisers, custodian, Transfer Agent and
Fund Accountant pursuant to their respective agreements with respect to the
Trust. The Administrator is obligated to maintain office facilities for the
Trust; furnish statistical and research data, clerical and certain bookkeeping
services, and stationary and office supplies; prepare periodic reports to the
SEC; assist the Trust or its designee in the preparation of, and file, the
Fund's federal and state tax returns; assist the Trust in preparing Annual and
Semi-Annual Reports to Shareholders and amendments to its Registration
Statement; and keep and maintain certain financial accounts and records of the
Fund. Partners, officers or employees of the Administrator may serve as officers
or employees of the Trust, and those who do so will be compensated by the
Administrator, not the Trust.
For services rendered and expenses borne by the Administrator pursuant to
the Administration Agreement, the Fund pays the Administrator a fee, computed
daily and paid monthly, at the annual rate of 0.20% of the Fund's average daily
net assets. Currently, the Administrator is waiving that portion of such fee
which exceeds 0.15%.
FUND ACCOUNTANT. Pursuant to a Fund Accounting Agreement with the Trust
(the "Accounting Agreement"), BISYS, as Fund Accountant, is responsible for
accounting relating to the Fund and its investment transactions; maintaining
certain books and records of the Fund; determining daily the net asset value per
share of the Fund; calculating yield, dividends and capital gains distributions;
and preparing security position, transaction and cash position reports.
For such services, the Fund reimburses the Fund Accountant for all
out-of-pocket expenses incurred by the Fund Accountant (including all charges
for delivery of materials, telephone and other communications expenses, and
costs of pricing portfolio securities) and pays the Fund Accountant a fee,
computed daily and paid monthly, at the annual rate of 0.03% of the Fund's
average daily net assets, provided, however, that such fee will not be less than
$30,000. In addition, the Fund is subject to an annual fee of $10,000 per
additional class.
TRANSFER AGENT. Pursuant to a Transfer Agency Agreement with the Trust
(the "Transfer Agency Agreement"), BISYS also acts as the Trust's transfer,
dividend disbursing and redemption agent. BISYS provides certain shareholder and
other services to the Trust, including furnishing certain account and
transaction information; providing mailing labels for the distribution to Fund
shareholders of financial reports, prospectuses, proxy statements and other such
materials; providing compliance reports; calculating distribution plan and
marketing expenses; and maintaining shareholder account records.
INDEPENDENT ACCOUNTANT. Coopers & Lybrand L.L.P. acts as the Trust's
independent auditors.
FUND EXPENSES
Under the Advisory, Administration, Fund Accounting and Transfer Agency
Agreements, the Fund pays the service fees of, and/or reimburses certain
expenses incurred by, the Adviser, Administrator, Fund
26
<PAGE> 30
Accountant and Transfer Agent. The expenses incurred in the operation of the
Fund that are borne by the Fund include taxes, interest and brokerage fees and
commissions, if any; fees and expenses of Trustees who are not partners,
officers, directors, shareholders or employees of the Adviser, the Administrator
or the Distributor (see "Distribution Plan" and "The Distributor"); SEC fees and
state Blue Sky notification and renewal fees and expenses; custodian fees (see
"Custodian"); transfer and dividend disbursing agent's fees; certain insurance
premiums; auditing and legal fees and expenses; fund accounting fees including
pricing of portfolio securities; costs of maintenance of legal existence; costs
of typesetting and printing prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund; costs of Trustees' and
shareholders' reports and meetings; and any extraordinary expenses.
NET ASSET VALUE
The net asset value of Fund shares is determined once daily as of the close
of regularly scheduled trading (normally 4:00 p.m., Eastern Time) on the New
York Stock Exchange (the "Exchange"), Monday through Friday, except that no
determination is required on (i) days on which the Exchange is closed or on
which changes in the value of the Fund's securities holdings will not materially
affect the current net asset value of the shares of the Fund; (ii) days during
which no shares of the Fund are tendered for redemption and no order to purchase
or sell such shares is received by the Fund; or (iii) the following business
holidays or the days on which such holidays are observed by the Exchange: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Generally,
trading in non-U.S. securities, as well as U.S. government securities and money
market instruments, is substantially completed each day at various times prior
to the close of regularly scheduled trading on the Exchange. The values of such
securities used in computing the net asset value of Fund shares are generally
determined as of such times.
The net asset value per share of the Fund is computed by taking the sum of
the value of the securities held by the Fund plus any cash or other assets it
holds, subtracting all its liabilities, and dividing the result by the total
number of Fund shares outstanding at such time. Securities which are traded on
stock exchanges are valued at the last sales price as of the close of the
Exchange, or lacking any sales, at the closing bid prices. Securities traded in
the "over-the-counter" market are valued at the last bid prices quoted by
brokers that make markets in the securities at the close of trading on the
Exchange. Securities and assets for which market quotations are not readily
available or not obtained from a pricing service are valued at fair value as
determined in good faith by the Trustees, although the actual calculations may
be made by persons acting pursuant to the direction of the Trustees. If approved
by the Trustees, the Fund may make use of a pricing service or services in
determining the net asset value of the Fund. Debt securities with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which the
Trustees have determined reflects fair value.
27
<PAGE> 31
DISTRIBUTION EXPENSES
DISTRIBUTION PLAN. In addition to the sales charge which may be deducted
at the time of purchase of Fund shares, the Fund is authorized under the Trust's
Distribution and Shareholder Service Plan (the "Plan"), adopted pursuant to Rule
12b-1 (the "Rule") under the 1940 Act, on behalf of shares of the Fund to use
its assets to finance certain activities relating to the distribution of shares
of the Fund to investors. The Plan is a "compensation" plan providing for the
payment of a fixed percentage of the Fund's average daily net assets to finance
distribution expenses. Under the Plan, the Fund pays monthly to BISYS Fund
Services, as its principal underwriter, a distribution fee which may not exceed,
on an annual basis, 0.25% of the Fund's average daily net assets.
The NASD Conduct Rules establish limits on all types of mutual fund sales
charges, whether front-end, deferred or asset-based. These limits may operate to
limit the aggregate distribution fees to which shareholders may be subject under
the terms of the Plan. BISYS Fund Services will monitor the Fund for compliance
with the NASD rules.
The Plan authorizes BISYS Fund Services to use the distribution fee to pay,
or reimburse expenses incurred by, banks, broker-dealers and other institutions
which, pursuant to agreements with the Distributor, provide distribution
assistance and/or shareholder services including, but not limited to, printing
and distributing prospectuses to persons other than shareholders of shares of
the Fund, printing and distributing advertising and sales literature and reports
to shareholders used in connection with selling shares of the Fund, furnishing
personnel and communications equipment to service shareholder accounts and
prospective shareholder inquiries. Such services may be performed by the
Distributor or any of its affiliates.
The Plan provides that so long as it is in effect the selection and
nomination of Trustees who are not "interested persons" (as defined in the 1940
Act) of the Trust will be committed to the discretion of the Trustees then in
office who are not interested persons of the Trust.
Neither the Plan nor any related agreements can take effect until approved
by a majority vote of both all the Trustees and those Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to it, cast
in person at a meeting called for the purpose of voting on the Plan and the
related agreements. Such approval of the Plan was obtained on May 24, 1994. The
Plan was approved by the sole shareholder of the Fund on May 24, 1994.
The Plan may not be amended so as to materially increase the amount of the
distribution fee unless the amendment is approved by a vote of at least a
majority of the outstanding voting securities of the Fund. In addition, no
material amendment may be made unless approved by the Trustees in the manner
described above for Trustee approval of the Plan.
THE DISTRIBUTOR. BISYS Fund Services serves as the Fund's Distributor or
principal underwriter (the "Distributor") pursuant to a Distribution Agreement
with the Trust (the "Distribution Agreement"). BISYS Fund Services is registered
as a broker-dealer under the 1934 Act and is a member of the NASD. The offering
of the Fund's shares is continuous. The Distribution Agreement provides that the
Distributor, as agent in
28
<PAGE> 32
connection with the distribution of Fund shares, will use appropriate efforts to
solicit orders for the sale of Fund shares and undertake such advertising and
promotion as the Distributor deems reasonable. The Distributor will finance
appropriate sales activities which it deems reasonable, including, but not
limited to, advertising, compensation of underwriters, dealers and sales
personnel, printing and mailing prospectuses to persons other than current Fund
shareholders and printing and mailing sales literature. As compensation, the
Distributor receives the distribution fee payable pursuant to the Plan (see
"Distribution Plan"). In addition, the Adviser, or one of its affiliates, may
provide additional compensation to securities dealers from its own resources in
connection with sales of shares of the Fund.
In addition, the Distributor has the right, as principal, to purchase Fund
shares at their net asset value and to sell such shares to the public, or to
dealers who have entered into selected dealer agreements with the Distributor,
in both cases against orders for such shares, at the public offering price
(i.e., net asset value plus a maximum sales charge of 4.50%) or, in the case of
sales to dealers, at the public offering price less a concession determined by
the Distributor which may not exceed the amount of the sales charge or the
underwriting discount. (See "How to Purchase Fund Shares -- Share Price and
Sales Charges.")
UNDERSTANDING PERFORMANCE INFORMATION
This section should help you understand the terms used to describe the
performance of shares of the Fund. You will come across them in shareholder
reports you receive from the Fund as well as in advertisements and in the media.
Information about a portfolio's performance is based on that portfolio's record
up to a certain date and is not intended to indicate future performance.
"TOTAL RETURN" tells you how much an investment in the Fund has changed in
value over a given time period. It reflects any net increase or decrease in the
share price and assumes that all dividends and capital gains (if any) paid
during the period were reinvested in additional shares. Reinvesting
distributions means that total return numbers include the effect of compounding,
i.e., you receive income and capital gain distributions on a rising number of
shares.
Advertisements for the Fund may include aggregate total return or average
annual total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
"AGGREGATE TOTAL RETURN" is the rate of return on an investment for a
specified period before annualizing it. An aggregate return does not indicate
how much the value of the investment may have fluctuated between the beginning
and the end of the period specified.
"AVERAGE ANNUAL TOTAL RETURN" is the constant year-by-year return produced
by the aggregate total return for a specified period. By smoothing out all the
variations in annual performance, it gives you an idea of the investment's
annual contribution to your portfolio provided you held it for the entire period
in question.
29
<PAGE> 33
"YIELD" refers to the advertised or "SEC yield" found by determining the
net income per share (as defined by the SEC) earned by the Fund during a 30-day
base period, dividing this amount by the per-share price on the last day of the
base period, and annualizing the result.
Further information about the performance of the Fund is included in the
Fund's Annual Report dated May 31, 1997, which may be obtained without charge by
contacting the Fund at 1-800-272-3442.
4. INVESTING WITH SUMMIT INVESTMENT TRUST
HOW TO PURCHASE SHARES
Shares of the Fund are offered continuously for sale directly through the
Distributor, BISYS Fund Services, or though securities dealers and banks which
have established dealer agreements with the Distributor. If you place
transactions through a broker or agent, you may be charged a fee by the broker
or agent. You are encouraged to consult a registered financial representative
for assistance in making an investment selection.
The initial purchase of shares of the Fund by an investor must be at least
$1000 except that the initial purchase for a retirement plan account may be made
with a minimum of $500. In addition, an account can be established with a
minimum of $500 if the account will be receiving periodic, regular investments
through a program such as the Automatic Investment Plan (see "Shareholder
Services" for a description of this plan).
The minimum for subsequent investments is $50.
NOTE: The Fund is eligible as a vehicle for a wide range of retirement plans for
individuals and institutions, including large and small businesses, including
such plans as IRAs, SEP-IRAs, Keoghs (profit sharing or money purchase pension),
401(k) plans and 403(b) plans. For information on retirement plans, please
consult your broker-dealer.
GENERAL METHODS OF PURCHASING SHARES
1. By Mail. To make an initial account purchase, mail a check or money
order made payable to "Summit High Yield Fund" with a completed Account
Registration Form (copy enclosed with this prospectus) to:
Summit Investment Trust
P.O. Box 182448
Columbus, OH 43218-2448
To purchase additional shares of the Fund for an existing account, please
note your account number on the check or money order and return it with an
account investment slip to the above address. Account Registration and other
account forms may be obtained by calling the Trust at 1-800-272-3442.
30
<PAGE> 34
2. By Federal Funds Wire. The Fund may be purchased by wire transfer. To
obtain instructions for Federal Funds Wire purchases, including the bank account
number into which funds are to be wired, please contact the Trust at
1-800-272-3442.
3. Through a Securities Dealer. You may purchase the Fund by contacting a
securities dealer having a selected dealer agreement or selling agreement with
the Distributor.
Orders for the Fund will be assigned the next closing price after receipt
of the order by the Distributor. The securities dealer is responsible for
transmitting such orders promptly to the Distributor. If the securities dealer
fails to do so, the investor's right to that day's closing price must be settled
between the investor and the securities dealer.
Under certain circumstances, the Trust has entered into one or more
agreements (each, a "Sales Agreement") with brokers, dealers or financial
institutions (each, an "Authorized Dealer") under which the Authorized Dealer
may directly, or through intermediaries that the Authorized Dealer is authorized
to designate under the Sales Agreement (each, a "Sub-designee"), accept purchase
and redemption orders that are in "good form" on behalf of the Funds. A Fund
will be deemed to have received a purchase or redemption order when the
Authorized Dealer or Sub-designee accepts the purchase or redemption order and
such order will be priced at the Fund's net asset value next computed after such
order is accepted by the Authorized Dealer or Sub-designee.
BACKUP WITHHOLDING: In accordance with Internal Revenue Service (the "IRS")
regulations, the Fund may be required to withhold 31% of all reportable
distributions from any account without a certified taxpayer identification or
Social Security number on file. Omission of this information from the Account
Registration Form will result in the Fund withholding 31% on any taxable
dividends, capital gain distributions or share redemptions, including shares
redeemed as a result of an exchange. The Fund is also required to begin backup
withholding if the Internal Revenue Service instructs the Fund to do so.
31
<PAGE> 35
SHARE PRICE AND SALES CHARGES
SHARE PRICE
The public offering price of shares of the Fund is the net asset value per
share (next determined following receipt of an order), plus a sales charge
shares of (expressed as a percentage of the offering price as set forth in the
table below). The sales charges and dealer discounts are as follows:
SALES CHARGE
<TABLE>
<CAPTION>
CONCESSION TO
PERCENTAGE OF PERCENTAGE OF BROKER-DEALER
AMOUNT OF PURCHASE THE OFFERING THE NET AMOUNT AS A PERCENTAGE
PAYMENT PRICE INVESTED OF OFFERING PRICE
--------------------- ------------- -------------- -----------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.05%
$100,000 but less
than $250,000 3.50% 3.63% 3.15%
$250,000 but less
than $500,000 2.25% 2.30% 2.03%
$500,000 or more 0%(1) 0%(1) 0%
</TABLE>
- ---------------
(1) A 1% sales charge will be assessed on shares that are redeemed prior to the
first anniversary of the purchase. See "Shareholder Services -- Redemption
of Shares" below.
The Fund's Distributor receives this sales charge and may reallow discounts
to securities dealers with whom it has agreements and retain the balance over
such discounts. At times the Distributor may reallow the entire sales charge to
such dealers. The Distributor may also pay banks and other financial service
firms that provide services for their clients to facilitate transactions in
shares of the Fund a transaction fee up to an amount equal to the greater of the
full applicable sales charge or the "Concession to Broker-Dealer as a Percentage
of Offering Price" as shown in the above table. In such circumstances, dealers,
banks, other financial service firms or intermediaries may be deemed to be
underwriters under the 1933 Act. Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, management would consider what action, if any, would be
appropriate. In addition, state securities laws may differ from federal laws
regarding banks and financial institutions which may be required to register
under state securities laws as brokers and/or dealers.
The sales charges set forth in the above table are applicable to purchases
made at one time by any investor, which includes: (i) an individual, his or her
spouse and children under the age of 21; and (ii) a trustee or other fiduciary
of a single trust estate or single fiduciary account. In order to qualify for
the lower sales charges keyed to the breakpoints ($100,000; $250,000; and
$500,000) set forth in the table, all orders from an investor will have to be
placed through a single investment dealer and identified at the time of
32
<PAGE> 36
purchase as originating from the same investor, although such orders may be
placed into more than one discrete account which identifies the investor.
For purchases made in connection with 401(k) plans, 403(b) plans and other
employer-sponsored, qualified retirement plans, as well as "wrap" type programs,
non-transactional fee fund programs and programs offered by fee-based financial
planners and other types of financial institutions, the applicable sales charge
may be waived.
REDUCED SALES CHARGES
Investors may be able to benefit from a reduction or elimination of the
sales charge through one of several purchase plans.
RIGHT OF ACCUMULATION. Investors may purchase shares of the Fund with a
reduced front-end sales charge or without a sales charge if the combined total
of the value of the shares currently being purchased plus the current net asset
value of the investor's holdings of the Fund exceeds one of the sales charge
breakpoints ($100,000; $250,000; and $500,000). The investor must, at the time
of purchase, give the Transfer Agent or the Distributor sufficient information,
including identification of all share accounts to be considered in exercising
the right of accumulation, to permit confirmation of qualification.
LETTER OF INTENT. Investors may obtain a reduced sales charge or the
elimination of the sales charge by means of a written Letter of Intent which
establishes a goal for total investment in the Fund which is to be achieved
within a thirteen-month period and which exceeds one of the Fund's sales charge
breakpoints ($100,000; $250,000; and $500,000). The applicable sales charge will
be determined in accordance with the total amount to be invested. All shares of
the Fund previously purchased and still beneficially owned by the investor may,
upon written notice to the Transfer Agent, also be included at the current net
asset value to reach the above minimums. A Letter of Intent may be executed by
checking the appropriate box on the Account Registration Form.
A Letter of Intent permits a purchaser to achieve a total investment goal
by any number of investments over a thirteen-month period. Each investment made
during the period will be assessed, as the case may be, the applicable reduced
sales charge or no sales charge. Shares totaling 5% of the dollar amount of the
Letter of Intent will be held in escrow by the Transfer Agent in the name of the
purchaser to secure payment of the higher sales charge which may be applicable
to the purchase of shares of the Fund if the full Letter of Intent amount is not
purchased. Dividends on escrowed shares, whether paid in cash or reinvested in
additional shares, are not subject to escrow. The effective date of a Letter of
Intent may be back-dated up to 30 days, in order that any investments made
during this 30-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the stated investment goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the balance of the full sales charge that would otherwise have applied to the
33
<PAGE> 37
purchases made during this period. If a payment is due under the preceding
sentence, it must be made directly to the Distributor within twenty days of
notification or, if not paid, the Distributor will liquidate sufficient escrowed
Shares to obtain such difference. Additionally, if the total purchases within
the thirteen-month period exceed the stated investment goal, an adjustment will
be made to reflect any further reduced sales charges applicable to such
purchases. All such adjustments will be made at the conclusion of the thirteen-
month period and in the form of additional shares at the then current applicable
public offering price.
CERTAIN QUALIFIED PURCHASERS. No sales charge is applicable to any shares
of the Fund purchased (i) through reinvestment of dividends or distributions;
(ii) by a Trustee or officer of the Trust, or the immediate families (i.e., the
spouse or any children) of such persons; (iii) by any full-time employee or
registered representative of broker-dealers having dealer agreements with the
Distributor ("Selling Broker") and their immediate families (or any trust,
pension, profit-sharing or other benefit plan for such persons); or (iv) by
other investment companies, the securities of which are also distributed by
BISYS Fund Services, The BISYS Group, Inc. or other affiliated companies.
In addition, no sales charge is applicable to any sale to (i) any Union
Central Life separate account used to fund tax-qualified variable annuity
contracts; (ii) a director, officer, full-time employee or sales representative
of Union Central Life or any of its affiliates, the Adviser or any of its
affiliates, or the Distributor or any of its affiliates; (iii) the immediate
families of such persons; or (iv) any trust, pension, profit-sharing or other
benefit plan for such persons.
Also, no sales charge will apply to a registered investment adviser
purchasing for discretionary accounts, provided such registered adviser executes
a Fund load waiver agreement which specifies certain aggregate minimum and
operating provisions. This waiver is available only for shares purchased
directly from the Distributor, without a broker, and is unavailable if the
registered adviser is part of an organization principally engaged in the
brokerage business.
In addition, no sales charge will be assessed in connection with certain
exchange arrangements made with two no-load money market portfolios described
below under "Shareholder Services -- Exchange Privileges."
SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
Shareholders who open an account with $500 or more and who wish to make
subsequent, regular monthly or quarterly investments in the Fund may establish
an Automatic Investment Plan ("AIP") as part of the initial account registration
or subsequently by submitting an application. Under an AIP, the Fund's Transfer
Agent will debit the shareholder's designated bank account in the amount
specified by the shareholder (which monthly or quarterly amount may not be less
than $50). The proceeds will be invested in shares of the Fund at the applicable
offering price determined on the date of the debit. Participation in the AIP may
be discontinued upon 30 days' written notice to the Transfer Agent, or if a
debit is not honored.
34
<PAGE> 38
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund to family members and others
at any time without incurring a sales charge. Shareholders should consult their
tax advisors concerning such transfers.
REDEMPTION OF SHARES
Shareholders may redeem shares in any amount and at any time at the net
asset value next determined after the request for redemption is received in
proper order by the Fund. The Fund will normally send the proceeds on the next
business day, but if making immediate payment could adversely affect the Fund,
it may take up to seven days for payment to be made. If the shares to be
redeemed were purchased by check or Automated Clearing House funds, redemption
proceeds will be sent upon clearance of the purchase amount which may involve a
delay for 15 days or more. Such delay may be avoided if shares are purchased by
wire transfer of Federal Funds. An investor who purchases $500,000 or more of
the Fund and is not assessed a sales charge at the time of purchase, will be
assessed a sales charge equivalent to 1% of the lesser of the purchase price or
the current net asset value of such shares on such shares that are redeemed
prior to the first anniversary of the purchase. In determining whether the sales
charge of 1% is payable, the Fund will first redeem shares not subject to the 1%
sales charge.
Under the Sales Agreement, the Authorized Dealer or Sub-designee is
authorized to accept redemption orders that are in "good form" on behalf of the
Funds. A Fund will be deemed to have received a redemption order when the
Authorized Dealer or Sub-designee accepts the redemption order and such order
will be priced at the Fund's net asset value next computed after such order is
accepted by the Authorized Dealer or Sub-designee.
EXCHANGE PRIVILEGES
Shares of the Fund may be exchanged for shares of two no-load money market
portfolios of The ARCH Fund, Inc., namely, the ARCH Money Market Portfolio and
the ARCH Treasury Money Market Portfolio (the "Money Market Funds"). The ARCH
Fund, Inc. is an investment company for which BISYS Fund Services also serves as
the distributor. Since shares of the Money Market Funds may be purchased at no
load, purchases of shares of the Fund made by redeeming shares of the Money
Market Funds will be subject to the sales charge applicable to an initial
purchase of shares of the Fund (see "Sales Price and Sales Charges" above).
However, shareholders exchanging shares of the Money Market Funds that were
acquired through a previous exchange of shares of the Fund on which a sales
charge was paid will not be required to pay an additional sales charge upon
exchange of those shares into shares of the Fund. Under such circumstances, the
shareholder must notify the Distributor that a sales charge was originally paid
and provide the Distributor with sufficient information to permit confirmation
of the shareholder's right not to pay a sales charge.
Exchanges are regarded as sales for federal and state income tax purposes
and could result in a gain or loss, depending on the original cost of shares
exchanged. If the exchanged shares were acquired within the previous 90 days,
the gain or loss may have to be computed without regard to any sales charges
incurred on the
35
<PAGE> 39
exchanged shares (except to the extent those sales charges exceed the sales
charges waived in connection with the exchange). The terms of the foregoing
exchange privilege are subject to change and the privilege may be terminated on
60 days' written notice to shareholders. The exchange privilege is only
available in those states or U.S. jurisdictions where the exchange may legally
be made.
SUMMIT INVESTMENT TRUST INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A Summit Investment Trust IRA enables individuals, even if they participate
in an employer-sponsored retirement plan, to establish their own retirement
program by purchasing shares of the Fund. Summit Investment Trust IRA
contributions may be tax-deductible and earnings are tax-deferred. Under the Tax
Reform Act of 1986, the tax deductibility of IRA contributions is restricted or
eliminated for individuals who participate in certain employer pension plans and
whose annual income exceeds certain limits. Existing IRAs and future
contributions up to the IRA maximums, whether deductible or not, still earn
income on a tax-deferred basis.
A Summit Investment Trust IRA distribution request must be made in writing
to the Transfer Agent. Any additional deposits to a Summit Investment Trust IRA
must distinguish the type and year of the contribution.
For more information on a Summit Investment Trust IRA call the Trust at
1-800-272-3442. Shareholders are advised to consult a tax advisor on Summit
Investment Trust IRA contribution and withdrawal requirements and restrictions.
GENERAL METHODS OF REDEEMING SHARES
1. By Mail. You may redeem shares of the Fund by mail by sending a written
request for the redemption to the Transfer Agent at 3435 Stelzer Road, Columbus,
Ohio 43219. The Transfer Agent may require a signature guarantee by an eligible
guarantor institution. For purposes of this policy, the term "eligible guarantor
institution" shall include banks, brokers, dealers, credit unions, securities
exchanges and associations, clearing agencies and savings associations as those
terms are defined in Rule 17Ad-15 under the 1934 Act. The Transfer Agent
reserves the right to reject any signature guarantee if: (1) it has reason to
believe that the signature is not genuine; (2) it has reason to believe that the
transaction would otherwise be improper; or (3) the guarantor institution is a
broker or dealer that is neither a member of a clearing corporation nor
maintains net capital of at least $100,000. The signature guarantee requirement
will be waived if all of the following conditions apply: (1) the redemption
check is payable to the shareholder(s) of record and (2) the redemption check is
mailed to the shareholder(s) at the address of record or the proceeds are either
mailed or wired to a commercial bank account previously designated on the
account registration form. There is no charge for having redemption requests
mailed to a designated bank account.
36
<PAGE> 40
2. Through a Securities Dealer. You may sell your shares by contacting a
securities dealer having a dealer or selling agreement with the Distributor.
(See "General -- Repurchase of Shares" in the SAI for more details.) The dealer
may assess a nominal fee for this service.
MINIMUM ACCOUNT BALANCE
The Trust reserves the right to involuntarily redeem your account any time
the value of your account falls below $300 as a result of a redemption. You will
be notified in writing prior to the involuntary redemption and be allowed 60
days to make additional investments to increase the value of your account above
$300 before this redemption is processed.
REDEMPTION IN KIND
All redemptions of shares of the Fund shall be made in cash, except that
this commitment to redeem shares in cash at the request for redemption by any
shareholder of record of the Fund is limited in amount with respect to each
shareholder during any 90-day period to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of such period. This commitment is
irrevocable without prior approval of the SEC. In the case of redemption
requests by a shareholder of record during any 90-day period in excess of such
limit for cash redemptions, the Board of Trustees reserves the right to have the
Fund make payment, in whole or in part, in securities or other assets of the
Fund. In this event, the securities or other assets would be valued in the same
manner as the securities or other assets of the Fund are valued for purposes of
determining the net asset value per share of the Fund. If the shareholder
recipient of such securities or other assets were to sell such securities or
other assets, the shareholder recipient could receive less than the redemption
value of the securities or other assets and could incur certain transaction
costs.
ADDITIONAL SHAREHOLDER PRIVILEGES
CERTAIN PRIVILEGES LISTED IN THIS SECTION MAY NOT BE OFFERED BY THE FUND IF
YOU HOLD SHARES OF THE FUND IN THE "STREET NAME" OF A FINANCIAL INSTITUTION, OR
IF THE ACCOUNT IS NETWORKED THROUGH NATIONAL SECURITIES CLEARING CORPORATION
(NSCC).
AUTOMATIC WITHDRAWAL PLAN
You may establish a plan for redemptions to be made automatically at
monthly or quarterly intervals ("AWP") with payments sent directly to you or to
persons designated by you as recipients of the withdrawals. Requests for the AWP
not made on the initial application require signature guarantees unless the
payments are to be made to you and mailed to the address of record on your
account. To continue your AWP, you are required to maintain a minimum account
value of $10,000 at all times, and the minimum withdrawal amount is $100.
Maintenance of an AWP concurrently with purchases of additional shares of the
Fund may be disadvantageous to you because of the sales charge on certain
purchases.
37
<PAGE> 41
The redemptions in the AWP will occur on or about the 25th day of the month
and the checks will generally be mailed within two days after the redemption
occurs. No redemption will occur if the account balance falls below the amount
required to meet the requested withdrawal amount. The AWP service may be
terminated at any time, and the Distributor reserves the right to initiate a fee
upon 30 days' written notice to the shareholders.
TELEPHONE TRANSACTIONS
Shareholders are permitted to request exchanges and/or redemptions by
telephone. The Trust will not be liable for following instructions communicated
by telephone that it reasonably believes to be genuine. To be permitted to
request an exchange or redemption by telephone, a shareholder must elect the
option on the Account Registration Form. (If a shareholder does not initially
elect an option on the Account Registration Form, the shareholder may request
authorization by executing an appropriate authorization form provided by the
Trust upon request.) The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following. Upon
telephoning a request, shareholders will be asked to provide their account
number and, if not available, their social security number. For the
shareholders' and the Trust's protection, all conversations with shareholders
will be tape recorded. All telephone transactions will be followed by a
confirmation statement of the transaction. If, due to temporary adverse
conditions, investors are unable to effect telephone transactions, investors may
send their requests to the Trust by mail or an express delivery service.
Telephone Exchanges. You may authorize your account for telephone
exchanges by completing the appropriate portion of the Account Registration
Form. By electing this option you may exchange shares of the Fund by calling the
Fund at 1-800-272-3442. Requests will be processed on the same day as receipt of
the telephone call if the request is made before the close of regularly
scheduled trading on the Exchange (normally, 4:00 p.m. Eastern Time).
Telephone Redemptions. You may request the option to redeem shares of the
Fund by telephone by completing the appropriate portion of the Account
Registration Form. In order to obtain that day's closing net asset value on the
redemption, the telephone call must be received by the Trust prior to the close
of regularly scheduled trading on the Exchange (normally, 4:00 p.m. Eastern
Time).
Payment for shares of the Fund will be made by Federal Funds wire or by
mail as specified by you on the Application. Payment will normally be sent on
the business day following the date of receipt of the request. Payment by wire
to your bank account must be in amounts of $1,000 or more. Although the Fund
does not assess a charge for wire transfers, your bank may assess a charge for
the transaction. Payments by mail may only be sent to your account address of
record and may only be payable to the registered owner(s).
38
<PAGE> 42
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS:
The Fund declares and pays income dividends monthly. If the Fund has net
capital gains (after subtracting any capital losses) they are declared and paid
at least annually. Dividend and capital gain distributions are reinvested in
additional Shares of the class unless you select another option on your Account
Registration Form.
TAX INFORMATION:
You should be aware of the possible tax consequences when the Fund makes a
distribution to your account, or when you sell shares of the Fund. In addition
to federal taxes, you may also be subject to state taxes. No attempt is here
made to discuss state tax consequences, and accordingly you should consult your
own tax adviser. Note: The following summary does not apply to retirement
accounts, such as IRAs or Keoghs, which are tax-deferred until you withdraw
money from them.
TAXES ON FUND DISTRIBUTIONS. In January, the Trust will send you
information indicating the federal tax status of dividends and capital gain
distributions in your Fund account.
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and will distribute substantially all
of its net income and gains to shareholders. All distributions are taxable to
shareholders for the year in which they were paid. The only exception is that
distributions declared during the last three months of the year to shareholders
of record in such month and paid in January of the following for are taxed to
shareholders as though they were paid by December 31.
Distributions from net income and short-term capital gains are taxable as
ordinary income, and Distributions from long-term capital gains are taxable at
the applicable rate for long-term capital gains. The gain is long- or short-term
depending on how long the Fund held the securities, not how long you held shares
in the Fund.
Distributions are taxable whether reinvested in additional shares of the
Fund or received in cash. Distributions will not generally qualify for the
corporate dividends - received deduction.
Foreign governments may improve taxes on the income and gains from the
Funds investment in foreign securities. These taxes will reduce the amount of
the Fund's distributions to you.
BUYING A DIVIDEND. On the record date for a distribution from capital
gains, the Fund's share price is reduced by the amount of the distribution. If
shares of the Fund are bought immediately before the record date ("buying a
dividend"), you will pay the full price for a share of the Fund. You will
receive a portion of the Fund's price back as a taxable distribution. A similar
result may occur with regard to distributions from net income.
39
<PAGE> 43
TAXES ON YOUR FUND TRANSACTIONS. When you sell or redeem shares in the
Fund, you may realize a gain or loss. An exchange from one fund to another is
treated as a sale for tax purposes. For more information on the tax consequences
of an exchange, see the section "Shareholder Services-Exchange Privileges" of
this Prospectus. If you hold your shares for six months or less, any loss you
have will be treated as a long-term capital loss to the extent of any capital
gain distributions received on such shares. In January, the Trust will send you
information indicating the date and amount of each sale of the Fund that you
made during the prior year. A copy is filed with the IRS.
You may calculate the cost basis of the shares you sold using the average
cost of the Fund or other methods acceptable to the IRS, such as "specific
identification." To help you maintain accurate records, we send you a
confirmation immediately following each transaction you make and a year-end
statement detailing all your transactions during the year.
At year-end the Trust will also send you any additional information you
need to determine your taxes, such as the sources of Fund income.
Non-U.S. investors should contact their tax advisors to determine the U.S.
and non-U.S. tax consequences of an investment in the Fund.
OBTAINING INFORMATION ON YOUR INVESTMENT
CONFIRMATION OF SHARE TRANSACTIONS AND DIVIDEND PAYMENTS
Every shareholder will receive a confirmation of each new transaction in
his or her Fund account. The Trust will confirm all account activity, including
the payment of dividend and capital gain distributions and transactions made as
a result of an AWP or an AIP. Shareholders may rely on these statements in lieu
of stock certificates. Stock certificates representing shares of the Fund will
not be issued.
SHAREHOLDER INQUIRIES
Please direct any questions or requests that you may have concerning the
Trust or your Fund account by writing to Summit Investment Trust, 3435 Stelzer
Road, Columbus, OH 43219, or by calling the Trust at 1-800-272-3442.
40
<PAGE> 44
APPENDIX I
BOND RATINGS
The following is a description of the bond rating categories of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("Standard
& Poor's") and Fitch Investors Service, Inc. ("Fitch"):
MOODY'S CORPORATE BOND RATINGS
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes, and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any longer period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Moody's also supplies numerical indicators 1, 2, 3 to rating categories.
41
<PAGE> 45
STANDARD & POOR'S CORPORATE BOND RATINGS
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capability to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB - Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal.
FITCH CORPORATE BOND RATINGS
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
42
<PAGE> 46
A - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB - Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B - Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC - Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC - Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C - Bonds are in imminent default in payment of interest or principal.
DDD-DD- and D - Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.
43
<PAGE> 47
APPENDIX II
DESCRIPTION OF THE SALOMON BROTHERS HIGH YIELD MARKET INDEX
The Salomon Brothers High Yield Market Index (the "Index") is an index of
high yield corporate debt securities, which at May 31, 1997, included 1,054
issues with an aggregate par value of $222 billion and an aggregate market value
of $220 billion. The securities comprising the Index include all public,
nonconvertible high yield issues which are rated by at least one rating agency
as below investment grade (BB or less) or which are unrated but of below
investment grade quality. Other criteria include issue size of at least $50
million, at least one year remaining to maturity, and issues must be considered
"current pay" (not in default). Securities issued as investment grade securities
but which subsequently are reduced to a rating below investment grade are
included in the Index subject to the same criteria. All securities that go into
default after inclusion in the Index are deleted from the Index. All additions
to and deletions from the Index occur after month-end and are made at market
prices. On May 31, 1997, of the 1,054 issues comprising the Index, 960 (89% of
market value) were cash paying issues not in default and 94 issues (11% of
market value) were zero-coupon, deferred interest or step-up coupons not in
default. The Index is calculated and published monthly by Salomon Brothers Fixed
Income Index Group.
44
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
RISK FACTORS - SPECIAL SUMMARY................ 2
1. ABOUT THE SUMMIT HIGH YIELD FUND......... 4
Transaction Costs and Fund Expenses...... 4
Financial Highlights..................... 6
Fund and Market Characteristics/Risk
Factors.................................. 7
2. INVESTMENT POLICIES, PRACTICES AND
RISKS.................................... 8
Types of Portfolio Securities............ 9
Types of Fund Management Practices....... 15
3. THE TRUST AND THE FUND................... 19
Organization of the Trust and the Fund... 19
Management of the Trust and the Fund..... 21
Management-Related Services.............. 25
Fund Expenses............................ 26
Net Asset Value.......................... 27
Distribution Expenses.................... 28
Understanding Performance Information.... 29
4. INVESTING WITH SUMMIT INVESTMENT TRUST... 30
How to Purchase Shares................... 30
General Methods of Purchasing Shares..... 30
Share Price and Sales Charges............ 32
Shareholder Services..................... 34
General Methods of Redeeming Shares...... 36
Additional Shareholder Privileges........ 37
Distributions and Taxes.................. 39
Obtaining Information on Your
Investment............................... 40
APPENDIX I -- Bond Ratings.................... 41
APPENDIX II -- Description of The Salomon Brothers
High Yield Market Index.................. 44
</TABLE>
----------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S COMBINED
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE TRUST, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE FUND, THE TRUST OR THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------------------
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
--------------------------------------------------
MANAGED BY
FIRST SUMMIT CAPITAL MANAGEMENT
--------------------------------------------------
SUMMIT HIGH YIELD FUND
--------------------------------------------------
PROSPECTUS AS OF SEPTEMBER 30, 1997
<PAGE> 49
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
<TABLE>
<CAPTION>
ITEM STATEMENT OF ADDITIONAL INFORMATION HEADING
NO. (RULE 495(c) CROSS REFERENCE)
- ---- --------------------------------------------
<S> <C> <C>
14. Management of the Registrant. General Information; Management of the Trust.
15. Control Persons and Principal Principal Holders of Securities.
Holders of Securities.
16. Investment Advisory and Other Investment Advisory Services; Management-Related
Services. Services; Distribution Plan.
17. Brokerage Allocation and Other Portfolio Transactions.
Practices.
18. Capital Stock and Other Securities. Capital Stock; General.
19. Purchase, Redemption and Pricing of Pricing of Securities; Dividends; General.
Securities Being Offered.
20. Tax Status. Tax Status.
21. Underwriters. Distribution Plan.
22. Calculation of Performance Data. Investment Performance.
23. Financial Statements. Financial Information.
</TABLE>
PART C. INFORMATION REQUIRED IN PART C.
Information required to be included in Part C is set forth
under the appropriate item, so numbered in Part C of this
Registration Statement.
<PAGE> 50
SUMMIT INVESTMENT TRUST
(the "Trust")
3435 Stelzer Road
Columbus, OH 43219
1-800-272-3442
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
SUMMIT HIGH YIELD FUND
(the "Fund")
This Statement of Additional Information ("SAI") is not a prospectus
but should be read in conjunction with the prospectus for the Summit High Yield
Fund, dated September 30, 1997, and which may be obtained from the Summit
Investment Trust, 3435 Stelzer Road, Columbus, OH 43219.
The date of this SAI is September 30, 1997.
<PAGE> 51
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
----
<S> <C>
GENERAL INFORMATION...............................................................................................1
INVESTMENT OBJECTIVE AND POLICIES.................................................................................1
Investment Objective...........................................................................................1
RISK FACTORS......................................................................................................2
Special Risks of Investing in High Yield, High Risk Bonds......................................................2
INVESTMENT PROGRAM................................................................................................3
Investment in Debt Securities..................................................................................3
Corporate Debt Securities......................................................................................3
U.S. Government Obligations....................................................................................3
U.S. Government Agency Securities..............................................................................3
Bank Obligations...............................................................................................3
Asset-Backed Securities........................................................................................4
Methods of Allocating Cash Flows............................................................................4
Types of Credit Support.....................................................................................5
Automobile Receivable Securities............................................................................6
Credit Card Receivable Securities...........................................................................6
Other Assets................................................................................................7
Mortgage-Backed Securities.....................................................................................7
Collateralized Mortgage Obligations ("CMOs")...................................................................7
Stripped Mortgage-Backed Securities............................................................................8
Zero-Coupon and Pay-in-Kind Bonds..............................................................................9
Repurchase Agreements.........................................................................................10
Private Placements (Restricted Securities)....................................................................10
Foreign Sovereign Debt Securities.............................................................................11
Foreign Securities............................................................................................14
Foreign Currency Transactions.................................................................................15
Warrants......................................................................................................17
Lending of Portfolio Securities...............................................................................18
Loan Participations and Assignments...........................................................................18
Short Sales...................................................................................................19
Futures Contracts.............................................................................................20
Interest Rate and Stock Index Futures......................................................................22
Regulatory Limitations.....................................................................................22
Special Risks of Futures Contracts.........................................................................23
Volatility and Leverage................................................................................23
Liquidity..............................................................................................24
Hedging Risk...........................................................................................24
Options on Futures Contracts...............................................................................26
Special Risks of Options on Futures Contracts..............................................................26
Additional Futures and Options on Futures Contracts........................................................27
Options ..................................................................................................27
Writing Covered Call Options...............................................................................28
Writing Covered Put Options................................................................................31
Purchasing Put Options.....................................................................................32
Purchasing Call Options....................................................................................33
Dealer Options.............................................................................................34
Spread Option Transactions.................................................................................35
Options on Securities and Other Financial Indices..........................................................35
Other Options..............................................................................................35
Federal Tax Treatment of Options, Futures
Contracts and Forward Foreign Exchange Contracts............................................................36
</TABLE>
i
<PAGE> 52
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT RESTRICTIONS..........................................................................................37
Fundamental Policies or Restrictions..........................................................................37
Non-Fundamental Policies or Restrictions......................................................................38
MANAGEMENT OF THE TRUST..........................................................................................40
Compensation of Trustees......................................................................................42
PRINCIPAL HOLDERS OF SECURITIES..................................................................................43
INVESTMENT ADVISORY SERVICES.....................................................................................44
The Investment Adviser........................................................................................44
The Advisory Agreement........................................................................................45
The Advisory Fee..............................................................................................46
The Sub-Adviser...............................................................................................47
The Sub-Advisory Agreement....................................................................................47
MANAGEMENT-RELATED SERVICES......................................................................................47
BISYS Service Agreements......................................................................................47
Administrator.................................................................................................47
Fund Accountant...............................................................................................49
Transfer Agent................................................................................................49
DISTRIBUTION PLAN................................................................................................50
The Distributor...............................................................................................52
PORTFOLIO TRANSACTIONS...........................................................................................52
Investment or Brokerage Discretion............................................................................52
How Brokers and Dealers are Selected..........................................................................53
How Evaluations are Made of the Overall
Reasonableness of Brokerage Commissions Paid................................................................53
Description of Research Services Received
from Brokers and Dealers....................................................................................54
Commissions to Brokers Who Furnish Research
Services...................................................................................................55
Internal Allocation Procedures................................................................................55
Portfolio Turnover........................................................................................... 55
Miscellaneous.................................................................................................56
CAPITAL STOCK....................................................................................................56
PRICING OF SECURITIES............................................................................................57
DIVIDENDS........................................................................................................58
TAX STATUS.......................................................................................................58
Foreign Currency Gains and Losses.............................................................................59
INVESTMENT PERFORMANCE...........................................................................................59
Yield Information.............................................................................................59
Total Return Performance......................................................................................61
GENERAL..........................................................................................................62
Repurchase of Shares..........................................................................................62
Payment for Shares Presented..................................................................................63
Custodian.....................................................................................................63
Independent Accountants.......................................................................................63
FINANCIAL INFORMATION............................................................................................64
</TABLE>
ii
<PAGE> 53
GENERAL INFORMATION
The Trust was organized as a business trust under the laws of the
Commonwealth of Massachusetts on March 8, 1994. The Fund is a separate
investment portfolio or series of the Trust. See "Capital Stock" in
this SAI.
This SAI relates to Summit High Yield Fund, which is designed for
purchase by retail investors, and to meet the specific and unique needs of very
high net worth individuals and institutional investors, such as: plan sponsors
of both public and corporate defined benefit, defined contribution,
profit-sharing, 401(k) and other savings and/or retirement type plans;
endowments, foundations and other eleemosynary institutions; banks and trust
companies; investment advisory and asset management firms; third-party
non-transactional fee fund programs; and other similar types of institutions
and/or programs, either investing directly for their own accounts or for the
accounts of others.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies on pages 1 and 7 through 18 of the
prospectus. No material change in the Fund's investment objective will be
made without obtaining shareholder approval. Unless otherwise specified, the
investment program and restrictions of the Fund are not fundamental policies.
The operating policies of the Fund are subject to change by the Board of
Trustees of the Trust (the "Trustees") without shareholder approval. The
fundamental policies of the Fund may not be changed without the approval of at
least a majority of the outstanding shares of the Fund or, if it is less, 67% of
the shares represented at a meeting of shareholders at which the holders of 50%
or more of the shares are represented.
INVESTMENT OBJECTIVE.
The Fund's investment objective is to seek a high level of income
and, secondarily, capital appreciation. The Fund's share price and yield will
fluctuate with changing market conditions, and your investment may be worth more
or less when redeemed than when purchased. The Fund should not be relied upon as
a complete investment program, nor used to play short-term swings in the bond
market. The Fund's high yield is a reflection of the added risk associated with
high yield, high risk bonds and is not necessarily indicative of the total
return you will receive on your investment. The Fund cannot guarantee that it
will achieve its objective. The terms "fixed income securities" and "debt
securities" are used interchangeably in the prospectus and this SAI.
The Fund will invest its assets in a widely diversified portfolio
consisting primarily of high yield, high risk bonds, loan partici-
-1-
<PAGE> 54
pations, convertible securities and preferred stocks. Under normal
circumstances, at least 65% of the Fund's total assets will be invested in high
yield, high risk debt securities. The Fund has no maturity limitation; however,
the Fund's average maturity is expected to be in the range of 5-10 years,
although it may vary if market conditions warrant. In addition, the Fund
calculates its weighted average maturity based on final activity instead of call
maturity or estimated average life (which factors in prepayments). The Fund
seeks to invest in medium- and lower-quality bonds and may also purchase bonds
in default if, in the opinion of the Fund's investment adviser, First Summit
Capital Management ("FSCM" or the "Adviser"), there is significant potential for
capital appreciation. When, in the opinion of the Adviser, changes in economic,
financial, political or market conditions so warrant, the Fund may, for
temporary defensive purposes, reduce its holdings in high yield securities and
invest all or a portion of its assets in cash, high-grade fixed income
securities or high-grade short term debt obligations, including certificates of
deposit, commercial paper, notes, obligations issued or guaranteed by the United
States government or any of its instrumentalities and repurchase agreements
involving such government securities.
In seeking to achieve its investment objective, the Fund may invest in
companies which are believed to be under-valued or out-of-favor in the eyes of
the investment community. Under-valued opportunities in bonds are usually found
among distressed companies, or in less popular areas of the market. The latter
might include bonds that are relatively illiquid, or those for which information
is not widely available. Sometimes opportunities can arise from takeover
situations where high-grade bonds have been substantially downgraded as
companies add heavier debt loads.
RISK FACTORS
Because of its investment policies, the Fund may not be suitable or
appropriate for all investors. The Fund is designed for long-term investors who
can accept the risks entailed in seeking a high level of current income
available from investments in intermediate to long-term, high yield, high risk
medium- and lower-quality, fixed-income securities. Consistent with a long-term
investment approach, investors in the Fund should not rely on the Fund for their
short-term financial needs. The principal value of the lower-quality securities
in which the Fund invests will be affected by interest rate levels, general
economic conditions, specific industry conditions and the creditworthiness of
the individual issuer. Although the Fund seeks to reduce risk by portfolio
diversification, extensive credit analysis and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk. There can, of course, be no assurance that the Fund will achieve these
results.
SPECIAL RISKS OF INVESTING IN HIGH YIELD, HIGH RISK BONDS.
The Fund's prospectus, in the section entitled "Risk Factors -
Special Summary" and "Fund and Market Characteristics/Risk
-2-
<PAGE> 55
Factors" describes the special considerations and additional risk factors
associated with the Fund's investments in lower-rated debt securities
commonly referred to as "junk bonds." Reference is also made to the
following sections in this SAI for discussions of the risks associated
with the investments or investment practices of the Fund.
INVESTMENT PROGRAM
INVESTMENT IN DEBT SECURITIES.
The securities in which the Fund may invest include those described below:
CORPORATE DEBT SECURITIES. (Outstanding convertible and non-convertible
corporate debt securities (e.g., bonds and debentures) that generally have
maturities of at least five years.) The Fund will generally invest in
intermediate to long-term corporate obligations which are rated BB or lower by
Standard & Poor's Ratings Group ("S&P") or Ba or lower by Moody's Investors
Service, Inc. ("Moody's"), or, if not rated, are of equivalent quality as
determined by the Adviser.
U.S. GOVERNMENT OBLIGATIONS. (Bills, notes, bonds, and other
debt securities issued by the U.S. Treasury.) These are direct obligations of
the U.S. Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES. (Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies.) These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Banks, Farm Credit Banks, the Small Business Administration
and the Tennessee Valley Authority. Some of these securities are supported by
the full faith and credit of the U.S. Treasury, and the remainder are supported
only by the credit of the instrumentality, which may or may not include the
right of the issuer to borrow from the U.S. Treasury.
BANK OBLIGATIONS. (Certificates of deposit, bankers' acceptances, and
other debt obligations.) Certificates of deposit are short-term obligations of
commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a
-3-
<PAGE> 56
borrower, usually in connection with international commercial transactions.
Certificates of deposit may have fixed or variable rates.
The Fund may also invest in the securities of certain supranational
entities, such as the International Development Bank.
ASSET-BACKED SECURITIES.
The Fund may invest a portion of its assets in debt obligations known
as asset-backed securities. The credit quality of most asset-backed securities
depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator of the debt obligations or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-backed securities may be classified either as
pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support" below.
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support" below), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
METHODS OF ALLOCATING CASH FLOWS. While many asset-backed securities
are issued with only one class of security, many asset-
-4-
<PAGE> 57
backed securities are issued in more than one class, each with different payment
terms. Multiple class asset-backed securities are issued for two main reasons.
First, multiple classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more classes whose
right to payments on the asset-backed security is made subordinate to the right
to such payments of the remaining class or classes. See "Types of Credit
Support." Second, multiple classes may permit the issuance of securities with
payment terms, interest rates or other characteristics differing both from those
of each other and from those of the underlying assets. Examples include
so-called "strips" (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objective and
policies and with the investment restrictions of the Fund.
TYPES OF CREDIT SUPPORT. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initiating payments on the underlying
assets, are held in reserve against future losses) or that have been
"over-collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue
-5-
<PAGE> 58
is based generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-backed security.
AUTOMOBILE RECEIVABLE SECURITIES. The Fund may invest in asset-backed
securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also, although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on the securities. In addition, various state and federal
laws give the motor vehicle owner the right to assert against the holder of the
owner's Automobile Contract certain defenses such owner would have against the
seller of the motor vehicle. The assertion of such defenses could reduce
payments on the Automobile Receivable Securities.
CREDIT CARD RECEIVABLE SECURITIES. The Fund may invest in asset-backed
securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities"). Credit balances on revolving credit card
agreements ("Accounts") are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued publicly to date
have been pass-through certificates. In order to lengthen the maturity of Credit
Card Receivable Securities, most such securities provide for a fixed period
during which only interest payments on the underlying Accounts are passed
through to the security holder and principal payments received on such Accounts
are used to fund
-6-
<PAGE> 59
the transfer to the pool of assets supporting the related Credit Card Receivable
Securities of additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of specified events
which signal a potential deterioration in the quality of the assets backing the
security, such as the imposition of a cap on interest rates. The ability of the
issuer to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
OTHER ASSETS. FSCM anticipates that asset-backed securities backed by
assets other than those described above will be issued in the future. The Fund
may invest in such securities in the future if such investment is otherwise
consistent with its investment objective and policies. There are, of course,
other types of securities that are, or may become, available, which are similar
to the foregoing.
MORTGAGE-BACKED SECURITIES.
Mortgage-backed securities are securities representing interests in a
pool of mortgages. Principal and interest payments made on the mortgages in the
underlying mortgage pool are passed through to the Fund. Unscheduled prepayments
of principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to the Fund. This principal
is returned to the Fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change because
of changes in the market's perception of the creditworthiness of the federal
agency that issued them. In addition, the mortgage securities market in general
may be adversely affected by changes in governmental regulation or tax policies.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS").
The Fund may invest in CMOs, bonds that are collateralized by whole
loan mortgages or mortgage pass-through securities. The bonds issued in a CMO
deal are divided into groups, and each group
-7-
<PAGE> 60
of bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in the
collateral pool are used to first pay interest and then pay principal to the CMO
bondholders. The bonds issued under a CMO structure are retired sequentially as
opposed to the pro-rata return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO issues, the
cash flow generated by the underlying collateral (to the extent it exceeds the
amount required to pay the stated interest) is used to retire the bonds. Under
the CMO structure, the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO issuance. The
"fastest-pay" tranche of bonds, as specified in the prospectus for the issuance,
would initially receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are retired. The
sequential retirement of bond groups continues until the last tranche, or group
of bonds, is retired. Accordingly, the CMO structure allows the issuer to use
cash flows of long maturity, monthly-pay collateral to formulate securities with
short, intermediate and long final maturities and expected average lives.
The primary risk of any mortgage security is the uncertainty of the
timing of cash flows. For CMOs, the primary risks result from the rate of
prepayments on the underlying mortgages serving as collateral. An increase or
decrease in prepayment rates (resulting from a decrease or increase in mortgage
interest rates) will affect the yield, average life and price of CMOs. CMOs can
be quite sensitive to interest rate changes and the rate of principal
prepayments on the underlying mortgages serving as collateral. As an
illustration, declining interest rates may result in prepayments and thus,
termination of interest payments. In addition, the proceeds of prepayments may
have to be reinvested at the lower interest rates. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
STRIPPED MORTGAGE-BACKED SECURITIES.
These are securities representing interests in a pool of mortgages, the
cash flow of which has been separated into its interest and principal
components. Interest-only securities ("IOs") receive the interest portion of the
cash flow while principal-only securities ("POs") receive the principal portion.
The Fund may invest up to 5% of its total assets in IOs and POs. Stripped
mortgage-backed securities may be issued by U.S. Government agencies or by
private issuers. The value of IOs tends to move in the same direction as
interest rates. The value of the other mortgage-backed securities described
herein, like other debt instruments, will tend to move in the opposite direction
compared to interest rates. Under the Internal Revenue Code of 1986, as amended
(the "Code"), POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund.
-8-
<PAGE> 61
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. In general, for IOs, prepayments affect the amount,
but not the timing of cash flows, whereas, for POs, the opposite is true. For
example, a rapid or slow rate of principal payments may have a material adverse
effect on the prices of IOs or POs, respectively. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, an investor
may fail to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely,
if the underlying mortgage assets experience slower than anticipated prepayments
of principal, the price on a PO class will be affected more severely than would
be the case with a traditional mortgage-backed security.
The staff of the Securities and Exchange Commission ("SEC" or the
"Commission") has taken the position that IOs and POs, other than
government-issued IOs or POs backed by fixed-rate mortgages, should be treated
as illiquid securities and, accordingly, the Fund will limit its investments in
such securities, together with all other illiquid securities, to 15% of the
Fund's net assets. Under the staff's position, the determination of whether a
particular government-issued IO and PO backed by fixed-rate mortgages is liquid
may be made on a case by case basis under guidelines and standards established
by the Trustees. The Trustees have delegated to the Adviser the authority to
determine the liquidity of these investments based on the following guidelines:
the type of issuer; type of collateral, including age and prepayment
characteristics; rate of interest on coupon relative to current market rates and
the effect of the rate on the potential for prepayments; complexity of the
issue's structure, including the number of tranches; size of the issue and the
number of dealers who make a market in the IO or PO. The Fund will treat
non-government-issued IOs and POs not backed by fixed-rate mortgages as illiquid
unless and until the SEC modifies its position.
ZERO-COUPON AND PAY-IN-KIND BONDS.
The Fund may invest up to 25% of its total assets in zero-coupon bonds.
A zero-coupon security has no cash coupon payments. Instead, the issuer sells
the security at a substantial discount from its maturity value. The interest
received by the investor from holding this security to maturity is the
difference between the maturity value and the purchase price. The advantage to
the investor is that reinvestment risk of the income received during the life of
the bond is eliminated. However, zero-coupon bonds like other bonds retain
interest rate and credit risk and usually display more price volatility than
those securities that pay a cash coupon.
The Fund may invest up to 25% of its total assets in pay-in-kind bonds.
Pay-in-kind ("PIK") bonds are securities that pay interest in either cash or
additional securities, at the issuer's option, for a specified period. PIKs,
like zero-coupon bonds, are designed
-9-
<PAGE> 62
to give an issuer flexibility in managing cash flow. PIK bonds can be either
senior or subordinated debt and trade flat (i.e., without accrued interest). The
price of PIK bonds is expected to reflect the market value of the underlying
debt plus an amount representing accrued interest since the last payment. PIKs
are usually less volatile than zero-coupon bonds, but more volatile than
cash-pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
Fund until the maturity or call date of the bond. The Fund will nonetheless be
required to distribute substantially all of this gross income each year to
comply with the Code and such distributions could reduce the amount of cash
available for investment by the Fund.
REPURCHASE AGREEMENTS.
The Fund may enter into repurchase agreements with well-established
securities dealers or banks that are members of the Federal Reserve System. Any
such dealer or bank will have been deemed creditworthy in accordance with
guidelines approved by the Trustees and will have a credit rating with respect
to its short-term debt in the highest rating category by a rating agency. In a
repurchase agreement, the Fund buys a security (known as the "underlying
security") from a seller that has agreed to repurchase it at a specified future
date and an agreed upon price. Repurchase agreements, which may be viewed as
loans collateralized by the underlying securities, are generally entered into
for a short period of time, often less than a week. The Fund will not enter into
a repurchase agreement which does not provide for payment within seven days if,
as a result, more than 15% of the value of its net assets would then be invested
in such repurchase agreements and other illiquid securities. The Fund will enter
into repurchase agreements only where: (i) the underlying securities are of the
type (excluding maturity limitations) which the Fund's investment guidelines
would allow it to purchase directly, either in normal circumstances or for
temporary defensive purposes; (ii) the market value of the underlying
securities, including interest accrued, will at all times equal or exceed the
value of the repurchase agreement; and (iii) payment for the underlying security
is made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying security and losses,
including: (i) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto; (ii) possible
subnormal levels of income and lack of access to income during this period; and
(iii) expenses of enforcing its rights.
PRIVATE PLACEMENTS (RESTRICTED SECURITIES).
The Fund may invest in securities, including restricted securities
(privately-placed debt securities), which are not readily marketable, but will
not acquire such securities if as a
-10-
<PAGE> 63
result they would comprise, together with all other illiquid securities, more
than 15% of the value of the Fund's net assets.
Certain restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933, as amended (the "1933
Act"). Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
without readily available market quotations will be priced at fair value as
determined in good faith by the Trustees.
Some restricted securities are eligible for purchase and sale under
Rule 144A under the 1933 Act. This rule permits certain qualified institutional
buyers, such as the Fund, to trade in privately-placed securities, including
various debt securities, even though such securities are not registered under
the 1933 Act. Securities purchased under Rule 144A, although restricted, may
nevertheless be liquid, and the Adviser, under the supervision of the Trustees,
on a case-by-case basis will make this determination. In making this
determination, the Adviser will consider the trading markets for the specific
security, taking into account the unregistered nature of a Rule 144A security.
In addition, the Adviser could consider the: (i) frequency of trades and quotes;
(ii) number of dealers and potential purchasers; (iii) dealer undertakings to
make a market; and (iv) nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). The liquidity of Rule 144A securities will be
monitored, and if as a result of changed conditions it is determined that a Rule
144A security is no longer liquid, the Fund's holdings of illiquid securities
will be reviewed to determine what, if any, steps are required to assure that
the Fund does not invest more than 15% of its net assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the amount
of the Fund's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
FOREIGN SOVEREIGN DEBT SECURITIES.
The Fund expects to invest in foreign sovereign debt securities,
including those of less developed countries ("LDCs"). Such securities will
include Brady Bonds. Sovereign obligors in LDCs are among the world's largest
debtors to commercial banks, other governments, international financial
organizations and other financial institutions. Some of these obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, leading to defaults on certain obligations and the restructuring of
certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling
-11-
<PAGE> 64
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Holders of certain foreign
sovereign debt securities may be requested to participate in the restructuring
of such obligations and to extend further loans to their issuers. There can be
no assurance that the Brady Bonds and other foreign sovereign debt securities in
which the Fund may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect the Fund's
holdings. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants.
Brady Bonds are debt securities issued under the framework of the Brady
Plan, an initiative announced by U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding external
indebtedness. In restructuring external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the "World Bank") and the International Monetary Fund (the "IMF"). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly-issued bonds. The World Bank and/or the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank or the IMF, debtor nations have been required to agree to
implement certain domestic monetary and fiscal reforms. Such reforms have
included liberalization of trade and foreign investment, privatization of
state-owned enterprises and setting targets for public spending and borrowing.
These policies and programs seek to promote the debtor country's economic growth
and development. Investors should recognize that the Brady Plan only sets forth
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by-case basis between debtor nations
and their creditors. The Adviser believes that economic reforms undertaken by
countries in connection with the issuance of Brady Bonds make the debt of
countries which have issued or have announced plans to issue Brady Bonds an
attractive opportunity for investment.
Investors should recognize that Brady Bonds have been issued somewhat
recently and, accordingly, do not have a long payment history. The financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount of face value of such
debt (generally known as discount bonds), and bonds bearing an interest rate
which increases over time and the advancement of new money by existing lenders.
The principal of certain Brady Bonds
-12-
<PAGE> 65
has been collateralized by U.S. Treasury zero-coupon bonds with a maturity equal
to the final maturity of such Brady Bonds. Collateral purchases are financed by
the IMF, the World Bank and the debtor nations' reserves. In addition, the first
two or three interest payments on certain types of Brady Bonds may be
collateralized by cash or securities agreed upon by creditors. Subsequent
interest payments may be uncollateralized or may be collateralized over
specified periods of time. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and principal
primarily on the willingness of the foreign government to make payment in
accordance with the terms of the Brady Bonds. Brady Bonds issued to date are
generally purchased and sold in secondary markets through U.S. securities
dealers and maintained through European transnational securities depositories. A
substantial portion of Brady Bonds and other sovereign debt securities in which
the Fund may invest are likely to be acquired at a discount.
Investing in foreign sovereign debt securities will expose the Fund to
the direct or indirect consequences of political, social or economic changes in
the LDCs that issue the securities. The ability and willingness of sovereign
obligors in LDCs or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Countries
such as those in which the Fund may invest have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate trade difficulties and extreme poverty and unemployment. Many of
these countries are also characterized by political uncertainty or instability.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
size of its debt service burden relative to the economy as a whole, and its
government's policy towards the IMF, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and
-13-
<PAGE> 66
others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds,
which may further impair the obligor's ability or willingness to timely service
its debts. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates, because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign exchange to service its external
debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
FOREIGN SECURITIES.
Subject to the Fund's quality and maturity standards, the Fund may
invest without limitation in the securities (payable in U.S. dollars) of foreign
issuers and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). The Fund may also invest up to
20% of its net assets in non-U.S. dollar-denominated fixed-income securities
principally traded in financial markets outside the United States. Because the
Fund may invest in foreign securities, investment in the Fund involves risks
that are different in some respects from an investment in a fund which invests
only in debt obligations of U.S. domestic issuers. Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. There may be less
governmental supervision of securities markets, brokers and issuers of
securities. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the United States. Settlement
practices may include delays and may differ from those customary in United
States markets. Investments in foreign securities may also be subject to other
risks different from those
-14-
<PAGE> 67
affecting U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, restrictions on foreign investment
and repatriation of capital, imposition of withholding taxes on dividend or
interest payments, currency blockage (which would prevent cash from being
brought back to the United States), and difficulty in enforcing legal rights
outside the United States.
In addition to the foreign securities listed above, the Fund may invest
in foreign sovereign debt securities which involve certain additional risks. See
"Foreign Sovereign Debt Securities" above.
FOREIGN CURRENCY TRANSACTIONS.
A forward foreign currency exchange contract (a "forward contract")
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
principally traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades.
The Fund may enter into forward foreign currency exchange contracts
under two circumstances. First, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
will be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when the Adviser believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the amount of the
former foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively, where
appropriate, the Fund may hedge all or part of its foreign currency exposure
through the use of a basket of currencies or a proxy currency where such
currency or currencies act as an effective proxy for other currencies. In such a
case, the Fund may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities denominated in such
currency. The use of this basket hedging technique may be more efficient and
economical than entering into separate forward contracts for each currency held
in the Fund. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future value
of
-15-
<PAGE> 68
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. The Adviser does not intend to
enter into such forward contracts under this second circumstance if, as result,
the Fund will have more than 20% of the value of its net assets committed to the
consummation of such contracts. Other than as set forth above, and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Fund's portfolio securities or other assets to which the
forward contracts relate (including accrued interest to the maturity of the
forward on such securities), provided the excess amount is "covered" by liquid,
high-grade debt securities, denominated in any currency, at least equal at all
times to the amount of such excess. For these purposes "the securities or other
assets to which the forward contract relate" may be securities or assets
denominated in a single currency, or where proxy forwards are used, securities
denominated in more than one currency. Under normal circumstances, consideration
of the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Adviser believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Fund will be served. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver. However, as noted, in order
to avoid excessive transactions and transaction costs, the Fund may use liquid
securities, denominated in any currency, to cover the amount by which the value
of a forward contract exceeds the value of the securities to which it relates.
-16-
<PAGE> 69
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Adviser. It also should be realized that this method of hedging against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
WARRANTS.
The Fund may invest in warrants; however, not more than 5% of its
total assets (at the time of purchase) will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5% not more
than 2% may be invested at the time of purchase in warrants that are not listed
on the New York or American Stock Exchanges. Warrants are pure speculation in
that they have no voting rights, pay no dividends and have no rights with
respect to the assets of the corporation issuing them. Warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do
-17-
<PAGE> 70
not represent ownership of the securities, but only the right to buy them.
Warrants differ from call options in that warrants are issued by the issuer of
the security which may be purchased on their exercise, whereas call options may
be written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
LENDING OF PORTFOLIO SECURITIES.
For the purpose of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than one-third of
its total assets. This policy is a fundamental policy. Securities loans are made
to broker-dealers or institutional investors pursuant to agreements requiring
that the loans be continuously secured by collateral at least equal at all times
to the value of the securities lent marked to market on a daily basis. The
collateral received will consist of cash, U.S. Government securities, letters of
credit or such other collateral as may be permitted under its investment
program. While the securities are being lent, the Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Fund will not have the right to vote securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
delay or default in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed by the Adviser to be of good standing, and will not be made unless,
in the judgment of the Adviser, the consideration to be earned from such loans
would justify the risk.
LOAN PARTICIPATIONS AND ASSIGNMENTS.
The Fund may invest in loan participations and assignments
(collectively "participations"). Such participations will typically be
participating interests in loans made by a syndicate of banks, represented by an
agent bank, which has negotiated and structured the loan to corporate borrowers
to finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may also have been made to
governmental borrowers, especially governments of LDCs. LDC debt will involve
the risk that the governmental entity responsible for the repayment of the debt
may be unable or unwilling to do so when due. (For a discussion of risks
associated with investing in LDCs, see "Foreign Sovereign Debt Securities"
above.) The loans underlying such participations may be secured or unsecured,
and the Fund may invest in loans collateralized by
-18-
<PAGE> 71
mortgages on real property or which have no collateral. The loan participations
themselves may extend for the entire term of the loan or may extend only for
short "strips" that correspond to a quarterly or monthly floating rate interest
period on the underlying loan. Thus, a term or revolving credit that extends for
several years may be subdivided into shorter periods.
The loan participations in which the Fund will invest will also vary in
legal structure. Occasionally, lenders assign to another institution both the
lender's rights and obligations under a credit agreement. Since this type of
assignment relieves the original lender of its obligations, it is called a
novation. More typically, a lender assigns only its right to receive payments of
principal and interest under a promissory note, credit agreement or similar
document. A true assignment shifts to the assignee the direct debtor-creditor
relationship with the underlying borrower. Alternatively, a lender may assign
only part of its rights to receive payments pursuant to the underlying
instrument or loan agreement. Such partial assignments, which are more
accurately characterized as "participating interests," do not shift the
debtor-creditor relationship to the assignee, who must rely on the original
lending institution to collect sums due and to otherwise enforce its rights
against the agent bank which administers the loan or against the underlying
borrower.
Because the Fund is allowed to purchase debt securities, including debt
securities in a private placement, the Fund will treat loan participations as
securities and not subject to its fundamental investment restriction prohibiting
the Fund from making loans.
There is not a recognizable, liquid public market for loan
participations. Hence, the Fund will consider loan participations as illiquid
securities and subject them to the Fund's restrictions on investing no more than
15% of net assets in illiquid securities.
Where required by applicable SEC positions, the Fund will treat both
the corporate borrower and the bank selling the participation interest as an
issuer for purposes of its fundamental investment restriction which prohibits
investing more than 5% of Fund assets in the securities of a single issuer.
Various service fees received by the Fund from loan participations may
be treated as non-interest income depending on the nature of the fee
(commitment, takedown, commission, service or loan origination). To the extent
the service fees are not interest income, they will not qualify as income under
Section 851(b) of the Code. Thus the sum of such fees plus any other
non-qualifying income earned by the Fund cannot exceed 10% of total income.
SHORT SALES.
The Fund may make short sales for hedging purposes to protect the Fund
against companies whose credit is deteriorating. Short sales are transactions in
which the Fund sells a security it does
-19-
<PAGE> 72
not own in anticipation of a decline in the market value of that security. The
Fund's short sales will be limited to securities listed on a national securities
exchange and to situations where the Fund owns a debt security of a company and
will sell short the common or preferred stock or another debt security at a
different level of the capital structure of the same company. No securities will
be sold short if, after the effect is given to any such short sale, the total
market value of all securities sold short would exceed 2% of the value of the
Fund's net assets.
To complete a short sale transaction, the Fund must borrow the security
to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account, containing cash,
U.S. Government securities or other liquid securities, at such a level that: (i)
the amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; and (ii) the
amount deposited in the segregated account plus the amount deposited with the
broker as collateral will not be less than the market value of the security at
the time it was sold short; or (b) otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if the price
of the security sold short increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will realize a
gain if the security sold short declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the amount
of any loss increased, by the amount of any premium, dividends or interest the
Fund may be required to pay in connection with a short sale. Any gain or loss on
the security sold short would be separate from a gain or loss on the Fund
security being hedged by the short sale.
FUTURES CONTRACTS.
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a debt security) at a specified price, date, time and
place designated at the time the contract is made. Brokerage fees are incurred
when a futures contract is bought or sold and margin deposits must be
maintained.
-20-
<PAGE> 73
Entering into a contract to buy is commonly referred to as buying or purchasing
a contract or holding a long position. Entering into a contract to sell is
commonly referred to as selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no price will be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open positions
in futures contracts, the Fund will be required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash, U.S.
Government securities, suitable money market instruments, or other liquid
securities, known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker are made on a daily basis as the price of the underlying assets
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing out
an open futures contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If the
offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting transaction with respect
to a particular futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain the margin deposits on the futures contract.
-21-
<PAGE> 74
As an example of an offsetting transaction in which the underlying
instrument is not delivered, the contractual obligations arising from the sale
of one contract of September Treasury Bills on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one contract of September
Treasury Bills on the same exchange. In such instance, the difference between
the price at which the futures contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.
INTEREST RATE AND STOCK INDEX FUTURES. The Fund may enter into
financial futures contracts, including stock index and interest rate futures.
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for the Adviser to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. Stock index futures
contracts are currently traded with respect to the S&P 500 Index and other broad
stock market indices, such as the New York Stock Exchange Composite Stock Index
and the Value Line Composite Stock Index. The Fund may, however, purchase or
sell futures contracts with respect to any stock index. Nevertheless, to hedge
the Fund's portfolio successfully, the Fund must sell futures contacts with
respect to indices or sub-indices whose movements will have a significant
correlation with movements in the prices of the Fund's portfolio securities.
Interest rate futures contracts may be used as a hedge against changes
in prevailing levels of interest rates in order to establish more definitely the
effective return on securities held or intended to be acquired by the Fund. In
this regard, the Fund could sell interest rate futures as an offset against the
effect of expected increases in interest rates and purchase such futures as an
offset against the effect of expected declines in interest rates.
The Fund will enter into futures contracts which are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. The principal financial futures exchanges in the United
States are the Board of Trade of the City of Chicago, the Chicago Mercantile
Exchange, the New York Futures Exchange and the Kansas City Board of Trade.
Futures exchanges and trading in the United States are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas.
REGULATORY LIMITATIONS. The Fund will engage in transactions
in futures contracts and options thereon only for bona fide
-22-
<PAGE> 75
hedging, risk management and other permissible purposes, in each case in
accordance with the rules and regulations of the CFTC, and not for speculation.
The Fund may not enter into futures contracts or options thereon for
other than bona-fide hedging purposes if immediately thereafter the sum of the
amounts of initial margin deposits on the Fund's existing futures and premiums
paid for options on futures would exceed 5% of the market value of the Fund's
total assets; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
In instances involving the purchase of futures contracts or call
options thereon or the writing of put options thereon by the Fund, an amount of
cash, U.S. Government securities or other liquid securities, equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
to cover the position, or alternative cover will be employed thereby insuring
that the use of such futures contracts and options is unleveraged.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
SPECIAL RISKS OF FUTURES CONTRACTS.
VOLATILITY AND LEVERAGE. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the minimum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in
-23-
<PAGE> 76
immediate and substantial loss, as well as gain, to the investor. For example,
if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit, if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of the futures contract, it had invested in the underlying instrument and sold
it after the decline. Furthermore, in the case of a futures contract purchase,
in order to be certain that the Fund has sufficient assets to satisfy its
obligations under a futures contract, the Fund earmarks to the futures contract
money market instruments equal in value to the current value of the underlying
instrument less the margin deposit.
LIQUIDITY. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. The Fund may close its positions by
taking opposite positions which would operate to terminate the Fund's position
in the futures contracts. Final determinations of variation margin would then be
made, additional cash would be required to be paid by or released to the Fund,
and the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. However, in the
event futures contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to the hedge
until the futures contracts could be terminated. In such circumstances, an
increase in the price of the underlying instruments, if any, might partially or
completely offset losses on the futures contract. However, as described below,
there is no guarantee that the price of the underlying instruments will in fact
correlate with the price movements in the futures contract and thus provide an
offset to losses on a futures contract.
HEDGING RISK. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, or market or interest rate
trends. There are several risks in connection with the use by the Fund of
futures contract as a
-24-
<PAGE> 77
hedging device. One risk arises because of the imperfect correlation between
movements in the prices of the futures contracts and movements in the prices of
the underlying instruments which are the subject of the hedge. The Adviser will,
however, attempt to reduce this risk by entering into futures contracts whose
movements, in its judgment, will have a significant correlation with movements
in the prices of the Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to the Adviser's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures to
hedge its portfolio against a decline in the market, the index, indices, or
underlying instruments on which the futures are written might advance and the
value of the underlying instruments held in the Fund's portfolio might decline.
If this were to occur, the Fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while this
might occur to a certain degree, the Adviser believes that over time the value
of the Fund's portfolio will tend to move in the same direction as the market
indices which are intended to correlate to the price movements of the underlying
instruments sought to be hedged. It is also possible that if the Fund were to
hedge against the possibility of a decline in the market (adversely affecting
the underlying instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value of those
underlying instruments that it has hedged, because it would have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
had insufficient cash, it might have to sell underlying instruments to meet
daily variation margin requirements. Such sales of underlying instruments might
be, but would not necessarily be, at increased prices (which would reflect the
rising market). The Fund might have to sell underlying instruments at a time
when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements
-25-
<PAGE> 78
in the prices of futures contracts, even a correct forecast of general market
trends by the Adviser might not result in a successful hedging transaction over
a very short time period.
OPTIONS ON FUTURES CONTRACTS.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to writing or purchasing call and put options on
interest rate futures, the Fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use of
options on futures contracts.
SPECIAL RISKS OF OPTIONS ON FUTURES CONTRACTS.
The Fund may seek to close out an option position by writing or buying
an offsetting option covering the same index, underlying instruments or contract
and having the same exercise price and expiration date. The ability to establish
and close out positions on such options will be subject to the maintenance of a
liquid secondary market. Reasons for the absence of a liquid secondary market on
an exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed will respect to particular
classes or series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in the class or series
of options) would cease to exist, although outstanding options on the exchange
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms. There
is no assurance that higher than anticipated trading activity or
-26-
<PAGE> 79
other unforeseen events might not, at times, render certain of the facilities of
any of the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
ADDITIONAL FUTURES AND OPTIONS ON FUTURES CONTRACTS.
Although the Fund has no current intention of engaging in financial
futures or options on futures transactions other than those described above, it
reserves the right to do so to the extent consistent with applicable law and the
Fund's investment objectives and restrictions as in effect at such time.
OPTIONS.
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below.
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
The Fund's purchase of a put option on a security, for example, might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
of such instrument by giving the Fund the right to sell the instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial futures contract, index, currency or other
instrument might be intended to protect the Fund against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase the instrument. An "American" style
put or call option may be exercised at any time during the option period,
whereas a "European" style put or call option may be exercised only upon
expiration or during a fixed period prior to expiration. Exchange-listed options
are issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
the options. The discussion below uses the OCC as an example, but is also
applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Index options are
cash settled for the net amount, if any, by which the option is "in-the-money"
(that is, the amount by which the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put
-27-
<PAGE> 80
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC-issued or exchange-listed put or call option is dependent, in part,
upon the liquidity of the particular option market. Among the possible reasons
for the absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits; (iv) interruption of the
normal operations of the OCC or an exchange; (v) inadequacy of the facilities of
an exchange or the OCC to handle current trading volume; or (vi) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
WRITING COVERED CALL OPTIONS. The Fund may write (sell) "covered" call
options and purchase options to close out options previously written by the
Fund. In writing covered call options, the Fund expects to generate additional
premium income which should serve to enhance the Fund's total return and reduce
the effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in the Adviser's opinion, are not expected to have any major
price increases or moves in the near future but which, over the long term, are
deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at expiration of
the option (European style) or at any time until a certain date (the expiration
date) (American style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the underlying security or
currency against payment of the exercise price. This obligation terminates upon
the expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To
-28-
<PAGE> 81
secure his obligation to deliver the underlying security or currency in the case
of a call option, a writer is required to deposit in escrow the underlying
security, currency or other assets in accordance with the rules of a clearing
corporation. In order to comply with the requirements of several states, the
Fund will not write a covered call option if, as a result, the aggregate market
value of all portfolio securities or currencies covering call or put options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of their application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written calls and
puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund has no
current intention of doing), but capable of enhancing the Fund's total return.
When writing a covered call option, the Fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying security
or currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control over
when it may be required to sell the underlying securities or currencies, since
it may be assigned an exercise notice at any time prior to the expiration of its
obligation as a writer. If a call option which the Fund has written expires, the
Fund will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security or currency
during the option period. If the call option is exercised, the Fund will realize
a gain or loss from the sale of the underlying security or currency. The Fund
does not consider a security or currency covered by a call to be "pledged" as
that term is used in the Fund's policy which limits the pledging or mortgaging
of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Adviser, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Fund for writing covered call options will
be recorded as a liability of the Fund. This liability will be adjusted daily to
the option' s current market value, which will be
-29-
<PAGE> 82
the latest sale price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or, in the absence of
such sale, the latest asked price. The option will be terminated upon expiration
of the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option or purchased a put option it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Fund will be able to effect
such closing transactions at favorable prices. If the Fund cannot enter into
such a transaction, it may be required to hold a security or currency that it
might otherwise have sold. When the Fund writes a covered call option, it runs
the risk of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price as well as the risk of being
required to hold onto securities or currencies that are depreciating in value.
This could result in higher transaction costs. The Fund will pay transaction
costs in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
The Fund considers an option to be covered if, as long as the Fund is
obligated as a writer of a call option, it will: (i) own the securities or
currencies subject to the option; (ii) have an
-30-
<PAGE> 83
absolute and immediate right to acquire securities or currencies without
additional cash consideration upon conversion or exchange of other securities or
currencies held in its portfolio; (iii) hold a call option on the same
securities or currencies with an exercise price no higher than the exercise
price of the call sold or, if higher, the Fund deposits and maintains the
differential in cash, U.S. Government securities or other liquid securities
("liquid assets") in a segregated account with its custodian, or; (iv) deposit
and maintain with its custodian in a segregated account liquid assets having a
value that, when added to any amounts deposited with a broker as margin, equal
the market value of the instruments underlying the call.
WRITING COVERED PUT OPTIONS. Although the Fund has no current
intention, in the foreseeable future, of writing American or European style
covered put options, the Fund reserves the right to do so. A put option gives
the purchaser of the option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the exercise price
during the option period (American style) or at the expiration of the option
(European style). So long as the obligation of the writer continues, he may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against delivery of
the underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. Government
securities or other liquid securities in an amount not less than the exercise
price or the Fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) The Fund
would generally write covered put options in circumstances where the Adviser
wishes to purchase the underlying security or currency for the Fund's portfolio
at a price lower than the current market price of the security or currency. In
such event the Fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
such a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
-31-
<PAGE> 84
currencies. In order to comply with the requirements of several states, the Fund
will not write a covered put option if, as a result, the aggregate market value
of all portfolio securities or currencies covering put or call options exceeds
25% of the market value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of their application, the Fund reserves the
right to increase this percentage. In calculating the 25% limit, the Fund will
offset, against the value of assets covering written puts and calls, the value
of purchased puts and calls on identical securities or currencies with identical
maturity dates.
PURCHASING PUT OPTIONS. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided below.
The Fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the Fund as a defensive technique in
order to protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange value.
For example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency where the Adviser deems it desirable to
continue to hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security or currency
is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security or currency must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put option
is sold in a closing sale transaction.
-32-
<PAGE> 85
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its total assets to premiums when
purchasing call and put options. Should these state laws change or should the
Fund obtain a waiver of their application, the Fund may commit more than 5% of
its total assets to premiums when purchasing call and put options. The premium
paid by the Fund when purchasing a put option will be recorded as an asset of
the Fund. This asset will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the Fund is computed (close of New York Stock Exchange), or,
in the absence of such sale, the latest bid price. This asset will be terminated
upon expiration of the option, the selling (writing) of an identical option in a
closing transaction, or the delivery of the underlying security or currency upon
the exercise of the option.
PURCHASING CALL OPTIONS. The Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the securities
or currencies at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or currencies directly. This
technique may also be useful to the Fund in purchasing a large block of
securities or currencies that would be more difficult to acquire by direct
market purchases. So long as it holds such a call option rather than the
underlying security or currency itself, the Fund is partially protected from any
unexpected decline in the market price of the underlying security or currency
and in such event could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its total assets to premiums when
purchasing call and put options. Should these state laws change or should the
Fund obtain a waiver of their application, the Fund may commit more than 5% of
its total assets to premiums when purchasing call and put options. The Fund may
also purchase call options on underlying securities or currencies it owns in
order to protect unrealized gains on call options previously written by it. A
call option would be purchased for this purpose
-33-
<PAGE> 86
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
DEALER OPTIONS. The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Fund would look
to a clearing corporation to exercise exchange-traded options, if the Fund were
to purchase a dealer option, it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as loss of
the expected benefit of the transaction. Thus, the Adviser must assess the
creditworthiness of each such dealer or any guarantor or credit enhancement of
the dealer's credit to determine the likelihood that the terms of the dealer
option will be met.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. Until the Fund, as a covered
dealer call option writer, is able to effect a closing purchase transaction, it
will not be able to liquidate securities (or other assets) or currencies used as
cover until the option expires or is exercised. In the event of insolvency of
the contra party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities or currencies at a time
when such sale might be advantageous.
The staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as liquid
if the dealer agrees that the Fund may repurchase the OTC option it has written
for a maximum price to be calculated by a predetermined formula. In such cases,
the OTC option would be considered illiquid only to the extent the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation prohibiting investment of more than 15% of its net assets in illiquid
securities. If the
-34-
<PAGE> 87
SEC changes its position on the liquidity of dealer options, the Fund will
change its treatment of such instruments accordingly.
SPREAD OPTION TRANSACTIONS. The Fund may purchase from and sell to
securities dealers covered spread options. Such covered spread options are not
presently exchange listed or traded. The purchase of a spread option gives the
Fund the right to put, or sell, a security that it owns at a fixed dollar spread
or fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Fund in purchasing
covered spread options is the cost of the premium paid for the spread option and
any transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect the Fund against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high-quality and lower quality securities. Such
protection is only provided during the life of the spread option. The security
covering the spread option will be maintained in a segregated account by the
Fund's custodian. The Fund does not consider a security covered by a spread
option to be "pledged" as that term is used in the Fund's policy limiting the
pledging or mortgaging of its assets.
OPTIONS ON SECURITIES AND OTHER FINANCIAL INDICES. The Fund may
purchase and sell call and put options on securities indices and other financial
indices. In so doing, the Fund can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments comprising the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
OTHER OPTIONS. Although it has no current intention of entering into
options transactions other than those described herein, the Fund reserves the
right to purchase or sell options on instruments and indices which may be
developed in the future to the extent consistent with applicable law and the
Fund's investment objectives and restrictions as in effect at such time.
-35-
<PAGE> 88
FEDERAL TAX TREATMENT OF OPTIONS, FUTURES CONTRACTS AND FORWARD FOREIGN EXCHANGE
CONTRACTS.
The discussion herein may refer to transactions in which the Fund does
not engage.
The Fund may enter into certain option, futures and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund will
be required to distribute net gains on such transactions to shareholders even
though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualified income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indices and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income. In
-36-
<PAGE> 89
order to avoid realizing excessive gains on securities or currencies held less
than three months, the Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gain on
Section 1256 option, futures and foreign forward exchange contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes of the 30%
test.
INVESTMENT RESTRICTIONS
Restrictions (1) through (10) below are fundamental. Fundamental
policies may not be changed without the approval of the lesser of: (i) 67% of
the Fund's shares present at a meeting of shareholders if the holders of more
than 50% of the outstanding shares are present in person or by proxy; or (ii)
more than 50% of the Fund's outstanding shares. All other restrictions are
operating policies and are subject to change by the Trustees without shareholder
approval. Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
of securities or assets of, or borrowings by, the Fund.
FUNDAMENTAL POLICIES OR RESTRICTIONS:
As a matter of fundamental policy, the Fund may not:
(1) BORROWING. Borrow money, except the Fund may borrow from banks as a
temporary measure for extraordinary or emergency purposes in amounts not
exceeding 15% of its total assets valued at market. The Fund will not borrow in
order to increase income (leveraging), but only to facilitate redemption
requests which might otherwise require untimely disposition of portfolio
securities. The Fund will not purchase additional securities when money borrowed
exceeds 5% of total assets. For purposes of this restriction, entering into
futures contracts or reverse repurchase agreements will not be deemed a
borrowing;
(2) COMMODITIES. Purchase or sell commodities or commodity
contracts, except that it may enter into futures contracts and
options thereon;
(3) PERCENT LIMIT ON ASSETS INVESTED IN ANY ONE ISSUER. Purchase the
securities of any issuer (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result, more than
5% of the value of the Fund's total assets would be invested in the securities
of a single issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to these restrictions;
-37-
<PAGE> 90
(4) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUER. Purchase the
securities of any issuer (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result, more than
10% of the outstanding voting securities of any issuer would be held by the
Fund, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these restrictions;
(5) INDUSTRY CONCENTRATION. Purchase the securities of any
issuer (other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, 25%
or more of the value of the Fund's total assets would be invested
in the securities of issuers having their principal business
activities in the same industry;
(6) REAL ESTATE. Purchase or sell real estate or real estate
limited partnerships (although it may purchase securities secured
by real estate or interests therein, or issued by companies which
invest in real estate or interests therein);
(7) LOANS. Make loans, although the Fund may: (i) purchase obligations
in which it is authorized to invest and enter into repurchase agreements; and
(ii) lend portfolio securities provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed one-third of the value of the
Fund's total assets. For purposes of this restriction, collateral arrangements
with respect to options and futures transactions shall not be deemed to be a
loan;
(8) SENIOR SECURITIES. Issue any class of securities senior
to any other class of securities, except to the extent that the
borrowing of money in accordance with restriction 1. or the
entering into reverse repurchase agreements as described in
restriction 10. may constitute the issuance of a senior security.
For purposes of this restriction, purchasing forward commitments
and engaging in options or futures transactions will not be deemed
to constitute the issuance of a senior security;
(9) UNDERWRITING. Underwrite securities issued by other persons,
except: (i) to the extent that the Fund may be deemed to be an underwriter
within the meaning of the 1933 Act in connection with the purchase of securities
directly from the issuer in accordance with the Fund's investment objective,
policies, and restrictions; and (ii) the later disposition of restricted
securities;
(10) REVERSE REPURCHASE AGREEMENTS. Enter into reverse
repurchase agreements if the total of such investments would exceed
5% of the total assets of the Fund.
NON-FUNDAMENTAL POLICIES OR RESTRICTIONS:
As a matter of non-fundamental policy, the Fund will not:
-38-
<PAGE> 91
(11) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for
the purpose of exercising management or control;
(12) EQUITY SECURITIES. Invest more than 10% of the Fund's
total assets in common stocks (including up to 5% in warrants);
(13) FUTURES CONTRACTS. Enter into futures contracts or options thereon
if, as a result thereof, more than 5% of the Fund's total assets (taken at
market value at the time of entering into the contract) would be committed to
initial margin and premiums on such contracts or options thereon, provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount, as defined in certain CFTC regulations, may
be excluded in computing such 5%;
(14) INVESTMENT COMPANIES. Purchase securities of other investment
companies if the purchase would cause more than 10% of the value of the Fund's
total assets to be invested in investment company securities, provided that: (i)
no investment will be made in the securities of any one investment company if
immediately after such investment more than 3% of the outstanding voting
securities of such company would be owned by the Fund or more than 5% of the
value of the Fund's total assets would be invested in such company; and (ii) no
restrictions shall apply to a purchase of investment company securities in
connection with a merger, consolidation or reorganization. For purposes of this
restriction, privately issued collateralized mortgage obligations will not be
treated as investment company securities if issued by "Exemptive Issuers."
Exemptive Issuers are defined as unmanaged, fixed-asset issuers that: (i) invest
primarily in mortgage-backed securities; (ii) do not issue redeemable securities
as defined in section 2(a)(32) of the Investment Company Act of 1940, as amended
(the "1940 Act"); (iii) operate under general exemptive orders exempting them
from "all provisions of the Investment Company Act of 1940;" and (iv) are not
registered or regulated under the 1940 Act as investment companies;
(15) MORTGAGING. Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security owned by the Fund, except as
may be necessary in connection with permissible borrowings, in which event such
mortgaging, pledging, or hypothecating may not exceed 10% of the Fund's net
assets, valued at market. For purposes of this restriction, collateral
arrangements with respect to options and futures transactions shall not be
deemed to involve a pledge;
(16) OIL AND GAS PROGRAMS. Purchase participations or other
direct interests or enter into leases with respect to oil, gas,
other mineral exploration or development programs;
(17) OPTIONS, ETC. Invest in options except in furtherance
of the Fund's investment objective and policies, and in this
connection the Fund may: (i) buy and sell covered and uncovered
put, call and spread options on securities, securities and other
financial indices, and currencies; and (ii) purchase, hold, and
-39-
<PAGE> 92
sell contracts for the future delivery of securities and currencies
and warrants where the grantor of the warrants is the issuer of the
underlying securities;
(18) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND TRUSTEES.
Purchase or retain the securities of any issuer if, to the knowledge of the
Trust's management, those officers and Trustees of the Trust, and of the
Adviser, who each owns beneficially more than 0.5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities;
(19) PURCHASES ON MARGIN. Purchase securities on margin, except for use
of short-term credit necessary for clearance of purchases of portfolio
securities. For purposes of this restriction, collateral arrangements with
respect to options and futures transactions shall not be deemed to involve the
use of margin;
(20) ILLIQUID SECURITIES. Invest more than 15% of the value
of its net assets in illiquid securities;
(21) UNSEASONED ISSUERS. Purchase the securities of any issuer (other
than obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of the Fund's
total assets would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years, including predecessors
and unconditional guarantors; or
(22) SHORT SALES. Sell securities short if, after giving effect to
such short sale, the total market value of all securities sold short would
exceed 2% of the Fund's net assets or sell securities short unless the
securities are listed on a national securities exchange.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years, are listed below. The
Trustees who are considered "interested persons" of the Adviser, of Carillon
Advisers, Inc., the sub-adviser of the Fund (the "Sub-Adviser") or of the Trust
as defined under Section 2(a)(19) of the 1940 Act, are noted with an
asterisk (*).
<TABLE>
<CAPTION>
(3)
PRINCIPAL
(1) (2) OCCUPATION(S)
NAME, ADDRESS AND POSITION(S) HELD DURING PAST 5
AGE WITH REGISTRANT YEARS
- -------------------- ---------------- ------------------
<S> <C> <C>
Theodore H. Emmerich* Trustee Consultant;
1201 Edgecliff Place Director of
Cincinnati, OH 45206 Carillon Fund,
71 years old Inc. and Trustee
of Carillon
Investment Trust
(investment
companies);
formerly partner,
Ernst & Whinney
(Certified Public
Accountants).
</TABLE>
-40-
<PAGE> 93
<TABLE>
<CAPTION>
(3)
PRINCIPAL
(1) (2) OCCUPATION(S)
NAME, ADDRESS AND POSITION(S) HELD DURING PAST 5
AGE WITH REGISTRANT YEARS
- -------------------- ---------------- ------------------
<S> <C> <C>
Frederick Moss Trustee Chairman of the
37 Riverside Drive Board of Trustees,
New York, NY 10023 Cincinnati Stock
68 years old Exchange;
Director, Margo
Nursery Farms
Puerto Rico
(tropical plants).
Dr. Bruce H. Olson Trustee Professor of
120 Upham Hall Finance, Miami
Miami University University
Oxford, OH 45056 (Oxford, OH).
61 years old
James F. Smith* Trustee and Director,
30 Montgomery Street President President and
Jersey City, NJ Chief Financial
07302 Officer of Freeman
53 years old Securities
Company, Inc.
(broker-dealer).
Steven R. Trustee and Representative of
Sutermeister* Chairman the Adviser
1876 Waycross Road (January, 1994-
Cincinnati, OH 54240 present); Vice
43 years old President of The
Union Central Life
Insurance Company
(August, 1991-
present), Vice
President of the
Sub-Adviser.
Scott A. Englehart Vice President Vice President of Client
3435 Stelzer Road Services, BISYS
Columbus, OH 43219 Fund Services,
35 years old Limited Partnership.
Gregory A. Sullivan Vice President Senior Vice President,
30 Montgomery Street Freeman Securities
Jersey City, NJ 07302 Company, Inc.
48 years old (broker-dealer).
Thresa Dewar Treasurer An employee of BISYS Fund
3435 Stelzer Road Services, Inc. since
Columbus, OH 43219 March 1997, and an officer
41 years old of other investment
companies administered by
BISYS or its affiliates.
Prior thereto, she was Vice
President and Controller of
Federated Administrative
Services, a subsidiary of
Federated Investors, Inc.
</TABLE>
-41-
<PAGE> 94
<TABLE>
<CAPTION>
(3)
PRINCIPAL
(1) (2) OCCUPATION(S)
NAME, ADDRESS AND POSITION(S) HELD DURING PAST 5
AGE WITH REGISTRANT YEARS
- -------------------- ---------------- ------------------
<S> <C> <C>
George Landreth Assistant Treasurer Senior Vice President of
3435 Stelzer Road Client Services, BISYS Fund
Columbus, OH 43219 Services, Limited
55 years old Partnership
Craig C. Rudesill Secretary Associate Manager of
3435 Stelzer Road Client Services and
Columbus, Ohio 43219 employee, BISYS Fund
28 years old Services, Limited
Partnership (since
September, 1994);
formerly, employee of
Merrill Lynch & Co.
(January 1993 through
August 1994).
George Martinez Assistant Secretary Senior Vice President
3435 Stelzer Road and Director of
Columbus, OH 43219 Legal and Compliance
38 years old Services, BISYS Fund
Services, Limited
Partnership since
April 1995; Vice
President, Alliance
Capital Management
prior thereto.
Alaina Metz Assistant Secretary Employee, BISYS Fund
3435 Stelzer Road Services, Limited
Columbus, OH 43219 Partnership since
30 years old June 1995; Supervisor,
Alliance Capital
Management prior thereto.
Steve Mintos Assistant Secretary Executive Vice President,
3435 Stelzer Road BISYS Fund Services,
Columbus, OH 43219 Limited Partnership
43 years old
Bob Tuch Assistant Secretary Vice President, BISYS Fund
3435 Stelzer Road Services, Limited
Columbus, OH 43219 Partnership
46 years old
</TABLE>
COMPENSATION OF TRUSTEES. The Trust does not pay any remuneration to
its Trustees who are officers or employees of the Adviser, BISYS Fund Services,
Limited Partnership (which is the Trust's administrator) or their affiliates.
Trustees not so affiliated receive an annual retainer of $6,000 and a fee of
$500 for each meeting of the Trustees which they attend in person or by
telephone. Trustees are reimbursed for travel and other out-of-pocket expenses.
For the fiscal year ended May 31, 1997, the Trustees received the
following compensation from the Trust:
-42-
<PAGE> 95
<TABLE>
<CAPTION>
(1) (2) (3)
Total
Compensation
Aggregate from Trust
Name and Compensation and Fund
Position from Complex to
with the Trust the Trust Trustee+
-------------- --------- --------
<S> <C> <C>
Theodore H. Emmerich $8,000 $8,000
Trustee
Frederick Moss $8,000 $8,000
Trustee
Dr. Bruce H. Olsen $8,000 $8,000
Trustee
James F. Smith 0 0
Trustee and President
Steven R. Sutermeister 0 0
Trustee and Chairman
- -------
<FN>
+ The "Fund Complex" presently consists of one investment company, the
Trust, and its sole portfolio, the Fund.
</TABLE>
The officers listed above are furnished to the Trust by the Adviser or
the Administrator (see "Management-Related Services -- Administrator") and
receive no compensation from the Trust. These officers spend only a portion of
their time on the affairs of the Trust. As of September 2, 1997, the officers
and Trustees, individually and as a group, owned beneficially less than 1% of
the outstanding shares of the Fund.
PRINCIPAL HOLDERS OF SECURITIES
As of September 2, 1997, The Union Central Life Insurance Company
("Union Central Life"), an Ohio mutual insurance company having its principal
offices at 1876 Waycross Road, Cincinnati, Ohio 45240, owned of record and
beneficially 2,937,394.038 outstanding shares of the Fund (84.44% of the
outstanding shares of the Fund).
As of September 2, 1997, Donaldson Lufkin Jenrette, P.O. Box 2052,
Jersey City, NJ 07303-9998 owned of record 219,623.609 outstanding shares of
the Fund (6.31% of the outstanding shares of the Fund).
Under the 1940 Act, Union Central Life is deemed a controlling person
of the Fund. A controlling person possesses the ability to control the outcome
of matters submitted for stockholder vote.
-43-
<PAGE> 96
INVESTMENT ADVISORY SERVICES
THE INVESTMENT ADVISER.
First Summit Capital Management ("FSCM," the "Adviser" or the "Joint
Venture"), a joint venture having its principal offices at 1876 Waycross Road,
Cincinnati, OH 45240, is the investment adviser to the Fund. FSCM was organized
principally for purposes of sponsoring and managing the investments of the Trust
pursuant to a Joint Venture Agreement dated January 4, 1994 (the "Joint Venture
Agreement") between Carillon Advisers, Inc. ("Carillon" or the "Sub-Adviser"),
an Ohio corporation, and Freeman Holding Company, Inc. ("Freeman"), a Delaware
corporation (collectively, the "Parties"). Under the Joint Venture Agreement,
Carillon serves as the general manager of the Adviser and is responsible for
maintaining its books of account and other financial records and for preparing
its quarterly financial statements. Carillon has full authority to act on behalf
of the Adviser except with respect to matters involving single commitments in
excess of $10,000 which must be approved by both Carillon and Freeman. Each of
Carillon and Freeman is authorized to appoint two representatives to serve, in
effect, as officers of the Adviser. Pursuant to the provisions of the Joint
Venture Agreement, Carillon and Freeman agreed that the initial number of
Trustees of the Trust would be six, of which three would be designated
by Carillon and three would be designated by Freeman. If the vacancy on the
Board increases for any reason, including any increase in the number of
Trustees, and is to be filled by action of the Trustees, no recommendation of
candidates to fill such vacancy will be made by the Joint Venture, Freeman or
Carillon without the consent of both Carillon and Freeman.
Carillon and Freeman are general partners of FSCM. Carillon, which is
located at 1876 Waycross Road, Cincinnati, OH 45240, is a wholly-owned
subsidiary of Union Central Life. Union Central Life is a mutual company owned
by its policyholders, none of which owns ten percent or more of Union Central
Life. Freeman is the parent corporation of Freeman Securities Company, Inc.
("Freeman Securities"), a New Jersey corporation which is registered as a
broker-dealer under the 1934 Act and is a member of the National Association of
Securities Dealers, Inc. (the "NASD"). While Freeman Securities qualifies as an
"Affiliated Broker" under the proxy rules under the 1934 Act, the Fund did not
pay any brokerage commissions to Freeman Securities during the fiscal year ended
May 31, 1997. Freeman has its principal offices at 30 Montgomery Street, Jersey
City, NJ 07302. Freeman is, in turn, majority-owned by the Freeman Securities'
Savings and Investment Plan and Employee Stock Ownership Plan. The trustees of
both such plans are Malcolm B. Sheldrick, Jr. and James F. Smith. Mr. Smith is
also a Trustee of the Trust.
Under the terms of the Joint Venture Agreement, Freeman initially agreed
to make an aggregate capital contribution to the Joint Venture not exceeding
$500,000, and Carillon agreed to arrange for the investment by its parent, Union
Central Life, of $25 million in shares of the Fund. Carillon and Freeman will
share in the profits and losses of the Joint Venture in the ratio of 51% to 49%,
except that Freeman alone will bear the initial $500,000 in losses. The Joint
Venture may be terminated and dissolved: (i) at any time upon the agreement of
the parties; (ii) 90 days after receipt by one party of written notice from the
other confirming the parties' failure to agree on a matter requiring their
agreement; (iii) on the occurrence of an event of dissolution under Ohio laws;
(iv) on the imposition on either party of any sanction resulting in the
suspension or revocation of its authorization to do business by any state or
Federal securities regulatory authority or on the conviction of either for any
criminal conduct constituting a felony; (v) on the filing by or with respect to
either party of any petition under applicable Federal or state law regarding
their bankruptcy, insolvency or other relief for debtors, the adjudication of
either as bankrupt or insolvent, or the appointment for either of a trustee or
liquidator of any substantial portion of its property; or (vi) on December 1,
2003, unless the Parties extend such date for periods not exceeding five years.
In the event of termination and dissolution of the Joint Venture, Carillon, or
any affiliate thereof, would have the first right to purchase all of the
interest of Freeman in the Joint Venture. If such right were not exercised,
Freeman, or any
-44-
<PAGE> 97
affiliate thereof, would have the right to purchase all of the interest of
Carillon in the Joint Venture. In 1996, each general partner contributed
$150,000 in additional capital to the Joint Venture. In addition, the general
partners have informally agreed to futher increase their capital commitments to
the Adviser prior to December 31, 1997.
THE ADVISORY AGREEMENT.
The Adviser serves pursuant to an Investment Advisory Agreement with
the Trust dated June 27, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser, subject to the supervision of the Trustees, provides a
continuous investment program for the Fund, including investment research and
management with respect to all securities, investments and cash equivalents, in
accordance with the Fund's investment objective, policies and restrictions as
set forth in its prospectus, this SAI and the resolutions of the Trustees. The
Adviser is responsible for effecting all security transactions on behalf of the
Fund, including the allocation of principal business and portfolio brokerage and
the negotiation of commissions. It also maintains books and records with respect
to the securities transactions of the Fund and furnishes to the Trustees such
periodic or other reports as the Trustees may request.
During the term of the Advisory Agreement, the Adviser pays all
expenses incurred by it in connection with its activities thereunder except the
cost of securities (including brokerage commissions, if any) purchased for the
Fund. The advisory services furnished by the Adviser under the Advisory
Agreement are not exclusive, and the Adviser is free to perform similar services
for others.
Unless sooner terminated in accordance with its terms, the Advisory
Agreement may be continued from year to year after June 27, 1996, provided that
such continuance is approved at least annually by vote of the holders of a
"majority" (as defined in the 1940 Act) of the outstanding voting securities of
the Trust, or by the Trustees, and in either event by vote of a majority of the
Trustees who are not parties to the Advisory Agreement or "interested persons"
(as defined in the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The required shareholder
approval of any continuance will be effective with respect to the Fund if a
majority of the outstanding voting securities of the Fund votes to approve such
continuance, notwithstanding that continuance may not have been approved by
other portfolios, if any, of the Trust or by a majority of the voting securities
of the Trust.
If the shareholders of the Fund fail to approve any continuance of the
Advisory Agreement, the Adviser will continue to act as such with respect to the
Fund pending the required approval of the continuance of such agreement, of a
new contract with the Adviser or different investment adviser, or other
definitive action. The compensation received by the Adviser during such period
will be no more than its actual costs incurred in furnishing investment advisory
and management services to the Fund or the amount it would have received under
the Advisory Agreement, whichever is less.
-45-
<PAGE> 98
The Advisory Agreement will automatically terminate if assigned and may
be terminated without penalty at any time upon 60 days' written notice to
the other party: (i) by the majority vote of all the Trustees or by majority
vote of the outstanding shares of the Fund; or (ii) by the Adviser.
The Advisory Agreement may be amended by the parties provided that such
amendment is specifically approved by the vote of a majority of the outstanding
voting securities of the Fund and by the vote of a majority of the Trustees who
are not interested persons of the Fund or of the Adviser, cast in person at a
meeting called for the purpose of voting upon such approval. The required
shareholder approval of any amendment shall be effective with respect to the
Fund if a majority of the outstanding voting securities of the Fund vote to
approve the amendment, notwithstanding that the amendment may not be approved by
a majority of the outstanding voting securities of the Trust.
Under the terms of the Advisory Agreement, the Adviser will be liable
to the Fund or the Trust only for losses resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services, willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty.
THE ADVISORY FEE.
The advisory fee payable to the Adviser is described in the prospectus.
As described in the prospectus, as full compensation for services furnished to
the Fund and expenses of the Fund assumed by the Adviser, the Fund pays the
Adviser an advisory fee which increases or decreases based on the total return
investment performance of the Fund for the prior twelve-month period relative to
the percentage change in the Salomon Brothers High Yield Market Index (the
"Index") for the same period (the "Index Return"). A general description of the
Index is set forth in Appendix II to the prospectus.
-46-
<PAGE> 99
In the event the Index is no longer published or available or becomes
an inappropriate measure of the Fund's performance, the Trustees will meet to
approve another appropriate index or will negotiate a fixed advisory fee with
the Adviser.
The Fund paid the Adviser for investment advisory services, $82,898 for
the period ended May 31, 1995, $73,369 for the fiscal year ended May 31, 1996
and $139,821 for the fiscal year ended May 31, 1997. The Adviser waived
investment advisory fees in the amounts of $265 for the period ended May 31,
1995, $164,637 for the fiscal year ended May 31, 1996, and $227,432 for the
fiscal year ended May 31, 1997.
THE SUB-ADVISER.
Carillon Advisers, Inc., an Ohio corporation with offices at 1876
Waycross Road, Cincinnati, Ohio 45246, is registered as an investment adviser
under the Investment Advisers Act of 1940. The Sub-Adviser is a wholly-owned
subsidiary of Union Central Life. Carillon and its affiliates currently act as
an investment adviser to Carillon Group of Mutual Funds, which consist of the
Carillon Fund, Inc. and the Carillon Investment Trust.
THE SUB-ADVISORY AGREEMENT.
The Sub-Adviser serves pursuant to an Investment Sub-Advisory
Agreement with the Adviser dated September 18, 1996 (the "Sub-Advisory
Agreement").
Under the Sub-Advisory Agreement, Carillon provides, subject to the
Adviser's direction, a portion of the investment advisory services for which
the Adviser is responsible pursuant to the Advisory Agreement relating to the
Fund. The Sub-Adviser provides investment research and advice with respect to
securities and investments and cash equivalents in the Fund. Research services
provided by the Sub-Adviser include information, analytical reports, computer
screening studies, statistical data and factual resumes pertaining to high
yield securities. Such supplemental research may be subject to additional
analysis by the Adviser. The Advisory fee payable to the Sub-Adviser is
described in the prospectus.
Prior to the implementation of the Sub-Advisory Agreement, the Adviser
had entered into an Investment Service Agreement (the "Service Agreement") with
the Trust and Union Central Life, which permitted the Adviser to have access to
and to utilize Union Central Life's advisory personnel, administrative services,
supplies and equipment in the performance of its advisory services and functions
under the Advisory Agreement. In consideration for such services, the Adviser
paid Union Central Life for the costs, direct or indirect, fairly attributable
thereto, but in no event less than $65,000 per year or such other amount as was
agreed to by the Adviser and Union Central Life. Pursuant to the Service
Agreement the Adviser paid Union Central Life $65,000 for the fiscal year ended
May 31, 1996 and $30,018 for the fiscal period from June 1, 1996 to September
18, 1996. The Service Agreement was terminated on September 18, 1996.
MANAGEMENT-RELATED SERVICES
BISYS SERVICE AGREEMENTS. As more fully described below, the Trust has
entered into a number of agreements with affiliates of BISYS Fund Services,
Inc., a Delaware corporation, pursuant to which management-related and other
services are performed for the Fund. BISYS Fund Services, Limited Partnership
(d.b.a. "BISYS Fund Services"), an Ohio limited partnership of which BISYS Fund
Services, Inc. is the General Partner, serves as the Administrator of the Fund
(the "Administrator"), and as the Fund's distributor or principal underwriter
(the "Distributor") (see "Distribution Plans -- The Distributor"). BISYS Fund
Services, Inc. is a wholly-owned subsidiary of The BISYS Group Inc. WC
Subsidiary Corporation, also a wholly-owned subsidiary of BISYS Fund Services,
Inc., is the sole limited partner of BISYS Fund Services.
BISYS Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation and also
a wholly-owned subsidiary of The BISYS Group, Inc., serves as Fund Accountant to
the Fund (the "Fund Accountant") and additionally acts as the Fund's transfer
and dividend disbursing agent (the "Transfer Agent"). Each of the "BISYS
Companies" has its principal offices at 3435 Stelzer Road, Columbus, OH 43219.
ADMINISTRATOR. Pursuant to an Amended and Restated Management and
Administration Agreement with the Trust dated June 27, 1994, as amended and
restated September 27, 1995 (the "Administration Agreement"), BISYS Fund
Services, as Administrator of the Fund and subject to the direction and control
of the Trustees, supervises all aspects of the operation of the Fund except
those performed by the Fund's Adviser, the Sub-Adviser, custodian,
-47-
<PAGE> 100
Transfer Agent and Fund Accountant pursuant to their respective agreements with
the Trust. For the fiscal period ended May 31, 1995, the Administrator received
fees of $35,528 and voluntarily waived fees of $11,994, for the fiscal year
ended May 31, 1996, the Administrator received fees of $54,750, and voluntarily
waived fees of $13,693, and for the fiscal year ended May 31, 1997, the
Administrator received fees of $50,954 and voluntarily waived fees of $17,134.
The Administration Agreement further provides that the Administrator
will not be liable for losses suffered by the Fund except for any loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard in
the performance by the Administrator of its obligations under such agreement.
The Administration Agreement is renewable automatically for successive
one-year terms, unless terminated by mutual agreement of the parties or by
either party for "cause," in either such case by written notice of non-renewal
given to the other party at least 60 days prior to expiration of the
then-current term. Such annual continuance is subject to annual review (as to
"cause") and approval (a) by vote of a majority of the Trustees or of a majority
of the Fund's outstanding voting securities and (b) by vote of a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the Administrator. "Cause" for purposes of the foregoing means, with
respect to a party: (i) willful misfeasance, bad faith, gross negligence or
reckless disregard; (ii) a final judgment or administrative order finding guilt
of criminal or unethical business conduct; (iii) financial difficulties
evidenced by bankruptcy, liquidation or reorganization proceedings; or (iv)
circumstances of substantial impairment of ability to perform the Administration
Agreement. Termination or replacement of the Administrator other than for such
"cause" would entitle the Administrator to receive from the Trust as liquidated
damages the balance of the fees due under the Administration Agreement for the
remainder of the term in which such termination or replacement takes place.
-48-
<PAGE> 101
FUND ACCOUNTANT.
Pursuant to an Amended and Restated Fund Accounting Agreement with the
Trust dated September 27, 1994, as amended and restated on September 27, 1995,
(the "Accounting Agreement"), BISYS, the Fund Accountant, is responsible for
accounting relating to the Fund and its investment transactions; maintaining
certain books and records of the Fund; determining daily the net asset value per
share of the Fund and calculating yield, dividends and capital gain
distributions; and preparing security position, transaction and cash position
reports.
For such services, the Fund reimburses the Fund Accountant for all out-of-pocket
expenses incurred by it (including all charges for delivery of materials,
telephone and other communications expenses, and costs of pricing portfolio
securities) and pays it a fee, computed daily and paid monthly, at the annual
rate of 0.03% of the Fund's average daily net assets, provided, however, that
such fee will not be less than $30,000. The Fund Accountant received fees of
$32,737 for the fiscal period ended May 31, 1995, $37,815 for the fiscal year
ended May 31, 1996, and $44,994 for the fiscal year ended May 31, 1997.
The Fund Accounting Agreement is renewable automatically for successive
one-year terms, unless terminated by mutual agreement of the parties or by
either party with or without "cause," in each case by written notice of
non-renewal given to the other party at least 60 days prior to expiration of the
then-current term. "Cause" for such purpose means, with respect to a party: (i)
willful misfeasance, bad faith, gross negligence or reckless disregard of duty;
(ii) a final judgment or administrative order finding guilt of criminal or
unethical business conduct; (iii) financial difficulties evidenced by
bankruptcy, liquidation or reorganization proceedings; or (iv) circumstances of
substantial impairment of ability to perform the Accounting Agreement. The
Accounting Agreement further provides that the Fund Accountant will not be
liable to the Trust for action taken or omitted by the Fund Accountant in the
absence of bad faith, willful misfeasance, negligence or reckless disregard of
its obligations and duties.
TRANSFER AGENT.
Pursuant to an Amended and Restated Transfer Agency Agreement with the
Trust dated June 27, 1994, as amended and restated on September 27, 1995 (the
"Transfer Agency Agreement"), BISYS also acts as the Trust's transfer, dividend
disbursing and redemption agent. BISYS provides certain shareholder and other
services to the Trust, including: furnishing account and transaction
information; providing mailing labels for the distribution to Fund shareholders
of financial reports, prospectuses, proxy statements and other such materials;
providing compliance reporting; calculating distribution plan and marketing
expenses; and maintaining shareholder account records.
For such services, the Trust reimburses the Transfer Agent for all
out-of-pocket expenses incurred by it (including all charges
-49-
<PAGE> 102
for delivery of materials, telephone and other communications expenses, and
costs of postage, supplies, and the microfilm or microfiche reproduction and
storage of records) and pays the Transfer Agent annual fees calculated in
accordance with a schedule of charges set forth in the Transfer Agency
Agreement. The Transfer Agent received fees of $27,416 for the fiscal period
ended May 31, 1995, $36,415 for the fiscal year ended May 31, 1996, and
$58,479 for the fiscal year ended May 31, 1997.
The Transfer Agency Agreement continues in effect unless terminated at
any time by either party upon 90 days' written notice. To the extent BISYS
continues to furnish services to the Trust beyond the date of any such
termination, it shall continue to be paid its fees and expenses as provided in
the Transfer Agency Agreement. In the event of termination, BISYS will be
entitled to collect from the Trust a fee equal to 102% of its actual costs
incurred in effecting such termination. Under the Transfer Agency Agreement,
BISYS will be liable to the Trust only for losses resulting from willful
misfeasance, bad faith, negligence, or reckless disregard in performing its
duties. The Trust has otherwise agreed to indemnify BISYS and its officers,
directors, nominees, employees and agents against claims, damages and
liabilities, including counsel fees and other expenses, arising out of its
performance of the Transfer Agency Agreement or based upon its reasonable
reliance upon information furnished by the Trust, the Adviser, the
Administrator, the Fund Accountant or another custodian of Trust or Fund
records.
DISTRIBUTION PLAN
The Trust's Distribution and Shareholder Service Plan (the "Plan"),
dated June 27, 1994, on behalf of the shares of the Fund is a written plan
contemplated by Rule 12b-1 (the "Rule") promulgated under the 1940 Act. The Fund
is authorized under the Plan to use the assets of the Fund to finance certain
activities relating to the distribution of shares of the Fund to investors. The
Plan is a "compensation" plan providing for the payment of a fixed percentage of
the Fund's average net assets to finance distribution expenses. Under the Plan,
the Fund pays monthly to BISYS Fund Services, as its principal underwriter, a
distribution fee which may not exceed, on an annual basis, 0.25% of the Fund's
average daily net assets.
The NASD's maximum sales charge rule relating to mutual fund shares
establishes limits on all types of sales charges, whether front-end, deferred or
asset-based. This rule may operate to limit the aggregate distribution fees to
which shareholders may be subject under the terms of the Plan. BISYS Fund
Services will monitor the Fund for compliance with this NASD rule.
-50-
<PAGE> 103
The Plan authorizes BISYS Fund Services to use the distribution fee to
pay, or reimburse expenses incurred by, banks, broker/dealers and other
institutions which, pursuant to agreements with the Distributor, provide
distribution assistance and/or shareholder services including, but not limited
to, printing and distributing prospectuses to persons other than class
shareholders, printing and distributing advertising and sales literature and
reports to shareholders used in connection with selling shares of the Fund,
furnishing personnel and communications equipment to service shareholder
accounts and prospective shareholder inquiries. Such services may be performed
by the Distributor or any of its affiliates.
The Plan requires that any person authorized to direct the disposition
of monies paid or payable by the Fund pursuant to the Plan or any related
agreement prepare and furnish to the Trustees for their review, at least
quarterly, written reports complying with the requirements of the Rule and
setting out the amounts expended under the Plan and the purposes for which
those expenditures were made. The Plan provides that so long as it is in
effect the selection and nomination of Trustees who are not interested persons
of the Trust will be committed to the discretion of the Trustees then in office
who are not interested persons of the Trust.
Neither the Plan nor any related agreements can take effect until
approved by a majority vote of both all the Trustees and those Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the Plan,
cast in person at a meeting called for the purpose of voting on the Plan and the
related agreements. Such approval of the Plan on behalf of the Fund was obtained
on May 24, 1994, and the Plan was also approved by the sole shareholder of the
Fund on May 24, 1994.
The Plan will continue in effect only so long as its continuance is
specifically approved at least annually by the Trustees in the manner described
above for Trustee approval of the Plan. The Plan may be terminated at any time
by a majority vote of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operations of the
Plan or in any agreement related to the Plan or by vote of a majority of the
outstanding voting securities of the Fund.
The Plan may not be amended so as to materially increase the amount of
the distribution fees unless the amendment is approved by a vote of at least a
majority of the outstanding voting securities of the Fund. In addition, no
material amendment may be made unless approved by the Trustees in the manner
described above for Trustee approval of the Plan.
For the fiscal year ended May 31, 1997, BISYS Fund Services, as the
Fund's principal underwriter, received $78,445 in distribution fees payable
pursuant to the Plan. The following is a breakdown of the expenses paid by the
shares of the current sole class of shares of the Fund out of distribution fees
for the fiscal year ended May 31, 1997: (i) advertising, $0; (ii) printing and
mailing of prospectuses to other shareholders, $0; (iii) compensation to
underwriters, $26,909; (vi) compensation to sales personnel, $51,536 and (v)
other, $0.
-51-
<PAGE> 104
From May 31, 1996 to July 31, 1997, the Fund offered a second class of
shares, the Summit High Yield Institutional Service Shares class (the "Service
Shares class"), which had a distribution plan adopted pursuant to the Rule that
was substantially the same as the Plan, but that applied only to the Service
Shares class. For the fiscal year ended May 31, 1997, BISYS Fund Services
received $6,665 in distribution fees payable pursuant to the distribution plan
adopted on behalf of the Service Shares class. The following is a breakdown of
the expenses paid by the Service Shares class of the Fund for the fiscal year
ended May 31, 1997; (i) advertising, $0; (ii) printing and mailing of
prospectuses to other shareholders, $0; (iii) compensation to underwriters, $0;
(vi) compensation to sales personnel, $6,665 and (v) other, $0.
THE DISTRIBUTOR.
BISYS Fund Services serves as the Fund's Distributor or principal
underwriter (the "Distributor") pursuant to an Amended and Restated Distribution
Agreement with the Trust dated June 27, 1994, as amended and restated on
September 27, 1995 (the "Distribution Agreement"). BISYS Fund Services is
registered as a broker-dealer under the 1934 Act and is a member of the NASD.
The offering of the Fund's shares is continuous. The Distribution Agreement
provides that the Distributor, as agent in connection with the distribution of
Fund shares, will use appropriate efforts to solicit orders for the sale of
Fund's shares and undertake such advertising and promotion as it deems
reasonable, including, but not limited to, advertising, compensation to
underwriters, dealers and sales personnel, printing and mailing prospectuses to
persons other than current Fund shareholders, and printing and mailing sales
literature. The Distributor received underwriting commissions on the sale of
shares of the Fund in the amount of $262 for the period of June 27, 1994 through
May 31, 1995, $11,717 for the fiscal year ended May 31, 1996, and $26,909 for
the fiscal year ended May 31, 1997, all of which commissions were retained by
the Distributor. Aside from the receipt of these underwriting commissions and
the payment of distribution fees as described earlier in this SAI, the
Distributor did not receive any other compensation for distributing shares of
the Fund.
PORTFOLIO TRANSACTIONS
INVESTMENT OR BROKERAGE DISCRETION.
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by the Adviser. The Adviser is also responsible
for implementing these decisions, including the negotiation of commissions and
the allocation of
-52-
<PAGE> 105
portfolio brokerage and principal business. The Fund's purchases and sales of
portfolio securities are normally done on a principal basis and do not involve
the payment of a commission although they may involve the designation of selling
concessions. That part of the discussion below relating solely to brokerage
commissions would not normally apply to the Fund or applies with respect to only
a very small percentage of the Fund's total assets. For the fiscal year ended
May 31, 1997, the Fund did not pay any brokerage commissions on brokerage
transactions.
HOW BROKERS AND DEALERS ARE SELECTED.
FIXED-INCOME SECURITIES. Fixed-income securities are generally
purchased from the issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being paid by the
client, although the price usually includes an undisclosed compensation.
Transactions placed through dealers serving as primary market-makers reflect the
spread between the bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
The Adviser may effect principal transactions on behalf of the Fund
with a broker or dealer who furnishes brokerage and/or research services,
designate any such broker or dealer to receive selling concessions, discounts or
other allowances, or otherwise deal with any such broker or dealer in connection
with the acquisition of securities in an underwriting. The Fund may receive
brokerage and research services in connection with such designations in a fixed
priced underwriting.
In purchasing and selling the Fund's portfolio securities, it is the
Adviser's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency transactions
(in which the Fund does not generally engage), at competitive commission rates.
However, under certain conditions, the Fund may pay higher brokerage commissions
in return for brokerage and research services. In selecting broker-dealers to
execute the Fund's portfolio transactions, consideration is given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition and
general execution and operational capabilities of competing brokers and dealers,
and brokerage and research services provided by them. It is not the policy of
the Adviser to seek the lowest available commission rate where it is believed
that a broker or dealer charging a higher commission rate would offer greater
reliability or provide better price or execution.
HOW EVALUATIONS ARE MADE OF THE OVERALL REASONABLENESS OF BROKERAGE
COMMISSIONS PAID.
On a continuing basis, the Adviser seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed on
behalf of the Fund. In evaluating the reasonableness of commission rates, the
Adviser considers: (i) historical commission rates; (ii) rates which other
institutional
-53-
<PAGE> 106
investors are paying based on available public information; (iii) rates quoted
by brokers and dealers; (iv) the size of a particular transaction in terms of
the number of shares, dollar amount, and number of clients involved; (v) the
complexity of a particular transaction in terms of both execution and
settlement; (vi) the level and type of business done with a particular firm over
a period of time; and (vii) the extent to which the broker or dealer has capital
at risk in the transaction.
DESCRIPTION OF RESEARCH SERVICES RECEIVED FROM BROKERS AND DEALERS.
The Adviser receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries, groups
of securities, individual companies, statistical information, accounting and tax
law interpretations, political developments, legal developments affecting
portfolio securities, technical market action, pricing and appraisal services,
credit analysis, risk measurement analysis, performance analysis and analysis of
corporate responsibility issues. These services provide both domestic and
international perspective. Research services are received primarily in the form
of written reports, computer-generated services, telephone contacts and personal
meetings with security analysts. In addition, such services may be provided in
the form of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some cases, research
services are generated by third parties but are provided to the Adviser by or
through broker-dealers.
Research services received from brokers and dealers are supplemental to
the Adviser's own research effort and, when utilized, are subject to internal
analysis before being incorporated by the Adviser into its investment process.
As a practical matter, it would not be possible for the Adviser to generate all
of the information presently provided by brokers and dealers. The Adviser also
allocates brokerage for research services which are available for cash. While
receipt of research services from brokerage firms may not reduce the Adviser's
normal research activities, the expenses of the Adviser could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by brokers
or dealers, the Adviser may be relieved of expenses which it might otherwise
bear.
The Adviser has a policy of not allocating brokerage business in return
for products or services other than brokerage or research services. In
accordance with the provisions of Section 28(e) of the 1934 Act, the Adviser may
from time-to-time receive services and products which serve both research and
non-research functions. In such event, the Adviser makes a good faith
determination of the anticipated research and non-research use of the product or
service and allocates brokerage only with respect to the research component.
-54-
<PAGE> 107
COMMISSIONS TO BROKERS WHO FURNISH RESEARCH SERVICES.
With regard to the payment of brokerage commissions, the Adviser has
adopted a brokerage allocation policy embodying the concepts of Section 28(e) of
the 1934 Act which permits an investment adviser to cause an account to pay
commission rates in excess of those another broker or dealer would have charged
for effecting the same transaction, if the Adviser determines in good faith that
the commission paid is reasonable in relation to the value of the brokerage and
research services provided. The determination may be viewed in terms of either
the particular transaction involved or the overall responsibilities of the
Adviser with respect to the accounts over which it exercises investment
discretion. Accordingly, while the Adviser cannot readily determine the extent
to which commission rates charged by broker-dealers reflect the value of their
research services, the Adviser would expect to assess the reasonableness of
commissions in light of the total brokerage and research services provided by
each particular broker.
INTERNAL ALLOCATION PROCEDURES.
The Adviser will follow a policy of not precommitting a specific amount
of business to any broker or dealer over any specific time period. The Adviser
expects that the majority of brokerage placement will be determined by the needs
of a specific transaction such as market-making availability of a buyer or
seller of a particular security, or specialized execution skills. However, the
Adviser may adopt an internal brokerage allocation procedure for that portion of
its discretionary client brokerage or selling concessions business where special
needs do not exist, or where the business may be allocated among several brokers
or dealers which are able to meet the needs of the transaction.
PORTFOLIO TURNOVER.
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Internal Revenue Code of 1986, as amended (the
"Code"), and the 1940 Act, when changes in circumstances or market conditions
make such a move desirable in light of the Fund's investment objective. The
Fund will not attempt to achieve or be limited to a predetermined rate of
portfolio turnover, and transactions will be undertaken with a view to achieving
the Fund's investment objective.
The Fund does not intend to use short-term trading as a primary means
of achieving its investment objective. The rate of portfolio turnover shall be
calculated by dividing: (a) the lesser of purchases and sales of portfolio
securities for the particular fiscal year by (b) the monthly average of the
value of the portfolio securities owned by the Fund during the particular fiscal
year. Such monthly average shall be calculated by totaling the values of the
portfolio securities as of the beginning and end of
-55-
<PAGE> 108
the first month of the particular fiscal year and as of the end of each of the
succeeding eleven months and dividing the sum by 13.
Under normal market circumstances, the portfolio turnover rate for the
Fund is not expected to exceed 200%. High portfolio turnover rates may involve
corresponding greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund and ultimately, by the Fund's shareholders.
In addition, high portfolio turnover rates may result in increased short-term
capital gains, which, when distributed to shareholders, are treated as ordinary
income.
For the fiscal year ended May 31, 1997, the portfolio turnover rate
for the Fund was 271.68% while for the fiscal year ended May 31, 1996, the
portfolio turnover rate for the Fund was 187.61%. The significant variation in
portfolio turnover rates over such periods was due to an increase in the assets
of the Fund, which caused the Fund to reposition its portfolio holdings in order
to meet its investment objective and policies.
MISCELLANEOUS.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis
of its sales of the Fund's shares. However, this does not mean that
broker-dealers who purchase Fund shares for their clients will not receive
business from the Fund.
The Adviser currently manages only the Fund. However, the Sub-Adviser
and Union Central Life manage a variety of investment portfolios and accounts,
some of which have investment objectives and programs similar to those of the
Fund. Although investment recommendations or determinations for the Fund will be
made by the Adviser independently from recommendations or determinations made by
such other entities for their respective portfolios and accounts, the latter may
occasionally make recommendations to their clients which result in their
purchasing, or selling, the same securities simultaneously with the Fund. As a
result, the demand for securities being purchased or the supply of securities
being sold may increase, and this could have an adverse effect on the price of
those securities. In such circumstances, the Adviser and the Sub-Adviser may
determine or agree that orders for the purchase or sale of the same security
for the Fund and one or more other portfolios should be combined, in which
event the transactions will be averaged as to price and normally allocated as
nearly as practicable in proportion to the amounts desired to be purchased or
sold for each portfolio.
CAPITAL STOCK
The Trust's Agreement and Declaration of Trust, as amended, permits the
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate
-56-
<PAGE> 109
beneficial interests in the Trust. As of the date of this SAI, the Trustees have
designated one series of the Trust, which is the Fund, and the Trustees have
created two classes of shares in the Fund: the Summit High Yield Shares class
and the Summit High Yield Institutional Shares class. This SAI relates to the
Summit High Yield Shares class. Shares of the Summit High Yield Institutional
Shares class are not currently offered to the public. The Trust currently offers
one class of shares of the Fund, the Summit High Yield Shares class; each share
represents an interest in the Fund's portfolio proportionately equal to the
interest of each other share of such portfolio. Upon the Trust's liquidation,
all shareholders of the Fund would share pro-rata in the net assets of the
Fund's portfolio available for distribution to shareholders.
If they deem it advisable and in the best interests of shareholders,
the Trustees may create additional classes of shares which may differ from each
other only as to expenses and dividends or additional series of shares, each of
which may have separate assets and liabilities (in which case any such series
would have a designation including the word "Trust" or "Fund"). If additional
series of shares or classes are created, shares of each series or class are
entitled to vote as a series or class only to the extent required by the 1940
Act or as permitted by the Trustees. Upon the Trust's liquidation, all
shareholders of a series would share pro-rata in the net assets of such
series available for distribution to shareholders of the series, but, as
shareholders of such series, would not be entitled to share in the
distribution of assets belonging to any other series.
PRICING OF SECURITIES
Securities which are traded on stock exchanges are valued at the last
sales price as of the close of the Exchange, or lacking any sales, at the
closing bid price. Securities traded only in the "over-the-counter" market are
valued at the last bid price quoted by brokers that make markets in the
securities at the close of trading on the Exchange. Fixed-income securities are
generally traded in the over-the-counter market. Securities and assets for which
market quotations are not readily available or not obtained from a pricing
service are valued at fair value as determined in good faith by the Trustees,
although the actual calculations may be made by persons acting pursuant to the
direction of the Trustees. If approved by the Trustees, the Fund may make use of
a pricing service or services in determining the net asset value of the Fund.
Debt securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis, which the Trustees have determined reflects fair value.
-57-
<PAGE> 110
There are a number of pricing services available, and the Trustees, on
the basis of ongoing evaluation of these services, may use or may discontinue
the use of any pricing service in whole or in part.
For the purposes of determining the Fund's net asset value per share,
all assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the mean of the bid and offer prices of such
currency against U.S. dollars quoted by any major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value,
as determined in good faith by the Adviser, as authorized by the Trustees.
DIVIDENDS
A shareholder will automatically receive all income dividends and
capital gain distributions in additional full and fractional shares of the Fund
at their net asset value as of the date of payment unless the shareholder elects
to receive such dividends or distributions in cash. The reinvestment date
normally precedes the payment date by about seven days although the exact timing
is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
Dividends and distributions paid by the Fund are not eligible for the
dividends received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends equal
to at least 98% of ordinary income (as of December 31) and capital gains (as of
October 31) in order to avoid a federal excise tax and distribute 100% of
ordinary income and capital gains as of its tax year-end to avoid federal income
tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held by
the Fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable as either dividends
or capital gain distributions. For federal income tax purposes, the Fund is
permitted to carry forward its net realized capital losses, if any, for eight
years, and realize net capital gains up to the amount of such losses without
being required to pay taxes on or distribute such gains.
-58-
<PAGE> 111
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction for
dividends or other distributions to shareholders; and (ii) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital
dividends).
To the extent the Fund invests in foreign securities, the Fund may be
required to pay withholding or other taxes to foreign governments. Foreign tax
withholding from dividends and interest, if any, is generally from 10% to 35%,
although lesser and greater amounts may be incurred. The investment yield of the
Fund will be reduced by these foreign taxes. Shareholders will bear the cost of
any foreign taxes but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. If the Fund is eligible for and makes an election to
allow its shareholders to claim a foreign tax credit or deduction for these
taxes for any taxable year, the shareholders will be notified. In addition, if
the Fund invests in securities of passive foreign investment companies, it may
be subject to U.S. federal income taxes (and interest on such taxes) as a result
of such investments. The investment yield of the Fund will be reduced by such
taxes and interest. Shareholders will bear the cost of these taxes and interest
but will not be able to claim a deduction for these amounts.
FOREIGN CURRENCY GAINS AND LOSSES.
Foreign currency gains and losses, including the portion of gain or
loss on the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if the
result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments, to reflect these gains and losses will be made at the end of the
Fund's taxable year.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Fund to
that of other mutual funds and to relevant indices in advertisements or in
reports to shareholders, performance will be stated in terms of total return and
yield. Both "total return" and "yield" figures are based on the historical
performance of the Fund, show the performance of a hypothetical investment and
are not intended to indicate future performance.
YIELD INFORMATION.
From time to time, the Fund may advertise a yield figure. A portfolio's
yield is a way of showing the rate of income the portfolio earns on its
investments as a percentage of the
-59-
<PAGE> 112
portfolio's share price. Under the rules of the SEC, yield must be
calculated according to the following formula:
a-b 6
YIELD = 2[(--- + 1) - 1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period.
Yields for the Fund used in advertising are computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's offering price (including the 4.50% sales
charge, in the case of shares of the Summit High Yield Shares class) at the end
of the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for purposes
of yield quotations in accordance with standardized methods applicable to all
stock and bond mutual funds. Dividends from equity investments are treated as if
they were accrued on a daily basis, solely for the purposes of yield
calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the calculation. Income
calculated for the purpose of calculating the Fund's yield differs from income
as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distributions the Fund paid over the same period or the rate of income reported
in the Fund's financial statements. For the 30-day period ended May 31, 1997,
the Fund's yield for the shares of the Summit High Yield Shares class was
7.57%.
-60-
<PAGE> 113
TOTAL RETURN PERFORMANCE.
Under the rules of the Commission, funds advertising performance must
include total return quotes, "T" below, calculated according to the following
formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year
periods (or fractional portion
thereof).
The average annual total return will be calculated under the foregoing
formula and the time periods used in advertising will be based on rolling
calendar quarters, updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover prescribed
periods. When the period since inception is less than one year, the total return
quoted will be the aggregate return for the period. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment (in the case of shares of the Summit High Yield Shares class) and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the prospectus on the reinvestment dates during
the period. Total return, or "T" in the formula above, is computed by finding
the average annual compounded rates of return over the prescribed periods (or
fractional portions thereof) that would equate the initial amount invested to
the ending redeemable value. Any sales loads that might in the future be made
applicable at the time to reinvestments would be included as would any recurring
account charges that might be imposed by the Fund. Based on the foregoing
calculation, the average annual total returns for the fiscal year ended May 31,
1997 and for the period from June 27, 1994 to May 31, 1997 for the Summit High
Yield Shares class were 18.15% and 16.47%, respectively. The total return
figures do not reflect the deduction of the maximum 4.50% front-end sales charge
which may be assessed purchasers of shares of the Summit High Yield Shares
class. The average annual total returns, after the deduction of the front-end
sales charge for the same periods, for the Summit High Yield Shares class were
12.84% and 14.66%, respectively.
The Fund may also from time to time include in such advertising an
aggregate total return figure or an average annual total return figure that is
not calculated according to the formula set forth above in order to compare more
accurately the Fund's performance with other measures of investment return. The
Fund may quote an aggregate total return figure in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Value Line
Composite Index, the Lehman Brothers Bond, Government Corporate, Corporate and
Aggregate Indices, Merrill Lynch Government & Agency Index, Merrill Lynch
Intermediate Agency Index, Morgan Stanley Capital International
-61-
<PAGE> 114
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, the Fund calculates its aggregate total return
for the specified periods of time by assuming the investment of $1,000 in Fund
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. The Fund would, however, disclose the maximum sales charge and would
also disclose that the performance data does not reflect sales charges and that
the inclusion of sales charges would reduce the performance quoted, if a sales
charge is in effect. To calculate its average annual total return, the aggregate
return is then annualized according to the Commission's formula for total return
quotes, outlined above. When the period since inception is less than one year,
the total return quoted will be the aggregate return for the period.
The Fund may also advertise the performance rankings assigned by
various publications and statistical services, including but not limited to SEI,
Lipper Mutual Performance Analysis, Intersec Research Survey of Non-U.S. Equity
Fund Returns, Frank Russell International Universe, and any other data which may
be presented from time to time by such analyses as Dow Jones, Morningstar, Inc.,
Chase Investment Performance, Wilson Associates, Stanger, CDA Investment
Technologies, Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor
National Index, IBC/Donaghue's Average/U.S. Government and Agency, or as they
appear in various publications including but not limited to The Wall Street
Journal, Forbes, Barron's, Fortune, Money Magazine, The New York Times,
Financial World, Financial Services Week, USA Today and other regional
publications.
GENERAL
REPURCHASE OF SHARES.
The Distributor is authorized to repurchase Fund shares through certain
securities dealers who have entered into selected dealer agreements with the
Distributor. The offer to repurchase may be suspended by the Distributor at any
time. Dealers may charge for their services in connection with a repurchase, but
neither the Fund nor the Distributor makes any such charge. Repurchase
-62-
<PAGE> 115
arrangements differ from redemptions in that the dealer buys the shares as
principal from his customer in lieu of tendering shares to the Fund for
redemption as agent for the customer. The proceeds to the shareholder will be
the net asset value of the shares repurchased as next determined after receipt
of the repurchase order by the dealer. By a repurchase, the customer should be
able to receive the sale proceeds from the dealer more quickly. Shareholders
should contact their dealers for further information as to how to effect a
repurchase and the dealer's charges applicable thereto.
PAYMENT FOR SHARES PRESENTED.
Payment for shares presented for redemption will be based on the Fund's
net asset value next computed after a request is received in proper form at the
Transfer Agent's office. Payment proceeds will be mailed within seven days
following receipt of all required documents. However, payment may be postponed
or the right of redemption suspended: (i) for any period during which the
Exchange is closed for other than customary weekend and holiday closing or
during which trading on the Exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or
(iii) for such other periods as the SEC may by order permit for the protection
of shareholders, provided that applicable rules and regulations of the SEC shall
govern as to whether the conditions described in (i) and (ii) exist. Payment of
proceeds may also be delayed if the shares to be redeemed or repurchased were
purchased by check and that check has not cleared (which may be up to 15 days or
more).
CUSTODIAN.
The Fifth Third Bank (the "Custodian"), a banking company organized
under the laws of Ohio, is the Custodian for the Fund's securities and cash, but
it does not participate in the Fund's investment decisions. Portfolio securities
purchased in the U.S. are maintained in the custody of the Custodian and may be
entered into the Federal Reserve Book Entry System or the security depository
system of the Depository Trust Corporation. The Custodian's principal offices
are located at 38 Fountain Square Plaza, Cincinnati, OH 45263. Foreign
securities are held with selected foreign sub-custodians through arrangements
with State Street Bank & Trust Co. N.A.
INDEPENDENT ACCOUNTANTS.
The Trust's independent accountants, Coopers & Lybrand L.L.P., 100
East Broad Street, Columbus, OH 43215, audit the Trust's annual financial
statements, assist in the preparation of certain reports to the SEC and prepare
the Trust's tax returns.
-63-
<PAGE> 116
FINANCIAL INFORMATION
The Fund's Financial Statements for the fiscal year ended May 31, 1997,
for the Summit High Yield Shares class and the Summit High Yield Institutional
Service Shares class, including the Report of Independent Accountants, which are
included in the Fund's Annual Report to Shareholders for the fiscal year ended
May 31, 1997 (the "Report"), are included on the following pages of this SAI.
The Report may be obtained free of charge by calling the Trust at
1-800-272-3442, or writing to the Trust at its address listed on the cover
of this SAI.
-64-
<PAGE> 117
SUMMIT HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $36,205,704).......................... $38,099,470
Cash.............................................................. 478
Interest receivable............................................... 771,064
Receivable for capital shares issued............................ 52,730
Receivable from Investment Adviser.............................. 3,773
Receivable from brokers for investments sold.................... 1,015,000
Income and other receivable..................................... 31,540
Prepaid expenses................................................ 20,490
-----------
Total Assets.................................................. 39,994,545
-----------
LIABILITIES:
Payable for investments purchased................................. 1,000,000
Payable for capital shares redeemed............................... 93
Accrued expenses and other payables:
Investment advisory fees........................................ 16,446
Administration fees............................................. 636
12b-1 fees (High Yield shares).................................. 7,208
12b-1 fees (Institutional Service shares)....................... 458
Legal and audit fees............................................ 11,343
Transfer agent fees............................................. 8,996
Trustees' fees.................................................. 5,636
-----------
Total Liabilities............................................. 1,050,816
-----------
NET ASSETS:
Capital........................................................... 35,254,495
Undistributed net investment income............................... 48,225
Net unrealized appreciation on investments........................ 1,893,766
Accumulated undistributed net realized gains on investment
transactions..................................................... 1,747,243
-----------
Net Assets.................................................... $38,943,729
===========
Net Assets
High Yield shares............................................... $34,706,789
Institutional Service shares.................................... 4,236,940
-----------
Total........................................................... $38,943,729
===========
Outstanding units of beneficial interest (shares)
High Yield shares............................................... 3,064,624
Institutional Service shares.................................... 374,948
-----------
Total........................................................... 3,439,572
===========
Net asset value
Redemption price per share--High Yield shares................... $11.32
Offering and Redemption price per share--Institutional Service
shares......................................................... $11.30
===========
Maximum Sales Charge--High Yield shares........................... 4.50%
===========
Maximum Offering Price--High Yield shares (100%/(100%-Maximum
Sales Charge) of net asset value adjusted to nearest cent)
per share........................................................ $11.85
===========
</TABLE>
See notes to financial statements.
<PAGE> 118
SUMMIT HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income.................................................... $3,486,114
Dividend income.................................................... 35,148
----------
Total Income..................................................... 3,521,262
----------
EXPENSES:
Investment advisory fees........................................... 367,253
Administration fees................................................ 68,088
12b-1 fees--High Yield shares...................................... 78,445
12b-1 fees--Institutional Service shares........................... 6,665
Custodian and accounting fees...................................... 51,392
Legal and audit fees............................................... 48,404
Organization costs................................................. 328
Trustees' fees..................................................... 27,023
Transfer agent fees................................................ 58,479
Registration and filing fees....................................... 11,933
Printing costs..................................................... 52,140
Other.............................................................. 20,831
----------
Total expenses before voluntary reductions....................... 790,981
Expenses voluntarily reduced..................................... (249,151)
----------
Total Expenses................................................... 541,830
----------
Net investment income.............................................. 2,979,432
----------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment transactions...................... 2,908,478
Net change in unrealized appreciation (depreciation) on
investments....................................................... (160,322)
----------
Net realized/unrealized gains on investments....................... 2,748,156
----------
Change in net assets resulting from operations..................... $5,727,588
==========
</TABLE>
See notes to financial statements.
<PAGE> 119
SUMMIT HIGH YIELD FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MAY 31, MAY 31,
1997 1996
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income............................ $ 2,979,432 $ 2,580,722
Net realized gains on investment transactions.... 2,908,478 1,021,588
Net change in unrealized appreciation
(depreciation) on investments.................... (160,322) 1,498,333
----------- -----------
Change in net assets resulting from operations.... 5,727,588 5,100,643
----------- -----------
DISTRIBUTIONS TO HIGH YIELD SHAREHOLDERS FROM:
Net investment income............................ (2,754,994) (2,515,712)
In excess of net investment income............... (353,047)
Net realized gains............................... (1,369,117) (66,947)
DISTRIBUTIONS TO INSTITUTIONAL SERVICE
SHAREHOLDERS FROM:
Net investment income............................ (231,725) (52,460)(a)
In excess of net investment income............... (48,995) (5,333)(a)
Net realized gains............................... (100,079)
----------- -----------
Change in net assets from shareholder
distributions.................................... (4,857,957) (2,640,452)
----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued...................... 8,216,321 3,568,045
Dividends reinvested............................. 4,761,817 2,865,386
Cost of shares redeemed.......................... (5,304,586) (6,168,600)
----------- -----------
Change in net assets from capital transactions.... 7,673,552 264,831
----------- -----------
Change in net assets.............................. 8,543,183 2,725,022
NET ASSETS:
Beginning of period.............................. 30,400,546 27,675,524
----------- -----------
End of period.................................... $38,943,729 $30,400,546
=========== ===========
SHARE TRANSACTIONS:
Issued........................................... 733,390 333,322
Reinvested....................................... 426,459 272,922
Redeemed......................................... (472,411) (591,773)
----------- -----------
Change in shares.................................. 687,438 14,471
=========== ===========
</TABLE>
- --------
(a) For the period from January 19, 1996 (commencement of operations) to May
31, 1996.
See notes to financial statements.
<PAGE> 120
SUMMIT HIGH YIELD FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<S> <C>
COMMON STOCKS (0.2%):
Transportation (0.2%):
279,669 Central Transport Rental Group
PLC-ADR............................................... $ 78,665
-----------
Total Common Stocks............................................. 78,665
-----------
CORPORATE BONDS (96.0%):
Consumer (4.8%):
Consumer Goods & Services (2.9%):
1,000,000 Coleman Escrow Corp.,
0.00%, 5/15/01**...................................... 648,750
500,000 Coleman Holding,
0.00%, 5/27/98*....................................... 462,500
-----------
1,111,250
-----------
Food Processors (2.0%):
1,000,000 PM Holdings Corp.,
0.00%, 9/1/00 (b)..................................... 770,000
-----------
Total Consumer.................................................. 1,881,250
-----------
Energy (2.9%):
Oil/Gas Exploration (2.9%):
1,000,000 TransTexas Gas Corp.,
11.50%, 6/15/02....................................... 1,113,750
-----------
Total Energy.................................................... 1,113,750
-----------
Manufacturing (25.2%):
Apparel/Textile (3.8%):
1,000,000 Anvil Knitwear, Inc.,
10.88%, 3/15/07**..................................... 1,011,250
500,000 CMI Industries,
9.50%, 10/1/03........................................ 485,000
-----------
1,496,250
-----------
Auto & Related (5.4%):
1,000,000 Venture Holdings,
9.75%, 4/1/04......................................... 975,000
1,000,000 Collins & Aikman Products Corp., 11.50%, 4/15/06....... 1,118,750
-----------
2,093,750
-----------
Chemicals (1.3%):
500,000 Tri Polyta Finance, Inc.,
11.38%, 12/1/03....................................... 487,500
-----------
General Industrial (13.5%):
1,000,000 Gulf States Steel,
13.50% 4/15/03........................................ 972,500
500,000 IMO Industries,
11.75%, 5/1/06........................................ 502,500
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<S> <C>
CORPORATE BONDS, CONTINUED:
Manufacturing, continued:
General Industrial, continued:
1,000,000 International Knife & Saw Corp.,
11.38%, 11/5/06....................................... $ 1,057,500
1,000,000 International Wire Group,
11.75%, 6/1/05........................................ 1,075,000
500,000 Telex Communications, Inc.,
10.50%, 5/1/07**...................................... 517,500
1,000,000 Terex Corp.,
13.25%, 5/15/02....................................... 1,120,000
-----------
5,245,000
-----------
Paper Products (1.3%):
500,000 Florida Coast Paper,
12.75%, 6/1/03........................................ 505,000
-----------
Total Manufacturing............................................. 9,827,500
-----------
Service (42.3%):
Discount Stores (1.2%):
500,000 Pamida, Inc.,
11.75%, 3/15/03....................................... 470,000
-----------
Drug Stores (2.7%):
1,000,000 Duane Reade Corp.,
12.00%, 9/15/02....................................... 1,042,500
-----------
Gaming/Hotels (4.2%):
1,000,000 Alliance Gaming Corp.,
12.88%, 6/30/03....................................... 1,085,000
500,000 Majestic Star Casino,
12.75%, 5/15/03....................................... 545,000
-----------
1,630,000
-----------
Grocery (2.4%):
1,000,000 Pueblo Xtra International,
9.50%, 8/1/03**....................................... 955,000
-----------
Media & Cable (19.0%):
1,000,000 Adelphia Communication Corp., 12.50%, 5/15/02.......... 1,053,750
1,000,000 Globalstar, L.P.,
11.38%, 2/15/04**..................................... 1,005,000
1,000,000 Kabelmedia Holdings,
0.00%, 8/1/06 (e)..................................... 590,000
500,000 Mobile Telecommunications, 13.50%, 12/5/02............. 515,000
1,000,000 People's Choice TV Corp.,
0.00%, 6/1/04 (c)..................................... 365,000
500,000 Phonetel Technologies, Inc.,
12.00%, 12/15/06...................................... 500,000
</TABLE>
Continued
<PAGE> 121
SUMMIT HIGH YIELD FUND
SCHEDULE OF INVESTMENTS, CONTINUED
MAY 31, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<S> <C>
CORPORATE BONDS, CONTINUED:
Service, continued:
Media & Cable, continued:
1,000,000 Spanish Broadcasting System,
11.00%, 3/15/04**.................................... $ 1,045,000
500,000 Tevecap SA,
12.63%, 11/26/04**................................... 530,000
750,000 TV Azteca SA,
10.50%, 2/15/07**.................................... 769,688
1,000,000 TV Filme, Inc.,
12.88%, 12/15/04**................................... 1,042,500
-----------
7,415,938
-----------
Other Services (12.7%):
1,000,000 Affinity Group Holdings, Inc.,
11.00%, 4/1/07**..................................... 1,045,000
500,000 Allied Waste North America, Inc.,
10.25%, 12/1/06**.................................... 531,250
1,000,000 Chief Auto Parts, Inc.,
10.50%, 5/15/05...................................... 1,011,250
500,000 Iron Mountain, Inc.,
10.13%, 10/1/06...................................... 527,500
800,000 Neodata Services, Inc.,
12.00%, 5/1/03....................................... 856,000
500,000 Speedy Muffler King, Inc.,
10.88%, 10/1/06...................................... 523,125
500,000 Stuart Entertainment,
12.50%, 11/15/04..................................... 445,000
-----------
4,939,125
-----------
Total Service.................................................. 16,452,563
-----------
Transportation (12.4%):
Air Transportation/Related (7.1%):
1,000,000 Airplanes Pass Through Trust, 10.88%, 3/15/19**....... 1,112,500
500,000 CHC Helicopter,
11.50%, 7/15/02...................................... 517,500
1,000,000 SC International,
13.00%, 10/1/05...................................... 1,135,000
-----------
2,765,000
-----------
Trucking/Other (5.3%):
1,000,000 Ameritruck Distribution,
12.25%, 11/15/05..................................... 1,000,000
500,000 Atlantic Express Transportation Corp., 10.75%,
2/1/04**............................................. 520,000
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<S> <C>
CORPORATE BONDS, CONTINUED:
Transportation, continued:
Trucking/Other, continued:
569,131 Central Transport Rental Group
PLC-ADR, 9.50%, 4/30/03.............................. $ 542,097
-----------
2,062,097
-----------
Total Transportation........................................... 4,827,097
-----------
Utilities (8.5%):
Gas & Electric (2.3%):
1,000,000 Empire Gas Corp.,
7.00%, 7/15/04....................................... 900,000
-----------
Telecommunications (6.2%):
750,000 Call-Net Enterprises, Inc.,
0.00%, 12/1/04 (f)................................... 640,313
1,000,000 Intermedia Communications,
0.00%, 5/15/01 (d)................................... 685,000
1,000,000 Qwest Communications, Inc., 10.88%, 4/1/07**.......... 1,070,000
-----------
2,395,313
-----------
Total Utilities................................................ 3,295,313
-----------
Total Corporate Bonds.......................................... 37,397,473
-----------
RIGHTS/WARRANTS (0.4%):
Broadcast, Radio & Television (0.0%):
200 American Telecastings, 5 Warrant Package, expire
6/15/99**............................................ 20
-----------
Consumer (0.3%):
2,000 Renaissance Cosmetics, Inc.,
Warrants, expire 8/15/01**........................... 100,000
-----------
Hotels/Gaming (0.0%):
500 Boomtown Warrants, expire 11/98**..................... 5
-----------
Machinery-Construction & Mining (0.0%):
4,000 Terex Corp. Rights, expire 5/15/02.................... 10,000
-----------
Paper Products (0.1%):
10,000 S.D. Warren Warrants, expire 12/15/04**............... 47,500
-----------
Total Warrants................................................. 157,525
-----------
</TABLE>
Continued
<PAGE> 122
SUMMIT HIGH YIELD FUND
SCHEDULE OF INVESTMENTS, CONTINUED
MAY 31, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<S> <C>
INVESTMENT COMPANIES (1.2%):
465,807 Fountain Square Money Market Fund...................... $ 465,807
-----------
Total Investment Companies...................................... 465,807
-----------
TOTAL INVESTMENTS
(Cost--$36,205,704)(a).......................................... $38,099,470
===========
</TABLE>
- ------
Percentages indicated are based on net assets of $38,943,729.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........... $2,274,438
Unrealized depreciation........... (380,672)
----------
Net unrealized appreciation....... $1,893,766
==========
</TABLE>
(b) Interest rate increases to 11.50% on September 1, 2000.
(c) Interest rate increases to 13.13% on June 1, 2000.
(d) Interest rate increases to 12.5% on May 15, 2001.
(e) Interest rate increases to 13.63% on August 1, 2001.
(f) Interest rate increases to 13.25% on December 1, 1999.
* Represents discount note.
** Represents private placement securities.
PLC = Public Limited Company
ADR = American Depositary Receipt
See notes to financial statements.
<PAGE> 123
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1997
1. ORGANIZATION:
Summit Investment Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company established as a Massachusetts business trust under an
Agreement and Declaration of Trust dated March 8, 1994, as amended. The Trust
is currently comprised of one investment portfolio, the Summit High Yield
Fund (the "Fund"). Between the date of organization and the date of
commencement of operations of the Fund (June 27, 1994), the Trust had no
operations other than those relating to organizational matters, including the
issuance on May 24, 1994 of 10,000 shares, at $10.00 per share, to The Union
Central Life Insurance Company ("Union Central Life").
The Fund's investment objective is high current income with capital
appreciation as a secondary goal. The Fund invests primarily in lower-
quality, intermediate to long-term corporate bonds.
The Fund is authorized to issue an unlimited number of shares, which are
units of beneficial interest without par value. During the fiscal year ended
May 31, 1997, the Fund was authorized to issue two classes of shares, the
High Yield Shares and Institutional Service Shares. The High Yield Shares are
subject to an initial sales charge imposed at the time of purchase, in
accordance with the Fund's prospectus. Each class of shares has identical
rights and privileges except with respect to voting rights on matters
affecting a single class of shares including the exchange privileges of each
class of shares.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its 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 of income and expenses for the
fiscal year ended May 31, 1997. Actual results could differ from those
estimates.
SECURITIES VALUATION:
Securities which are traded on stock exchanges are valued at the last
sales price as of the close of the New York Stock Exchange (the
"Exchange"), or lacking any sales, at the closing bid price. Securities
traded only in the "over-the-counter" market are valued at the last bid
price quoted by brokers that make markets in the securities at the close
of trading on the Exchange. Fixed income securities are generally traded
in the over-the-counter market. Securities and assets for which market
quotations are not readily available or not obtained from a pricing
service are valued at fair value as determined in good faith by the Board
of Trustees, although the actual calculations may be made by persons
acting pursuant to the direction of the Trustees. As approved by the
Board of Trustees, the Fund uses a pricing service or services in
determining the net asset value of shares of the Fund. Fixed income
securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis, which the Trustees have determined reflects fair
value.
Continued
<PAGE> 124
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997
The Fund may invest its assets in intermediate to long-term, high yield,
medium and lower quality, fixed income securities. Because the market for
lower-rated securities may be thinner and less active than for higher-
rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. If market
quotations are not readily available for the Fund's lower-rated or non-
rated securities, these securities will be valued by a method that the
Trustees believe accurately reflects fair value. Judgment plays a greater
role in valuing lower-rated securities than with respect to securities
for which external sources of quotations and last sale information are
more available.
SECURITIES TRANSACTIONS AND RELATED INCOME:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the pro rata
amortization of premium or discount. Dividend income is recorded on
the ex-dividend date. Gains or losses realized on sales of securities
are determined by comparing the identified cost of the security lot
sold with the net sales proceeds.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared and paid monthly.
Distributable net realized capital gains, if any, are declared and
distributed at least annually.
Dividends from net investment income and from net realized capital
gains are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments for organization
costs and deferrals of certain losses.
FEDERAL INCOME TAXES:
It is the policy of the Fund to continue to qualify as a regulated
investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code of 1986, as amended, and to make distributions
of net investment income and net realized capital gains sufficient to
relieve it from all, or substantially all, Federal income taxes.
OTHER:
All expenses in connection with the Trust's organization and
registration under the 1940 Act and the Securities Act of 1933, as
amended, were paid by the Fund. Such expenses were amortized over a
period of two years commencing with the date of the initial public
offering.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities for the Fund (excluding short-term
securities) for the year ended May 31, 1997 were $94,455,956 and $88,215,652
respectively.
Continued
<PAGE> 125
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997
4. RELATED PARTY TRANSACTIONS:
First Summit Capital Management ("FSCM" or the "Adviser"), a joint venture
having its principal offices at 1876 Waycross Road, Cincinnati, Ohio 45240,
is the investment adviser to the Fund. FSCM was organized principally for
purposes of sponsoring and managing the Trust pursuant to a Joint Venture
Agreement between Carillon Advisers, Inc. ("Carillon"), an Ohio corporation,
and Freeman Holding Company, Inc. ("Freeman"), a Delaware corporation (the"
Joint Venture"). Under the Joint Venture Agreement, Carillon serves as the
general manager of the Adviser and is responsible for maintaining its books
of account and other financial records and for preparing its quarterly
financial statements. Carillon is a wholly-owned subsidiary of Union Central
Life, an Ohio mutual insurance company, which owns as of May 31, 1997 more
than 91% of the High Yield Shares class and more than 73% of the
Institutional Service Shares Class of shares of the Fund. Freeman is the
parent corporation of Freeman Securities Company, Inc., a New Jersey
corporation which is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended, and is a member of the National Association
of Securities Dealers, Inc.
Under the terms of the Investment Advisory Agreement between the Trust and
FSCM (the "Advisory Agreement"), FSCM is entitled to receive fees based on a
percentage of the average net assets of the Fund. Effective July 1, 1995, the
investment advisory fee is based on the total return investment performance
of the Fund for the prior twelve-month period relative to the percentage
change in the Salomon Brothers High Yield Market Index for the same period.
The advisory fee is paid monthly at an annual rate which varies between 0.35%
and 1.15% of the Fund's average daily net assets. The Adviser has agreed to
waive a portion of its advisory fee so as to limit the Fund's total annual
expenses to 1.60%. For the year ended May 31, 1997, FSCM voluntarily reduced
$227,432 of investment advisory fees.
Carillon with offices at 1876 Waycross Road, Cincinnati, Ohio 45240, serves
as investment sub-adviser (the "Sub-Adviser") to the Fund pursuant to an
Investment Sub-Advisory Agreement with the Adviser dated September 18, 1996
(the "Sub-Advisory Agreement"). Under the Sub-Advisory Agreement, Carillon
provides, subject to the Adviser's direction, a portion of the investment
advisory services for which the Adviser is responsible pursuant to the
Advisory Agreement relating to the Fund. Under the Sub-Advisory Agreement,
the Sub-Adviser receives from the Adviser an annual fee in the amount of
$150,000 per year. If the Sub-Adviser renders services to the Adviser under
the Sub-Advisory Agreement for a period of less than twelve months in length,
the Sub-Adviser is entitled to a pro-rata portion of such fee, or such other
fees as shall be agreed to by the Adviser and the Sub-Adviser, not to exceed
the equivalent of the pro-rata portion of such fee. In the event that the
amount payable as the Sub-Adviser's fees exceeds the amount of advisory fees
paid to the Adviser pursuant to the Advisory Agreement, the difference will
be shared equally by the Adviser's general partners, Freeman and Carillon, or
paid by the Joint Venture.
BISYS Fund Services, Limited Partnership d/b/a BISYS Fund Services ("BISYS")
is an Ohio limited partnership. BISYS Fund Services Ohio, Inc. ("BISYS
Ohio"), and BISYS are subsidiaries of The BISYS Group, Inc.
Continued
<PAGE> 126
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997
Certain officers of the Trust are affiliated with BISYS or with FSCM. Such
officers are not paid any fees directly by the Fund for serving as officers
of the Trust.
BISYS serves the Trust as manager and administrator. Under the terms of the
Management and Administration Agreement between the Trust and BISYS, BISYS'
fees are computed daily and paid monthly as a percentage of the average daily
net assets of the Fund at an annual rate of 0.20%. For the year ended May 31,
1997, BISYS voluntarily reduced $17,134 of administration fees of the Fund.
BISYS also serves as distributor of the Fund's shares. BISYS receives fees
for providing distribution services under the Distribution Agreement between
the Trust and BISYS and the Trust's Distribution and Shareholders Service
Plans (the "Plans") pursuant to Rule 12b-1 under the 1940 Act. Under the
Plans, the Fund pays BISYS a fee not to exceed, on an annual basis, 0.25% of
the average daily net assets of the shares of the High Yield Shares class and
of the Institutional Service Shares class of the Fund for payments BISYS
makes to financial institutions, including FSCM, and broker/dealers, and for
expenses BISYS and any of its affiliates incur for providing distribution or
shareholder service assistance. For the year ended May 31, 1997 BISYS waived
$4,585 in 12b-1 fees. In addition, BISYS has the right, as principal, to
purchase Fund shares at their net asset value and to sell such shares to the
public, or to dealers who have entered into selected dealer agreements with
the Distributor, in both cases against orders for such shares. BISYS may sell
such shares at the public offering price, which for Institutional Service
Shares Class shares is net asset value, and for High Yield Shares class
shares is net asset value plus a maximum sales charge of 4.50% or, in the
case of sales to dealers, at the public offering price less a concession
determined by BISYS which may not exceed the amount of the sales charge or
the underwriting discount. For the year ended May 31, 1997, BISYS received
$26,909 from commissions earned on sales of High Yield Shares class shares of
the Fund, $24,202 of which was reallowed to unaffiliated broker/dealers.
BISYS Ohio serves as the Trust's transfer agent and is entitled to receive
fees based upon a contractually specified amount per shareholder with
specified minimum per portfolio amounts and surcharges. In addition, the
transfer agent is reimbursed for certain out-of-pocket expenses incurred in
providing transfer agency services. BISYS Ohio also serves as fund accountant
for the Trust. Under the terms of the Fund Accounting Agreement between the
Trust and BISYS Ohio, the fund accountant is entitled to receive fees based
on a percentage of the average daily net assets of the Fund and is reimbursed
for certain out-of-pocket expenses incurred in providing such fund accounting
services. Transfer agent and fund accounting fees for the year ended May 31,
1997 were $58,479 and $44,994 respectively.
Continued
<PAGE> 127
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997
5. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Fund were as follows:
<TABLE>
<CAPTION>
SUMMIT HIGH YIELD
BOND FUND
------------------------
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
MAY 31, MAY 31,
1997 1996
----------- -----------
<S> <C> <C>
CAPITAL TRANSACTIONS:
HIGH YIELD SHARES:
Proceeds from shares issued..................... $ 4,256,939 $ 573,171
Dividends reinvested............................ 4,423,689 2,820,631
Shares redeemed................................. (3,409,061) (4,848,104)
----------- -----------
Change in net assets from High Yield share
transactions................................. $ 5,271,567 $(1,454,302)
=========== ===========
INSTITUTIONAL SERVICE SHARES:
Proceeds from shares issued..................... $ 3,959,382 $ 2,994,874 (a)
Dividends reinvested............................ 338,128 44,755 (a)
Shares redeemed................................. (1,895,525) (1,320,496)(a)
----------- -----------
Change in net assets from Institutional
Service share transactions................... $ 2,401,985 $ 1,719,133 (a)
=========== ===========
SHARE TRANSACTIONS:
HIGH YIELD SHARES:
Issued.......................................... 379,660 54,443
Reinvested...................................... 396,115 268,810
Redeemed........................................ (302,538) (469,528)
----------- -----------
Change in High Yield shares................... 473,237 (146,275)
=========== ===========
INSTITUTIONAL SERVICE SHARES
Issued.......................................... 353,730 278,879 (a)
Reinvested...................................... 30,344 4,112 (a)
Redeemed........................................ (169,873) (122,245)(a)
----------- -----------
Change in Institutional Service shares........ 214,201 160,746 (a)
=========== ===========
</TABLE>
- --------
(a) For the period from January 19, 1996 (commencement of operations) to May
31, 1996.
Continued
<PAGE> 128
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1997
6. SUBSEQUENT EVENTS:
At the regular quarterly meeting on June 18, 1997, the Board of Trustees
authorized and directed the officers of the Trust to effectuate the exchanges
of all the shares of the Institutional Service Shares class into shares of
the High Yield Shares class and, upon completion of such exchanges, to
effectuate the abolishment of the Institution Service Class. The exchange of
the shares and abolishment of the Institution Service Class is scheduled to
be completed by the end of July, 1997. At that time, the Fund will have only
one class of shares, the High Yield Shares class, which will continue to have
substantially the same expenses as prior to the abolishment of the
Institutional Service Class.
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS Summit High Yield Fund
- -------------------------------------------------------------------------------
To the Shareholders and Trustees of
Summit Investment Trust
We have audited the accompanying statements of assets and liabilities of the
Summit High Yield Fund, including the schedule of portfolio investments, as of
May 31, 1997, and the related statement of operations, statement of changes in
net assets, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
Summit Investment Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 1997 by correspondence with the custodian and brokers or
other auditing procedures where confirmations from brokers were not received.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Summit High Yield Fund as of May 31, 1997, and the results of their
operations and the changes in their net assets and the financial highlights
for the periods referred to above in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Columbus, Ohio
July 21, 1997
<PAGE> 130
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in Part A:
(1) Financial Highlights for the period from
June 27, 1994 (commencement of operations)
to May 31, 1997 (audited) for the Summit
High Yield Shares class of the Summit High
Yield Fund.
Included in Part B:
(1) Report of Independent Accountants relating
to the Financial Statements at May 31, 1997
and for the year then ended.
(2) Schedule of Portfolio Investments at
May 31, 1997 (audited).
(3) Statement of Assets and Liabilities for the
year ended May 31, 1997 (audited).
(4) Statement of Operations for the period from
June 27, 1994 (commencement of operations)
to May 31, 1997 (audited).
(4) Statement of Changes in Net Assets for the
period from June 27, 1994 (commencement of
operations) to May 31, 1997 (audited).
(5) Financial Highlights for the period from
June 27, 1994 (commencement of operations)
to May 31, 1997 (audited) for the Summit
High Yield Shares class of the Summit High
Yield Fund, and for the period from January
19, 1996 (commencement of operations) to May
31, 1997 for the Summit High Yield
Institutional Service Shares class of the
Summit High Yield Fund.
(6) Notes to Financial Statements at May 31,
1997 (audited).
The Financial Statements of the Summit High Yield
Fund series (the "Fund") of the Summit Investment
Trust (the "Trust"), as noted above, were filed on
approximately August 1, 1997 with the Securities and
Exchange Commission in the Fund's Annual Report to
Shareholders for the fiscal year ended May 31, 1997
pursuant to Rule 30b2-1 under the Investment Company
Act of 1940, as amended, and are included in the
Statement of Additional Information.
(b) Exhibits:
(1) Agreement and Declaration of Trust of
Registrant is incorporated herein by
reference to the Registrant's Initial
Registration Statement No. 33-76250, Exhibit
No. (1), as filed on April 7, 1994.
(a) Amendment to Agreement and
Declaration of Trust of Registrant
is incorporated herein by reference
to Pre-Effective Amendment No. 2 to
the Registrant's Registration
Statement No. 33-76250, Exhibit No.
(1)(a), as filed on June 15, 1994.
(b) Amendment No. 2 to Agreement and
Declaration of Trust of
Registrant is filed herewith as
Exhibit No. (1)(b).
(2) By-laws of the Summit Investment Trust are
incorporated herein by reference to the
Registrant's Initial Registration Statement
No. 33-76250, Exhibit No. (2), as filed on
April 7, 1994.
(3) Not Applicable.
(4) Not Applicable.
<PAGE> 131
(5) Investment Advisory Agreement between the
Summit Investment Trust and First Summit
Capital Management is incorporated herein by
reference to Pre-Effective Amendment No. 2
to the Registrant's Registration Statement
No. 33-76250, Exhibit No. (5), as filed on
June 15, 1994.
(a)(1) "Form of" Investment Sub-Advisory
Agreement between First Summit
Capital Management and Carillon
Advisers, Inc. is incorporated
herein by reference to Post-
Effective Amendment No. 5 to the
Registrant's Registration Statement
No. 33-76250, Exhibit No. 5(a)(2),
as filed on September 30, 1996.
(6) (a)(1) Distribution Agreement between the
Summit Investment Trust and The
Winsbury Company, Limited
Partnership is incorporated herein
by reference to the Registrant's
Initial Registration Statement No.
33-76250, Exhibit No. (6)(a), as
filed on April 7, 1994.
(a)(2) Amended and Restated Distribution
Agreement between the Summit
Investment Trust and BISYS Fund
Services Limited Partnership is
filed herewith as Exhibit No.
(6)(a)(2).
(b)(1) "Form of" Dealer Agreement on behalf
of the Summit Investment Trust is
incorporated herein by reference to
Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement
No. 33-76250, Exhibit No. (6)(b), as
filed on June 15, 1994.
(b)(2) "Form of" Selling Agreement between
BISYS Fund Services Limited
Partnership and McDonald & Co., on
behalf of the Summit Investment
Trust incorporated herein by
reference to Post-Effective
Amendment No. 3 to the Registrant's
Registration Statement No. 33-76250
Exhibit (6)(b)(2), as filed on
October 12, 1995.
(c)(1) "Form of" Servicing Agreement on
behalf of the Summit Investment
Trust is incorporated herein by
reference to the Registrant's
Initial Registration Statement No.
33-76250, Exhibit No. (6)(c), as
filed on April 7, 1994.
(7) Not Applicable.
(8) Custodian Agreement between the Summit
Investment Trust and The Fifth Third Bank is
incorporated herein by reference to the
Registrant's Initial Registration Statement
No. 33-76250, Exhibit No. (8), as filed on
April 7, 1994.
(9) (a)(1) Management and Administration
Agreement between the Summit
Investment Trust and The Winsbury
Company, Limited Partnership
is incorporated herein by reference
to the Registrant's Initial
Registration Statement No. 33-76250,
Exhibit No. (9)(a), as filed on
April 7, 1994.
<PAGE> 132
(a)(2) "Form of" Amended and Restated
Management and Administration
Agreement between Summit Investment
Trust and BISYS Fund Services
Limited Partnership is incorporated
herein by reference to
Post-Effective Amendment No. 3 to
the Registrant's Registration
Statement No. 33-76250, Exhibit No.
(9)(a)(2), as filed on October 12,
1995.
(b)(1) Transfer and Dividend Disbursing
Agent Agreement between the
Summit Investment Trust and The
Winsbury Service Corporation is
incorporated herein by reference to
the Registrant's Initial
Registration Statement No. 33-76250,
Exhibit No. (9)(b), as filed on
April 7, 1994.
(b)(2) "Form of" Amended and Restated
Transfer Agency Agreement between
the Summit Investment Trust and
BISYS Fund Services Ohio, Inc. is
incorporated herein by reference to
Post-Effective Amendment No. 3 to
the Registrant's Registration
Statement No. 33-76250, Exhibit No.
(9)(b)(2), as filed on October 12,
1995.
(c)(1) Fund Accounting Agreement between
the Summit Investment Trust and The
Winsbury Service Corporation is
incorporated herein by reference to
the Registrant's Initial
Registration Statement No. 33-76250,
Exhibit No. (9)(c), as filed on
April 7, 1994.
(c)(2) "Form of" Amended and Restated Fund
Accounting Agreement between the
Summit Investment Trust and BISYS
Fund Services Ohio, Inc. is
incorporated herein by reference to
Post-Effective Amendment No. 3 to
the Registrant's Registration
Statement No. 33-76250, Exhibit No.
(9)(c)(2), as filed on October 12,
1995.
(d) Joint Venture Agreement between
Carillon Advisers, Inc., and Freeman
Holding Company, Inc. is
incorporated herein by reference
to Pre-Effective Amendment No. 2 to
the Registrant's Registration
Statement No. 33-76250, Exhibit No.
(9)(d), as filed on June 15,
1994.
(10) (a) Opinion and consent of Stradley,
Ronon, Stevens & Young, LLP is
incorporated herein by reference
to Registrant's Notice pursuant to
Rule 24f-2, as filed on
July 28, 1997.
(11) Consent of Coopers & Lybrand L.L.P. is filed
herewith as Exhibit No. (11).
(12) Not Applicable.
(13) Letter Containing Investment Undertaking is
incorporated herein by reference to
Pre-Effective Amendment No. 2 to
Registrant's Registration Statement No.
33-76250, Exhibit No. (13), as filed on
June 15, 1994.
(14) Not Applicable.
(15) See Schedule C-1 to Amended and Restated
Distribution Agreement filed herewith as
Exhibit No. 6(a)(2).
(16) Schedule for Computation of Performance
Quotation on behalf of the Summit High Yield
Fund is incorporated by reference to
Post-Effective Amendment No. 5 to
Registrant's Registration Statement No.
33-76230, Exhibit No. (16), as filed on
October 1, 1996.
(27) Financial Data Schedule on behalf of the:
(a) Summit High Yield Shares class of the
Summit High Yield Fund is filed
herewith as Exhibit No. 27.A
(b) Summit High Yield Institutional
Service Shares class of the Summit
High Yield Fund is filed herewith as
Exhibit No. 27.B
<PAGE> 133
(18) Not Applicable.
(19) Powers-of-Attorney are incorporated herein
by reference to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement
No. 33-76250, as filed on June 15, 1994.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT.
No person is directly or indirectly controlled by the
Registrant. With respect to the Summit High Yield Fund, as of
September 2, 1997, The Union Central Life Insurance Company
("Union Central Life"), a mutual insurance company organized
under the laws of Ohio, owned 84.45% of the outstanding shares
of the Summit High Yield Shares class. While the Summit
Investment Trust disclaims any such control relationship, it
may be deemed to be controlled by its investment adviser by
virtue of the advisory relationship. The Registrant's
investment adviser, First Summit Capital Management ("FSCM"),
is a joint venture of Carillon Advisers, Inc. ("Carillon") and
Freeman Holding Company, Inc. ("Freeman"). Carillon is an Ohio
corporation which is a wholly-owned subsidiary of Union
Central Life. Freeman is a Delaware corporation which is
majority-owned by the employee benefit plans of its
wholly-owned, broker-dealer subsidiary, Freeman Securities
Company, Inc., a New Jersey corporation. Set forth below is a
chart showing the entities controlled by Union Central Life,
the jurisdictions in which such entities are organized, and
the percentage of voting securities owned by the person
immediately controlling each such entity.
THE UNION CENTRAL LIFE INSURANCE COMPANY,
ITS SUBSIDIARIES AND AFFILIATES
I. The Union Central Life Insurance Company (Ohio)
A. Carillon Life Insurance Company (Ohio) -
100% owned.
B. Carillon Investments, Inc. (Ohio) - 100%
owned.
C. Carillon Marketing Agency, Inc. (Delaware) -
100% owned.
a. Carillon Marketing Agency of
Alabama, Inc. (Alabama) - 100%
owned.
b. Carillon Marketing Agency of
Arkansas, Inc. (Arkansas) - 100%
owned.
c. Carillon Marketing Agency of Hawaii,
Inc. (Hawaii) - 100% owned.
d. Carillon Marketing Agency of Idaho,
Inc. (Idaho) - 100% owned.
e. Carillon Marketing Agency of
Kentucky, Inc. (Kentucky) - 100%
owned.
f. Carillon Marketing Agency of
Massachusetts, Inc. (Massachusetts)
- 100% owned.
<PAGE> 134
g. Carillon Marketing Agency of New
Mexico, Inc. (New Mexico) -
100% owned.
h. Carillon Marketing Agency of Ohio,
Inc. (Ohio) - 100% owned.
i. Carillon Marketing Agency of Texas,
Inc. (Texas) - 100% owned.
D. Carillon Advisers, Inc. (Ohio) - 100% owned.
E. The Manhattan Life Insurance Company (New
York) - 73% owned.
II. Mutual Funds of the Carillon Group.
A. Carillon Fund, Inc.* (Maryland).
B. Carillon Investment Trust** (Massachusetts).
III. Summit Investment Trust (Massachusetts).
A. Summit High Yield Fund Shares Class
- 84.45% owned.
------
* At August 31, 1997, Union Central owned 100% of the
outstanding shares of Carillon Fund, Inc.
** At August 31, 1997, Union Central owned 33% of the
outstanding shares of Carillon Investment Trust.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF SEPTEMBER 2, 1997
------------------- ----------------------
<S> <C> <C>
Shares of beneficial interest,
no par value of:
Summit High Yield Shares 140
Summit High Yield Institutional Shares 0
</TABLE>
ITEM 27. INDEMNIFICATION.
Sections 6.4 and 6.5 of the Agreement and Declaration of
Trust, as amended, of the Registrant provide that the
Registrant shall indemnify each of its Trustees and officers
against all liabilities, including but not limited to amounts
paid in satisfaction of judgments, in compromise or as fines
and penalties, and against all expenses, including but not
limited to accountants and counsel fees, reasonably incurred
in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before
any court or administrative or legislative body, in which such
Trustee or officer may be or may have been involved as a party
or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being
or having been such a Trustee or officer, except that
indemnification shall not be provided if it shall have been
finally adjudicated in a decision on the merits by the court
or other body before which the proceeding was brought that
such Trustee or officer: (i) did not act in good faith in the
reasonable belief that his or her action was in the best
interests of the Registrant; or (ii) is liable to the
Registrant or its shareholders by reason of willful
<PAGE> 135
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office.
Indemnification of the Registrant's officers and Trustees,
persons who control the Registrant, or Registrant's
Distributor, Transfer Agent, Fund Accountant or Administrator
against certain stated liabilities is provided for in the
following documents:
(a) Sections 1.11 and 1.12 of the Amended and Restated
Distribution Agreement between the Summit Investment
Trust and BISYS Fund Services, Limited Partnership,
incorporated herein by reference to Post-Effective
Amendment No. 3 to the Registrant's Registration
Statement No. 33-76250, as Exhibit (6)(a)(2);
(b) Section 4 of the Amended and Restated Management and
Administration Agreement between the Summit
Investment Trust and BISYS Fund Services Limited
Partnership, incorporated herein by reference to
Post-Effective Amendment No. 3 to the Registrant's
Registration Statement No. 33-76250, as Exhibit
(9)(a)(2), as filed on October 12, 1995;
(c) Section 9 of the Amended and Restated Transfer Agency
Agreement between the Summit Investment Trust and
BISYS Fund Services Ohio, Inc., incorporated herein
by reference to Post-Effective Amendment No. 3 to
the Registrant's Registration Statement No.
33-76250, as Exhibit (9)(b)(2), as filed on
October 12, 1995;
(d) Section 7 of the Amended and Restated Fund Accounting
Agreement between the Summit Investment Trust and
BISYS Fund Services Ohio, Inc., incorporated herein
by reference to Post-Effective Amendment No. 3 to
the Registrant's Registration Statement No.
33-76250, as Exhibit (9)(c)(2), as filed on
October 12, 1995; and
(e) Sections 8.1 and 8.2 of the Custodian Agreement
between the Summit Investment Trust and The Fifth
Third Bank, incorporated herein by reference to the
Registrant's Initial Registration Statement No.
33-76250, Exhibit No. (8), as filed on April 7,
1994.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended, (the "1933 Act"), may be
permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the Registrant in
the successful defense of any action suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the 1933 Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Summit Capital Management ("FSCM") is a joint venture of
Carillon Advisers, Inc. ("Carillon"), an Ohio corporation, and
Freeman Holding Company, Inc. ("Freeman"), a Delaware
corporation. Information regarding the Representatives of FSCM
and their business, profession or employment of a substantial
nature during the last two years is set forth below. For
information as to the business, profession, vocation or
employment of a substantial nature of Carillon and Freeman,
reference is made to the respective Forms ADV of Carillon
and Freeman's wholly-owned subsidiary, Freeman Securities
Company, Inc. ("Freeman Securities") as amended, filed under
the Investment Advisers Act of 1940, as amended, which are
herein incorporated by reference.
<PAGE> 136
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE ADVISER DURING PAST TWO YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
James F. Smith Representative President and Chief Financial Officer, Freeman Securities.
30 Montgomery Street
Jersey City, NJ 07302
Gregory A. Sullivan Representative Senior Vice President, Freeman Securities.
30 Montgomery Street
Jersey City, NJ 07302
Steven R. Sutermeister Representative Vice President of Union Central Life and Carillon.
1876 Waycross Road
Cincinnati, OH 45240
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITER.
(a) BISYS Fund Services, Limited Partnership ("BISYS"),
the Distributor of shares of the Registrant, also
distributes the securities of the following open-end
management investment companies:
The Coventry Group;
The Riverfront Funds, Inc.;
The Victory Portfolios;
The Parkstone Group of Funds;
The B B & T Mutual Funds Group;
M S D & T Funds, Inc.;
The ARCH Fund, Inc.;
American Performance Funds;
The Sessions Group;
Pacific Capital Funds;
AmSouth Mutual Funds;
MarketWatch Funds;
M M A Praxis Mutual Funds;
Qualivest Funds;
Empire Builder Tax Free Bond Fund;
First Choice Funds Trust;
Fountain Square Funds;
Hirtle Callaghan Trust;
HSBC Family of Funds;
The Infinity Mutual Funds, Inc.;
Intrusts Funds;
Kent Funds;
Magna Funds;
Meyers Sheppard Investment Trust;
Minerva Funds;
The Parkstone Advantage Funds;
Pegasus Funds;
The Republic Funds Trust;
The Republic Advisors Funds Trust;
SBSF Funds, Inc. dba Key Mutual Funds; and
Sefton Funds.
(b) Officers and Directors of Principal Underwriter
Set forth below is information with respect to the
partners of BISYS as of September 2, 1997.
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND PRINCIPAL POSITION AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH UNDERWRITER REGISTRANT
------------------ -------------------- --------------
<S> <C> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Rd.
Columbus, OH 43219
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND PRINCIPAL POSITION AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH UNDERWRITER REGISTRANT
------------------ -------------------- --------------
<S> <C> <C> <C>
WC Subsidiary Corporation Sole Limited Partner None
3435 Stelzer Rd.
Columbus, OH 43219
</TABLE>
Each of these corporations is a subsidiary of The BISYS Group,
Inc., 150 Clove Road, Little Falls, NJ 07424.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act
of 1940, as amended [15 U.S.C. 80a-30(a)], and the Rules
promulgated thereunder, [17 CFR 270.31a-1 to 31a-3] are
maintained by the Registrant's investment adviser,
First Summit Capital Management, 1876 Waycross Road,
Cincinnati, OH 45240, except for those maintained by the
Registrant's Custodian, The Fifth Third Bank, 38 Fountain
Square Plaza, Cincinnati, OH 45263, the Registrant's
Administrator and Distributor, BISYS Fund Services Limited
Partnership or the Registrant's Transfer Agent and Fund
Accountant, BISYS Fund Services Ohio, Inc. BISYS Fund
Services Limited Partnership and BISYS Fund Services Ohio
Inc. are located at 3435 Stelzer Road, Columbus, OH 43219.
ITEM 31. MANAGEMENT SERVICES.
All management-related service contracts are discussed in Part
A or B of this Registration Statement.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to furnish each person
to whom a prospectus is delivered with a copy of the
Registrant's Statement of Additional Information and
the latest Annual Report to Shareholders, upon
request and without charge.
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Cincinnati, and State of Ohio on the 30th day
of September, 1997.
SUMMIT INVESTMENT TRUST
(The Registrant)
By: /s/ Steven R. Sutermeister
------------------------------------
Steven R. Sutermeister
Chairman of the Board and
Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
/s/ Steven R. Sutermeister Chairman of the September 30, 1997
- ----------------- Board and Trustee ------------------
Steven R. Sutermeister (Chief Executive Officer) (Date)
* Trustee September 30, 1997
- ----------------- ------------------
Theodore H. Emmerich (Date)
* Trustee September 30, 1997
- ----------------- ------------------
Frederick Moss (Date)
* Trustee September 30, 1997
- ----------------- ------------------
Dr. Bruce H. Olson (Date)
* Trustee September 30, 1997
- ----------------- ------------------
James F. Smith (Date)
/s/ Thresa B. Dewar Treasurer (Principal September 30, 1997
- ----------------- Financial and ------------------
Thresa B. Dewar Accounting Officer) (Date)
* By /s/ Scott A. Englehart September 30, 1997
------------------------- ------------------
Scott A. Englehart, pursuant to (Date)
Power-of-Attorney
<PAGE> 139
EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
FORM N-1A EDGAR
EXHIBIT NO. DESCRIPTION EXHIBIT NO.
- ----------- ----------- -----------
<S> <C> <C>
(1) (b) Amendment No. 2 to Agreement and Declaration of Trust
of Registrant Ex-99.B1.B
(6)(a)(2) Amended and Restated Distribution Agreement Ex-99.B6.A.6
(11) Consent of Coopers & Lybrand L.L.P. Ex-99.B11
(27) Financial Data Schedule of the
(a) Summit High Yield Shares class of the Summit High
Yield Fund Ex-99.B27.A
(b) Summit High Yield Institutional Service Shares class of
the Summit High Yield Fund Ex-99.B27.B
</TABLE>
<PAGE> 1
EXHIBIT 1(b)
SUMMIT INVESTMENT TRUST
AMENDMENT NO. 2 TO AGREEMENT AND DECLARATION OF TRUST
Pursuant to Article VII, Section 7.3 of the Agreement and Declaration
of Trust of Summit Investment Trust (the "Trust") and resolutions adopted by the
Board of Trustees of the Trust at a meeting held on June 18, 1997, the Agreement
and Declaration of Trust of the Trust dated March 8, 1994 was amended as set
forth below.
FIRST: Article IV, Section 4.1(b) of the Agreement and
Declaration of Trust was amended to read as follows:
(b) Classes of Shares. The Trustees shall have the authority,
without action or approval of the Shareholders, from time to time to
divide the Shares of any Sub-Trust into classes and to fix and
determine the different rights and preferences as between the Shares of
separate classes within a particular Sub-Trust as to purchase price,
right of redemption and the price, terms and manner of redemption,
dividends and other distributions and rights on liquidation, conversion
rights, voting rights and such other rights as the Trustees may
determine, and may designate the specific classes of shares of each
Sub-Trust. The fact that a Sub-Trust shall have initially been
established and designated without any specific establishment or
designation of classes (i.e., that all Shares of such Sub-Trust are
initially of a single class), or that a Sub-Trust shall have more than
one established and designated class, shall not limit the authority of
the Trustees to establish and designate separate classes, or one or
more further classes, of said Sub-Trust without approval of the holders
of the initial class thereof, or previously established and designated
class or classes thereof, provided that the Trustees shall have
determined that the establishment and designation of such further
separate classes would not adversely affect the rights of the holders
of the initial or previously established and designated class or
classes. All such determinations by the Trustees shall be conclusive
and binding for all purposes and upon all Shareholders. The division of
Shares into classes and the terms and conditions pursuant to which the
Shares of the classes will be issued, must be made in compliance with
the 1940 Act. The establishment and designation of any class of Shares
of a Sub-Trust shall be effective upon the execution by a majority of
the then Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of the Shares of
such class.
The Board of Trustees may, without shareholder approval, exchange
shares of one class of a Sub-Trust for shares of
<PAGE> 2
another class of such Sub-Trust, provided that (i) the Board has
determined that such exchange will not adversely affect the rights of
any shareholder of the exchanging class or the class into which the
exchanging class is moving; and (ii) the Board has determined that the
exchange will not change the proportionate beneficial interest that the
exchanging shareholder has in the Fund; and (iii) in advance of the
exchange, the exchanging shareholders are notified that such exchange
will take place. At any time that there are no Shares outstanding of a
particular class of a Sub-Trust previously established and designated,
the Trustees may by an instrument executed by a majority of their
number abolish that particular class of a Sub-Trust and the
establishment and designation thereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
11 day of July, 1997.
/s/ Craig C. Rudesill
------------------------
Name: Craig C. Rudesill
Title: Secretary
State of Ohio )
) ss:
County of Hamilton )
I HEREBY CERTIFY that on this 11 day of July, 1997, before me, the
subscriber, a Notary Public of the State of Ohio, personally appeared Craig C.
Rudesill, to me known to be the person described in and who executed the
foregoing instrument and acknowledged that he executed the same of his own free
act and deed.
WITNESS my hand and notarial seal this 11 day of July, 1997.
/s/ Constance S. Plants
- -----------------------
Notary Public
My Commission expires: NOTARIAL SEAL
STATE OF OHIO
CONSTANCE S. PLANTS
NOTARY PUBLIC, STATE OF OHIO
MY COMMISSION EXPIRES OCT. 1, 2001
-2-
<PAGE> 1
Exhibit 6(a)(2)
AMENDED AND RESTATED DISTRIBUTION AGREEMENT
AGREEMENT made this 27th day of June, 1994, as amended and restated on
September 27, 1995, between Summit Investment Trust (the "Trust"), a
Massachusetts business trust having its principal place of business at 3435
Stelzer Road, Columbus, Ohio, 43219, and BISYS Fund Services Limited
Partnership (formerly The Winsbury Company Limited Partnership)
("Distributor"), having its principal place of business at 3435 Stelzer Road,
Columbus, Ohio, 43219.
WHEREAS, the Trust is an open-end management investment company,
organized as a Massachusetts business trust and registered with the Securities
and Exchange Commission (the "Commission") under the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest of each of the investment portfolios of the Trust
identified in Schedule A hereto as such Schedule may be amended from time to
time (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds"); and
WHEREAS, pursuant to the Agreement and Declaration of Trust dated
March 8, 1994, each Fund may be divided into separate classes of units of
beneficial interests (such unites being referred to as "Shares") identified on
Schedule A hereto as such Schedule may be amended from time to time.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS DISTRIBUTOR.
1.1 Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Trust then in
effect under the Securities Act of 1933, as amended (the "Securities Act"). As
used in this Agreement, the term "registration statement" shall mean Parts A
(the prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term
"prospectus" shall mean each form of prospectus and Statement of Additional
Information used by the Funds for delivery to shareholders and prospective
shareholders after the effective dates of the above referenced registration
statements, together with any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit orders
for the sale of the Shares and will undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Trust
understands that Distributor is now and may in the future be the distributor of
the shares of several investment companies or series (together, "Companies")
including Companies having investment objectives similar to those of the Trust.
The Trust further understands
<PAGE> 2
that investors and potential investors in the Trust may invest in shares of
such other Companies. The Trust agrees that Distributor's duties to such
Companies shall not be deemed in conflict with its duties to the Trust under
this paragraph 1.2.
Distributor shall, at its own expense, finance appropriate activities
which it deems reasonable which are primarily intended to result in the sale of
the Shares, including, but not limited to, advertising, the compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current shareholders, and the printing and mailing
of sales literature.
1.3 In its capacity as distributor of the Shares, all activities of
Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under
the Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Trust.
1.5 Distributor will transmit any orders received by it for purchase
or redemption of the Shares to the transfer agent and custodian for the Funds.
1.6 Whenever in their judgement such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8 The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification
of the Shares for sale in such states as Distributor may designate.
1.9 The Trust shall furnish from time to time, for use in connection
with the sale of the Shares, such information with respect to the Funds and the
Shares as Distributor may reasonably request; and the Trust warrants that the
statements contained in any such information shall fairly show or represent
what they purport to show or represent. The Trust shall also furnish
Distributor upon request with: (a) unaudited semi-annual statements of the
Funds' books and accounts prepared by the Trust, (b) a monthly itemized list of
the securities in the Funds, (c) monthly balance sheets as soon as practicable
after the end of each month, and (d) from time to time such additional
information regarding the financial condition of the Funds as Distributor may
reasonably request.
2
<PAGE> 3
1.10 The Trust represents to Distributor that, with respect to the
Shares, all registration statements and prospectuses filed by the Trust with
the Commission under the Securities Act have been carefully prepared in
conformity with requirements of said Act and rules and regulations of the
Commission thereunder. The registration statement and prospectus contain all
statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission and all statements of fact contained
in any such registration statement and prospectus are true and correct.
Furthermore, neither any registration statement nor any prospectus includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
to a purchaser of the Shares. The Trust may, but shall not be obligated to,
propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus as, in the light
of future developments, may, in the opinion of the Trust's counsel, be
necessary or advisable. If the Trust shall not propose such amendment or
amendments and/or supplement or supplements within fifteen days after receipts
by the Trust of a written request from Distributor to do so, Distributor may,
at its option, terminate this Agreement. The Trust shall not file any
amendment to any registration statement or supplement to any prospectus without
giving Distributor reasonable notice thereof in advance; provided, however,
that nothing contained in this Agreement shall in any way limit the Trust's
right to file at any time such amendments to any registration statement and/or
supplements to any prospectus, of whatever character, as the Trust may deem
advisable, such right being in all respect absolutes and unconditional.
1.11 The Trust authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Trust agrees to indemnify, defend and hold Distributor, its
several partners and employees, and any person who controls Distributor within
the meaning of Section 15 of the Securities Act free and harmless from and
against any and all liabilities and expenses (including the cost of
investigating or defending claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Distributor, its partners and
employees, or any such controlling person, may incur under the Securities Act
or under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be state in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading. Provided, however, that the
Trust's agreement to indemnify Distributor, its partners or employees, and any
such controlling person shall not be deemed to cover any liabilities or
expenses arising out of any statements or representations as are contained in
any prospectus and in such financial and other statements as are furnished in
writing to the Trust by Distributor and used in the answers to the registration
statement or in the corresponding statements made in the prospectus, or arising
out of or based upon any omission or alleged omission to state a material fact
in connection with the giving of such information required to be stated in such
answers or necessary to make the answers not misleading; and further provided
that the Trust's agreement to indemnify Distributor and the Trust's
representations and warranties hereinbefore set forth in paragraph 1.10 shall
not be deemed to cover any liability to the Trust or its shareholders to which
Distributor would otherwise be subject by reason of willful misfeasance, bad
3
<PAGE> 4
faith or gross negligence in the performance of its duties, or by reason of
Distributor's reckless disregard of its obligations and duties under this
Agreement. The Trust's agreement to indemnify Distributor, its partners and
employees and any such controlling person, as aforesaid, is expressly
conditioned upon the Trust being notified of any action brought against
Distributor, its partners or employees, or any such controlling person, such
notification to be given by letter or by telegram addressed to the Trust at its
principal office in Columbus, Ohio and sent to the Trust by the person against
whom such action is brought, within 10 days after the summons or other first
legal process shall have been served. The failure to so notify the Trust of any
such action shall not relieve the Trust from any liability which the Trust may
have to the person against whom such action is brought by reason of any such
untrue, or allegedly untrue, statement or omission, or alleged omission,
otherwise than on account of the Trust's indemnity agreement contained in this
paragraph 1.11. The Trust will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or lability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Trust and
approved by Distributor, which approval shall not be unreasonably withheld. In
the event the Trust elects to assume the defense of any such suit and retain
counsel of good standing approved by Distributor, the defendant or defendants
in such suit shall bear the fees and expenses of any additional counsel
retained by any of them; but in case the Trust does not elect to assume the
defense of any such suit, or in case Distributor reasonably does not approve of
counsel chosen by the Trust, the Trust will reimburse Distributor, its partners
and employees, or the controlling person or persons named as defendant or
defendants in such suit, for the fees and expenses of any counsel retained by
Distributor or them. The Trust's indemnification agreement contained in this
paragraph 1.11 and the Trust's representations and warranties in this Agreement
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of Distributor, its partners and employees,
or any controlling person, and shall survive the delivery of any Shares.
The indemnity provision will insure exclusively to Distributor's
benefit, to the benefit of its several partners and employees, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Trust agrees promptly to notify Distributor of the commencement
of any litigation or proceedings against the Trust or any of its officers or
Trustees in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees and any person who controls the Trust within the
meaning of Section 15 of the Securities Act free and harmless from and against
any all liabilities and expenses (including the costs of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Trust, its officers or Trustees or any such
controlling person, may incur under the Securities Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by
the Trust, its officers or Trustees or such controlling person resulting from
such claims or demands, shall arise out of or be based upon any untrue, or
alleged untrue, statement of a material fact contained in information furnished
in writing by Distributor to the Trust and used in the answers to any of the
items of the registration statement or in the corresponding statements made in
the prospectus, or shall arise out of or be based upon any omission, or alleged
omission, to state a material fact in connection with such information
furnished in writing by
4
<PAGE> 5
Distributor to the Trust required to be stated in such answers or necessary to
make such information not misleading. Distributor's agreement to indemnify the
Trust, its officers and Trustees, and any such controlling person, as
aforesaid, is expressly conditioned upon Distributor being notified of any
action brought against the Trust, its officers or Trustees, or any such
controlling person, such notification to be given by letter or telegram
addressed to Distributor at its principal office in Columbus, Ohio, and sent to
Distributor by the person against whom such action is brought, within 10 days
after the summons or other first legal process shall have been served.
Distributor shall have the right of first control of the defense of such
action, with counsel of its own choosing, satisfactory to the Trust, if such
action is based solely upon such alleged misstatement or omission on
Distributor's part, and in any other event the Trust, its officers or Trustees
or such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action. The failure to so
notify Distributor of any such action shall not relieve Distributor from any
liability which Distributor may have to the Trust, its officers or Trustees, or
to such controlling person by reason of any such untrue or alleged untrue
statement, or omission or alleged omission, otherwise than on account of
Distributor's indemnity agreement contained in this paragraph 1.12.
1.13 No Shares shall be offered by either Distributor or the Trust
under any of the provisions of this Agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act or if and so long as a current prospectus as required by Section
10(b)(2) of said Act is not on file with the commission; provided, however,
that nothing contained in this paragraph 1.13 shall in any way restrict or have
an application to or bearing upon the Trust's obligation to repurchase Shares
from any Shareholder in accordance with the provisions of the Trust's
prospectus, Agreement and Declaration of Trust, or Bylaws.
1.14 The Trust agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Commission for amendments to the
registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Commission of any stops order
suspending the effectiveness of the registration statement or
prospectus then in effect or the initiation by service of process
on the Trust of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement of a
material fact made in the registration statement or prospectus
then in effect or which requires the making of a change in such
registration statement or prospectus in order to make the
statements therein not misleading; and
(d) of all action of the Commission with respect to any amendment to
any registration statement or prospectus which may from time to
time be filed with the Commission.
5
<PAGE> 6
For purposes of this section, informal requests by or acts of the
Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and its prior, present
or potential shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except, after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where
Distributor may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
1.16 This Agreement shall be governed by the laws of the Commonwealth
of Massachusetts.
2. FEES.
2.1 The Distributor shall receive from the Funds and classes
identified on Schedule B hereto (the "Distribution Plan Funds") a distribution
fee at the rate and upon the terms and conditions set forth in the Distribution
and Shareholder Services Plans attached as Schedules C-1 and C-2 hereto, and as
amended from time to time. The distribution fee shall be accrued daily and
shall be paid on the first business day of each month, or at such time(s) as
the Distributor shall reasonably request.
3. SALE AND PAYMENT
One or more classes of Shares may be subject to a sales load and
may be subject to the imposition of a distribution fee pursuant to the
Distribution and Service Plans referred to above. To the extent that Shares of
a Fund are sold at an offering price which includes a sales load or that Shares
of one or more classes of a Fund are sold at such an offering price, such
Shares shall hereinafter be referred to collectively as "Load Shares" and
individually as a "Load Share." A Fund that contains Load Shares shall
hereinafter be referred to collectively as "Load Funds" and individually as a
"Load Fund." Under this Agreement, the following provisions shall apply with
respect to the sale of, and payment for, Load Shares of the Load Funds
identified in Schedule D attached hereto.
3.1 Distributor shall have the right, as principal, to purchase Load
Shares at their net asset value and to sell such Load Shares to the public
against orders therefor at the applicable public offering price, as defined in
Section 4 hereof. Distributor shall also have the right, as principal, to sell
Load Shares to dealers against orders therefor at the public offering price
less a concession determined by Distributor, which concession shall not exceed
the amount of the sales charge or underwriting discount, if any, referred to in
Section 4 below.
6
<PAGE> 7
3.2 Prior to the time of delivery of any Load Shares by a Load Fund
to, or on the order of, Distributor, Distributor shall pay or cause to be paid
to the Load Fund or to its order an amount in Boston or New York clearing house
funds equal to the applicable net asset value of such Shares. The Distributor
may retain so much of any sales charge or underwriting discount as is not
allowed by the Distributor as a concession to dealers.
4. PUBLIC OFFERING PRICE.
The public offering price of a Load Share shall be the net asset
value of such Load Share, plus any applicable sales charge, all as set forth in
the current prospectus of the Load Fund. The net asset value of Shares shall be
determined in accordance with the provisions of the Agreement and Declaration
of Trust and Bylaws of the Trust and the then current prospectus of the Load
Fund.
5. ISSUANCE OF SHARES.
The Trust reserves the right to issue, transfer or sell Load Shares
at net asset value, (a) in connection with the merger or consolidation of the
Trust or the Load Fund(s) with any other investment company or the acquisition
by the Trust or the Load Fund(s) of all or substantially all of the assets or
of the outstanding Shares of any other investment company; (b) in connection
with a pro rata distribution directly to the holders of Shares in the nature of
a stock dividend or split; (c) upon the exercise of subscription rights granted
to the holders of Shares on a pro rata basis; (d) in connection with the
issuance of Load Shares pursuant to any exchange and reinvestment privileges
described in any then current prospectus of the Load Fund; and (e) otherwise in
accordance with any then current prospectus of the Load Fund.
6. TERM, DURATION AND TERMINATION.
This Agreement shall become effective with respect to each Fund
listed on Schedule A hereof as of the date first written above (or, if a
particular Fund is not in existence on the date, on the date an amendment to
Schedule A to this Agreement relating to that Fund is executed) and, unless
sooner terminated as provided herein, shall continue until May 31, 1995.
Thereafter, if not terminated, this Agreement shall continue with respect to a
particular Fund automatically for successive one-year terms, provided that such
continuance is specifically approved at least annually by (a) by the vote of a
majority of those members of the Trust's Board of Trustees who are not parties
to this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval and (b) by the
Trustees or the vote of a majority of the outstanding voting securities of such
Fund. This Agreement is terminable without penalty, on not less than sixty-days
prior written notice, by the Trustees, by vote of a majority of the outstanding
voting securities of the Trust or by the Distributor. This Agreement will also
terminate automatically in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities",
"interested persons" and "assignment" shall have the same meanings as ascribed
to such terms in the 1940 Act.)
7
<PAGE> 8
7. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
The names "Summit Investment Trust" and "Trustees of Summit
Investment Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting form time to time under an
Agreement and Declaration of Trust dated as of March 8, 1994, to which
reference is hereby made and a copy of which is on file at the office of the
Secretary of the Commonwealth of Massachusetts and elsewhere as required by
law, and to any and all amendments thereto so filed or hereafter filed. The
obligations of "Summit Investment Trust" entered into in the name or on behalf
thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders or representatives of the Trust personally, but bind
only the assets of the Trust, and all persons dealing with any series of shares
of the Trust must look solely to the assets of the Trust belonging to such
series for the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
written above.
SUMMIT INVESTMENT TRUST BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By: /s/ R. Christopher Meng By: /s/ Stephen G. Mintos
------------------------- ----------------------------
R. Christopher Meng Stephen G. Mintos
Title: PRESIDENT Title: EXECUTIVE VICE PRESIDENT
---------------------- -------------------------
Date: Date:
---------------------- -------------------------
8
<PAGE> 9
Dated: As of June 27, 1994, as amended
and restated on September 27, 1995
Schedule A
to the
Amended and Restated Distribution Agreement
between Summit Investment Trust and
BISYS Fund Services Limited Partnership
NAME OF FUND NAME OF CLASSES
- ---------------------------- ---------------------------------
Summit High Yield Fund Summit High Yield Shares Class
Summit High Yield Institutional
Service Shares Class
SUMMIT INVESTMENT TRUST
By: /s/ R. CHRISTOPHER MENG
----------------------------
Name: R. CHRISTOPHER MENG
--------------------------
Title: PRESIDENT
-------------------------
BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.
General Partner,
By: /s/ STEPHEN G. MINTOS
----------------------------
Name: STEPHEN G. MINTOS
--------------------------
Title: EXECUTIVE VICE PRESIDENT
-------------------------
A-1
<PAGE> 10
Dated: As of June 27, 1994, as amended
and restated on September 27, 1995
Schedule B
to the
Amended and Restated Distribution Agreement
between Summit Investment Trust and
BISYS Fund Services Limited Partnership
NAME OF FUND
- ------------------------------------
Summit High Yield Fund
Summit High Yield Shares Class
Summit High Yield Institutional
Service Shares Class
SUMMIT INVESTMENT TRUST
By: /s/ R. CHRISTOPHER MENG
----------------------------
Name: R. CHRISTOPHER MENG
--------------------------
Title: PRESIDENT
-------------------------
BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.
General Partner,
By: /s/ STEPHEN G. MINTOS
----------------------------
Name: STEPHEN G. MINTOS
--------------------------
Title: EXECUTIVE VICE PRESIDENT
-------------------------
B-1
<PAGE> 11
Dated: As of June 27, 1994, as amended
and restated on September 27, 1995
Schedule C-1
to the Amended and Restate Distribution Agreement between
Summit Investment Trust and BISYS Fund Services Limited Partnership
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
This Plan (the "Plan") constitutes the distribution and shareholder service
plan of Summit Investment Trust, a Massachusetts business trust (the "Trust"),
adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). The Plan relates to those investment portfolios ("Funds")
identified on Schedule B of the Trust's Distribution Agreement, as amended from
time to time (the "Distribution Plan Funds"), and to the Summit High Yield
Shares Class.
SECTION 1. Subject to the limitations on the payment of asset-based sales
charges set forth in Article III, section 26 of the National Association of
Securities Dealers' Rules of Fair Practice, each Distribution Plan Fund shall
pay to BISYS Fund Services Limited Partnership, the distributor (the
"Distributor") of the Trust's units of beneficial interest, a fee (the
"Distribution Fee") in an amount not to exceed on an annual basis .25% of the
average daily net asset value of the shares of the summit High Yield Shares
Class (the "Class") for: (a) payments the Distributor makes to banks and other
institutions and broker/dealers (a "Participating Organization") for
distribution assistance and/or shareholder service on behalf of the Class
pursuant to an agreement between the Distributor and the Participating
Organization; or (b) reimbursement of expenses incurred by a Participating
Organization pursuant to an agreement in connection with distribution
assistance and/or shareholder service including, but not limited to, the
reimbursement of expenses relating to printing and distributing prospectuses to
persons other than shareholders of a Distribution Plan Fund, printing and
distributing advertising and sales literature and reports to shareholders used
in connection with the sale of Shares, and personnel and communication
equipment used in servicing shareholder accounts and prospective shareholder
inquiries. For purposes of the Plan, a Participating Organization may include
the Distributor or any of its affiliates or subsidiaries.
SECTION 2. The Distribution Fee shall be paid by the Distribution Plan Funds to
the Distributor only to compensate or to reimburse the Distributor for payments
or expenses incurred pursuant to Section 1.
SECTION 3. The Plan shall not take effect with respect to a Distribution Plan
Fund or the Class until it has been approved by a vote of at least a majority
of the outstanding voting securities of such Fund or Class.
C-1
<PAGE> 12
SECTION 4. The Plan shall not take effect until it has been approved, together
with any related agreements, by votes of the majority (or whatever greater
percentage may, from time to time, be required by Section 12(b) of the 1940 Act
of the rules and regulations thereunder) of both (a) the Trustees of the Trust,
and (b) the Independent Trustees of the Trust, cast in person at a meeting
called for the purpose of voting on the Plan or such agreements.
SECTION 5. The Plan shall continue in effect for a period of more than one year
after the date of its execution or adoption only so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Section 4.
SECTION 6. Any person authorized to direct the disposition of money paid or
payable by the Distribution Plan Funds pursuant to the Plan, or any related
agreement, shall provide to the Trustees of the Trust, and the Trustees shall
review, at least quarterly, a written report of the amounts so expended and the
purposes of which such expenditures were made.
SECTION 7. The Plan may be terminated at any time by vote of a majority of the
Independent Trustees, or by vote of a majority of the Class's outstanding
voting securities.
SECTION 8. All agreements with any person relating to implementation of the
Plan shall be in writing, and any agreement related to the Plan shall provide:
(a) That such agreement may be terminated at any time, without payment
of any penalty, by vote of a majority of the Independent Trustees
or by vote of a majority of the outstanding voting securities of
the Class, on not more than 60 days' written notice to any other
party to the agreement; and
(b) That such agreement shall terminate automatically in the event of
its assignment.
SECTION 9. The Plan may not be amended to increase materially the amount of
distribution expenses permitted pursuant to Section 1 hereof without approval
in the manner provided in Section 3 hereof, and all material amendments to the
Plan shall be approved in the manner provided for approval of the Plan in
Section 4.
SECTION 10. As used in the Plan, (a) the term "Independent Trustees" shall mean
those Trustees of the Trust who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plan or
any agreements related to it, and (b) the terms "assignment," "interested
person" and "majority of the outstanding voting securities" shall have the
respective meanings specified in the 1940 Act and the rules and regulations
thereunder, subject to such exemptions as may be granted by the Securities and
Exchange Commission.
C-2
<PAGE> 13
Dated: As of September 27, 1995
Schedule C-2
Amended and Restate Distribution Agreement
between Summit Investment Trust and
BISYS Fund Services Limited Partnership
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
This Plan (the "Plan") constitutes the distribution and shareholder service
plan of Summit Investment Trust, a Massachusetts business trust (the "Trust"),
adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). The Plan relates to those investment portfolios ("Funds")
identified on Schedule B of the Trust's Distribution Agreement, as amended from
time to time (the "Distribution Plan Funds"), and to the Summit High Yield
Institutional Service Shares Class.
SECTION 1. Subject to the limitations on the payment of asset-based sales
charges set forth in Article III, section 26 of the National Association of
Securities Dealers' Rules of Fair Practice, each Distribution Plan Fund shall
pay to BISYS Fund Services Limited Partnership, the distributor (the
"Distributor") of the Trust's units of beneficial interest, a fee (the
"Distribution Fee") in an amount not to exceed on an annual basis .25% of the
average daily net asset value of the shares of the summit High Yield Shares
Class (the "Class") for: (a) payments the Distributor makes to banks and other
institutions and broker/dealers (a "Participating Organization") for
distribution assistance and/or shareholder service on behalf of the Class
pursuant to an agreement between the Distributor and the Participating
Organization; or (b) reimbursement of expenses incurred by a Participating
Organization pursuant to an agreement in connection with distribution
assistance and/or shareholder service including, but not limited to, the
reimbursement of expenses relating to printing and distributing prospectuses to
persons other than shareholders of a Distribution Plan Fund, printing and
distributing advertising and sales literature and reports to shareholders used
in connection with the sale of Shares, and personnel and communication
equipment used in servicing shareholder accounts and prospective shareholder
inquiries. For purposes of the Plan, a Participating Organization may include
the Distributor or any of its affiliates or subsidiaries.
SECTION 2. The Distribution Fee shall be paid by the Distribution Plan Funds to
the Distributor only to compensate or to reimburse the Distributor for payments
or expenses incurred pursuant to Section 1.
SECTION 3. The Plan shall not take effect with respect to a Distribution Plan
Fund or the Class until it has been approved by a vote of at least a majority
of the outstanding voting securities of such Fund or Class.
C-3
<PAGE> 14
SECTION 4. The Plan shall not take effect until it has been approved, together
with any related agreements, by votes of the majority (or whatever greater
percentage may, from time to time, be required by Section 12(b) of the 1940 Act
of the rules and regulations thereunder) of both (a) the Trustees of the Trust,
and (b) the Independent Trustees of the Trust, cast in person at a meeting
called for the purpose of voting on the Plan or such agreements.
SECTION 5. The Plan shall continue in effect for a period of more than one year
after the date of its execution or adoption only so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Section 4.
SECTION 6. Any person authorized to direct the disposition of money paid or
payable by the Distribution Plan Funds pursuant to the Plan, or any related
agreement, shall provide to the Trustees of the Trust, and the Trustees shall
review, at least quarterly, a written report of the amounts so expended and the
purposes of which such expenditures were made.
SECTION 7. The Plan may be terminated at any time by vote of a majority of the
Independent Trustees, or by vote of a majority of the Class's outstanding
voting securities.
SECTION 8. All agreements with any person relating to implementation of the
Plan shall be in writing, and any agreement related to the Plan shall provide:
(a) That such agreement may be terminated at any time, without payment
of any penalty, by vote of a majority of the Independent Trustees
or by vote of a majority of the outstanding voting securities of
the Class, on not more than 60 days' written notice to any other
party to the agreement; and
(b) That such agreement shall terminate automatically in the event of
its assignment.
SECTION 9. The Plan may not be amended to increase materially the amount of
distribution expenses permitted pursuant to Section 1 hereof without approval
in the manner provided in Section 3 hereof, and all material amendments to the
Plan shall be approved in the manner provided for approval of the Plan in
Section 4.
SECTION 10. As used in the Plan, (a) the term "Independent Trustees" shall mean
those Trustees of the Trust who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plan or
any agreements related to it, and (b) the terms "assignment," "interested
person" and "majority of the outstanding voting securities" shall have the
respective meanings specified in the 1940 Act and the rules and regulations
thereunder, subject to such exemptions as may be granted by the Securities and
Exchange Commission.
C-4
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 6 to the Registration
Statement on Form N-1A (File No. 33-76250) of Summit Investment Trust of our
report dated July 21, 1997 on our audit of the financial statements of the
Summit High Yield Fund as of May 31, 1997 and for the periods then ended
referred to in our report included in the Statement of Additional Information.
We also consent to the reference to our firm under the captions "Independent
Accountants" and "Financial Highlights" in the Prospectus and Statement of
Additional Information of Summit Investment Trust.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000919989
<NAME> SUMMIT HIGH YIELD FUND
<SERIES>
<NUMBER> 011
<NAME> SUMMIT HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 36,205,704
<INVESTMENTS-AT-VALUE> 38,099,470
<RECEIVABLES> 1,874,107
<ASSETS-OTHER> 20,968
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,994,545
<PAYABLE-FOR-SECURITIES> 1,000,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50,816
<TOTAL-LIABILITIES> 1,050,816
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35,254,495
<SHARES-COMMON-STOCK> 3,064,624<F1>
<SHARES-COMMON-PRIOR> 2,591,388<F1>
<ACCUMULATED-NII-CURRENT> 48,225
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,747,243
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,893,766
<NET-ASSETS> 38,943,729
<DIVIDEND-INCOME> 35,148
<INTEREST-INCOME> 3,486,114
<OTHER-INCOME> 0
<EXPENSES-NET> 541,830
<NET-INVESTMENT-INCOME> 2,979,432
<REALIZED-GAINS-CURRENT> 2,908,478
<APPREC-INCREASE-CURRENT> (160,322)
<NET-CHANGE-FROM-OPS> 5,727,588
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,108,041<F1>
<DISTRIBUTIONS-OF-GAINS> 1,369,117<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 379,660<F1>
<NUMBER-OF-SHARES-REDEEMED> 302,538<F1>
<SHARES-REINVESTED> 396,115<F1>
<NET-CHANGE-IN-ASSETS> 8,543,183
<ACCUMULATED-NII-PRIOR> 7,287
<ACCUMULATED-GAINS-PRIOR> 755,490
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 367,253
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 790,981
<AVERAGE-NET-ASSETS> 31,378,042<F1>
<PER-SHARE-NAV-BEGIN> 11.05<F1>
<PER-SHARE-NII> 0.99<F1>
<PER-SHARE-GAIN-APPREC> 0.90<F1>
<PER-SHARE-DIVIDEND> 1.12<F1>
<PER-SHARE-DISTRIBUTIONS> 0.50<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 11.32<F1>
<EXPENSE-RATIO> 1.60<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>HIGH YIELD SHARES
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000919989
<NAME> SUMMIT HIGH YIELD FUND
<SERIES>
<NUMBER> 012
<NAME> SUMMIT HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 36205704
<INVESTMENTS-AT-VALUE> 38099470
<RECEIVABLES> 1874107
<ASSETS-OTHER> 20968
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39994545
<PAYABLE-FOR-SECURITIES> 1000000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50816
<TOTAL-LIABILITIES> 1050816
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35254495
<SHARES-COMMON-STOCK> 374948<F1>
<SHARES-COMMON-PRIOR> 160746<F1>
<ACCUMULATED-NII-CURRENT> 48225
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1747243
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1893766
<NET-ASSETS> 38943729
<DIVIDEND-INCOME> 35148
<INTEREST-INCOME> 3486114
<OTHER-INCOME> 0
<EXPENSES-NET> 541830
<NET-INVESTMENT-INCOME> 2979432
<REALIZED-GAINS-CURRENT> 2908478
<APPREC-INCREASE-CURRENT> (160322)
<NET-CHANGE-FROM-OPS> 5727588
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 280720<F1>
<DISTRIBUTIONS-OF-GAINS> 100079<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 353730<F1>
<NUMBER-OF-SHARES-REDEEMED> 169873<F1>
<SHARES-REINVESTED> 30344<F1>
<NET-CHANGE-IN-ASSETS> 8543183
<ACCUMULATED-NII-PRIOR> 7287
<ACCUMULATED-GAINS-PRIOR> 755490
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 367253
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 790981
<AVERAGE-NET-ASSETS> 2666132<F1>
<PER-SHARE-NAV-BEGIN> 11.03<F1>
<PER-SHARE-NII> 1.04<F1>
<PER-SHARE-GAIN-APPREC> 0.87<F1>
<PER-SHARE-DIVIDEND> 1.14<F1>
<PER-SHARE-DISTRIBUTIONS> 0.50<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 11.30<F1>
<EXPENSE-RATIO> 1.43<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>INSTITUTIONAL SERVICE SHARES
</FN>
</TABLE>
