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PROSPECTUS
SUMMIT EMERGING MARKETS BOND 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 EMERGING MARKETS BOND
FUND (the "Fund"), a non-diversified investment portfolio of the Trust.
FACTS AT A GLANCE
INVESTMENT OBJECTIVE:
The Fund's investment objective is to provide high income and capital
appreciation. As with any mutual fund, there is no assurance that the Fund
will achieve its objective.
STRATEGY:
The Fund will invest primarily in government and corporate debt securities
of emerging market nations, and will be actively managed to take advantage
of relative values of various issuers. The Fund's investment adviser will
apply a market risk analysis that evaluates factors such as liquidity,
volatility, tax implications, interest rate sensitivity, counterparty risks
and technical market considerations.
RISKS OF THE FUND'S PORTFOLIO SECURITIES:
The Fund may invest up to 100% of its assets in emerging market debt
securities that entail greater risks, including currency and default risks,
than U.S. debt securities. Since emerging market nations are less developed
and their debt securities carry greater risks, such securities are typically
rated below investment grade. Such securities rated below investment grade
are normally referred to as "junk bonds" in the U.S. The Fund may invest in
the lowest-rated debt securities, including securities in default. While
these investments may offer significantly greater total returns than
higher-quality debt securities of developed foreign markets, they entail a
higher degree of risk and are subject to sharp price declines. Investors
should carefully consider these risks before investing. See "Summary of Risk
Factors," "Fund and Market Characteristics/Risk Factors" and "Investment
Policies, Practices and Risks" 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 a high level of income and capital
appreciation 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.
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, distribution and operating expenses and fees. See
"Transaction Costs and Fund Expenses."
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").
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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. WHEN SOLD, FUND
SHARES MAY BE WORTH MORE OR LESS THAN WHEN PURCHASED. AN INVESTMENT IN THE FUND
INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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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
December 31, 1997, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference in this prospectus. To obtain a free
copy of the SAI, write the Trust at the above address or call 1-800-272-3442.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is December 31, 1997.
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1. ABOUT THE SUMMIT EMERGING MARKETS BOND 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 Charge Imposed on Purchases (as a percentage of
offering price)................................................. 4.50%(1)
Maximum Sales Charge Imposed on Reinvested Dividends.............. None
Maximum Deferred Sales Charge..................................... None(2)
Redemption Fees................................................... None
Exchange Fees..................................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of projected average daily net assets)
<TABLE>
<S> <C>
Management Fees................................................... 0.75%
12b-1 Fees........................................................ 0.25%
Other Administrative and Servicing Expenses (net of waivers or
reimbursements)................................................. 1.00%
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Total Fund Operating Expenses..................................... 2.00%(3)
</TABLE>
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(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) The Adviser has voluntarily agreed to waive its advisory fee and/or to
reimburse the Fund, if necessary, if the advisory fee would cause the Total
Fund Operating Expenses to exceed 2.00%. Absent this voluntary agreement,
Total Fund Operating Expenses are estimated to be 2.04%.
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 or redeeming
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.
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"Other Administrative and Servicing Expenses" is based on estimated amounts for
the current fiscal 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
------ -------
<S> <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:... $ 64 $ 105
------ -------
</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;
-- 12B-1 FEES: a 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."
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SUMMARY OF RISK FACTORS
Because of its investment policies, the Fund may not be suitable or
appropriate for all investors. The Fund is designed for intermediate to
long-term investors who can accept the risks entailed in seeking a high level of
income and capital appreciation available from investments in intermediate to
long-term emerging market debt securities that may be considered to be 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.
RISKS OF INVESTING IN EMERGING MARKET NATIONS
Investing in emerging market debt securities involves certain
considerations not typically associated with investing in U.S. securities,
including (1) restrictions on foreign investment and on repatriation of capital
invested in emerging market nations, (2) currency fluctuations, (3) the cost of
converting foreign currency into U.S. dollars, (4) potential price volatility
and lesser liquidity of debt securities traded on emerging market nations'
securities markets or lack of a secondary trading market for such securities and
(5) political, social and economic risks, including the risk of nationalization
or expropriation of assets and the risk of war. In addition, accounting,
auditing, financial and other reporting standards in emerging market nations are
not equivalent to U.S. standards and therefore, disclosure of certain material
information may not be made and less information may be available to investors
investing in emerging market nations than in the United States. There is also
generally less governmental regulation and supervision of the securities
industry in emerging market nations than in the United States. Securities
trading practices may offer less protection to investors. Moreover, it may be
more difficult to obtain a judgment in a court outside the United States.
RISKS OF INVESTING IN HIGH YIELD, HIGH RISK SECURITIES
While investments in high yield, lower-rated securities offer the
opportunity for substantial income and capital appreciation, there are
significant risks associated with such investments, including:
GREATER CREDIT RISK. Companies and governments issuing lower-rated
securities are not as strong financially as those with higher credit ratings and
their securities are often viewed as speculative investments. Such issuers are
more vulnerable to real or perceived business setbacks and to changes in the
economy, such as a recession, that might impair their ability to make timely
interest and principal payments. Certain less developed governments have in the
past defaulted on payment of interest and principal on debt they have issued. As
a result, the Fund's portfolio manager relies heavily on proprietary research by
the Adviser when selecting the Fund's investments.
REDUCED MARKET LIQUIDITY. High yielding emerging market nation debt
securities are generally less "liquid" than higher-quality securities issued by
companies and governments in developed countries. Consequently, large purchases
or sales of certain high yield, emerging market debt issues may cause
significant changes in their prices. Because many of these securities do not
trade frequently, when they do trade, their price may be
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substantially higher or lower than had been expected. A lack of liquidity also
means that the Adviser's judgment may play a bigger role when seeking to
establish the fair value of the securities.
OTHER FACTORS. The major factor influencing prices of high-quality
securities is changes in interest rate levels; but this is only one of several
factors affecting prices of lower-quality securities. Because the credit quality
of the issuer is lower, such securities are more sensitive to developments
affecting the issuer's underlying fundamentals, such as changes in financial
condition, or a given country's economy in general. In addition, the entire
securities market in an emerging market nation can experience sudden and sharp
price swings due to a variety of factors, including changes in economic
forecasts, stock market activity, large or sustained sales by such investors, a
high-profile default, a political upheaval of some kind, or merely a change in
the market's psychology. This type of volatility is usually associated more with
stocks than securities, but investors in lower-quality securities should also
anticipate it.
Since mutual funds can be a major source of demand in certain markets,
substantial cash flows into and out of these funds can affect high yield
securities prices. If, for example, a significant number of funds were to sell
securities to meet shareholder redemptions, both securities prices and a fund's
share price could fall more than underlying fundamentals might justify.
OTHER RISKS
The Fund is considered to be "non-diversified" for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund may invest
in hybrid instruments and derivative securities, such as mortgage-backed and
asset-backed securities and options and futures contracts. For risks relating to
investing in futures contracts and options, and risks of other investment
policies, see "Fund and Market Characteristics/Risk Factors" and "Investment
Policies, Practices and Risks" in this prospectus, and the SAI.
FUND AND MARKET CHARACTERISTICS/RISK FACTORS
The Fund's investment objective is to provide high income and capital
appreciation. The Fund invests at least 65% of its total assets in the
government and corporate debt securities of emerging market nations. In
selecting securities for the Fund's portfolio, the Adviser will apply a market
risk analysis that evaluates factors such as liquidity, volatility, tax
implications, interest rate sensitivity, counterparty risks and technical market
considerations.
There are no maturity restrictions on the Fund. Its weighted average
maturity normally ranges between 5 and 10 years, but may vary substantially
because of market conditions. Under normal circumstances, most of the Fund's
total assets are expected to be denominated in U.S. dollars, and the Fund will
not usually hedge foreign currency holdings with respect to the U.S. dollar.
Currency fluctuations may have a significant impact on the value of the Fund's
holdings.
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WHAT OTHER KINDS OF SECURITIES CAN THE FUND INVEST IN?
The Fund will normally invest a significant portion (and may invest all) of
its assets in high-risk, non-investment-grade debt securities in pursuit of
maximum income and capital appreciation. The Fund may also invest in a variety
of fixed income securities, hybrid instruments, private placements, loan
participations and assignments, convertible bonds and depositary receipts. See
"Types of Portfolio Securities."
HOW DOES CURRENCY FLUCTUATION AFFECT THE PERFORMANCE OF AN EMERGING MARKETS BOND
FUND?
Fluctuating currencies can have either a positive or negative impact on all
international and global funds, such as the Fund, regardless of the credit
quality of their holdings. U.S. shareholders benefit when foreign currencies
appreciate against the U.S. dollar and are injured when foreign currencies lose
value against the U.S. dollar.
The Adviser may manage currency risk. The Fund has slightly more risk
because of the greater potential for political and economic setbacks in emerging
market nations. Securities issued by these countries are often denominated in
U.S. dollars to improve their marketability, but this does not protect them from
substantial price declines in the face of political and/or economic turmoil.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUND?
The risks are the usual ones associated with investments in U.S. or foreign
fixed income securities, including:
INTEREST RATE OR MARKET RISK. The decline in securities prices that
accompanies a rise in the overall level of interest rates. (Securities prices
and interest rates move in opposite directions.) Because prices of long-term
securities are more sensitive to interest rate changes than prices of short-term
securities, the Fund has greater interest rate risk than short-term bond funds.
CREDIT RISK. The chance that any of the Fund's holdings will have its
credit down-graded or will default, potentially reducing the Fund's share price
and income level. The Fund has higher credit risk because normally the average
credit quality of its holdings is low. The issuers of the government and
government-related debt securities in which the Fund expects to invest have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness.
CURRENCY RISK. The possibility that the Fund's foreign holdings will be
adversely affected by fluctuations in currency markets. For a detailed
discussion of this risk, please see the previous question that addressed
currency fluctuation and also the next question.
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WHAT ARE THE PARTICULAR RISKS ASSOCIATED WITH INTERNATIONAL AND GLOBAL INVESTING
SUCH AS INVESTING IN THE FUND?
International investing involves additional risks which can increase the
potential for losses in the Fund. These risks can be significantly magnified for
investments in foreign countries that are emerging market nations. Currency risk
can not be eliminated entirely, and there is no guarantee that hedging will
always work. In addition, it may not be possible to effectively hedge the
currencies of certain countries, particularly emerging market nations.
Furthermore, hedging costs can be significant, and they are paid out of the
Fund's capital and are reflected in the Fund's net asset value.
CURRENCY FLUCTUATIONS. Transactions in foreign securities are conducted in
local currencies, so U.S. dollars must often be exchanged for another currency
when a security is bought or sold or a dividend is paid. Likewise, security
price quotations and total return information reflect conversion into U.S.
dollars.
INCREASED COSTS. It is more expensive for U.S. investors to trade in
foreign markets than in the U.S. markets. Mutual funds offer an efficient way
for individuals to invest abroad, but the overall expense ratios of
international mutual funds are usually higher than those of mutual funds that
invest in U.S. securities.
POLITICAL AND ECONOMIC FACTORS. The economies, markets, and political
structures of a number of the countries in which the Fund can invest do not
compare favorably with the U.S. and other mature economies in terms of wealth
and stability. Therefore, investments in these countries will be riskier and
more subject to erratic and abrupt price movements. This is especially true for
emerging market nations such as those found in Latin America, Asia, Eastern
Europe and Africa. However, even investments in countries with highly developed
economies are subject to risk. While certain countries have made progress in
economic growth, liberalization, fiscal discipline, and political and social
stability, there is no assurance these trends will continue.
Some economies are less well developed (for example, various countries in
Latin America, Eastern Europe, Africa and Asia), overly reliant on particular
industries, and more vulnerable to the ebb and flow of international trade,
trade barriers, and other protectionist or retaliatory measures (for example,
Southeast Asia, Latin America, Eastern Europe and Africa). This makes investment
in such markets significantly riskier than in other countries. Some countries,
particularly those in Latin America and other emerging market nations have
legacies of hyperinflation and currency devaluations versus the U.S. dollar
(which adversely affects returns to U.S. investors). These countries have
historically experienced, and may continue to experience, high interest rates,
large amounts of external debt, balance of payments and trade difficulties and
extreme poverty and unemployment. Investments in countries that have recently
begun moving away from central planning and state-owned industries toward free
markets, such as Eastern Europe, China and Africa, should be regarded as
speculative. Certain countries have histories of political instability and
upheaval (for example, Latin America and Africa) that could cause their
governments to act in a detrimental or hostile manner toward private enterprise
or foreign investment. Actions such as nationalizing a company or industry,
expropriating assets, or imposing punitive taxes could have a severe effect on
security prices and impair the Fund's ability to repatriate capital or income.
Significant external risks, including war, currently affect some countries.
Governments in many emerging market nations participate to a significant degree
in their economies and securities markets.
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Additional factors which may influence the ability or willingness of a
country to service debt include, but are not limited to, the country's cash flow
situation, the availability of sufficient foreign exchange on the date payment
is due, the relative size of the country's debt service burden to the economy as
a whole, its government policy toward particular international agencies and any
political restrictions that may be imposed.
LEGAL, REGULATORY, AND OPERATIONAL. Certain countries may impose
restrictions on foreign investors, such as the Fund. These restrictions may take
the form of prior governmental approval, limits on the amount and type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Certain countries lack uniform accounting, auditing, and
financial reporting standards, have less governmental supervision of financial
markets than in the United States, do not honor legal rights enjoyed in the
United States, and have settlement practices, such as delays, which could
subject the Fund to risks not customary in the United States. In addition,
securities markets in these countries have substantially lower trading volumes
than U.S. markets, resulting in less liquidity and more volatility than in the
United States.
PRICING. Portfolio securities may be listed on foreign exchanges that are
open days (such as Saturdays) when the Fund does not account for their prices in
calculating its net asset value. As a result, the Fund's net asset value may
change significantly on days when shareholders cannot make transactions.
HOW DOES THE ADVISER ATTEMPT TO REDUCE THE SPECIAL RISKS OF FOREIGN INVESTING?
Consistent with the Fund's objective, the portfolio manager actively seeks
to reduce risk and increase total return. Risk management tools include:
- Diversification of assets to reduce the impact of a single holding on the
Fund's net asset value. While the Fund is considered to be
"nondiversified" for purposes of the 1940 Act, the Fund invests in many
different issuers.
- Thorough credit research by the Adviser's own analysts.
- Technical analysis of trading and ownership patterns of targeted
securities.
- Adjustment of Fund duration to try to reduce the negative impact of
rising interest rates or take advantage of the benefits of falling rates.
(Duration is a more sensitive measure than maturity of a fund's
sensitivity to interest rate changes.)
HOW CAN I DECIDE IF THE FUND IS APPROPRIATE FOR ME?
First, be sure that your investment objective is consistent with the
Fund's. Second, your decision should take into account whether you have any
other foreign investments. If not, you may want to invest in the Fund to gain a
broader exposure to overseas opportunities. Third, consider your risk tolerance
and the risk profile of the Fund, as previously described. Also consider your
investment time horizon.
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IS THERE OTHER INFORMATION I NEED TO REVIEW BEFORE MAKING A DECISION?
Be sure to read the "Investment Policies, Practices and Risks" section of
this prospectus, which discusses the principal types of portfolio securities
that the Fund may purchase as well as the types of management practices that the
Fund may use.
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 FUNDAMENTAL POLICIES and
current OPERATING POLICIES of the Fund are noted where applicable. The Fund's
FUNDAMENTAL POLICIES (like 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 Board of Trustees ("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.
The Fund's investment objective is to provide high income and capital
appreciation. Under normal circumstances, at least 65% of the Fund's total
assets will be invested in the government and corporate debt securities of
emerging market nations. The Fund considers a country to be an "emerging market
nation" if it is defined as a country with an emerging or developing economy by
any one of the following: the International Bank for Reconstruction and
Development (i.e., the World Bank), the International Finance Corporation, or
the United Nations or its authorities. The Fund will ordinarily invest in
securities of issuers located in at least three emerging market nations, which
may be located in Asia, Europe, Latin America, Africa or the Middle East. As
these markets change and other countries' markets develop, the Fund expects the
countries in which it invests to change. The Fund may, however, invest all or a
portion of its assets in the securities of only one country, including the
United States, for temporary defensive purposes.
An emerging market security is a security issued by a government,
corporation or other issuer that, in the opinion of the Adviser, has one or more
of the following characteristics: (1) the principal trading market of the
security is an emerging market nation; (2) the primary revenue of the issuer (at
least 50%) is generated from goods produced or sold, investments made, or
services performed in an emerging market nation; (3) the corporation is
organized under the laws of a particular emerging market nation; or (4) at least
50% of the assets of the issuer are situated in emerging market nations.
In managing the Fund, the Adviser will apply a market risk analysis that
evaluates factors such as liquidity, volatility, tax implications, interest rate
sensitivity, counterparty risks and technical market considerations. Investors
should understand that all investments involve risk and that there can be no
guarantee against loss
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resulting from an investment in the Fund, nor can there be any assurance that
the Fund's investment objective will be attained.
NONDIVERSIFIED INVESTMENT COMPANY. The Fund is able to invest more than 5%
of its total assets in the fixed income securities of individual foreign
governments or issuers. The Fund may, but generally will not, invest more than
5% of its total assets in any individual corporate issuer, provided that (1) the
Fund may place assets in bank deposits or other short-term bank instruments with
a maturity of up to 30 days provided that (i) the bank has a short-term credit
rating of Al+ (or, if unrated, the equivalent as determined by the Adviser) and
(ii) the Fund may not maintain more than 10% of its total assets with any single
bank; and (2) the Fund may maintain more than 5% of its total assets, including
cash and currencies, in custodial accounts or deposits of the Fund's custodian
or sub-custodians. In addition, the Fund intends to qualify as a regulated
investment company for purposes of the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification requires the Fund to limit its investments so
that, at the end of each calendar quarter, with respect to at least 50% of its
total assets, not more than 5% of such assets are invested in the securities of
a single issuer, and with respect to the remaining 50%, no more than 25% is
invested in a single issuer. Since, as a nondiversified investment company, the
Fund is permitted to invest a greater proportion of its assets in the securities
of a smaller number of issuers, the Fund may be subject to greater credit risk
with respect to its portfolio securities than an investment company that is more
broadly diversified.
CONCENTRATION OF INVESTMENTS. From time to time, the Fund may invest more
than 25% of its total assets in the securities of foreign governmental and
corporate issuers located in the same country. However, the Fund will not, under
normal market conditions, invest more than 25% of its total assets in any single
foreign governmental issuer or in two or more such issuers subject to a common,
explicit guarantee.
TYPES OF PORTFOLIO SECURITIES
In seeking to meet its investment objective, the Fund may invest in any
type of security whose characteristics are consistent with the Fund's investment
program. The following pages describe the principal types of portfolio
securities and Fund management practices.
FIXED INCOME SECURITIES.
The Fund's investments may include, but will not be limited to: (1) debt
securities issued or guaranteed by: (a) a foreign sovereign government or one of
its agencies, authorities, instrumentalities, or political subdivisions,
including a foreign state, province or municipality, or (b) supranational
organizations such as the World Bank, Asian Development Bank, European
Investment Bank, and European Economic Community; (2) debt obligations: (a) of
foreign banks and bank holding companies, or (b) of domestic banks and
corporations issued in foreign currencies; and (3) foreign corporate debt
securities and commercial paper. Such securities may take a variety of forms
including those issued in the local currency of the issuer, Brady Bonds,
Eurobonds, and bonds denominated in the European Currency Unit. The Fund may
also invest in such U.S. dollar denominated fixed income securities as (1) debt
securities issued or guaranteed by the U.S. government, its agencies or
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instrumentalities; (2) domestic corporate debt securities; (3) domestic
commercial paper, including commercial paper indexed to certain specific foreign
currency exchange rates; (4) debt obligations of domestic banks and bank holding
companies; and (5) zero-coupon and pay-in-kind securities. The Fund may from
time to time purchase securities on a when-issued basis, invest in repurchase
agreements, and purchase bonds convertible into equities. The Fund may also
purchase mortgage-backed and asset-backed securities, and collateralized
mortgage obligations.
HYBRID INSTRUMENTS.
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging,
duration management, and increased total return. Hybrids may not bear interest
or pay dividends. The value of a hybrid or its interest rate may be a multiple
of a benchmark and, as a result, may be leveraged and move (up or down) more
steeply and rapidly than the benchmark. These benchmarks may be sensitive to
economic and political events, such as commodity shortages and currency
devaluations, which cannot be readily foreseen by the purchaser of a hybrid.
Under certain conditions, the redemption value of a hybrid could be zero. Thus,
an investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated
debt security that has a fixed principal amount and pays a fixed rate or
floating rate of interest. The purchase of hybrids also exposes the Fund to the
credit risk of the issuer of the hybrid. These risks may cause significant
fluctuations in the net asset value of the Fund. HYBRIDS CAN HAVE VOLATILE
PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE FUND MAY NOT BE SUCCESSFUL.
OPERATING POLICY The Fund may invest up to 10% of its total assets in
hybrid instruments.
PRIVATE PLACEMENTS.
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered with
the SEC. Although certain of these securities may be readily sold, for example,
under Rule 144A, others may be illiquid, and their sale may involve substantial
delays and additional costs.
OPERATING POLICY The Fund will not invest more than 15% of its net
assets in illiquid securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS.
Large loans to corporations or governments, including governments of less
developed countries and emerging market nations, may be shared or syndicated
among several lenders, usually banks. The Fund could participate in such
syndicates, or could buy part of a loan, becoming a direct lender.
Participations and assignments involve special types of risk, including limited
marketability and the risks of being a lender. If the Fund purchases a
participation, it may only be able to enforce its rights through the lender, and
it may assume the
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credit risk of the lender in addition to the borrower. In assignments, the
Fund's rights against the borrower may be more limited than those held by the
original lender.
OPERATING POLICY The Fund may invest not more than 15% of its total
assets in loan participations and assignments.
HIGH YIELD, HIGH RISK SECURITIES.
Larger bond issues are evaluated by nationally recognized statistical
rating organizations ("NRSROs"), such as Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's"), on the
basis of the issuer's ability to meet all required interest and principal
payments. The highest ratings are assigned to issuers perceived to be the best
credit risks. The Adviser's research analysts also evaluate all portfolio
holdings of the Fund, including those rated by an NRSRO. Other things being
equal, lower-rated bonds generally have higher yields due to greater risk. High
yield, high risk securities 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 debt security ratings of several NRSROs are set forth in
Appendix I to this prospectus. While the Fund is permitted to purchase defaulted
bonds, the Adviser will acquire such securities only if the portfolio manager
foresees the potential for significant capital appreciation.
BRADY BONDS.
Brady Bonds, named after former U.S. Secretary of the Treasury Nicholas
Brady, are used as a means of restructuring the external debt burden of
governments in certain emerging market nations. A Brady Bond is created when an
outstanding commercial bank loan to a government or private entity is exchanged
for a new bond in connection with a debt restructuring plan. Brady Bonds may be
collateralized or uncollateralized and issued in various currencies (although
typically in the U.S. dollar). They are often fully collateralized as to
principal in U.S. Treasury zero-coupon bonds. However, even with this
collateralization feature, Brady Bonds are often considered speculative,
below-investment-grade investments because the timely payment of interest is the
responsibility of the issuing party (for example, a Latin American country) and
the value of the bonds can fluctuate significantly based on the issuer's ability
or perceived ability to make these payments. Finally, some Brady Bonds may be
structured with floating rate or low fixed rate coupons.
OPERATING POLICY The Fund may invest substantially all of its assets
in Brady Bonds.
CONVERTIBLE BONDS.
Convertible bonds are debt instruments convertible into equity of the
issuing company at certain times in the future and according to a certain
exchange ratio. Typically, convertible bonds are callable by the company, which
may, in effect, force conversion before the holder would otherwise choose. While
the Fund intends to invest primarily in debt securities, it may invest in
convertible bonds or equity securities. While some countries or companies may be
regarded as favorable investments, pure fixed income opportunities may be
unattractive or
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limited due to insufficient supply, or legal or technical restrictions. In such
cases, the Fund may consider equity securities or convertible bonds to gain
exposure to such markets.
OPERATING POLICY The Fund may invest up to 10% of its total assets in
convertible bonds and equity securities.
DEPOSITORY RECEIPTS.
The Fund may invest indirectly in securities of emerging market issuers
through sponsored or unsponsored American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs"). ADRs are
receipts issued by a U.S. bank or trust company evidencing ownership of
underlying securities issued by foreign issuers. ADRs may be listed on a
national securities exchange or may be traded in the over-the-counter market.
EDRs also represent securities of foreign issuers and are designed for use in
European markets. A GDR represents ownership in a non-U.S. company's publicly
traded securities that are traded on foreign stock exchanges or foreign
over-the-counter markets. Holders of unsponsored ADRs, EDRs or GDRs generally
bear all the costs of such facilities and the depository of an unsponsored
facility frequently is under no obligation to distribute investor communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
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
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. The Fund is required to distribute to shareholders income imputed to
any zero-coupon or PIK investments even though the Fund will not receive such
income until the investment matures. Such distributions may require the Fund to
sell portfolio securities or could reduce the Fund's cash position.
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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.
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.
TYPES OF FUND MANAGEMENT PRACTICES
CASH POSITION AND TEMPORARY OR DEFENSIVE INVESTMENTS.
The Fund will hold a certain portion of its assets in U.S. and foreign U.S.
dollar denominated money market securities, including repurchase agreements,
rated in the two highest NRSRO rating categories, maturing in one year or less.
For temporary, defensive purposes, the Fund may invest without limitation in
such securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments, and serves as a
short-term defense during periods of unusual market volatility.
BORROWING MONEY AND TRANSFERRING ASSETS.
The Fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the Fund's investment objective and program. Such borrowings may be
collateralized with Fund assets, subject to restrictions.
FUNDAMENTAL POLICY Borrowings may not exceed 33 1/3% of total Fund
assets.
OPERATING POLICY The Fund may not transfer as collateral any
portfolio securities except as necessary in connection with permissible
borrowings or investments, and then such transfers may not exceed 33 1/3%
of the Fund's total assets. The Fund may not purchase additional securities
when borrowings exceed 5% of total assets.
FOREIGN CURRENCY TRANSACTIONS.
The Fund may engage in foreign currency transactions either on a spot
(cash) basis at the rate prevailing in the currency exchange market at the time
or through forward foreign currency exchange contracts ("forwards")
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with terms generally of less than one year. Forwards will be used primarily to
adjust the foreign exchange exposure of the Fund with a view to protecting the
portfolio from adverse currency movements, based on the Adviser's outlook. The
Fund may enter into forwards under the following circumstances:
LOCK IN. When the Adviser desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
CROSS HEDGE. If a particular currency is expected to decrease against
another currency, the Fund may sell the currency expected to decrease and
purchase a currency which is expected to increase against the currency sold in
an amount approximately equal to some or all of the Fund's portfolio holdings
denominated in the currency sold.
DIRECT HEDGE. If the Adviser wants to eliminate substantially all of the
risk of owning a particular currency, and/or if the Adviser believes the
portfolio may benefit from price appreciation in a given country's bonds but
does not want to hold the currency, it may employ a direct hedge against the
U.S. dollar. In either case, the Fund would enter into a forward to sell the
currency in which a portfolio security is denominated and purchase U.S. dollars
at an exchange rate established at the time it initiated the contract. The cost
of the direct hedge transaction may offset most, if not all, of the yield
advantage offered by the foreign security, but the Fund would hope to benefit
from an increase (if any) in value of the security.
IT IS OFTEN NOT POSSIBLE TO EFFECTIVELY HEDGE THE CURRENCY RISK ASSOCIATED
WITH EMERGING MARKET NATION DEBT SECURITIES BECAUSE THEIR CURRENCY MARKETS ARE
NOT SUFFICIENTLY DEVELOPED.
PROXY HEDGE. The Adviser might choose to use a proxy hedge, which is less
costly than a direct hedge. In that case, the Fund, having purchased a bond,
will sell a currency whose value is believed to be closely linked to the
currency in which the bond is denominated. Interest rates prevailing in the
country whose currency was sold would be expected to be closer to those in the
United States and lower than those of bonds denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge
because it is dependent on a stable relationship between the two currencies
paired as proxies, and because the relationships can be very unstable at times.
Forwards involve other risks, including, but not limited to, significant
volatility in currency markets. In addition, currency moves may not occur
exactly as the Adviser expected, so the use of forwards could adversely affect
the Fund's total return.
COSTS OF HEDGING. When the Fund purchases a foreign bond with a higher
interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially lost if the Fund
were to enter into a direct hedge by selling the foreign currency and purchasing
the U.S. dollar. This is what is known as the "cost" of hedging. Proxy hedging
attempts to reduce this cost through an indirect hedge back to the U.S. dollar.
It is important to note that hedging costs are treated as capital transactions
and are not, therefore, deducted from the Fund's dividend distribution and are
not reflected in its yield. Instead such costs will, over time, be reflected in
the Fund's net asset value.
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TAX CONSEQUENCES OF HEDGING. For the Fund's current taxable year, the Fund
may be required to limit its gains from hedging in forwards, futures and
options. Hedging may also result in the application of the mark-to-market and
straddle provisions of the Code. These provisions could result in an increase
(or decrease) in the amount of taxable dividends paid by the Fund and could
affect whether dividends paid by the Fund are classified as capital gains or
ordinary income.
FUTURES AND OPTIONS.
Futures (a type of potentially high-risk derivative) are often used to
manage risk because they enable the investor to buy or sell an asset in the
future at an agreed upon price. Options (another type of potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or sell
an asset at a predetermined price in the future. The Fund may buy and sell
futures and options contracts for a number of reasons, including, but not
limited to: to manage exposure to changes in interest rates, securities prices,
and foreign currencies; as an efficient means of adjusting overall exposure to
certain markets; in an effort to enhance income; to protect the value of
portfolio securities; and to adjust the portfolio's duration. The Fund may
purchase, sell, or write call and put options on securities, financial indices,
and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the Fund's total return,
and the potential loss from the use of futures can exceed the Fund's initial
investment in such contracts. In many emerging market nations, futures and
options markets do not exist or are not sufficiently developed to be effectively
used by the Fund.
OPERATING POLICY Initial margin deposits and premiums on futures and
options on futures used for non-hedging purposes will not equal more than 5% of
the Fund's total assets.
OPERATING POLICY The total market value of securities against which the
Fund has written call or put options may not exceed 5% of the Fund's total
assets. The Fund will not commit more than 5% of the Fund's total assets to
premiums when purchasing call or put options.
SWAPS.
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies. The
purchase of a cap entitles the purchaser to receive payments
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on a notional principal amount from the party selling the cap to the extent that
a specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Adviser
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service ("Service") rules, any lump sum
payment received or due under the notional principal contract must be amortized
over the life of the contract using the appropriate methodology prescribed by
the Internal Revenue Service.
REPURCHASE AGREEMENTS.
The Fund may enter into repurchase agreements with well-established
securities dealers or banks that are members of the Federal Reserve System. 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 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 capital
losses.
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 insolvency of the broker-dealer or other borrower. In this event, the
Fund could experience delays in recovering its securities and possibly capital
losses.
FUNDAMENTAL POLICY The value of loaned securities may not exceed
33 1/3% of total Fund assets.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS.
The Fund may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. There is no
limit on the Fund's investment in these securities. The price of these
securities is fixed at the time of the commitment to buy, but delivery and
payment can take place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest accrues to the
purchaser. At the time of delivery, the value of the securities may be more or
less than the purchase
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or sale price. To the extent the Fund remains fully or almost fully invested (in
securities with a remaining maturity of more than one year) at the same time it
purchases these securities, there will be greater fluctuations in the Fund's net
asset values than if the Fund did not purchase them.
PORTFOLIO TURNOVER.
Turnover is an indication of trading frequency. The Fund may purchase and
sell securities without regard to the length of time they are held. A high
turnover rate may increase transaction costs and result in additional taxable
gains. The Fund will not attempt to achieve or be limited to a predetermined
rate of portfolio turnover, and the Fund's portfolio turnover rate will always
be incidental to transactions undertaken with a view to achieving the Fund's
investment objective. Although the Fund's portfolio turnover rate may vary
greatly from year to year, it is anticipated that, under normal circumstances,
the annual rate will not exceed 150%.
3. THE TRUST AND THE FUND
ORGANIZATION OF THE TRUST AND THE FUND
HOW ARE THE TRUST AND THE FUND ORGANIZED?
The Trust is an 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.
The Fund is a separate investment portfolio or series of shares of the
Trust, which became available to investors on December 31, 1997. This prospectus
relates only to the Fund. The Fund is designed for purchase by both retail
investors and institutional investors. The Trust presently offers shares in a
second series, the Summit High Yield Fund.
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.
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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 paid from 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.
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"). The Adviser also serves as investment
adviser to the Summit High Yield Fund, the Trust's second portfolio.
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Portfolio Manager. Since the Fund's inception, 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 the Summit High Yield Fund, the
Trust's second portfolio, and of the 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 December 31, 1997 (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 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.
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 equal to 0.75 of 1% of the Fund's average daily net assets. The
advisory fee is paid monthly. However, the Adviser has voluntarily agreed to
reduce its fee, and to reimburse the Fund, if necessary, if the advisory fee
would cause the Fund's total annual operating expenses to exceed 2.00%.
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. The Sub-Adviser currently acts as the sub-adviser to the Summit High Yield
Fund. 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.
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THE SUB-ADVISORY AGREEMENT
The Sub-Adviser serves pursuant to an Investment Sub-Advisory Agreement
with the Adviser dated December 31, 1997 (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 portfolio 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.
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 copy of each agreement is on file with and may be obtained from the SEC.
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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 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,
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<PAGE> 23
and costs of pricing portfolio securities) and pays the Fund Accountant a fee,
computed daily and paid monthly, at the annual rate of 0.05% of the Fund's
average daily net assets, provided, however, that such fee will not be less than
$45,000. 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 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, Jr. 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.
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<PAGE> 24
However, because the calculation of the Fund's net asset value will not take
place contemporaneously with the determination of the values of the Fund's
portfolio securities, events affecting the values of portfolio securities that
occur between the time their prices are determined and the time the Fund's net
asset value is calculated will not be reflected in the net asset value unless
the Adviser, under the supervision of the Trustees, determines that the
particular event should be taken into account in computing the Fund's net asset
value.
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.
The value of securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets will be translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by the
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
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.
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<PAGE> 25
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 December 16, 1997.
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 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.")
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<PAGE> 26
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.
"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.
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.
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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 Emerging Markets Bond 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.
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 shares of the Fund by
contacting a securities dealer having a selected dealer agreement or selling
agreement with the Distributor.
Orders for shares of 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 Fund. The 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
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<PAGE> 28
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.
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
(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 purchased through Authorized
Dealers and Sub-designees who have been paid a fee by the Fund's Distributor
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.
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<PAGE> 29
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 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.
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<PAGE> 30
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
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 and Summit
High Yield Fund 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
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<PAGE> 31
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.
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 of up to 15 days. Such delay may be avoided if shares are purchased by
wire transfer of Federal Funds. An investor who purchases $500,000 or more of
shares 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
Fund. The 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"), and for
shares of Summit High Yield Fund, another portfolio of the Trust. 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 (or would have been paid, if not for the purchase amount of $500,000 or
more) will not be required to pay an additional sales charge upon exchange of
those shares into shares of the Fund. Shareholders exchanging shares of the
Summit High Yield Fund on which a sales charge was paid (or would have been
paid, if not for the purchase amount of $500,000 or more) will not be required
to pay an additional sales charge upon exchange of those
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<PAGE> 32
shares into shares of the Fund. Under these circumstances, the shareholder must
notify the Distributor that a sales charge was originally paid (or would have
been paid, if not for the purchase amount of $500,000 or more) and provide the
Distributor with sufficient information to permit confirmation of the
shareholder's right not to pay a sales charge. There may be limitations on the
number of exchanges that a shareholder may make. See "Excessive Trading" in this
prospectus.
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 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:
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<PAGE> 33
(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.
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.
EXCESSIVE TRADING
The Adviser may bar excessive traders from purchasing shares of the Fund.
Frequent trades, involving either substantial Fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management of
the Fund and raise its expenses. The Fund defines "excessive trading" as
exceeding one purchase and sale involving the Fund and the Summit High Yield
Fund within any 120-day period. For example, you are invested in the Fund. You
can move substantial assets from the Fund to the Summit High Yield Fund and,
within the next 120 days, sell your shares in the Summit High Yield Fund to
return to the Fund or move to a Money Market Fund.
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<PAGE> 34
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of shares of the Fund and shares of the
Summit High Yield Fund. Two types of transactions are exempt from the excessive
trading guidelines: (1) redemptions that are not part of exchanges; and (2)
systematic purchases or redemptions made through an AIP or an automatic
withdrawal plan described in "Additional Shareholder Privileges."
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.
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
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<PAGE> 35
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).
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 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
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<PAGE> 36
during the last three months of the year to shareholders of record in such month
and paid in January of the following year 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.
Distributions resulting from the sale of certain foreign currencies and
debt securities, to the extent of foreign exchange gains, are taxed as ordinary
income or loss. If the Fund pays nonrefundable taxes to foreign governments
during the year, the taxes will reduce the Fund's dividends but will still be
included in your taxable income. However, you may be able to claim an offsetting
credit or deduction on your tax return for your portion of foreign taxes paid by
the Fund.
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.
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.
NOTE: For information on the tax consequences of hedging, see "Investment
Policies, Practices and Risks" in this prospectus.
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<PAGE> 37
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.
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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.
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<PAGE> 39
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+.
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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.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. ABOUT THE SUMMIT EMERGING MARKETS BOND
FUND..................................... 2
Transaction Costs and Fund Expenses...... 2
Summary of Risk Factors.................. 4
Fund and Market Characteristics/Risk 5
Factors..................................
2. INVESTMENT POLICIES, PRACTICES AND 9
RISKS....................................
Types of Portfolio Securities............ 10
Types of Fund Management Practices....... 14
3. THE TRUST AND THE FUND................... 18
Organization of the Trust and the Fund... 18
Management of the Trust and the Fund..... 19
Management-Related Services.............. 22
Fund Expenses............................ 23
Net Asset Value.......................... 23
Distribution Expenses.................... 24
Understanding Performance Information.... 26
4. INVESTING WITH SUMMIT INVESTMENT TRUST... 26
How to Purchase Shares................... 26
General Methods of Purchasing Shares..... 27
Share Price and Sales Charges............ 28
Shareholder Services..................... 30
General Methods of Redeeming Shares...... 32
Additional Shareholder Privileges........ 34
Distributions and Taxes.................. 35
Obtaining Information on Your 37
Investment...............................
APPENDIX I -- Bond Ratings.................... 38
</TABLE>
----------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE TRUST'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 EMERGING MARKETS BOND FUND
--------------------------------------------------
PROSPECTUS AS OF DECEMBER 31, 1997
<PAGE> 42
SUMMIT INVESTMENT TRUST
(THE "TRUST")
3435 STELZER ROAD COLUMBUS, OH 43219
1-800-272-3442
STATEMENT OF ADDITIONAL INFORMATION
SUMMIT HIGH YIELD FUND
SUMMIT EMERGING MARKETS BOND 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, or the prospectus for the Summit Emerging
Markets Bond Fund, dated December 31, 1997, which may be obtained from Summit
Investment Trust, 3435 Stelzer Road, Columbus, OH 43219.
The date of this SAI is September 30, 1997, as amended December 31,
1997.
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION 1
INVESTMENT OBJECTIVES AND POLICIES 1
Investment Objectives 1
RISK FACTORS 2
Special Risks of Investing in High Yield, High Risk Bonds and in Emerging Market
Securities 2
INVESTMENT PROGRAMS 2
Investment in Debt Securities 2
Corporate Debt Securities 3
U.S. Government Obligations 3
U.S. Government Agency Securities 3
Bank Obligations 3
Asset-backed Securities 3
Methods of Allocating Cash Flows 4
Types of Credit Support 4
Automobile Receivable Securities 5
Credit Card Receivable Securities 5
Other Assets 5
Mortgage-backed Securities 6
Collateralized Mortgage Obligations ("CMOS") 6
Stripped Mortgage-backed Securities 6
Zero-coupon and Pay-in-kind Bonds 7
Repurchase Agreements 7
Private Placements (Restricted Securities) 8
Foreign Sovereign Debt Securities 9
Foreign Securities 10
Foreign Currency Transactions 11
Warrants 13
Lending of Portfolio Securities 13
Loan Participations and Assignments 13
Short Sales 14
Futures Contracts 15
Interest Rate and Stock Index Futures 16
Regulatory Limitations 16
Special Risks of Futures Contracts 17
Volatility and Leverage 17
Liquidity 17
Hedging Risk 18
Options on Futures Contracts 18
Special Risks of Options on Futures Contracts 19
Additional Futures and Options on Futures Contracts 19
Options 19
Writing Covered Call Options 20
Writing Covered Put Options 22
Purchasing Put Options 22
Purchasing Call Options 23
Dealer Options 23
Spread Option Transactions 24
Options on Securities and Other Financial Indices 24
Other Options 25
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange
Contracts 25
INVESTMENT RESTRICTIONS 26
High Yield Fund 26
</TABLE>
(i)
<PAGE> 44
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fundamental Policies or Restrictions of the High Yield Fund 26
Non-fundamental Policies or Restrictions of the High Yield Fund 27
Emerging Markets Fund 28
Fundamental Policies or Restrictions of the Emerging Markets Fund 28
Non-fundamental Policies or Restrictions of the Emerging Markets Fund 29
MANAGEMENT OF THE TRUST 30
Compensation of Trustees 32
PRINCIPAL HOLDERS OF SECURITIES 33
INVESTMENT ADVISORY SERVICES 33
The Investment Adviser 33
The Advisory Agreements 34
The Advisory Fees 36
The Sub-Adviser 36
The Sub-Advisory Agreements 36
MANAGEMENT-RELATED SERVICES 37
BISYS Service Agreements 37
Administrator 37
Fund Accountant 38
Transfer Agent 38
DISTRIBUTION PLAN 39
The Distributor 40
PORTFOLIO TRANSACTIONS 40
Investment or Brokerage Discretion 40
How Brokers and Dealers are Selected 41
How Evaluations are Made of the Overall Reasonableness of Brokerage Commissions
Paid 41
Description of Research Services Received From Brokers and Dealers 41
Commissions to Brokers Who Furnish Research Services 42
Internal Allocation Procedures 42
Portfolio Turnover 42
Miscellaneous 43
CAPITAL STOCK 43
PRICING OF SECURITIES 44
DIVIDENDS 44
TAX STATUS 44
Foreign Currency Gains and Losses 45
INVESTMENT PERFORMANCE 45
Yield Information 45
Total Return Performance 46
GENERAL 47
Repurchase of Shares 47
Payment for Shares Presented 47
Custodian 48
Independent Accountants 48
FINANCIAL INFORMATION 48
</TABLE>
(ii)
<PAGE> 45
GENERAL INFORMATION
The Trust was organized as a business trust under the laws of the
Commonwealth of Massachusetts on March 8, 1994. This SAI relates to the Summit
High Yield Fund (the "High Yield Fund") and the Summit Emerging Markets Bond
Fund (the "Emerging Markets Fund"). (As used in this SAI, the High Yield Fund
and the Emerging Markets Fund are collectively the "Funds," and individually a
"Fund"). Each Fund is a separate investment portfolio or series of the Trust.
See "Capital Stock" in this SAI.
The Funds are 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 OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds'
investment objectives and policies. No material change in a Fund's investment
objective will be made without obtaining shareholder approval. Unless otherwise
specified, the investment programs and restrictions and the operating policies
of the Funds are not fundamental policies and are subject to change by the Board
of Trustees of the Trust (the "Trustees") without shareholder approval. The
fundamental policies of each 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 of the Fund represented at a meeting of shareholders at which the
holders of 50% or more of the shares of the Fund are represented.
INVESTMENT OBJECTIVES.
The High Yield Fund's investment objective is to provide a high level
of income and, secondarily, capital appreciation. The Emerging Markets Fund's
investment objective is to provide high income and capital appreciation. The
share price and yield of each Fund will fluctuate with changing market
conditions, and your investment may be worth more or less when redeemed than
when purchased. The Funds should not be relied upon as a complete investment
program, nor used to play short-term swings in the bond market. The Funds' high
yields are a reflection of the added risk associated with high yield, high risk
bonds, in the case of both Funds, and of emerging markets securities, in the
case of the Emerging Markets Fund, and are not necessarily indicative of the
total return you will receive on your investment. The Funds cannot guarantee
that they will achieve their objectives. The terms "fixed income securities" and
"debt securities" are used interchangeably in the prospectuses and this SAI.
The High Yield Fund will invest 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 High Yield Fund's total assets will be
invested in high yield, high risk debt securities. The Emerging Markets Fund
will invest its assets in a portfolio consisting primarily of government and
corporate debt securities of emerging market nations. Under normal
circumstances, at least 65% of the Emerging Markets Fund's total assets will be
invested in the securities of emerging market governments or companies located
in emerging market nations. The Funds have no maturity limitations; however,
each 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, each Fund
calculates its weighted average maturity based on final activity instead of call
maturity or estimated average life (which factors in prepayments). The Funds
seek to invest in medium- and lower-quality bonds and may also purchase bonds in
default if, in the opinion of the Funds' 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 Funds
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<PAGE> 46
may, for temporary defensive purposes, reduce their holdings in high yield
securities and, in the case of the Emerging Markets Fund, in emerging market
securities, and invest all or a portion of their 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 U.S. government or any of its instrumentalities and repurchase
agreements involving such government securities.
In seeking to achieve its investment objective, the High Yield 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.
In seeking to achieve its investment objective, the Emerging Markets
Fund will ordinarily invest in the securities of issuers located in at least
three emerging market nations, which may be located in Asia, Europe, Latin
America, Africa or the Middle East. As these markets change and other countries'
markets develop, the Emerging Markets Fund expects the countries in which it
invests to change. The Fund may, however, invest substantially all of its assets
in the securities of only one country, including the United States, for
temporary defensive purposes.
RISK FACTORS
Because of their investment policies, the Funds may not be suitable or
appropriate for all investors. The Funds are designed for intermediate to
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 (in the case
of both Funds) and in emerging market securities (in the case of the Emerging
Markets Fund). Consistent with an intermediate to long-term investment approach,
investors in the Funds should not rely on the Funds for their short-term
financial needs. The principal value of the lower-quality securities in which
the Funds invest will be affected by interest rate levels, general economic
conditions, specific industry conditions (in the case of the High Yield Fund)
and the creditworthiness of the individual issuer. In addition, the principal
value of the lower-quality securities in which the Emerging Markets Fund invests
will be affected by social, economic and political conditions of emerging market
nations in which the Fund invests. Although the Funds seek 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 Funds will achieve
these results.
SPECIAL RISKS OF INVESTING IN HIGH YIELD, HIGH RISK BONDS AND IN EMERGING MARKET
SECURITIES.
The Funds' prospectuses, in the sections entitled "Risk Factors -
Special Summary" (for the High Yield Fund), "Summary of Risks" (for the Emerging
Markets Fund) and "Fund and Market Characteristics/Risk Factors," describe the
special considerations and additional risk factors associated with each Fund's
investments in lower-rated debt securities commonly referred to as "junk bonds,"
and investing abroad in emerging market nations (in the case of the Emerging
Markets Fund). 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 Funds.
INVESTMENT PROGRAMS
INVESTMENT IN DEBT SECURITIES.
The securities in which the Funds may invest include those described
below:
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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 Funds 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. As described
in its prospectus, the Emerging Markets Fund may invest in corporate securities
of companies located in emerging market nations.
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 Fannie Mae (formerly, 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 borrower,
usually in connection with international commercial transactions. Certificates
of deposit may have fixed or variable rates. The Emerging Markets Fund may
invest in obligations of foreign banks and bank holding companies.
The Funds may also invest in the securities of certain supranational
entities, such as the International Development Bank.
ASSET-BACKED SECURITIES.
Each 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.
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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-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. A 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 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.
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<PAGE> 49
AUTOMOBILE RECEIVABLE SECURITIES. The Funds 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 Funds 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 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 Funds
may invest in such securities in the future if such investment is otherwise
consistent with their investment objectives and policies. There are, of course,
other types of securities that are, or may become, available, which are similar
to the foregoing.
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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 a 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 Funds 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 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.
Each Fund may invest up to 5% of its total assets in IOs and POs. The Emerging
Markets Fund has no present intention of investing 5% or more 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
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accrual of original issue discount, without a corresponding distribution of cash
to the Fund.
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, each 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 Funds 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.
Each Fund may invest up to 25% of its total assets in zero-coupon
bonds. A zero-coupon bond is a security that 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.
Each 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 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 a Fund
until the maturity or call date of the bond. The Funds 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 Funds.
REPURCHASE AGREEMENTS.
The Funds 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
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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, a
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. Funds 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 each Fund's net assets would then be invested in such repurchase
agreements and other illiquid securities. The Funds will enter into repurchase
agreements only where: (i) the underlying securities are of the type (excluding
maturity limitations) which the Funds' 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, a 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).
Each 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 result they would comprise, together with
all other illiquid securities, more than 15% of the value of each 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, a 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 Funds, 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, a 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 a Fund's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
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FOREIGN SOVEREIGN DEBT SECURITIES.
The Funds expect to invest in foreign sovereign debt securities,
including those of emerging market nations, and Brady Bonds, and the Emerging
Markets Fund may invest substantially all of its assets in such securities.
Sovereign obligors in emerging market nations 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 Funds may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Funds' 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 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 Funds 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
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Bonds and other sovereign debt securities in which the Funds may invest are
likely to be acquired at a discount.
Investing in foreign sovereign debt securities will expose the Funds to
the direct or indirect consequences of political, social or economic changes in
the emerging market nations that issue the securities. The ability and
willingness of sovereign obligors in emerging market nations 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
Funds, particularly the Emerging Markets 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 others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
FOREIGN SECURITIES.
Subject to the Funds' quality and maturity standards, the Funds 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 High Yield 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 the Emerging Markets Fund may invest up to 100% of its net assets in
non-U.S. dollar-denominated fixed-income securities principally traded in
financial markets outside the United States. Because the Funds may invest in
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foreign securities, investments in the Funds involve risks that are different in
some respects from investments 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 U.S. markets. Investments in foreign
securities may also be subject to other risks different from those 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 Funds 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 Funds may enter into forward foreign currency exchange contracts
under the following circumstances. First, when a 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 a Fund's
portfolio securities denominated in such foreign currency. Alternatively, where
appropriate, a 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 Funds 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 Funds. 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 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, a 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, a Fund will also not enter into such
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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. Each 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 Funds will be served. At the maturity
of a forward contract, a 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 a 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 Funds 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.
If a 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 a 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 a 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, a 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 Funds' dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, each Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Funds are
not required to enter into forward contracts with regard to their 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 each Fund values its assets daily in terms of U.S. dollars,
the Funds do not intend to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They 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
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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 a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
WARRANTS.
The Funds may invest in warrants; however, not more than 5% of a Fund's
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 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, each 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, a 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 Funds have 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 Funds will not have the right to vote securities while
they are being lent, but they 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 Funds 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 emerging market nations.
Emerging market nations debt securities or obligations 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 securities in emerging market nations, see "Foreign Sovereign
Debt Securities" above.) The loans underlying such participations may be secured
or unsecured, and the Funds may invest in loans collateralized by 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
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term or revolving credit that extends for several years may be subdivided into
shorter periods.
The loan participations in which the Funds 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 Funds are allowed to purchase debt securities, including
debt securities in a private placement, the Funds will treat loan participations
as securities and not subject to their fundamental investment restrictions
prohibiting the Funds from making loans.
There is not a recognizable, liquid public market for loan
participations. Hence, each 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 High Yield Fund will
treat both the corporate borrower and the bank selling the participation
interest as an issuer for purposes of its fundamental investment restriction
with respect to investing more than 5% of Fund assets in the securities of a
single issuer. The Emerging Markets Fund is not subject to such a restriction.
Various service fees received by the Funds 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 each Fund cannot exceed 10% of the Fund's total
income.
SHORT SALES.
The Funds may make short sales for hedging purposes to protect the
Funds against companies whose credit is deteriorating. Short sales are
transactions in which a Fund sells a security it does not own in anticipation of
a decline in the market value of that security. The Funds' short sales will be
limited to securities listed on a national securities exchange and to situations
where a 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 a Fund's net assets.
To complete a short sale transaction, a 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.
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Until a 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.
A 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. 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 Funds purchase or sell a security, no price will be
paid or received by the Funds 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, a 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 Funds.
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." Each 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, a 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
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transaction costs must also be included in these calculations. There can be no
assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a 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.
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 Funds.
INTEREST RATE AND STOCK INDEX FUTURES. The Funds 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 a 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 Funds may, however, purchase or
sell futures contracts with respect to any stock index. Nevertheless, to hedge a
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 a Fund. In
this regard, the Funds 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 Funds 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 Funds' objectives in these
areas.
REGULATORY LIMITATIONS. The Funds will engage in transactions in
futures contracts and options thereon only for bona fide 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 Funds 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 a 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 Funds, 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 Funds' custodian
to cover the position, or alternative
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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 Funds'
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 Funds 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 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, a 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 a 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. Each Fund may elect to close some or all of its futures
positions at any time prior to their expiration. A Fund would do so to reduce
exposure represented by long futures positions or increase exposure represented
by short futures positions. A 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 each 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, each 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
Funds 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
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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 Funds of futures
contract as a 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 each Fund's underlying instruments
sought to be hedged.
Successful use of futures contracts by the Funds 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 a 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 a 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 a 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 a 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 Funds 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 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
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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 Funds 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.
A 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 with 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 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 Funds have no current intention of engaging in financial
futures or options on futures transactions other than those described above,
they reserve the right to do so to the extent consistent with applicable law and
each 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.
A 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. A 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
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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 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.
A 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 Funds may write (sell) "covered" call
options and purchase options to close out options previously written by the
Funds. In writing covered call options, each 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 Funds.
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 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.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Funds' 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
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naked or uncovered options, which the Funds have no current intention of doing),
but capable of enhancing the Funds' total returns. When writing a covered call
option, a 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, a 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 a 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 Funds do not consider a security or
currency covered by a call to be "pledged" as that term is used in the Funds'
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium a
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 a 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 the latest sale price at the
time at which the net asset value per share of each 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 a Fund to write another
call option on the underlying security or currency with either a different
exercise price or expiration date or both. If a 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 Funds will be able to
effect such closing transactions at favorable prices. If a Fund cannot enter
into such a transaction, it may be required to hold a security or currency that
it might otherwise have sold. When a 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 Funds 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 Funds 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, a 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 Funds 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
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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 a
Fund.
Each 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 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 Funds have no current
intention, in the foreseeable future, of writing American or European style
covered put options, the Funds reserve 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 Funds would write put options only on a covered basis, which means
that a 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.) A 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 a Fund. In
addition, a 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 currencies.
PURCHASING PUT OPTIONS. The Funds may purchase American or European
style put options. As the holder of a put option, each 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 Funds may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. Each 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.
A 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
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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.
Each 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, a 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, a 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.
The premium paid by a 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 Funds may purchase American or European
style call options. As the holder of a call option, a 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 Funds may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. Each Fund may
purchase call options for the purpose of increasing its current return or
avoiding tax consequences which could reduce its current return. Each 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 a Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables a 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 Funds 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, a 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.
Each 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
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 Funds may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While each 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
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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, a 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 a 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 each 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 Funds will be able to liquidate a dealer option at a favorable price at
any time prior to expiration. Until a 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 Funds may be unable to liquidate a dealer option. With respect to options
written by the Funds, the inability to enter into a closing transaction may
result in material losses to the Funds. For example, since a 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 Funds'
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. Each 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, each 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 SEC changes its position on the liquidity of dealer options,
each Fund will change its treatment of such instruments accordingly.
SPREAD OPTION TRANSACTIONS. The Funds 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 a
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 Funds 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 Funds 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
Funds' custodian. The Funds do not consider a security covered by a spread
option to be "pledged" as that term is used in each Fund's policy limiting the
pledging or mortgaging of its assets.
OPTIONS ON SECURITIES AND OTHER FINANCIAL INDICES. The Funds may
purchase and sell call and put options on securities indices and other financial
indices. In so doing, each 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
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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 the Funds have no current intention of entering
into options transactions other than those described herein, each 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 each
Fund's investment objective(s) and restrictions as in effect at such time.
FEDERAL TAX TREATMENT OF OPTIONS, FUTURES CONTRACTS AND FORWARD FOREIGN EXCHANGE
CONTRACTS.
The discussion herein may refer to transactions in which the Funds do
not engage.
The Funds 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 each 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. Each 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 each 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.
The Taxpayer Relief Act of 1997 has added new provisions for dealing
with transactions that are generally called "Constructive Sale Transactions."
Under these rules, each Fund must recognize gain (but not loss) on any
constructive sale of an appreciated financial position in stock, a partnership
interest or certain debt instruments. Each Fund will generally be treated as
making a constructive sale when it: (i) enters into a short sale on the same
property, (ii) enters into an offsetting notional principal contract, or (iii)
enters into a futures or forward contract to deliver the same or substantially
similar property. Other transactions (including certain financial instruments
called collars) will be treated as constructive sales as provided in Treasury
regulations to be published. There are also certain exceptions
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that apply for transactions that are closed before the end of the 30th day after
the close of the taxable year.
Distributions paid to a shareholder by a Fund of ordinary income and
short-term capital gains arising from the Fund's investments, including
investments in options, forwards, and futures contracts, will be taxable as
ordinary income. Each Fund will monitor its transactions in such options and
contracts and may make certain other tax elections in order to mitigate the
effect of the above rules.
INVESTMENT RESTRICTIONS
HIGH YIELD FUND
Restrictions (1) through (10) below are fundamental. Fundamental
policies may not be changed without the approval of the lesser of: (i) 67% of
the High Yield 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 High Yield 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 High
Yield Fund.
FUNDAMENTAL POLICIES OR RESTRICTIONS OF THE HIGH YIELD FUND:
As a matter of fundamental policy, the High Yield 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;
(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);
26
<PAGE> 71
(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; or
(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 OF THE HIGH YIELD FUND:
As a matter of non-fundamental policy, the High Yield Fund will not:
(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 1940 Act; 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
27
<PAGE> 72
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 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.
EMERGING MARKETS FUND
Restrictions (1) through (8) below are fundamental. Fundamental
policies may not be changed without the approval of the lesser of: (i) 67% of
the Emerging Markets 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 Emerging Markets 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
Emerging Markets Fund.
FUNDAMENTAL POLICIES OR RESTRICTIONS OF THE EMERGING MARKETS FUND:
As a matter of fundamental policy, the Emerging Markets 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 331/3% of its total assets valued at market. The
Fund will not borrow in order to increase income (leveraging), but only
to facilitate redemption requests
28
<PAGE> 73
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) 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;
(4) 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);
(5) 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;
(6) 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 8. 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;
(7) 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; or
(8) 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 OF THE EMERGING MARKETS FUND:
As a matter of non-fundamental policy, the Emerging Markets Fund will
not:
(9) Control of Portfolio Companies. Invest in companies for
the purpose of exercising management or control;
(10) Equity Securities. Invest more than 10% of the Fund's
total assets in common stocks (including up to 5% in warrants);
(11) Futures Contracts. Enter into futures contracts or
options thereon if, as a result thereof, more than 5% of the Fund's net
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 CFTC regulations, may be excluded in computing
such 5%;
(12) 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
29
<PAGE> 74
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 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;
(13) 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;
(14) 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;
(15) 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 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; or
(16) Illiquid Securities. Invest more than 15% of the value of
its net assets in illiquid securities.
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 Funds (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>
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; Director of
1201 Edgecliff Place Carillon Fund, Inc. and
Cincinnati, OH 45206 Trustee of Carillon
71 years old Investment Trust
(investment companies);
formerly partner, Ernst &
Whinney (Certified Public
Accountants).
</TABLE>
30
<PAGE> 75
<TABLE>
<CAPTION>
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 Board of
37 Riverside Drive Trustees, Cincinnati Stock
New York, NY 10023 Exchange; Director, Margo
68 years old Nursery Farms Puerto Rico
(tropical plants).
Dr. Bruce H. Olson Trustee Professor of Finance,
120 Upham Hall Miami University (Oxford,
Miami University OH).
Oxford, OH 45056
62 years old
James F. Smith* Trustee and President Director, President and
30 Montgomery Street Chief Financial Officer of
Jersey City, NJ 07302 Freeman Securities
53 years old Company, Inc. (broker-
dealer)
Steven R. Sutermeister* Trustee and Chairman Representative of the
1876 Waycross Road Adviser (January, 1994-
Cincinnati, OH 45240 present); Vice President
43 years old of The Union Central Life
Insurance Company (August,
1991-present), Vice
President of the Sub-
Adviser.
Gregory A. Sullivan Vice President Senior Vice President,
30 Montgomery Street Freeman Securities
Jersey City, NJ 07302 Company, Inc. (broker-
49 years old dealer).
Thresa Dewar Treasurer Employee of BISYS Fund
3435 Stelzer Road Services, Limited
Columbus, OH 43219 Partnership (since March
41 years old 1997); officer of other
investment companies
administered by BISYS Fund
Services, Limited
Partnership and its
affiliates; Vice President
and Controller of
Federated Administrative
Services, a subsidiary of
Federated Investors, Inc.
prior thereto.
George Landreth Assistant Treasurer Senior Vice President of
3435 Stelzer Road Client Services, BISYS
Columbus, OH 43219 Fund Services, Limited
55 years old Partnership.
</TABLE>
31
<PAGE> 76
<TABLE>
<CAPTION>
PRINCIPAL
(1) (2) OCCUPATION(S)
NAME, ADDRESS AND POSITION(S) HELD DURING PAST 5
AGE WITH REGISTRANT YEARS
- --- --------------- -----
<S> <C> <C>
Craig C. Rudesill Secretary Manager of Client Services
3435 Stelzer Road and employee, BISYS Fund
Columbus, OH 43219 Services, Limited
28 years old Partnership (since
September 1994); formerly,
employee of Merrill Lynch
& Co. (January 1993
through August 1994).
George Martinez Assistant Secretary Senior Vice President and
3435 Stelzer Road Director of Legal and
Columbus, OH 43219 Compliance Services, BISYS
38 years old 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 June
30 years old 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, the Subadviser, BISYS
Fund Services, Limited Partnership (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.
32
<PAGE> 77
For the fiscal year ended May 31, 1997, the Trustees received the
following compensation from the Trust:
<TABLE>
<CAPTION>
(1) (2) (3)
TOTAL
COMPENSATION
FROM TRUST
NAME AND AGGREGATE AND FUND
POSITION COMPENSATION COMPLEX TO
WITH THE TRUST FROM 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
</TABLE>
+ As of May 31, 1997, the "Fund Complex" consisted of one investment
company, the Trust, and one portfolio, the High Yield Fund.
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 December 26, 1997, the officers
and Trustees, individually and as a group, owned beneficially less than 1% of
the outstanding shares of the High Yield Fund and of the Emerging Markets Fund.
PRINCIPAL HOLDERS OF SECURITIES
As of December 26, 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 3,021,688.665 outstanding shares of the High Yield Fund (74% of the
outstanding shares of the High Yield Fund).
As of December 26, 1997, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94101-4122 owned of record and beneficially
298,225.593 outstanding shares of the High Yield Fund (7% of the outstanding
shares of the High Yield Fund).
Under the 1940 Act, Union Central Life is deemed a controlling person
of the High Yield Fund. A controlling person possesses the ability to control
the outcome of matters submitted for stockholder vote.
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 Funds. 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
33
<PAGE> 78
"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 Securities Exchange Act of 1934, as amended (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 Funds 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 and President 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 High Yield 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 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 further
increase their capital commitments to the Adviser prior to December 31, 1997.
THE ADVISORY AGREEMENTS.
The Adviser serves as investment adviser to the High Yield Fund
pursuant to an Investment Advisory Agreement with the Trust dated June 27, 1994
(the "High Yield Advisory Agreement"). The Adviser serves as investment adviser
to the Emerging Markets Fund pursuant to an Investment Advisory Agreement with
the Trust dated December 31, 1997 (the "Emerging Markets Advisory Agreement").
(The High Yield Advisory Agreement and the Emerging Markets Advisory Agreement
are collectively the "Advisory Agreements.") The Advisory Agreements are
identical in all material respects except for
34
<PAGE> 79
their provisions relating to compensation of the Adviser and except as otherwise
noted below. Under the Advisory Agreements, the Adviser, subject to the
supervision of the Trustees, provides a continuous investment program for each
Fund, including investment research and management with respect to all
securities, investments and cash equivalents, in accordance with each 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 each 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 each Fund and furnishes to the Trustees such periodic or other
reports as the Trustees may request.
During the term of the Advisory Agreements, 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
Funds. The advisory services furnished by the Adviser under the Advisory
Agreements are not exclusive, and the Adviser is free to perform similar
services for others.
Unless sooner terminated in accordance with its terms, the High Yield
Advisory Agreement may be continued from year to year after June 27, 1996, and
the Emerging Markets Advisory Agreement may be continued from year to year after
December __, 1999, provided that each 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 respective Fund, or by the Trustees,
and in either event by vote of a majority of the Trustees who are not parties to
either 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 a Fund if a majority of the outstanding voting
securities of that Fund votes to approve such continuance, notwithstanding that
continuance may not have been approved by the other Fund, of the Trust or by a
majority of the voting securities of the Trust.
If the shareholders of a Fund fail to approve any continuance of the
Fund's Advisory Agreement, the Adviser will continue to act as such with respect
to that 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 appropriate Advisory Agreement, whichever is less.
Each 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 appropriate Fund; or (ii) by the Adviser.
The Advisory Agreements 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 appropriate 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 a Fund if a majority of the outstanding voting securities of the
appropriate 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 each Advisory Agreement, the Adviser will be liable
to each 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.
35
<PAGE> 80
THE ADVISORY FEES.
The advisory fees payable to the Adviser are described in the
prospectuses. As described in the High Yield Fund's prospectus, as full
compensation for services furnished to the High Yield Fund and expenses of the
High Yield Fund assumed by the Adviser, the High Yield Fund pays the Adviser an
advisory fee which increases or decreases based on the total return investment
performance of the High Yield 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 High Yield Fund's prospectus. In the
event the Index is no longer published or available or becomes an inappropriate
measure of the High Yield Fund's performance, the Trustees will meet to approve
another appropriate index or will negotiate a fixed advisory fee with the
Adviser.
The High Yield 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.
As described in the Emerging Markets Fund's prospectus, as full
compensation for services furnished to the Emerging Markets Fund and expenses of
the Emerging Markets Fund assumed by the Adviser, the Emerging Markets Fund pays
the Adviser an advisory fee equal to 0.75 of 1% of the Emerging Markets Fund's
average daily net assets. The Emerging Markets Fund commenced operations on
December 31, 1997 and hence, has not previously paid an advisory fee to the
Adviser.
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 AGREEMENTS.
The Sub-Adviser serves as sub-adviser of the High Yield Fund pursuant
to an Investment Sub-Advisory Agreement with the Adviser dated September 18,
1996 (the "High Yield Sub-Advisory Agreement"). The Sub-Adviser serves as
sub-adviser of the Emerging Markets Fund pursuant to an Investment Sub-Advisory
Agreement with the Adviser dated December 31, 1997 (the "Emerging Markets
Sub-Advisory Agreement"). (The High Yield Sub-Advisory Agreement and the
Emerging Markets Sub-Advisory Agreement are collectively the "Sub-Advisory
Agreements.") The Sub-Advisory Agreements are identical in all material respects
except for their provisions relating to compensation and except as otherwise
noted below.
Under the Sub-Advisory Agreements, Carillon provides, subject to the
Adviser's direction, a portion of the investment advisory services for which the
Adviser is responsible pursuant to each Advisory Agreement relating to the
Funds. The Sub-Adviser provides investment research and advice with respect to
securities and investments and cash equivalents in the Funds. Research services
provided by the Sub-Adviser include information, analytical reports, computer
screening studies, statistical data and factual resumes pertaining to high yield
securities (for both Funds) and emerging market securities (for the Emerging
Markets Fund). Such supplemental research may be subject to additional analysis
by the Adviser. The advisory fees payable to the Sub-Adviser are described in
the prospectuses.
Prior to the implementation of the High Yield 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
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equipment in the performance of its advisory services and functions for the High
Yield Fund under the High Yield 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 Funds. 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 Funds
(the "Administrator"), and as the Funds' distributor or principal underwriter
(the "Distributor") (see "Distribution Plan -- 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 Funds (the "Fund Accountant") and additionally acts as the Funds' 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 Funds and subject to the direction and control
of the Trustees, supervises all aspects of the operation of the Funds except
those performed by the Funds' Adviser, the Sub-Adviser, custodian, Transfer
Agent and Fund Accountant pursuant to their respective agreements with the
Trust. For the following fiscal periods, the Administrator received fees, as
noted, for providing services to the High Yield Fund: 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. As the Emerging Markets Fund
did not have operations prior to the date of this SAI, the Administrator had
neither furnished services to the Emerging Markets Fund nor received fees from
the Fund prior to such date.
The Administration Agreement further provides that the Administrator
will not be liable for losses suffered by the Funds 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 each 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 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
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
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due under the Administration Agreement for the remainder of the term in which
such termination or replacement takes place.
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 Funds and their investment transactions; maintaining
certain books and records of the Funds; determining daily the net asset values
per share of the Funds and calculating yield, dividends and capital gain
distributions; and preparing security position, transaction and cash position
reports.
For such services, the Funds reimburse 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 pay it a fee, computed daily and paid monthly, at the
annual rate of 0.03% of the High Yield Fund's average daily net assets,
provided, however, that such fee for the High Yield Fund will not be less than
$30,000, and at the annual rate of 0.03% of the Emerging Markets Fund's average
daily net assets, provided, however, that such fee for the Emerging Markets Fund
will not be less than $50,000. The Fund Accountant received fees from the High
Yield Fund 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 Emerging Markets Fund did not have any operations during such periods.
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 each Fund's
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 Funds reimburse the Transfer Agent for all
out-of-pocket expenses incurred by it (including all charges for delivery of
materials, telephone and other communication 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 from the High Yield Fund 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 Emerging Markets Fund did not have
operations during such periods.
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%
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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 High Yield Fund, and adopted
and effective on behalf of the shares of the Emerging Markets Fund on December
16, 1997, is a written plan contemplated by Rule 12b-1 (the "Rule") promulgated
under the 1940 Act. Each 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 each Fund's average net assets to finance
distribution expenses. Under the Plan, each 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 each 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 Funds for compliance with this NASD rule.
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 Fund
shareholders, printing and distributing advertising and sales literature and
reports to shareholders used in connection with selling shares of the Funds,
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 a 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 High Yield Fund
was obtained on May 24, 1994, and the Plan was also approved by the sole
shareholder of the High Yield Fund on May 24, 1994. Such approval of the Plan on
behalf of the Emerging Markets Fund by the Trustees was obtained on December 31,
1997.
The Plan will continue in effect for a Fund 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 for a Fund 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
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agreement related to the Plan or by vote of a majority of the outstanding voting
securities of such Fund.
The Plan may not be amended so as to materially increase the amount of
the distribution fees for a Fund unless the amendment is approved by a vote of
at least a majority of the outstanding voting securities of such 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
High Yield Fund's principal underwriter, received $78,445 in distribution fees
from the High Yield Fund 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 High Yield 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.
From May 31, 1996 to July 31, 1997, the High Yield 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 Emerging Markets Fund did not have operations during the fiscal
year ended May 31, 1997 and paid no fees under the Plan during such period.
THE DISTRIBUTOR.
BISYS Fund Services serves as the Funds' 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 Funds' 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
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 High
Yield 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 High Yield
Fund. The Emerging Markets Fund did not have operations during the fiscal year
ended May 31, 1997 and the Distributor received no underwriting commissions on
sales of shares of such Fund during such period.
PORTFOLIO TRANSACTIONS
INVESTMENT OR BROKERAGE DISCRETION.
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Funds are made by the Adviser. The Adviser is also responsible
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. The Funds'
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
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of the discussion below relating solely to brokerage commissions would not
normally apply to the Funds or applies with respect to only a very small
percentage of each Fund's total assets. For the fiscal year ended May 31, 1997,
neither of the Funds paid any brokerage commissions on brokerage transactions.
The Emerging Markets Fund did not have operations during the fiscal year ended
May 31, 1997.
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 Funds
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 Funds may receive
brokerage and research services in connection with such designations in a fixed
priced underwriting.
In purchasing and selling the Funds' 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 a Fund does not generally engage), at competitive commission rates.
However, under certain conditions, a Fund may pay higher brokerage commissions
in return for brokerage and research services. In selecting broker-dealers to
execute a 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 Funds. In evaluating the reasonableness of commission rates, the
Adviser considers: (i) historical commission rates; (ii) rates which other
institutional 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.
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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.
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 Funds are free to dispose of their 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 a Fund's investment objective.
Each 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 Funds do not intend to use short-term trading as a primary means of
achieving their investment objectives. 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 a Fund during the particular fiscal
year. Such monthly average shall be calculated by totaling the values of the
portfolio securities as of the
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beginning and end of 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
High Yield Fund is not expected to exceed 200%, and for the Emerging Markets
Fund, 150%. High portfolio turnover rates may involve corresponding greater
brokerage commissions and other transaction costs, which will be borne directly
by a 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 High Yield Fund was 271.68%, while for the fiscal year ended May 31, 1996,
the portfolio turnover rate for the High Yield Fund was 187.61%. The significant
variation in portfolio turnover rates over such periods was due to an increase
in the assets of the High Yield Fund, which caused the High Yield 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 Funds do not allocate business to any broker-dealer on the basis of
its sales of the Funds' shares. However, this does not mean that broker-dealers
who purchase Fund shares for their clients will not receive business from that
Fund.
The Adviser currently manages only the Funds. 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
Funds. Although investment recommendations or determinations for the Funds 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 a 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
a 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 beneficial interests
in the Trust. As of the date of this SAI, the Trustees have designated two
series of the Trust, which are the High Yield Fund and the Emerging Markets
Fund, and the Trustees have created two classes of shares in the High Yield
Fund: the Summit High Yield Shares class and the Summit High Yield Institutional
Shares class. This SAI covers 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 High Yield Fund,
the Summit High Yield Shares class; each share represents an interest in the
High Yield Fund's portfolio proportionately equal to the interest of each other
share of such portfolio. The Trust currently offers one class of shares of the
Emerging Markets Fund; each share represents an interest in the Emerging Markets
Fund's portfolio proportionately equal to the interest of each other share of
such portfolio. Upon the Trust's liquidation, all shareholders of a Fund would
share pro-rata in the net assets of that Fund's portfolio available for
distribution to shareholders.
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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, each 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.
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 a 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 a 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
Each 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 a 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. Each 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, a 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
44
<PAGE> 89
investment, would be taxable as either dividends or capital gain distributions.
For federal income tax purposes, each 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.
If, in any taxable year, a 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 a 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 a
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 a 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 a
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 a 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 a 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 each
Fund's taxable year.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of a 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 a Fund, show the performance of a hypothetical investment and are not
intended to indicate future performance.
YIELD INFORMATION.
From time to time, a 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 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.
45
<PAGE> 90
Yields for a 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 a Fund's offering price (including the 4.50%
sales charge) 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 a 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 a 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 High Yield Fund's yield for the shares of the Summit High Yield Shares class
was 7.57%. The Emerging Markets Fund did not commence operations during such
period.
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:
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 and all dividends and distributions by a Fund are assumed to have been
reinvested at net asset value as described in the prospectuses 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 a 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 of the High Yield Fund 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 of the High Yield Fund. 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 of the High Yield Fund were
12.84% and 14.66%, respectively. The Emerging Markets Fund did not commence
operations during such periods.
46
<PAGE> 91
Each 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. Each
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 Europe,
Australia, Far East Index or the Morgan Stanley Capital International World
Index. For such purposes, each 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. Each Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. Each 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.
Each 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 Funds nor the Distributor makes any such charge. Repurchase
arrangements differ from redemptions in that the dealer buys the shares as
principal from his customer in lieu of tendering shares to the appropriate 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 a 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 a 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;
47
<PAGE> 92
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 Funds' securities and cash, but
it does not participate in the Funds' 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 The Bank of New York.
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.
FINANCIAL INFORMATION
The High Yield 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. The Emerging Markets Fund did not have operations during such
period.
48
<PAGE> 93
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.
49
<PAGE> 94
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.
50
<PAGE> 95
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.
51
<PAGE> 96
SMMIT 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
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
-----------
</TABLE>
52
<PAGE> 97
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------ ----------- -----
<S> <C>
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
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
-----------
</TABLE>
53
<PAGE> 98
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------ ----------- -----
<S> <C>
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
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
-----------
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.
54
<PAGE> 99
(a) Represents cost for federal income tax purposes and differs from value
by net unrealized appreciation of securities as follows:
Unrealized appreciation $2,274,438
Unrealized depreciation (380,672)
----------
Net unrealized appreciation $1,893,766
==========
(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.
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
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<PAGE> 100
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.
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.
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<PAGE> 101
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.
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.
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<PAGE> 102
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.
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<PAGE> 103
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.
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.
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<PAGE> 104
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
60
