<PAGE> 1
As filed with the U.S. Securities and Exchange Commission on September 29, 1998
Registration No. 33-76250
File No. 811-8406
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
--
Post-Effective Amendment No. 9 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 11 (X)
(Check appropriate box or boxes.)
SUMMIT INVESTMENT TRUST
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(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, OH 43219
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(Address of Principal Executive Offices)(Zip Code)
(800) 272-3442
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(Registrant's Telephone Number, Including Area Code)
Craig C. Rudesill
Summit Investment Trust
3435 Stelzer Road
Columbus, OH 43219
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(Name and Address of Agent for Service)
Copy to:
Bruce G. Leto, Esq.
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square, Suite 2600
Philadelphia, PA 19103
(215) 564-8115
Approximate Date of Proposed Public Offering: Immediately upon effectiveness
-----------------------------------
It is proposed that this filing will become effective (check appropriate box):
X Immediately upon filing pursuant to paragraph (b)
- --
On (________________) pursuant to paragraph (b)
- --
60 days after filing pursuant to paragraph (a)(1)
- --
On (__________________) pursuant to paragraph (a)(1)
- --
75 days after filing pursuant to paragraph (a)(2)
- --
On (__________________) pursuant to paragraph (a)(2) of Rule 485.
- --
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
- -- previously filed post-effective amendment.
Title of Securities Being Registered: Shares of beneficial interest, without par
value.
<PAGE> 2
FORM N-1A
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CROSS REFERENCE SHEET
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SUMMIT HIGH YIELD FUND AND SUMMIT EMERGING MARKETS BOND FUND
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM NO. PROSPECTUS LOCATION
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<S> <C> <C>
Item 1. Front and Back Cover Pages Front and Back Cover Page
Item 2. Risk/Return Summary: Investments, Risks and Risk/Return Summary and
Performance Fund Expenses
Item 3. Risk/Return Summary: Fee Table Risk/Return Summary and
Fund Expenses
Item 4. Investment Objectives, Principal Investment About Each Fund and
Strategies, and Related Risks Its Managers
Item 5. Management's Discussion of Fund Risk/Return Summary and
Performance Fund Expenses; About Each Fund
and Its Managers
Item 6. Management, Organization and Organization and Management
Capital Structure of the Funds
Item 7. Shareholder Information Purchasing and Selling Your
Shares; Services For Fund Investors;
Dividends, Distributions and Taxes
Item 8. Distribution Arrangements Distribution Arrangements;
Distribution (12b-1) Fees
Item 9. Financial Highlights Information Financial Highlights
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
LOCATION IN STATEMENT OF
FORM N-1A PART B ITEM NO. ADDITIONAL INFORMATION
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<S> <C> <C>
Item 10. Cover Page and Table of Contents Cover Page and Table of Contents
Item 11. Fund History General Information
Item 12. Description of the Fund and Its General Information; Investment
Investments and Risks Objectives and Policies; Risk Factors;
Investment Programs
Item 13. Management of the Fund Management of the Trust
Item 14. Control Persons and Principal Principal Holders of Securities
Holders of Securities
Item 15. Investment Advisory and Management of the Trust; Investment
Other Services Advisory Services; Management-Related
Services
Item 16. Brokerage Allocation and Distribution Plan; Portfolio Transactions
Other Practices
Item 17. Capital Stock and Other Securities Capital Stock
Item 18. Purchase, Redemption, and General; Pricing of Securities
Pricing of Shares
Item 19. Taxation of the Fund Taxes; General
Item 20. Underwriters Distribution Plan
Item 21. Calculation of Performance Data Investment Performance
Item 22. Financial Statements Financial Statements
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
FORM N-1A PART C ITEM NO. LOCATION IN PART C
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<S> <C> <C>
Item 23. Exhibits Exhibits
Item 24. Persons Controlled by or Under Persons Controlled by or Under
Common Control with the Fund Common Control with the Registrant
Item 25. Indemnification Indemnification
Item 26. Business and Other Connections Business and Other Connections
of the Investment Adviser of the Investment Adviser
Item 27. Principal Underwriters Principal Underwriter
Item 28. Location of Accounts and Records Location of Accounts and Records
Item 29. Management Services Management Services
Item 30. Undertakings Undertakings
</TABLE>
4
<PAGE> 5
[Summit Investment Trust Logo]
MANAGED BY
FIRST SUMMIT CAPITAL MANAGEMENT
------------------------------------------------------
SUMMIT HIGH YIELD FUND
SUMMIT EMERGING MARKETS BOND FUND
PROSPECTUS AS OF SEPTEMBER 30, 1998
THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED THE SHARES DESCRIBED
IN THIS PROSPECTUS OR DETERMINED
WHETHER THIS PROSPECTUS IS ACCURATE
OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
QUESTIONS?
Call 800-272-3442 or your
investment representative.
<PAGE> 6
SUMMIT INVESTMENT TRUST PROSPECTUS TABLE OF CONTENTS
<TABLE>
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<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
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LOGO
Carefully review this very 3 Summit High Yield Fund
important section, which 7 Summit Emerging Markets Bond Fund
summarizes each fund's
investments, risks,
performance, and fees.
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
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LOGO
Review this section for 10 Summit High Yield Fund
important additional 12 Summit Emerging Markets Bond Fund
information, including each
Fund's investment policies
and risks.
SHAREHOLDER INFORMATION
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LOGO
Turn to this section for 15 Pricing of Fund Shares
information on how to open 16 Purchasing and Selling Your Shares
and maintain your account, 21 Distribution Arrangements/Sale Charges
including how to buy, sell 27 Services for Fund Investors
and exchange Fund shares. 29 Dividends, Distributions and Taxes
MANAGEMENT OF THE FUNDS
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LOGO
Look here for details on the 30 Investment Adviser
management of the Funds, 30 Advisory Agreement
including the portfolio 31 Advisory Fee
manager. 32 Sub-Adviser
OTHER INFORMATION ABOUT THE FUND
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LOGO
33 Shareholder Inquiries
34 Financial Highlights
</TABLE>
2
<PAGE> 7
RISK/RETURN SUMMARY AND FUND EXPENSES LOGO
RISK/RETURN SUMMARY OF THE
SUMMIT HIGH YIELD FUND
(THE "HIGH YIELD FUND")
<TABLE>
<S> <C>
WHAT IS THE HIGH YIELD (1) High Current Income
FUND'S INVESTMENT OBJECTIVE? (2) Capital Appreciation, secondarily.
WHAT ARE THE HIGH YIELD The Fund invests primarily in high-yield, high risk ("junk")
FUND'S PRINCIPAL INVESTMENT bonds, with intermediate (5-10 year) maturities. For its
STRATEGIES? investments, the Fund seeks to identify high yield bonds of
financially sound companies that have the ability to make
timely payments of principal and interest. Using fundamental
credit analysis of companies, the Fund seeks to invest in
companies whose financial conditions gives them greater
value relative to other companies in the high yield market.
WHAT ARE THE PRINCIPAL RISKS - The risks described below could have the effect of
OF INVESTING IN THE HIGH reducing the Fund's net asset value, yield or total return:
YIELD FUND?
- High yield bonds are sensitive to interest rate changes.
Generally, when interest rates rise, the prices of these
bonds fall and when interest rates fall the prices of
these bonds rise. The longer the maturity of these bonds,
the greater is this impact from interest rate changes.
- The value of the Fund's investments also will vary with
bond market conditions.
- High Yield bonds are below investment grade instruments
because of the significant risk of issuer default.
- Other risks of high yield bonds include the market's
relative youth, price volatility, economic changes, limited
liquidity, valuation difficulties and special tax
considerations.
- You could lose money on your investment in the Fund or the
Fund could underperform other investments.
An investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
</TABLE>
3
<PAGE> 8
RISK/RETURN SUMMARY AND FUND EXPENSES LOGO
The bar chart and table
below help show the returns
and risks of investing in
the High Yield Fund. They
show changes in the Fund's
yearly performance over the
life of the Fund and
compare the Fund's average
annual returns for the past
one year and the life of
the Fund to those of the
Salomon High Yield Index**
during each period. You
should keep in mind that
the Fund's past performance
is not necessarily an
indication of the Fund's
future performance.
PERFORMANCE BAR
CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
The Fund's performance for calendar year 1998
through June 30, 1998 was 5.33%.
<TABLE>
<S> <C> <C>
Best quarter: Q2 1997 6.71%
Worst quarter: Q4 1997 1.27%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS* (FOR THE PERIODS ENDING DECEMBER 31, 1997)
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<TABLE>
<CAPTION>
SINCE
PAST ONE INCEPTION
YEAR (JUNE 27, 1994)
<S> <C> <C>
--------------------------------
SUMMIT HIGH YIELD FUND CLASS A*** 17.62% 16.88%
--------------------------------
SALOMON HIGH YIELD INDEX** 13.18% 12.84%
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</TABLE>
* The bar chart does not reflect the impact of any applicable sales charges
and if these amounts were reflected, returns would be less than those shown.
The table above does reflect the impact of any applicable sales charges. The
Fund Fees and Expenses table below details the sales charges, if any, that
apply to each class of shares of the High Yield Fund.
** The Salomon High Yield Index is the Salomon Brothers High Yield Market
Index,(R) a widely recognized, unmanaged index of high yield bond prices.
The Index assumes reinvestment of all dividends/distributions and does not
reflect any asset-based charges for investment management or other expenses.
*** Returns are for Class A shares only; Class B shares had not yet been offered
prior to the date of this prospectus.
4
<PAGE> 9
RISK/RETURN AND FUND EXPENSES [LOGO]
As an investor in the High Yield Fund, you will pay the following fees and
expenses. Shareholder transaction fees are paid from your account. Annual Fund
operating expenses are paid out of Fund assets, and are reflected in the share
price.
CONTINGENT DEFERRED SALES CHARGE
Class B Shares impose a back end sales charge (load) if you sell your shares
before a certain period of time has elapsed. This is called a Contingent
Deferred Sales
FEES AND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID
DIRECTLY FROM
YOUR INVESTMENT)
HIGH YIELD FUND
A SHARES B SHARES
<S> <C> <C>
Maximum sales charge (load) imposed on
Purchases (as a percentage of offering
prices) 4.50%(1) None
- -------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lesser of
price at purchase or net asset value
at redemption) None(2) 5.00%(3)
ANNUAL FUND
OPERATING EXPENSES
(EXPENSES THAT ARE
DEDUCTED FROM
FUND ASSETS) A SHARES B SHARES
Management fees(4) 1.15% 1.15%
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Distribution and service (12b-1)
fees(5) 0.25% 1.00%(6)
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Other expenses 0.63% 0.63%
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Total fund operating expenses(7) 2.03% 2.78%
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</TABLE>
(1) Reduced on investments of $100,000 or more and subject to certain discounts
and exceptions. See "Distribution Arrangements-Calculation of Sales Charges."
(2) A deferred sales charge may be applicable on investments of $500,000 or
more. See "Distribution Arrangements-Calculation of Sales Charges."
(3) Contingent deferred sales charge ("CDSC") declines each year over 6 years,
as follows: 5%, 4%, 3%, 3%, 2%, 1%, and 0%. (4) This fee may vary between 0.35%
and 1.15% depending on the Fund's investment performance. For the fiscal year
ended May 31, 1998, the fee was 0.91% before the voluntary fee waiver described
in footnote 7 and was 0.55% after such voluntary fee waiver.
(5) Long-term shareholders may pay indirectly more than the equivalent of the
maximum front-end sales charge permitted by National Association of Securities
Dealers, Inc. regulation due to the recurring nature of Distribution (12b-1)
Fees.
(6) Includes a fee of 0.75% for distribution related expenses and 0.25% for
shareholder services expenses.
(7) The Adviser has voluntarily agreed to waive its advisory fee and/or to
reimburse the Fund, if necessary, if the advisory fee or expenses would cause
the Total Fund Operating Expenses to exceed 1.60% for the Class A shares and
2.35% for the Class B shares. The Adviser may revise or cancel these expense
limitations at any time and will notify you of the change. Charge ("CDSC").
5
<PAGE> 10
RISK/RETURN SUMMARY AND FUND EXPENSES LOGO
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison purposes, your actual
costs will be different.
EXPENSE EXAMPLE
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
CLASS A SHARES $647 $1,058 $1,494 $2,702
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CLASS B SHARES
Assuming redemption $781 $1,162 $1,669 $3,109
Assuming no redemption $281 $ 862 $1,469 $3,109
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</TABLE>
6
<PAGE> 11
RISK/RETURN SUMMARY AND FUND EXPENSES LOGO
RISK/RETURN SUMMARY OF THE
SUMMIT EMERGING MARKETS BOND FUND
(THE "EMERGING MARKETS FUND")
<TABLE>
<S> <C>
WHAT IS THE EMERGING MARKETS High income and capital appreciation.
FUND'S INVESTMENT OBJECTIVE?
WHAT IS THE EMERGING MARKETS The Fund invests primarily in government and corporate bonds
FUND'S PRINCIPAL INVESTMENT of emerging markets nations. For its investments, the Fund
STRATEGIES? seeks to identify high yield bonds of financially sound
companies that have the ability to make timely payments of
principal and interest. Using fundamental credit analysis of
companies, the Fund seeks to invest in companies whose
financial conditions gives them greater value relative to
other companies in the high yield market. The Fund also uses
a fundamental credit analysis of the country and government
risks of the countries where the issuers of the bonds are
domiciled to identify issuers with greater value relative to
other issuers in the same or other countries. The Fund
invests predominantly in U.S. dollar denominated bonds. The
Fund is nondiversified which means that up to 50% of the
Fund's assets may be invested without limitation on the
amount invested in a single issuer. Normally, the Fund will
not invest more than 5% of its assets in a single issuer.
WHAT ARE THE PRINCIPAL RISKS Emerging market debt carries significant risks of principal
OF INVESTING IN THE EMERGING loss. These risks could have the effect of reducing the
MARKETS FUND? Fund's net asset value, yield or total return. Among the
risks are:
- the low quality of the bonds' issuers which increases the
risk of default
- the volatile nature of many of these countries' economies
and markets
- the relatively small number of investors buying these
securities which increases price volatility
- currency conversion risks in the relatively few cases
where these securities are not denominated in U.S. dollars
High yield bonds are sensitive to interest rate changes.
Generally, when interest rates rise, the prices of these
bonds fall and when interest rates fall the price of these
bonds rise. The longer the maturity of these bonds, the
greater is this impact from interest rate changes. In
addition, certain foreign countries may impose exchange
controls or other policies, including taxes, that restrict
the Fund's movement of its assets out of the country and its
liquidation of its investments in the country. Lack of
diversification may expose the Fund to risks related to a
single issuer or a few issuers.
An investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
</TABLE>
7
<PAGE> 12
RISK/RETURN SUMMARY AND FUND EXPENSES LOGO
This table describes the fees and expenses you may pay if you buy and hold
shares of the Emerging Markets Fund.
As an investor in the Emerging Markets Fund, you will pay the following fees and
expenses. Shareholder transaction fees are paid from your account. Annual Fund
operating expenses are paid out of Fund assets, and are reflected in the share
price.
CONTINGENT DEFERRED SALES CHARGE
Class B Shares impose a back end sales charge (load) if you sell your shares
before a certain period of time has elapsed. This is called a Contingent
Deferred Sales Charge ("CDSC").
FEES AND EXPENSES
<TABLE>
<CAPTION>
<S> <C> <C>
EMERGING MARKETS FUND
A SHARES B SHARES
SHAREHOLDER FEES
(FEES PAID
DIRECTLY FROM
VALUE INVESTMENT)
Maximum sales charge (load) imposed
on purchases (as a percentage of
offering prices) 4.50%(1) None
- ---------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of the lesser of
price at purchase or net asset value
at redemption) None(2) 5.00%(3)
- ---------------------------------------------------------------
ANNUAL FUND
OPERATING EXPENSES
(EXPENSES THAT ARE
DEDUCTED FROM
FUND ASSETS) A SHARES B SHARES
Management fee 0.75% 0.75%
- ---------------------------------------------------------------
Distribution and service (12b-1)
fees(4) 0.25% 1.00%(5)
Other expenses 1.20% 1.20%
- ---------------------------------------------------------------
Total fund operating expenses(6) 2.20% 2.95%
- ---------------------------------------------------------------
</TABLE>
(1) Reduced on investments of $100,000 or more subject to certain discounts
and exceptions. See "Distribution Arrangements-Calculation of Sales Charges."
(2) A deferred sales charge may be applicable on investments of $500,000 or
more. See "Distribution Arrangements-Calculation of Sales Charges."
(3) Contingent deferred sales charge ("CDSC") declines each year over 6
years, as follows: 5%, 4%, 3%, 3%, 2%, 1% and 0%.
(4) Long-term shareholders may pay indirectly more than the equivalent of the
maximum front-end sales charge permitted by National Association of
Securities Dealers, Inc. regulation due to the recurring nature of
Distribution (12b-1) Fees.
(5) Includes a fee of 0.75% for distribution related expenses and 0.25% for
shareholder services expenses.
(6) The Adviser has voluntarily agreed to waive its advisory fee and/or to
reimburse the Emerging Markets Fund, if necessary, if the advisory fee or
expenses would cause the Total Fund Operating Expenses to exceed 2.00% for
the Class A shares and 2.75% for the Class B shares. The Adviser may revise
or cancel these expense limitations at any time and will notify you of the
change.
8
<PAGE> 13
RISK/RETURN SUMMARY AND FUND EXPENSES LOGO
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of
each period
- no changes in the Fund's
operating expenses
Because this example is hypothetical and for comparison purposes, your actual
costs will be different.
EXPENSE EXAMPLE
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
CLASS A SHARES $223 $ 668 * *
- --------------------------------------------------------------------
CLASS B SHARES
Assuming redemption $798 $1,162 * *
Assuming no redemption $298 $ 897 * *
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</TABLE>
* Not provided because the Emerging Markets Fund commenced operations only
recently, on January 1, 1998.
<PAGE> 14
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS LOGO
HIGH YIELD FUND
TICKER SYMBOL: CLASS A SUMHX CLASS B N/A
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high current income.
PRINCIPAL INVESTMENT STRATEGIES
To achieve this objective, it will ordinarily invest at least 65% of its
total assets in high yield, high risk bonds, also known as "junk" bonds. For
its investments, the Fund seeks to identify high yield bonds of financially
sound companies that have the ability to make timely payments of principal
and interest. Using fundamental credit analysis of companies, the Fund seeks
to invest in companies whose financial conditions gives them greater value
relative to other companies in the high yield market, providing the further
potential for capital appreciation. Consequently, capital appreciation is a
secondary objective of the Fund.
The Adviser will actively manage the Fund to take advantage of relative
values of various sectors of the high yield market in order to seek high
current income and secondarily, capital appreciation. Among the factors that
are important in the Adviser's securities selection are credit fundamentals
and technical trading factors. The Adviser thoroughly researches the bonds it
purchases to make its own determination of the issuer's creditworthiness and
underlying strength. By using this strategy, the Adviser seeks to outperform
the high yield bond market as a whole by choosing individual securities that
may be overlooked by other investors, or bonds that are likely to improve in
credit quality.
The Adviser makes a decision to sell a portfolio security held by the Fund
when (1) the security has appreciated in value due to market conditions and
the issuing company's financial condition; (2) the issuing company's
financial position indicates the company will not perform well and the price
of the security could fall; or (3) the Adviser identifies another security
that is potentially more valuable for current income or capital appreciation
compared to securities held by the Fund.
INVESTING IN HIGH YIELD SECURITIES
When a corporation or a government entity issues a bond, it
generally submits the security to one or more rating
organizations, such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("Standard &
Poor's"). These services evaluate the creditworthiness of the
issuer and assign a rating, based on their evaluation of the
issuer's ability to repay the bond.
Bonds with ratings below Baa (Moody's) or BBB (Standard &
Poor's) are considered below investment grade and are commonly
referred to as junk bonds. Some bonds are not rated at all.
The Adviser determines the comparable rating quality of bonds
that are not rated.
High yield, high-risk bonds present both an opportunity and a
danger. These junk bonds generally offer higher interest
payments because the company that issues the bond -- the
issuer -- is at greater risk of default (failure to repay the
bond). This may be because the issuer is small or new to the
market, the issuer has financial difficulties, or the issuer
has a greater amount of debt.
10
<PAGE> 15
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS LOGO
TEMPORARY OR DEFENSIVE INVESTMENTS -- In response to unfavorable conditions
in the high yield bond market, the Fund may make temporary investments,
without limitation, such as shifting its investments to money market
securities, cash or higher rated bonds, which could cause the Fund not to
meet its principal investment objective and policies.
TRADING OF SECURITIES -- The Fund will buy and sell securities based on its
overall objectives of achieving the highest possible total return, which may
translate into higher than average portfolio turnover. While the Fund's
portfolio turnover rate will vary greatly from year to year, under normal
circumstances it is not expected to exceed 200% annually. If the Fund buys
and sells securities frequently, there will be increased transaction costs
and additional taxable gains to shareholders.
OTHER INVESTMENTS -- The Fund may have other investments that are not part of
its principal investment strategies. The Fund may invest in loan
participations, convertible securities and preferred stocks. Other types of
investments the Fund may use include mortgage-backed or asset-backed
securities, collateralized mortgage obligations, stripped mortgage-backed
securities, zero-coupon and pay-in-kind bonds, equity securities, warrants,
private placements, and foreign securities. See the Statement of Additional
Information for more information about these investments.
RISKS --
There are three types of risks for investors in the High Yield Fund:
(1) RISKS OF INVESTING IN BONDS -- All bonds fluctuate in value as interest
rates fluctuate. Therefore, there is a risk that as interest rates rise, the
value of the Fund's bond investments will decline, resulting in capital
losses to shareholders. In general, high yield bonds are less affected by
interest rate movements than are higher rated bonds.
The Fund generally invests in bonds with maturities between five and ten
years, which are considered intermediate-term bonds. Since prices of longer
term bonds are more sensitive to interest rate changes than prices of
short-term bonds, the Fund has greater interest rate risk that short-term
bond funds.
(2) RISKS OF INVESTING IN HIGH YIELD BONDS -- Some risks of investing in high
yield bonds include:
- Greater credit risk -- Because of their more precarious financial
position, issuers of high yield bonds may be more vulnerable to changes
in the economy or to interest rate changes that might affect their
ability to repay debt.
- Reduced liquidity -- There are fewer investors willing to buy high
yield bonds than there are for higher rated, investment grade
securities. Therefore, it may be more difficult to sell these
securities or to receive a fair market price for them.
- Lack of historical data -- Because high yield bonds are a relatively
new type of security, there is little data to indicate how such bonds
will behave in a prolonged economic downturn. However, there is a risk
that such an economic downturn would negatively affect the ability of
issuers to repay their debts, leading to increased defaults and overall
losses to the Fund.
(3) RISKS OF INVESTING IN FOREIGN SECURITIES -- See the discussion in the
section on Investment Objective, Principal Investment Strategies and Related
Risks for the Emerging Markets Fund on page 14.
11
<PAGE> 16
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS LOGO
EMERGING MARKETS FUND
TICKER SYMBOL: CLASS A SUMEX CLASS B N/A
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide high income and capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
To achieve its investment objective, the Fund invests at least 65% of its
total assets in the government and corporate debt securities (bonds) of
emerging market nations. In pursuit of maximum income and capital
appreciation, the Fund may invest all of its assets in high-risk,
non-investment grade ("junk") bonds. Before the Fund invests in a particular
country or security, the Adviser applies a market risk analysis that
evaluates factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations.
To achieve the Fund's total return objectives while reducing risk, the Fund
employs these strategies:
- Invest in a wide variety of issuers, as described below, to reduce the
impact of any single holding on the Fund's total performance
- Thorough credit analysis of individual issuers through in-depth
proprietary research
- Technical analysis of trading and ownership patterns of targeted
securities
- Adjusting the average maturity of the portfolio to take advantage of or
to minimize the impact of interest rate fluctuations.
The portfolio's weighted average maturity will normally be between 5 and 10
years, although this may vary substantially with changing market conditions.
Because most emerging market debt is issued in U.S. dollars, it is expected
that the Fund will not normally have foreign currency holdings. However, the
Fund may invest in debt denominated in local currencies or other
international currencies. In such cases, the Fund will seek to hedge against
currency fluctuations. The Adviser makes a decision to sell a portfolio
security held by the Fund when (1) the security has appreciated in value due
to market conditions and the issuing company's financial condition; (2) the
issuing company's financial position indicates the company will not perform
well and the price of the security could fall; or (3) the Adviser identifies
another security that is potentially more valuable for current income or
capital appreciation compared to securities held by the Fund.
The Fund's investments may include bonds issued directly by the sovereign or
corporate entities or those issued by supranational entities, such as the
World Bank. The Fund may also invest substantially all of its assets in Brady
Bonds. Brady Bonds are used as a means of restructuring the external debt
burden of governments in certain emerging market nations. These bonds may be
collateralized or uncollateralized and issued in various currencies, although
typically they are issued in U.S. Dollars. However, as with any emerging
market debt, Brady Bonds are considered speculative, high-risk investments
because the value of the bonds can fluctuate significantly based on the
issuer's ability to make payments.
12
<PAGE> 17
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS LOGO
DEFINING EMERGING MARKET NATIONS
Emerging market nations, as defined by the World Bank, the
United Nations and other international bodies, are those
countries whose economies are in a transitional stage. They
may be located in Asia, Eastern Europe, Latin America, Africa
or the Middle East. The economies, markets and political
structures of these countries generally do not offer the same
stability as those of developed nations. As a consequence,
securities issued in these emerging markets generally pay a
higher yield to compensate investors for higher risks.
CONCENTRATION OF INVESTMENTS -- The Fund may invest more than 25% of its
assets in government and corporate bonds issued by or located in the same
country. The Fund does not, however, intend to invest 25% or more of its
assets in government debt of a single country (other than the United States
or in a single industry or group of industries.) As a rule, the Fund will
invest in the securities of issuers from at least three different countries.
TEMPORARY DEFENSIVE POSITIONS -- In order to provide flexibility in meeting
redemptions, expenses and the timing of new investments, the Fund will
routinely hold cash or money market securities readily convertible to cash.
These cash positions may be increased without limitation during periods of
unusual market volatility as a short-term defense. Additionally. the Fund may
invest substantially all of its assets in the securities of only one country,
including the United States, for temporary defensive purposes. Such
investments could cause the Fund not to meet its principal investment
objective and policies.
TRADING OF SECURITIES -- The Fund will buy and sell securities based on its
overall objectives of achieving the highest possible total return, which may
translate into higher than average portfolio turnover. While the Fund's
portfolio turnover rate will vary greatly from year to year, under normal
circumstances it is not expected to exceed 200% annually. If the Fund buys
and sells securities frequently, there will be increased transaction costs
and additional taxable gains to shareholders.
OTHER INVESTMENTS
The Fund may also invest in other investments that are not part of its
principal investment strategies described above. These other investments
include other types of fixed income securities, private placements, loan
participations and assignments, convertible bonds and depository receipts.
For more information about these types of securities, please consult the
Statement of Additional Information.
13
<PAGE> 18
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
LOGO
RISKS --
There are numerous and significant risks involved in investing in emerging
markets securities. While bonds are generally considered safer than stocks
for investors seeking diversification into emerging markets, there are
several types of risks that should be considered.
Overall, this Fund must be considered a high-risk investment suitable only
for a portion of an individual's portfolio.
Any bond fund involves the risk of capital loss due to changes in interest
rates. This is a normal process in which rising interest rates cause the
price of bonds to fall. There are, additionally, risks associated with high
yield (junk) bonds. See the discussion in the section on Investment
Objectives, Principal Investment Strategies and Related Risks for the High
Yield Fund.
The unique risks associated with emerging market debt include:
- CREDIT RISK -- Companies and governments in emerging nations may not be
as strong financially as those in other nations and may be more
vulnerable to changes in worldwide markets and the world economy. The
entire securities market in an emerging market nation can experience
sudden and sharp price swings. Furthermore, accounting and other
financial reporting standards are often less rigorous, so that less
information may be available to investors. There is also generally less
governmental regulation that may mean less protection for investors.
- LIQUIDITY RISK -- Because of lower trading volumes and the lack of
secondary trading markets for most emerging markets securities, there is
a greater potential for price volatility. With fewer buyers, large
purchases or sales may have a disproportionate impact on prices.
- CURRENCY RISK -- The relatively small portion of the portfolio which is
not denominated in U.S. dollars is exposed to the fluctuations of the
currency markets, as well as the increased costs involved in converting
currency into U.S. Dollars.
- EXTERNAL RISK -- Investing in emerging markets debt securities involves
political, social and economic risks including the risk of
nationalization or expropriation of assets and the risk of war. Certain
countries may impose restrictions on foreign investors and on the
movement of assets out of the country for periods of one year or more.
Such restrictions reduce the liquidity of securities held in such
countries and make it difficult or impossible for the Fund to sell the
securities at opportune times. Certain trading practices, such as
settlement delays or differing hours and days of operation, may also
expose the Fund to risks not customary with U.S. investments.
Furthermore, it may be more difficult to obtain a judgment in a court
outside the U.S.
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the
"Euro." Each such participating country anticipates replacing its
existing currency with the Euro on January 1, 1999. Other European
countries may participate after that date. This conversion presents
unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the
scheduled launch date; the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment of exchange rates for
existing currencies and the euro; and the creation of suitable clearing
and settlement payment systems for the new currency. These or other
factors, including political and economical risks, could cause market
disruptions before or after the interaction of the euro, and could
adversely affect the value of securities held by the Fund. The conversion
is not expected to have a material impact on the Fund, however, because
the Fund invests predominantly, normally over 90% of its assets, in U.S.
dollar denominated securities. The Fund is taking steps reasonably
designed to ensure that its service providers update their information
systems technology for the conversion in a timely manner.
14
<PAGE> 19
SHAREHOLDER INFORMATION LOGO
PRICING OF FUND SHARES
NONDIVERSIFIED INVESTMENT COMPANY -- Under securities laws, the Fund is
considered a "nondiversified investment company." The Fund is, however,
subject to diversification limits under federal tax law that permit it to
invest more than 5%, but not more than 25%, of its assets in a single issuer
with respect to up to 50% of its total assets. Under normal circumstances,
such investment of more than 5% in a single issuer will not take place.
Occasionally, the Fund may place as much as 10% of its assets in bank
deposits or other short-term instruments of a single issuer or custodian.
- Each Fund's per share net asset value ("NAV") is determined and its
shares are priced as of the close of regularly scheduled trading on the
New York Stock Exchange ("NYSE") (normally at 4:00 p.m. Eastern Time)
on each Business Day of the Funds (the "Valuation Time").
- Your shares are bought, sold or exchanged at the NAV (plus any
applicable sales charge as noted under "Distribution Arrangements"
below) determined after your request has been received in proper form.
Any request received in proper form before the Valuation Time will be
processed the same Business Day. Any request received in proper form
after the Valuation Time will be processed the next Business Day.
- A Business Day is any day that the NYSE is open for business or any day
in which there is enough trading in the securities held by a Fund to
affect the NAV materially. Currently, the NYSE observes the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
and Christmas.
- Each Fund's NAV can be found daily during the business week in The Wall
Street Journal and other newspapers.
- Each Fund's securities are generally valued at current market prices.
Generally, trading in non-U.S. securities, as well as U.S. government
securities and money market instruments, is substantially completed
each Business Day at various times prior to the close of regularly
scheduled trading on the NYSE. The values of such securities used in
computing the NAV of Fund shares are generally determined as of such
times. However, because the calculation of the Fund's NAV 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 NAV is calculated will not be reflected in the NAV
unless the Adviser, under the supervision of the Trustees, determines
that the particular event should be taken into account in computing the
Fund's NAV.
- Foreign Securities may trade on weekends or other days when the Fund
does not price its shares. While the NAV may change on these days,
Shareholders will not be able to purchase or redeem Fund shares.
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
15
<PAGE> 20
SHAREHOLDER INFORMATION LOGO
PURCHASING AND SELLING YOUR SHARES
Shares are sold on a continuous basis by the Fund's Distributor, BISYS Fund
Services, located at 3435 Stelzer Road, Columbus, Ohio 43219. You may also
purchase shares through securities dealers and banks that have established
dealer agreements with the Distributor. You are encouraged to consult a
registered financial representative for assistance in making an investment
selection. Any fees they charge will be in addition to and unrelated to the
fees and expenses charged by the Fund(s). Buying or selling shares
automatically is easy with the services described in the following chart.
INSTRUCTIONS FOR ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT TO SELL SHARES
<S> <C> <C>
Choose the Fund and the class Choose the Fund and the class Choose from which Fund and
of shares in which you want to of shares in which you want to class of shares you wish to
invest. invest. sell your shares.
Each Fund's minimum initial Each Fund's minimum initial Normally, the Fund will send
investment amounts for Class A investment amounts for Class A your redemption proceeds on the
or Class B shares are as or Class B shares are as next Business Day after receipt
follows*: follows*: of the redemption request, but
Non-retirement account $1,000 Non-retirement account $50 the Fund may take up to seven
Retirement account** $ 500 Retirement account** $50 days to send you the redemption
proceeds.
--logo IN WRITING:-------------------------------------------------------------------------------
Complete the application. Make Complete the detachable Write a letter of instruction
your check+ payable to: Summit investment slip from your that includes:
Investment Trust -- [Fund Name] account statement, or if the - your name(s)and signature(s)
slip is not available, include - your account number
a note specifying the fund - the fund name
name, share class, your account - the dollar amount you want to
number and the name on the sell
account. - how and where to send the
proceeds
You may request redemption
forms by calling
1-800-272-3442. Your redemption
may require a signature
guarantee.++++
All requests for redemptions
from IRA accounts must be in
writing.
Mail your application and a Mail the slip, along with your Mail your letter to:
check to: check made payable to Summit
Investment Trust -- [Fund Name]
to:
Summit Investment Trust Summit Investment Trust Summit Investment Trust
P.O. Box 182448 P.O. Box 182448 P.O. Box 182448
Columbus, Ohio 43218-2448 Columbus, Ohio 43218-2448 Columbus, Ohio 43218-2448
If mailed by overnight service, If mailed by overnight service, If mailed by overnight service,
mail to: mail to: mail to:
Summit Investment Trust c/o Summit Investment Trust c/o Summit Investment Trust c/o
BISYS Fund Services Attn: T.A. BISYS Fund Services Attn: T.A. BISYS Fund Services Attn: T.A.
Services 3435 Stelzer Road Services 3435 Stelzer Road Services 3435 Stelzer Road
Columbus, Ohio 43219 Columbus, Ohio 43219 Columbus, Ohio 43219
</TABLE>
16
<PAGE> 21
SHAREHOLDER INFORMATION LOGO
- --------------------------------------------------------------------------------
PURCHASING AND SELLING YOUR SHARES
CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT TO SELL SHARES
<S> <C> <C>
--logo BY TELEPHONE++:-----------------------------------------------------------------------------
You may purchase fund shares by Once you have established an When you are ready to redeem
telephone once you have account, you may purchase fund call 1-800-272-3442 and select
established an account with the shares by telephone by calling how you would like to receive
Fund. 1-800-272-3442. Payment for the proceeds:
fund shares ordered by - Mail your redemption check to
telephone must be received the address of record
within 3 days of the telephone - Wire funds to a domestic
order. financial institution
- Mail to a previously
designated alternate address++++
- Electronically transfer the
funds via ACH
--logo BY WIRE:------------------------------------------------------------------------------------
To obtain instructions for To obtain instructions for Be sure the fund has your bank
Federal Funds wire purchases Federal Funds wire purchases account information on file.
for the funds, please call the for the funds, please call the Call us to request your
Trust at 1-800-272-3442. Trust at 1-800-272-3442. transaction. Proceeds will be
wired to your bank.
--logo THROUGH A SECURITIES DEALER+++:-------------------------------------------------------------
You may purchase shares of a You may purchase shares of a You may sell your shares by
Fund by contacting a securities Fund by contacting a securities contacting a securities dealer
dealer having a selected dealer dealer having a selected dealer having a dealer or selling
agreement or selling agreement agreement or selling agreement agreement with the Distributor,
with the Distributor, BISYS with the Distributor, BISYS BISYS Fund Services.
Fund Services. Fund Services.
Orders for shares of the Fund
will be assigned the next NAV
determined after receipt of the
order by the Transfer Agent.
The securities dealer is
responsible for transmitting
such orders promptly to the
Transfer Agent. If the
securities dealer fails to do
so, the investor's right to
that day's NAV must be settled
between the investor and the
securities dealer.
--logo AUTOMATICALLY-------------------------------------------------------------------------------
Automatic Investment Plan -- All Services -- Call us to Automatic Withdrawal
Indicate on your application request a form to add any Plan -- Call us to request a
which automatic service(s) you automatic investing service. form to add the plan. Complete
want. Complete and return the forms the form, specifying the amount
along with any other required and frequency of withdrawals
materials. you would like.
Return your application with Be sure to maintain an account
your investment balance of $10,000 or more.
</TABLE>
17
<PAGE> 22
SHAREHOLDER INFORMATION LOGO
PURCHASING AND SELLING YOUR SHARES
CONTINUED
* A Fund may waive its minimum requirement. In addition, the Distributor
can reject any purchase order if it considers it in the best interests
of the Fund and its shareholders.
** Each Fund is eligible as a vehicle for a wide range of retirement plans
for individuals and institutions (including large and small businesses),
including 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.
+ All checks should be in U.S. Dollars and drawn on U.S. banks. If your
check is returned to any reason, you may be charged for any resulting
fees or losses. Third-party checks will not be accepted.
++ Unless you have instructed us otherwise, only one account owner needs to
call in redemption requests. All telephone calls are recorded for your
protection and reasonable procedures are taken to verify the identity of
the caller (such as providing your account number and taxpayer
identification number). If such measures are followed to ensure against
unauthorized transactions, neither the Trust, the Adviser, the Transfer
Agent nor the Distributor will be responsible for any losses.
+++ Under certain circumstances, the Summit Investment Trust has entered
into one or more agreements (each a "Sales Agreement") with brokers,
dealers or financial institution (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 purchases 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 NAV next computed
after such order is accepted by the Authorized Dealer or Sub-designee.
++++ A signature guarantee is required for the following redemption requests:
redemptions over $10,000; your account registration or the name(s) on
your account has changed within the last 15 days; the check is not being
mailed to the address on your account; the check is not being made
payable to the owner of the account; or if the redemption proceeds are
being transferred to another Fund account with a different registration.
A signature guarantee can be obtained from a financial institution, such
as a bank, broker-dealer, credit union, securities exchanges and
associations, clearing agency, or savings association. The Transfer
Agent reserves the right to reject any signature guarantee if: it has
reason to believe that (1) the signature is not genuine; (2) 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.
SUMMIT INVESTMENT TRUST INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A 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. 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 Trust IRA distribution request must be made in writing to the Transfer
Agent. Any additional deposits to a Trust IRA must distinguish the type and
year of the contribution.
For more information on a Trust IRA call the Trust at 1-800-272-3442.
Shareholders are advised to consult a tax advisor on Trust IRA contribution
and withdrawal requirements and restrictions.
18
<PAGE> 23
SHAREHOLDER INFORMATION LOGO
PURCHASING AND SELLING YOUR SHARES
CONTINUED
SELLING YOUR SHARES
You can withdraw all or any portion of your investment by redeeming (selling)
your shares at the next determined NAV after receipt of the redemption order.
If your redemption order is received by 4:00 p.m. Eastern Time on a Business
Day, your redemption will receive the NAV determined the same Business Day.
For investments that have been made by check, payment on redemption requests
will be delayed until the Transfer Agent is reasonably satisfied that the
purchase payment has been collected by the Funds (which may require up to 15
business days). You may avoid a delay in receiving redemption proceeds by
purchasing shares with a certified check. Payments of redemptions also may be
delayed under extraordinary circumstances or as permitted by the SEC in order
to protect remaining shareholders.
An investor who purchases $500,000 or more of the Class A shares of a Fund
and is not assessed a sales charge at the time of purchase, may be assessed a
sales charge equivalent to 1% of the lesser of the purchase price or the
current NAV 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 NAV next computed after such order is
accepted by the Authorized Dealer or Sub-designee.
As described under "Distribution Agreements," your redemption proceeds from
Class B Shares are net of any applicable deferred sales charges. You may
choose from the following redemption methods:
REDEMPTION OF SMALL ACCOUNTS
Due to the relatively high cost of servicing small accounts, the Trust
reserves the right to redeem a Fund's shares at NAV, on not less than 60
days' notice, in your account if your account has fallen below the minimum
balance of $300 because of redemptions you have made. However, if you add to
your account to bring it up to the minimum balance within the 60 day notice
period, the Fund's shares in your account will not be redeemed. This
redemption policy is applicable on a fund-by-fund basis.
REDEMPTION IN KIND
Each Fund intends to pay cash for all shares redeemed, unless the redemption
request is for more than $250,000 or 1% of the net assets of a Fund by a
single shareholder over any 90-day period. If such a redemption request is
presented and the Fund deems it to be detrimental to existing shareholders,
to pay the redemption in cash, the Fund may pay all or part of the redemption
in the Fund's portfolio securities at their then-current market value equal
to the redemption price. If you received securities in kind and converted
them to cash, you would incur brokerage costs.
19
<PAGE> 24
SHAREHOLDER INFORMATION LOGO
PURCHASING AND SELLING YOUR SHARES
CONTINUED
EXCESSIVE TRADING
The Adviser may bar excessive traders from purchasing shares of a 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 Funds within any 120-day
period. For example, assume you are invested in a Fund. You can move
substantial assets from the Fund to the other Fund and, within the next 120
days, sell your shares in that Fund to return to the first Fund or move your
assets to a money market Fund (as described under "Other Shareholder
Services -- Exchange Privilege" below.)
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of shares of the Funds. 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 automatic investment plan or an automatic
withdrawal plan described in "Other Shareholder Services."
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
20
<PAGE> 25
SHAREHOLDER INFORMATION LOGO
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
Before you open an account in the Fund(s) you selected, you should consider
the most cost effective way for you to invest by choosing the appropriate
share class. This section describes the differences between the share classes
and ways to qualify for reduced sales charges.
<TABLE>
<S> <C> <C>
TYPES OF CHARGES CLASS A CLASS B
Sales Charge (Load) Front-end sales charge; reduced No front-end sales charge. A
sales charges may be available. deferred sales charge may be
imposed on shares redeemed within
six years after purchase; shares
automatically convert to Class A
Shares after 8 years. Maximum
investment is $250,000.
-------------------------------------------------------------------------------------------------------------
Distribution and Service Fees Subject to annual distribution and Subject to annual distribution and
shareholder servicing fees shareholder servicing fees
of up to .25% of the Fund's of up to 1.00% of the Fund's
total assets.** assets.**
-------------------------------------------------------------------------------------------------------------
Fund Expenses Lower annual expenses than Class Higher annual expenses than Class
B. A shares.
-------------------------------------------------------------------------------------------------------------
Reinvested Distributions No sales charge. No sales charge.
</TABLE>
GENERAL
You pay no sales charges on shares of any class you buy with reinvested
distributions. In addition to the compensation paid to investment
representatives as described below, the Distributor may provide promotional
incentives in the form of travel expenses, lodging and bonuses to licensed
individuals who sell shares of the Funds as well as vacation trips (including
lodging at luxury resorts), tickets to entertainment events and merchandise.
None of this incentive compensation is paid for by any Fund or its
shareholders.
** See "Distribution (12b-1) fees" on page 26.
21
<PAGE> 26
SHAREHOLDER INFORMATION LOGO
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
CALCULATION OF SALES CHARGES
CLASS A SHARES
Class A shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases above certain breakpoints. The
current sales charge rates and commissions paid to investment representatives
are as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE SALES CHARGE REALLOWANCE
YOUR AS A % OF AS A % OF AS A % OF
INVESTMENT OFFERING PRICE YOUR INVESTMENT OFFERING PRICE
<S> <C> <C> <C>
Up to $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 and above* 0.00%* 0.00%* 0.00%*
</TABLE>
The Distributor reserves the right to pay the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under federal
securities laws.
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 "Dealer Reallowance as
a % 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 Securities Act of 1933, as amended. Banks are
currently prohibited under the Glass-Steagall Act, as amended, from providing
certain underwriting or distribution services. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, management would consider what action, if any, would be
appropriate. In addition, state securities laws may differ from federal laws
regarding banks and financial institutions which may be required to register
under state securities laws as brokers and/or dealers.
The sales charges set forth in the above table are applicable to purchases
made at one time by any investor, which includes: (i) an individual, his or
her spouse and children under the age of 21; and (ii) a trustee or other
fiduciary of a single trust estate or single fiduciary account. In order to
qualify for the lower sales charges keyed to the breakpoints ($100,000;
$250,000; and $500,000) set forth in the table, all orders from an investor
will have to be placed through a single investment dealer and identified at
the time of purchase as originating from the same investor, although such
orders may be placed into more than one discrete account which identifies the
investor.
* There is no initial sales charge on purchases of $500,000 or more. However,
a contingent deferred sales charge ("CDSC") of up to 1.00% of the lesser of
the purchase price or the current NAV may be charged to the shareholder if
shares are redeemed in the first year after purchase. There will be no CDSC
on reinvested distributions. Investment Professionals may be paid at a rate
of up to 1.00% of the purchase price at the time of purchase.
22
<PAGE> 27
SHAREHOLDER INFORMATION LOGO
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
CALCULATION OF SALES CHARGES
CLASS B SHARES
Class B shares are offered at NAV, without any up-front sales charges. However,
if you sell Class B shares of a Fund before the sixth anniversary of their
purchase, you will pay a contingent deferred sales charge ("CDSC"). The CDSC
will be based upon the lesser of the offering price at the time of purchase or
the NAV at the time the shares are sold (the "Dollar Amount Subject To Charge")
according to the following schedule:
<TABLE>
<CAPTION>
YEARS CDSC AS A % OF
SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CHARGE
<S> <C>
0-1 5.00%
1-2 4.00%
2-3 3.00%
3-4 3.00%
4-5 2.00%
5-6 1.00%
more than 6 None
</TABLE>
In the event you sell only a portion of your shares, Class B shares not
subject to a CDSC (i.e., shares purchased with reinvested dividends) will be
sold first, followed by shares subject to the lowest CDSC (typical shares
held for the longest time).
The Distributor pays a commission of 4.00% of the original purchase price at
the time of purchase to investment representatives who sell Class B shares of
the Funds.
CONVERSION FEATURE--CLASS B SHARES
- Class B shares will automatically convert to Class A shares of the same
Fund after eight years.
- Conversion periods are measured from the end of the month in which the
Class B shares were purchased.
- After conversion, your shares will be subject to the lower distributions
and shareholder servicing fees charged on Class A shares.
- You will not pay any sales charge or fees for conversion of shares, nor
will the transaction be subject to any tax.
- Because the share price of the Class A shares may be higher than that of
the Class B shares at the time of conversion, you may receive fewer Class A
shares; however, the dollar value will be the same.
- If you have exchanged Class B shares of one Fund for Class B shares of
another, the time you held the shares in each Fund will be added together
for purposes of calculating the six- and eight-year time periods.
23
<PAGE> 28
SHAREHOLDER INFORMATION LOGO
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
SALES CHARGE REDUCTIONS
CLASS A SHARES
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 determining sales charge reductions or waivers,
to permit confirmation of the qualification.
You may qualify for reduced sales charges in the following cases:
- --------------------------------------------------------------------------------
LETTER OF INTENT.
You purchase Class A shares of the Funds over a 13-month period and receive
the same sales charge as if all shares had been purchased at one time. The
applicable sales charge will be determined in accordance with the total
amount to be invested. All shares of the Funds previously purchased and still
beneficially owned by the investor may, upon written notice to the Transfer
Agent, also be included at the current NAV to reach the above minimums. A
Letter of Intent may be executed by checking the appropriate box on the
Account Registration Form. (See "Letter of Intent" contained in the SAI.")
- --------------------------------------------------------------------------------
RIGHTS OF ACCUMULATION.
You may add the value of any Class A shares you already own to the amount of
your next purchase of Class A shares for purposes of calculating the sales
charge at the time of purchase.
- --------------------------------------------------------------------------------
COMBINATION PRIVILEGE.
You can combine Class A shares of both Funds for purposes of calculating the
sales charge. You may also combine the total investments from the accounts of
household members of your immediate family (spouse and children under 21) for
a reduced sales charge at the time of purchase.
24
<PAGE> 29
SHAREHOLDER INFORMATION LOGO
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
SALES CHARGE WAIVERS
CLASS A SHARES
Sales Charge Waivers apply for the following investors:
- Investors purchasing shares of the Funds through reinvestment of
dividends and distributions by the Funds.
- A Trustee or officer of the Trust, or the immediate families (i.e., the
spouse or any children) of such persons.
- 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).
- Other investment companies, the securities of which are also distributed
by BISYS Fund Services, The BISYS Group, Inc. or other affiliated
companies.
- Directors, trustees, employees, and family members of the Adviser or
"Affiliated Providers;"* or trade organization to which the Adviser or
the Administrator belong.
- Any Union Central Life separate account used to Fund tax-qualified
variable annuity contracts; a director, officer, full-time employee or
sales representative of Union Central Life or any of its affiliates, or
the Distributor or any of its affiliates; the immediate families of such
persons; or any trust, pension, profit-sharing or other benefit plan for
such persons.
- 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.
- Investors who purchase shares for trust or other advisory accounts
established with the Adviser or its affiliate.
- Investors who reinvest a distribution from a deferred compensation plan,
agency, trust, or custody account that was maintained by the Adviser and
its affiliates or invested in any Fund.
- Investors who reinvest shares from another mutual Fund complex within 90
days after redemption, if they paid a sales charge of more than 2.25% for
those shares.
- Investment representatives who purchase Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.
In addition, no sales charge will be assessed in connection with certain
exchange arrangements made with two no-load money market portfolios and the
Funds described below under "Other Shareholder Services -- Exchange
Privilege."
* Affiliated Providers are affiliates and subsidiaries of the Adviser, and
any organization that provides services to the Fund.
25
<PAGE> 30
SHAREHOLDER INFORMATION LOGO
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
SALES CHARGE WAIVERS
CLASS B SHARES
The CDSC will be waived for the following redemptions:
- Distribution from retirement plans if the distributions are made:
-- to the extent that the redemption represents a minimum required
distribution from an Individual Retirement Account or other qualifying
retirement plan to a shareholder who has attained the age of 70 1/2
or;
-- following the death or disability of the participant or beneficial
owner.
- Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder;
- Returns of excess contributions to retirement plans;
- Distributions of less than 12% of the annual account value under an
Automatic Withdrawal Plan; and
- Shares issued in a plan of reorganization sponsored by the Adviser, or
shares redeemed involuntarily in a similar situation.
DISTRIBUTION AND SERVICE (12B-1) FEES
Each Fund pays annual fees as a percentage of the net assets of the Fund,
which are called 12b-1 fees. 12b-1 fees are paid to the Distributor as
compensation for its services and expenses relating to the sale and
distribution of the Fund's shares and the providing of shareholder services.
The Distributor in turn pays all or part of the 12b-1 fee to investment
representatives for these purposes. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of
sales charges.
The 12b-1 fees vary by share class as follows:
- Class A shares pay a 12b-1 fee of 0.25% of the average daily net assets
of the Fund.
- Class B shares pay a 12b-1 fee of 1.00% of the average daily net assets
of the Fund. This will cause expenses for Class B shares to be higher and
dividends to be lower than for Class A shares.
The Distributor may use up to 0.25% of the fees for shareholder servicing and
up to 0.75% for distribution activities.
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
26
<PAGE> 31
SHAREHOLDER INFORMATION LOGO
SERVICES FOR FUND INVESTORS
As a shareholder of the Fund(s), you can take advantage of other privileges.
You can set up most of these services with your application or by calling
1-800-272-3442.
AUTOMATIC INVESTMENT PLAN
You can make automatic investments into the funds on a monthly or quarterly
basis by checking the Automatic Investment Plan box on the Account
Application. A minimum investment of $500 is required. Automatic withdrawals
from your bank account in an amount of $50 or more will be invested in the
class of shares of a fund that you designate. You can set up the Automatic
Investment Plan by providing your bank account information and following the
instructions on your Account Registration Form.
EXCHANGE PRIVILEGE
The Exchange Privilege permits you to sell your shares for the shares of the
same class of another Fund within the Trust without paying additional sales
charges. No transaction fees are charged for the exchanges. The minimum
investment requirements for the Fund must be met at the time of your
exchange. Exchanges are subject to the following conditions:
- Class A shares of a 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 Class A shares of the other Fund. 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 for shares of the other 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. 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.
27
<PAGE> 32
SHAREHOLDER INFORMATION [LOGO]
SERVICES FOR FUND INVESTORS
CONTINUED
The Exchange Privilege may be changed or eliminated at any time upon 60 days
notice to shareholders. Exchanges may be made by a written request by using
the Trust's Exchange Request Form, or by phone, by calling 1-800-272-3442.
AUTOMATIC WITHDRAWAL PLAN
The Automatic Withdrawal Plan allows you to redeem shares from the Fund(s).
You, or the person you designate will receive monthly or quarterly payments.
The minimum withdrawal amount is $100. You must have an account value of
$10,000 or more to start withdrawals. The Automatic Withdrawal Plan is not
available for Class B shares. Requests for this privilege made after 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. No
redemption will occur if the account balance falls below the amount required
to meet the requested withdrawal amount.
REINSTATEMENT PRIVILEGE
The Reinstatement Privilege allows you to purchase shares, within 90 days of
redemption, without a sales load. Under this plan you may purchase only the
amount of redemption proceeds that you received. You must submit a written
reinstatement request, along with the payment to the Fund's Transfer Agent
within 90 days of the trade date of the redemption. To receive a
Reinstatement Request Form call 1-800-272-3442.
CONFIRMATION OF SHARE TRANSACTIONS & DIVIDEND PAYMENTS
Every shareholder will receive a confirmation of each new transaction in
their account. The Trust will confirm all account activity and shareholders
may rely on these statements in lieu of stock certificates.
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
28
<PAGE> 33
SHAREHOLDER INFORMATION LOGO
DIVIDENDS, 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
Distributions from the Fund, whether you receive them in cash or in
additional shares, are generally subject to income tax as ordinary income or
capital gains. Distributions paid to you in January, but declared in December
of the previous year, will be considered to have been paid the previous
December. Distributions that are taxed as capital gains may be taxable at
different rates. In January of each year you will receive a statement that
shows the tax status of distributions you received from the Fund for the
previous calendar year.
If you sell your shares or if you exchange your shares in the Fund for shares
in another Summit Investment Trust Fund, you will generally have a capital
gain or loss. The rate of tax imposed upon any gain from the sale or exchange
of Fund shares will depend upon the length of time you held your shares.
Distributions that you receive from the Fund and gains from the sale or
exchange of your Fund shares will generally be subject to state and local
income tax. Distributions from the Fund to non-U.S. shareholders may be
subject to U.S. income tax withholding. Fund shares held by a non-U.S.
investor may be subject to U.S. estate tax.
The Fund may be required to withhold 31% on distributions paid to you and on
proceeds you receive when you sell or exchange Fund shares. This is called
back-up withholding. Back-up withholding is imposed when you fail to provide
the Fund with your correct taxpayer identification number ("TIN") or fail to
certify that your TIN is correct. Even if you supply the Fund with your TIN
and you make the required certifications, the IRS may instruct the Fund that
it is required to impose back-up withholding on amounts paid to you.
THIS TAX DISCUSSION PROVIDES GENERAL INFORMATION ONLY. YOU SHOULD CONSULT
YOUR OWN TAX ADVISOR CONCERNING THE FEDERAL, STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES OF INVESTING IN THE FUND. A MORE COMPLETE DISCUSSION OF THESE
RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION ENTITLED "TAX STATUS"
IN THE SAI.
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
29
<PAGE> 34
MANAGEMENT OF THE FUNDS LOGO
In the following sections, the percentages shown are the percentages of the
average daily net assets of each Fund paid on an annual basis for the
advisory services described. The SAI has more detailed information about the
Investment Adviser and other service providers.
INVESTMENT ADVISER
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 Funds. 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.
Portfolio Manager -- Since May 21, 1996, for the High Yield Fund, and since
the Fund's inception, for the Emerging Markets Fund, Steven R. Sutermeister
has been primarily responsible for the day-to-day management of the Funds'
investment portfolios. 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 $4 billion in fixed income assets as of August 31, 1998,
and is personally responsible for the investment of nearly $500 million in
high yield assets as of August 31, 1998, for various clients. In addition,
Mr. Sutermeister serves as the portfolio manager of Carillon Bond Fund,
another registered investment company that is advised by Carillon.
ADVISORY AGREEMENT
The Adviser serves pursuant to an Investment Advisory Agreement with the
Trust dated June 27, 1994, as amended and restated December 16, 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.
30
<PAGE> 35
MANAGEMENT OF THE FUNDS LOGO
ADVISORY FEE
HIGH YIELD FUND -- As full compensation for services furnished to the High Yield
Fund and expenses of the Fund assumed by the Adviser, the Adviser is entitled to
receive from the Fund an advisory fee which increases or decreases based on the
total return investment performance of the Fund for the prior twelve-month
period relative to the percentage change in the Salomon Brothers High Yield
Market Index (the "Index") for the same period (the "Index Return"). The
advisory fee is paid monthly at an annual rate that varies between 0.35% and
1.15% of the High Yield Fund's average daily net assets. The advisory fee is
structured so that it will be 0.75% of the Fund's average daily net assets if
the Fund's investment performance for the preceding twelve months (net of all
fees and expenses, including the advisory fee) equals the Index Return.
The advisory fee increases or decreases from the "fulcrum fee" of 0.75% by 4% of
the difference between the Fund's investment performance during the preceding
twelve months and the Index Return during that period, up to the maximum fee of
1.15% of average daily net assets or down to the minimum fee of 0.35%. The table
shows examples of the advisory fees that would be applicable at the stated
levels of the Fund's performance relative to the Index Return for a particular
twelve-month period:
For the fiscal year ended May 31, 1998, the Adviser received an investment
advisory fee of $262,141 (0.55%), following certain voluntary waivers. Absent
the voluntary waivers undertaken by the Adviser, the Adviser would have been
entitled to receive an advisory fee of $434,032 (0.90%), based on the Fund's
performance for the fiscal year ended May 31, 1998, pursuant to the performance
schedule above. Under the provisions of the Advisory Agreement, the Adviser is
entitled to receive one-twelfth of the performance related portion of the fee
computed for the preceding twelve-month period. At the present time, the Adviser
has agreed to waive a portion of its advisory fee so as to limit the Fund's
total annual expenses to 1.60% for the Class A shares and 2.35% for the Class B
shares of the Fund.
<TABLE>
<CAPTION>
ADVISORY FEE
(AS % OF
AVERAGE
FUND PERFORMANCE DAILY NET
(NET OF FEES AND EXPENSES) ASSETS)
<S> <C>
Index Return + 10 percentage points or more 1.15%
Index Return + 9 1.11
Index Return + 8 1.07
Index Return + 7 1.03
Index Return + 6 0.99
Index Return + 5 0.95
Index Return + 4 0.91
Index Return + 3 0.87
Index Return + 2 0.83
Index Return + 1 0.79
Index Return 0 0.75
Index Return - 1 0.71
Index Return - 2 0.67
Index Return - 3 0.63
Index Return - 4 0.59
Index Return - 5 0.55
Index Return - 6 0.51
Index Return - 7 0.47
Index Return - 8 0.43
Index Return - 9 0.39
Index Return - 10 percentage points or more 0.35
</TABLE>
31
<PAGE> 36
MANAGEMENT OF THE FUNDS LOGO
ADVISORY FEE
CONTINUED
The advisory fee paid by the High Yield Fund may exceed the advisory fees
paid by most other investment companies, even if the investment performance
of the Fund is less than the Index Return. In addition, the "fulcrum fee" of
0.75% is higher than the fees paid by most other investment companies,
although it is not necessarily higher than the fees paid by most Fund
portfolios having the same investment objective and policies as the Fund.
Investors may pay higher advisory fees under the performance arrangement even
though the Fund's performance may have declined. For example, if the market
declined and the Index dropped by 27 percentage points, and the Fund's
performance declined by 17 percentage points, the Adviser would be entitled
to be paid by the Fund the maximum advisory fee, absent any voluntary
waivers.
EMERGING MARKETS FUND -- As full compensation for services furnished to the
Emerging Markets 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% for the Class A shares and
2.75% for the Class B shares of the Fund. For the fiscal year ended May 31,
1998, the Adviser received an investment advisory fee of $61,669 (0.60%),
following certain voluntary waivers. Absent the voluntary waivers undertaken
by the Adviser, the Adviser would have been entitled to receive an advisory
fee of $77,180 (0.75%).
SUB-ADVISER
Carillon, an Ohio corporation with offices at 1876 Waycross Road, Cincinnati,
Ohio 45240, 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. The Sub-Adviser currently acts as the Sub-Adviser to the High
Yield Fund and the Emerging Markets 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.
Under a restructuring of the Sub-Adviser scheduled to occur approximately
mid-October 1998, the Sub-Adviser will assign its advisory business to a new
organization named Summit Investment Partners, LLC ("SIP"), organized as a
limited liability company. The ownership of SIP will be the same as that of
the Sub-Adviser. There will be no change in control of the investment
sub-adviser of the Trust, however, and Union Central Life will remain in
control of both the Sub-Adviser and SIP. All the personnel of the Sub-Adviser
who have been providing investment advisory services to the Trust will
continue to provide such services to the Trust as personnel of SIP.
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 each
Fund. The Sub-Adviser provides investment research and advice with respect to
securities, investments and cash equivalents in each 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. The Board of Directors of the Trust has approved an
amendment of the Sub-Advisory Agreement to reflect the changes in the
investment sub-adviser of the Trust described above.
DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services is the Trust's distributor and administrator.
32
<PAGE> 37
OTHER INFORMATION ABOUT THE FUNDS LOGO
YEAR 2000
Like other funds and business organizations around the world, the Fund could
be adversely affected if the computer systems used by the Adviser and the
Fund's other service providers do not properly process and calculate
date-related information for the year 2000 and beyond. The Fund has been
informed that the Adviser and the Fund's other service providers (i.e.,
Administrator, Transfer Agent, Fund Accounting Agent, Distributor and
Custodian) have developed and are implementing clearly defined and documented
plans to minimize the risk associated with the Year 2000 problem. These plans
include the following activities: inventorying of software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems and retesting for Year 2000
readiness. In addition, the service providers are obtaining assurances from
their vendors and suppliers in the same manner. Non-compliant Year 2000
systems upon which the Fund is dependent may result in errors and account
maintenance failures. The Fund has no reason bo believe that (1) the Year
2000 plans of the Adviser and the Fund's other service providers will not be
completed by December, 1999, and (2) the costs currently associated with the
implementation of their plans will have material adverse impact on the
business, operations or financial condition of the Fund or its service
providers.
In addition, the Year 2000 problem may adversely affect the companies in
which the Fund invests. For example, these companies may incur substantial
costs to correct the problem and may suffer losses caused by data processing
errors.
Since the ultimate costs or consequences of incomplete or untimely resolution
of the Year 2000 problem by the Fund's service providers are unknown to the
Fund at this time, no assurance can be made that such costs or consequences
will not have a material adverse impact on the Fund or its service providers.
The Fund and the Adviser will continue to monitor developments relating to
this issue, including the development of contingency plans for providing
back-up computer services in the event of a systems failure.
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.
33
<PAGE> 38
OTHER INFORMATION ABOUT THE FUNDS LOGO
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Funds for each of
the periods presented. The Funds' financial highlights for each of the
periods presented have been audited by PricewaterhouseCoopers LLP,
independent auditors, whose unqualified report thereon is included in the
SAI. The Funds' financial statements, notes to financial statements and
report of independent accountants are included in the SAI as well as in the
Funds' Annual Report to Shareholders (the "Annual Report"). Additional
performance information for the Funds is included in the Annual Report. The
Annual Report and the SAI are available at no cost from the Fund at the
address and telephone number noted on the back card page of this Prospectus.
The following information should be read in conjunction with the financial
statements and notes thereto.
SUMMIT HIGH YIELD FUND
HIGH YIELD SHARES
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27, 1994
MAY 31, 1998 MAY 31, 1997 MAY 31, 1996 TO MAY 31, 1995(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.32 $ 11.05 $ 10.11 $ 10.00
---------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 1.01 0.99 1.01 0.83
Net realized and unrealized gains
(losses) on investments 0.70 0.90 0.95 0.11
---------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.71 1.89 1.96 0.94
---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net investment income (1.01) (0.99) (1.01) (0.83)
In excess of net investment income (0.13)
Net realized gains (1.03) (0.50) (0.01)
---------------------------------------------------------------------------------------------------------
Total Distributions (2.04) (1.62) (1.02) (0.83)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.99 $ 11.32 $ 11.05 $ 10.11
---------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 16.17% 18.15% 20.34% 9.97%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $55,643 $34,707 $28,628 $27,676
Ratio of expenses to average net
assets 1.60% 1.60% 1.60% 1.56%(c)
Ratio of net investment income to
average net assets 8.81% 8.73% 9.42% 9.13%(c)
Ratio of expenses to average net
assets* 2.03% 2.32% 2.24% 1.61%(c)
Ratio of net investment income to
average net assets* 8.38% 8.01% 8.78% 9.08%(c)
Portfolio turnover (d) 518.74% 271.68% 187.61% 158.36%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
34
<PAGE> 39
OTHER INFORMATION ABOUT THE FUNDS LOGO
FINANCIAL HIGHLIGHTS
SUMMIT EMERGING MARKETS BOND FUND
<TABLE>
<CAPTION>
FOR THE FIVE
MONTH PERIOD
ENDED
MAY 31, 1998(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
--------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.35
Net realized and unrealized gains (losses) on
investments (0.15)
--------------------------------------------------------------------
Total from Investment Activities 0.20
--------------------------------------------------------------------
DISTRIBUTIONS:
Net investment income (0.33)
--------------------------------------------------------------------
Total Distributions (0.33)
--------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.87
--------------------------------------------------------------------
Total Return (excludes sales charges) 2.01%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $25,879
Ratio of expenses to average net assets 2.00%(c)
Ratio of net investment income to average net
assets 8.67%(c)
Ratio of expenses to average net assets* 2.20%(c)
Ratio of net investment income to average net
assets* 8.47%(c)
Portfolio turnover 85.69%
--------------------------------------------------------------------
<FN>
(*) During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
</TABLE>
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
35
<PAGE> 40
For investors who want more information about the Funds, the following
documents are available upon request:
ANNUAL & SEMIANNUAL REPORTS:
Additional information about the Funds' investments is available in the
Funds' annual and semiannual reports to shareholders. In each Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds and is
incorporated into this prospectus by reference.
You can receive free copies of reports and SAI, request other information and
discuss your questions about the Funds by contacting a broker or bank that
sells the Funds, or by contacting the Funds directly at:
SUMMIT INVESTMENT TRUST
3435 STELZER ROAD
COLUMBUS, OHIO 43219
TELEPHONE: 1-800-272-3442
E-MAIL: [email protected]
INTERNET: HTTP://WWW.SUMMITFUNDS.COM
You can review the Funds' reports and SAIs at the Public Reference Room of
the SEC. You can receive text-only copies:
- For a fee, by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330
- Free from the SEC's Internet Website at http://www.sec.gov.
(Investment Company Act file no. 811-8406)
<PAGE> 41
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.
It should be read in conjunction with the prospectus for the Summit High Yield
Fund and the Summit Emerging Markets Bond Fund, dated September 30, 1998. The
prospectus may be obtained by writing to Summit Investment Trust, 3435 Stelzer
Road, Columbus, OH 43219 or by calling 1-800-272-3442.
The date of this SAI is September 30, 1998.
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TABLE OF CONTENTS
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GENERAL INFORMATION.......................................................................................................1
INVESTMENT OBJECTIVES AND POLICIES........................................................................................1
INVESTMENT OBJECTIVES........................................................................................1
RISK FACTORS..............................................................................................................2
INVESTMENT PROGRAMS.......................................................................................................5
CORPORATE DEBT SECURITIES....................................................................................5
U.S. GOVERNMENT OBLIGATIONS..................................................................................5
U.S. GOVERNMENT AGENCY SECURITIES............................................................................5
BANK OBLIGATIONS.............................................................................................5
ASSET-BACKED SECURITIES......................................................................................6
MORTGAGE-BACKED SECURITIES...................................................................................6
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS").................................................................9
STRIPPED MORTGAGE-BACKED SECURITIES.........................................................................10
ZERO-COUPON AND PAY-IN-KIND BONDS...........................................................................11
CONVERTIBLE BONDS...........................................................................................11
DEPOSITORY RECEIPTS.........................................................................................12
REPURCHASE AGREEMENTS.......................................................................................12
PRIVATE PLACEMENTS (RESTRICTED SECURITIES)..................................................................12
FOREIGN SOVEREIGN DEBT SECURITIES...........................................................................13
FOREIGN SECURITIES..........................................................................................16
FOREIGN CURRENCY TRANSACTIONS...............................................................................16
WARRANTS....................................................................................................19
LENDING OF PORTFOLIO SECURITIES.............................................................................19
LOAN PARTICIPATIONS AND ASSIGNMENTS.........................................................................20
SHORT SALES.................................................................................................21
FUTURES CONTRACTS...........................................................................................22
INTEREST RATE AND STOCK INDEX FUTURES.......................................................................23
SPECIAL RISKS OF FUTURES CONTRACTS..........................................................................24
OPTIONS.....................................................................................................27
FEDERAL TAX TREATMENT OF OPTIONS, FUTURES CONTRACTS AND FORWARD FOREIGN EXCHANGE
CONTRACTS...................................................................................................33
HYBRID INSTRUMENTS..........................................................................................34
INVESTMENT RESTRICTIONS..................................................................................................35
HIGH YIELD FUND.............................................................................................35
EMERGING MARKETS FUND.......................................................................................38
MANAGEMENT OF THE TRUST..................................................................................................41
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<TABLE>
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PRINCIPAL HOLDERS OF SECURITIES..........................................................................................44
INVESTMENT ADVISORY SERVICES.............................................................................................45
MANAGEMENT-RELATED SERVICES..............................................................................................49
BISYS SERVICE AGREEMENTS....................................................................................49
ADMINISTRATOR...............................................................................................50
FUND ACCOUNTANT.............................................................................................51
TRANSFER AGENT..............................................................................................52
DISTRIBUTION PLAN........................................................................................................52
THE DISTRIBUTOR.............................................................................................54
PORTFOLIO TRANSACTIONS...................................................................................................55
PORTFOLIO TURNOVER.......................................................................................................58
CAPITAL STOCK............................................................................................................58
PRICING OF SECURITIES....................................................................................................59
DIVIDENDS................................................................................................................60
TAX STATUS...............................................................................................................60
INVESTMENT PERFORMANCE...................................................................................................60
YIELD INFORMATION...........................................................................................60
TOTAL RETURN PERFORMANCE....................................................................................61
GENERAL..................................................................................................................63
REPURCHASE OF SHARES........................................................................................63
PAYMENT FOR SHARES PRESENTED................................................................................63
UNDELIVERABLE REDEMPTION CHECKS.............................................................................64
SALES CHARGE REDUCTION AND WAIVERS FOR CLASS A SHARES.......................................................64
EXCHANGE PRIVILEGE..........................................................................................65
CUSTODIAN...................................................................................................66
INDEPENDENT ACCOUNTANTS.....................................................................................66
FINANCIAL INFORMATION....................................................................................................66
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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. Each Fund is an open-end, management investment
company. The High Yield Fund is a diversified series, and the Emerging Markets
Fund is a nondiversified series, of the Trust.
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.
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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. 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, investment 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.
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 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
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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).
The economies, markets, and political structures of a number of the
countries in which the Emerging Market 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 particularly true for emerging
market nations.
Some economies are less well developed, overly reliant on particular
industries, and more vulnerable to the ebb and flow of international trade,
trade barriers, and other protectionist or retaliatory measures. Certain
countries have histories of political instability and upheaval 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.
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.
HIGH YIELD/HIGH RISK SECURITIES.
Larger bond issues are evaluated by nationally recognized statistical
rating organizations (each, an "NRSRO") 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
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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. 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.
WHO ISSUES HIGH YIELD, HIGH RISK BONDS?
Typically, corporations in one of several categories: small and
medium-size companies that lack the history or capital strength to merit
"investment-grade" status; former blue-chip companies that have been downgraded
due to financial difficulties; companies electing to borrow heavily to finance
(or avoid) a takeover or buyout; and highly indebted ("leveraged") companies
seeking to refinance their debt at lower rates.
DO THE FUNDS INVEST ONLY IN HIGH YIELD, HIGH RISK BONDS?
No, but such bonds will generally represent a significant portion of
the Fund's assets. The Funds may also include loan participations, convertible
securities - preferred stocks and bonds which may be converted at some future
point into common stock - and substantial holdings of foreign securities. When,
in the opinion of the Adviser, market or economic conditions warrant a temporary
defensive posture, the Funds may place all or a portion of its assets in high
quality, fixed-income securities, short-term debt obligations or cash.
HOW DO SHARE PRICE CHANGES AFFECT OVERALL RETURN?
Your total return for any given period has two parts:
Income, which, if any, will always be positive, and
Change in share price, which can be positive or negative. If the Fund's
income return was 10% during a year, for example, and the price
declined 15%, your total return would be approximately -5%. A price
increase of 5% would have given you a return of approximately 15%.
Always remember that the Fund's yield does not indicate its total
return.
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.
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INVESTMENT PROGRAMS
INVESTMENT IN DEBT 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 securities in which the Funds may invest include those described
below:
CORPORATE DEBT SECURITIES
(Outstanding convertible and non-convertible corporate debt securities
(e.g., bonds and debentures) that generally have maturities of at least five
years.) The 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.
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ASSET-BACKED SECURITIES
Each Fund may invest up to 10% of its total assets in debt obligations
known as asset-backed securities. The credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator of the debt obligations or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-backed securities may be classified either as
pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support" below.
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support" below), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
MORTGAGE-BACKED SECURITIES
Each Fund may invest up to 10% of its total assets in mortgage-backed
securities. Mortgage-backed securities are securities representing interests in
a pool of mortgages. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the Fund. The actual
prepayment experience of a pool of mortgage loans or other obligations may cause
the yield realized by the Fund to differ from the yield calculated on the basis
of the average life of the pool. (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
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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.
In addition, for mortgage-backed or asset-backed securities purchased
at a premium, the premium may be lost in the event of early prepayment which may
result in a loss to the Fund. Each Fund may invest in asset-backed securities
that are either pass-through certificates or collateralized obligations. Such
securities may be of short maturity, such as commercial paper, or longer, such
as bonds, and may be issued with only one class of security or have more than
one class with some classes having rights to payments on the asset-backed
security subordinate to the rights of the other classes. These subordinated
classes will take the risk of default before the classes to which they are
subordinated. It is anticipated that asset-backed securities other than those
described above will be issued in the future. Each Fund may invest in such
securities in the future if such investment is otherwise consistent with the
Fund's investment objective and policies.
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
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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.
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
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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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
Collateralized Mortgage Obligations ("CMOs") CMOs are debt securities
that are fully collateralized by a portfolio of 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
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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 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.
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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. 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.
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.
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. Each Fund may invest up to 10% of its total assets in
convertible bonds and equity securities. 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 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.
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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.
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 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
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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.
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
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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 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
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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.
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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
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. Forwards will be used primarily to adjust the foreign exchange
exposure of the Funds with a view to protecting the portfolios from adverse
currency movements, based on the Adviser's outlook. Forwards involve other
risks, including, but not limited to, significant volatility in currency
markets. In addition, currency movements may not occur exactly as the Adviser
expected, so the use of forwards could adversely affect the Fund's total return.
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
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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 not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. 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. 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.
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
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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.
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 commonly referred to 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 the 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.
TAX CONSEQUENCE OF HEDGING. Under applicable tax law, the Fund may be
required to limits it gains from hedging in forwards, futures and options.
Although the Fund is expected to comply with such limits, the extent to which
such limits apply is subject to tax regulations as yet unissued. 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 also affect whether
dividends paid by the Fund are classified as capital gains or ordinary income.
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 recognized 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
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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 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
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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 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.
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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.
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.
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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 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
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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
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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 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
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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 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
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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 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
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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 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;
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(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 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
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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 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.
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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.
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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 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.
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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 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
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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 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.
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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 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.
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
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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. The Fund may invest up to 10% of its total assets in hybrid
instruments.
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;
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(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);
(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:
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(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
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;
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(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 33% 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
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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);
39
<PAGE> 83
(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 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.
40
<PAGE> 84
MANAGEMENT OF THE TRUST
The Trust is governed by a Board of Trustees which is responsible for
protecting the interests of shareholders. The trustees are experienced business
persons who meet throughout the year to oversee the Trust's activities, review
contractual arrangements with companies that provide services to the Funds, and
review performance. 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>
(1) (2) (3)
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH REGISTRANT DURING THE PAST 5 YEARS
- ------- --------------- -----------------------
<S> <C> <C>
Theodore H. Emmerich* Trustee Consultant; Director of Carillon Fund, Inc.
1201 Edgecliff Place and Trustee of Carillon Investment Trust
Cincinnati, OH 45206 (investment companies); formerly partner,
72 years old Ernst & Whinney (Certified Public
Accountants).
Frederick Moss Trustee Chairman of the Board of Trustees, Cincinnati
37 Riverside Drive Stock Exchange; Director, Margo Nursery Farms
New York, NY 10023 Puerto Rico (tropical plants).
69 years old
Dr. Bruce H. Olson Trustee Professor of Finance, Miami University
120 Upham Hall (Oxford, OH).
Miami University
Oxford, OH 45056
63 years old
James F. Smith* Trustee and President Director, President and Chief Financial
30 Montgomery Street Officer of Freeman Securities Company, Inc.
Jersey City, NJ 07302 (broker-dealer)
54 years old
</TABLE>
41
<PAGE> 85
<TABLE>
<S> <C> <C>
Steven R. Sutermeister* Trustee and Chairman Representative of the Adviser (January,
1876 Waycross Road 1994-present); Vice President of The Union
Cincinnati, OH 45240 Central Life Insurance Company (August,
44 years old 1991-present), Vice President of the
Sub-Adviser.
Gregory A. Sullivan Vice President Senior Vice President, Freeman Securities
30 Montgomery Street Company, Inc. (broker-dealer).
Jersey City, NJ 07302
49 years old
Nimish Bhatt Treasurer Vice President of BISYS Fund Services,
3435 Stelzer Road Limited Partnership (since July, 1996);
Columbus, OH 43219 [officer of other investment companies
35 years old administered by BISYS Fund Services, Limited
Partnership and its affiliates]; prior to joining
Bisys, he was Assistant Vice President of First Union
Evergreen from January, 1995 to July, 1996 and Price
Waterhouse from 1990 to 1994.
George Landreth Assistant Treasurer Senior Vice President of Client Services,
3435 Stelzer Road BISYS Fund Services, Limited Partnership.
Columbus, OH 43219
56 years old
John J. Quillin Secretary Vice President of Client Services and employee,
3435 Stelzer Road BISYS Fund Services, Limited Partnership (since
Columbus, OH 43219 February 1996); formerly, employee of Bay Bank
39 years old (June 1987 through February 1996).
James L. Smith Assistant Secretary Officer, BISYS Fund Services, Limited
3435 Stelzer Road Partnership (since October, 1996); employee
Columbus, OH 43219 of Alps Mutual Fund Services, Inc. prior
38 years old thereto.
Alaina Metz Assistant Secretary Employee, BISYS Fund Services, Limited
3435 Stelzer Road Partnership (since June 1995); Supervisor,
Columbus, OH 43219 Alliance Capital Management prior thereto.
31 years old
</TABLE>
42
<PAGE> 86
<TABLE>
<S> <C> <C>
Bob Tuch Assistant Secretary Vice President, BISYS Fund Services, Limited
3435 Stelzer Road Partnership
Columbus, OH 43219
47 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 Sub-Adviser, BISYS Fund Services,
Limited Partnership, the Trust's administrator (the "Administrator") or their
affiliates. Trustees not so affiliated receive an annual retainer of $6,000 and
a fee of $500 for each meeting of the Trustees which they attend in person or by
telephone. Trustees are reimbursed for travel and other out-of-pocket expenses.
For the fiscal year ended May 31, 1998, the Trustees received the
following compensation from the Trust:
<TABLE>
<CAPTION>
(1) (2) (3)
TOTAL COMPENSATION
NAME AND AGGREGATE FROM TRUST AND FUND
POSITION COMPENSATION COMPLEX TO
WITH THE TRUST FROM THE TRUST TRUSTEE+
-------------- -------------- --------
<S> <C> <C>
Theodore H. Emmerich, Trustee $8,000 $8,000
Frederick Moss, Trustee $8,000 $8,000
Dr. Bruce H. Olsen, Trustee $8,000 $8,000
James F. Smith, Trustee and President $0 $0
Steven R. Sutermeister, Trustee and Chairman $0 $0
</TABLE>
+ As of May 31, 1998, the "Fund Complex" consisted of one investment
company, the Trust, and two portfolios, the High Yield Fund and the
Emerging Markets Fund.
43
<PAGE> 87
The officers listed above are furnished to the Trust by the Adviser or
the Administrator (see "Management-Related Services -- Administrator") and
receive no compensation from the Trust. These officers spend only a portion of
their time on the affairs of the Trust. As of September 23, 1998, 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.
Waivers of the sales charges for Class A shares of the Funds apply for
the following investors:
o A Trustee or officer of the Trust, or the immediate families (i.e.,
the spouse or any children) of such persons.
o Directors, trustees, employees, and family members of the o Adviser
or "Affiliated Providers;"1 or trade organization to which the
Adviser or the Administrator belong.
o Any Union Central Life separate account used to fund o
tax-qualified variable annuity contracts; a director, officer,
full-time employee or sales representative of Union Central Life or
any of its affiliates, or the Distributor or any of its affiliates;
the immediate families of such persons; or any trust, pension,
profit-sharing or other benefit plan for such persons.
These waivers have been established as incentives to encourage persons
involved with operating and servicing the Funds to use their best efforts to
further the performance of the Funds and to attract the highest caliber people
possible to such positions.
PRINCIPAL HOLDERS OF SECURITIES
As of Sept. 23, 1998, The Union Central Life Insurance Company ("Union
Central Life"), an Ohio mutual insurance company having its principal offices at
1876 Waycross Road, Cincinnati, Ohio 45240, owned of record and beneficially
2,650,207.823 outstanding Class A shares or 62.669% of such shares of the High
Yield Fund and 2,675,853.031 outstanding Class A shares or 99.396% of such
shares of the Emerging Markets Fund.
As of Sept. 23, 1998, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94101-4122 owned of record and beneficially
872,454.592 outstanding Class A shares or 16.680% of such shares of the High
Yield Fund.
As of Sept. 23, 1998, no Class B shares were issued and outstanding.
- --------
1 Affiliated Providers are affiliates and subsidiaries of the Adviser, and any
organization that provides services to the Fund.
44
<PAGE> 88
Under the 1940 Act, Union Central Life is deemed a controlling person
of the High Yield Fund and the Emerging Markets Fund. Union Central Life is an
Ohio mutual insurance company and is publicly owned. 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 is registered
as an investment adviser under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"). FSCM was organized principally for purposes of sponsoring
and managing the investments of the Trust pursuant to a Joint Venture Agreement
dated January 4, 1994 (the "Joint Venture Agreement") between Carillon Advisers,
Inc. ("Carillon" or the "Sub-Adviser"), an Ohio corporation, and Freeman Holding
Company, Inc. ("Freeman"), a Delaware corporation (collectively, the "Parties").
Under the Joint Venture Agreement, Carillon serves as the general manager of the
Adviser and is responsible for maintaining its books of account and other
financial records and for preparing its quarterly financial statements. Carillon
has full authority to act on behalf of the Adviser except with respect to
matters involving single commitments in excess of $10,000 which must be approved
by both Carillon and Freeman. Each of Carillon and Freeman is authorized to
appoint two representatives to serve, in effect, as officers of the Adviser.
Pursuant to the provisions of the Joint Venture Agreement, Carillon and Freeman
agreed that the initial number of Trustees of the Trust would be six, of which
three would be designated by Carillon and three would be designated by Freeman.
If the vacancy on the Board increases for any reason, including any increase in
the number of Trustees, and is to be filled by action of the Trustees, no
recommendation of candidates to fill such vacancy will be made by the Joint
Venture, Freeman or Carillon without the consent of both Carillon and Freeman.
Carillon and Freeman are general partners of FSCM. Carillon, which is
located at 1876 Waycross Road, Cincinnati, OH 45240, is a wholly-owned
subsidiary of Union Central Life. Union Central Life is a mutual company owned
by its policyholders, none of which owns ten percent or more of Union Central
Life. Freeman is the parent corporation of Freeman Securities Company, Inc.
("Freeman Securities"), a New Jersey corporation which is registered as a
broker-dealer under the 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, 1998.
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.
45
<PAGE> 89
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 AGREEMENT
The Adviser serves as investment adviser to the Funds pursuant to an
Investment Advisory Agreement with the Trust dated June 27, 1994, as amended and
restated December 16, 1997 (the "Advisory Agreement"). The Advisory Agreement
applies identically in all material respects to the Funds except for their
provisions relating to compensation of the Adviser and except as otherwise noted
below. Under the Advisory Agreement, 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 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
Funds. The advisory services furnished by the Adviser under the Advisory
Agreement are not exclusive, and the Adviser is free to perform similar services
for others.
Unless sooner terminated in accordance with its terms, the Advisory
Agreement may be continued from year to year after June 27, 1996, provided that
such continuance is approved at least annually by a 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
46
<PAGE> 90
Trustees of the Trust 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 in the event of
any transfer or assignment thereof, as defined in the 1940 Act, 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.
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 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.
47
<PAGE> 91
The High Yield Fund paid the Adviser for investment advisory services,
$73,369 for the fiscal year ended May 31, 1996, $139,821 for the fiscal year
ended May 31, 1997 and $262,141 for the fiscal year ended May 31, 1998. The
Adviser waived investment advisory fees in the amounts of $164,637 for the
fiscal year ended May 31, 1996, $227,432 for the fiscal year ended May 31, 1997
and $171,891 for the fiscal year ended May 31, 1998.
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 paid the Adviser for investment advisory services, $61,669
for the period that began on December 31, 1997 and ended on May 31, 1998. For
the same period, the Adviser waived investment advisory fees in the amount of
$15,511.
THE SUB-ADVISER
Carillon Advisers, Inc., (Carillon or the "Sub-Adviser") an Ohio corporation
with offices at 1876 Waycross Road, Cincinnati, Ohio 45246, is registered as an
investment adviser under the Advisers Act. The Sub-Adviser is a wholly-owned
subsidiary of Union Central Life. Carillon and its affiliates currently act as
an investment adviser to Carillon Group of Mutual Funds, which consist of the
Carillon Fund, Inc. and the Carillon Investment Trust. Under a restructuring of
the Sub-Adviser scheduled to occur approximately mid-October, 1998, the
Sub-Adviser will assign its business to a new organization named Summit
Investment Partners, LLC. For further information about the restructuring, see
"SUB-ADVISER" in the Prospectus of the Trust.
THE SUB-ADVISORY AGREEMENT
The Carillon Advisers, Inc. serves as sub-adviser of the Trust 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 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 prospectus. The Board of Directors of the
Trust has approved an amendment of the Sub-Advisory Agreement to reflect the
changes in the investment sub-adviser of the Trust. Aside from the change in
name and organization of the investment sub-adviser, the Sub-Advisory Agreement
will remain the same as before.
The Sub-Advisory Agreement is renewable annually for successive periods
not to exceed one year (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 of 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.
48
<PAGE> 92
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 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 terminated the Advisory
Agreement.
Prior to the implementation of the Sub-Advisory Agreement, the Adviser
had entered into an Investment Service Agreement (the "Service Agreement") with
the Trust and Union Central Life, which permitted the Adviser to have access to
and to utilize Union Central Life's advisory personnel, administrative services,
supplies and equipment in the performance of its advisory services and functions
for the High Yield Fund under the Advisory Agreement. In consideration for such
services, the Adviser paid Union Central Life for the costs, direct or indirect,
fairly attributable thereto, but in no event less than $65,000 per year or such
other amount as was agreed to by the Adviser and Union Central Life. Pursuant to
the Service Agreement, the Adviser paid Union Central Life $65,000 for the
fiscal year ended May 31, 1996 and $30,018 for the fiscal period from June 1,
1996 to September 18, 1996. The Service Agreement was terminated on September
18, 1996.
Under the Sub-Advisory Agreement, the Sub-Adviser receives from FSCM an
annual fee in the amount of $150,000 per fund for services rendered. 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 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.
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,
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<PAGE> 93
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,
1996, the Administrator received fees of $54,750 and voluntarily waived fees of
$13,693; for the fiscal year ended May 31, 1997, the Administrator received fees
of $50,954 and voluntarily waived fees of $17,134; and for the fiscal year ended
May 31, 1998, the Administrator received fees of $71,895 and voluntarily waived
fees of $24,056. For providing services to the Emerging Markets Fund, the
Administrator received fees of $15,279 and voluntarily waived fees of $5,306 for
the fiscal period from December 31, 1997 (commencement of operations) to May 31,
1998.
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
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Administrator other than for such "cause" would entitle the Administrator to
receive from the Trust as liquidated damages the balance of the fees due under
the Administration Agreement for the remainder of the term in which such
termination or replacement takes place.
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 0.05% 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 $37,815 for the fiscal period ended May 31, 1996, $44,994 for the
fiscal year ended May 31, 1997, and $40,780 for the fiscal year ended May 31,
1998. The Fund Accountant received fees from the Emerging Markets Fund of
$21,215 for the fiscal period from December 31, 1997 (commencement of
operations) to May 31, 1998.
The Fund Accounting Agreement is effective until June 17, 2001, and
thereafter 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.
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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 $36,415 for the fiscal year ended May
31, 1996, $58,479 for the fiscal year ended May 31, 1997, and $78,430 for the
fiscal year ended May 31, 1998. The Transfer Agent received fees from the
Emerging Markets Fund of $21,705 for the fiscal period from December 31, 1997
(commencement of operations) to May 31, 1998.
The Transfer Agency Agreement continues in effect unless terminated at
any time by either party upon 90 days' written notice. To the extent BISYS
continues to furnish services to the Trust beyond the date of any such
termination, it shall continue to be paid its fees and expenses as provided in
the Transfer Agency Agreement. In the event of termination, BISYS will be
entitled to collect from the Trust a fee equal to 102% of its actual costs
incurred in effecting such termination. Under the Transfer Agency Agreement,
BISYS will be liable to the Trust only for losses resulting from willful
misfeasance, bad faith, negligence, or reckless disregard in performing its
duties. The Trust has otherwise agreed to indemnify BISYS and its officers,
directors, nominees, employees and agents against claims, damages and
liabilities, including counsel fees and other expenses, arising out of its
performance of the Transfer Agency Agreement or based upon its reasonable
reliance upon information furnished by the Trust, the Adviser, the
Administrator, the Fund Accountant or another custodian of Trust or Fund
records.
DISTRIBUTION PLAN
The Trust's Distribution and Shareholder Service Plan (the "Plan"),
dated June 27, 1994, on behalf of the shares of the 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. The Distributor in turn pays all or part of the 12b-1 fee
to investment representatives for these purposes. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
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The 12b-1 fees vary by share class as follows:
(1) Class A shares pay a 12b-1 fee of .25% of the average daily net
assets of the Fund;
(2) Class B shares pay a 12b-1 fee of 1.00% of the average daily net
assets of the Fund. This will cause expenses for Class B shares to be higher and
dividends to be lower than for Class A shares. In addition, the Distributor may
use up to .25% of the fees for shareholder servicing and .75% for distribution
activities.
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 agreement related to the Plan
or by vote of a majority of the outstanding voting securities of such Fund.
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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, 1998, BISYS Fund Services, as the
High Yield Fund's principal underwriter, received $108,665 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
offered by the High Yield Fund out of distribution fees for the fiscal year
ended May 31, 1998: (i) advertising, $0; (ii) printing and mailing of
prospectuses to other shareholders, $0; (iii) compensation to underwriters,
$108,665; (vi) compensation to sales personnel, $0; 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, 1998, BISYS Fund
Services received $1,041 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, $1,041 (vi) compensation to sales personnel, $0; and (v) other,
$0.
For the fiscal period from December 31, 1997 (commencement of
operations) to May 31, 1998, BISYS Fund Services, as the Emerging Markets Fund's
principal underwriter, received $25,554 in distribution fees from the Emerging
Markets 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 Emerging
Markets Fund out of distribution fees for the fiscal year ended May 31, 1998:
(i) advertising, $0; (ii) printing and mailing of prospectuses to other
shareholders, $0; (iii) compensation to underwriters, $25,554; (vi) compensation
to sales personnel, $0; and (v) other, $0.
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 Class A shares of
the High Yield Fund in the amount of $11,717 for the fiscal year ended May 31,
1996, $26,909 for the fiscal year ended May 31, 1997, and $16,205.07 for the
fiscal year ended May 31, 1998, all of which commissions
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were retained by the Distributor. The Distributor received underwriting
commissions on the sale of Class A shares of the Emerging Markets Fund in the
amount of $276.15 for the fiscal period from December 31, 1997 (commencement of
operations) to May 31, 1998, 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 Funds. No
Class B shares of the Funds were sold during the fiscal year ended May 31, 1998
and the Distributor received no underwriting commissions on sales of such shares
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 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, 1998, neither of the Funds paid any
brokerage commissions on brokerage transactions.
HOW BROKERS AND DEALERS ARE SELECTED
FIXED-INCOME SECURITIES. Fixed-income securities are generally
purchased from the issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being paid by the
client, although the price usually includes an undisclosed compensation.
Transactions placed through dealers serving as primary market-makers reflect the
spread between the bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
The Adviser may effect principal transactions on behalf of the 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
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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.
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
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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 committing 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.
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
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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.
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 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, 200%. 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, 1998, the portfolio turnover rate for
the High Yield Fund was 518.74%, while for the fiscal year ended May 31, 1997,
the portfolio turnover rate for the High Yield Fund was 271.68%. No comparison
of the portfolio turnover rates for the Emerging Markets Fund is possible
because the Fund commenced operations in the most recent fiscal year, ended May
31, 1998.
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 have created two classes of shares of the Funds: the Class A shares
and the Class B shares. The Trustees have designated a third class of shares for
the High Yield Fund: the Summit High Yield Institutional Shares class. The Class
A shares of the Funds were renamed on September 16, 1998 and prior to such date
were named the Summit High Yield Shares class for the High Yield Fund and were
not named for the Emerging Markets Fund. This SAI covers the Class A shares and
the Class B shares of the Funds. Shares of the Summit High Yield
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Institutional Shares class are not currently offered to the public. The Trust
currently offers Class A shares and the Class B shares of the Funds; each share
of a Fund represents an interest in the Fund's portfolio proportionately equal
to the interest of each other share of such Fund. 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.
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. The net asset value is
determined by dividing the value of a Fund's securities, plus any cash and other
assets, less all liabilities, by the number of shares outstanding. Expenses and
fees of a Fund, including the advisory and the distributor fees, are accrued
daily and taken into account for the purpose of determining the net asset value.
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. The Trustees, on the basis of ongoing evaluation
of the various pricing 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 and traded on
foreign exchanges or in foreign markets will be 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, 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 converted into U.S. Dollars, fluctuations in the value of such currencies in
relation to the U.S. Dollar may affect the NAV of Fund shares even if there has
not been any change in the foreign-currency denominated values of such
securities.
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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. Shareholders will receive a confirmation of each new
transaction in their 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 Automatic Withdrawal Plan or an Automatic
Investment Plan. Shareholders may rely on these statements in lieu of stock
certificates. Stock certificates representing shares of the Fund will not be
issued.
TAX STATUS
In January, the Trust will send you information indicating the federal
tax status of dividends and capital gain distributions in your Fund account. All
distributions are taxable to shareholders for the year in which they were paid.
The only exception is that distributions declared during the last three months
of the year to shareholders of record in such month and paid in January of the
following year are taxed to shareholders as though they were paid by December
31.
The Funds intend to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification requires the Funds to limit their 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.
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 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.
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 Objective, Policies and Strategy" in the prospectus.
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:
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<PAGE> 104
ab 6
YIELD = 2 [ ( ------- + 1 ) - 1 ]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yields for 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, 1998,
the High Yield Fund's yield for the shares of the Summit High Yield Shares class
(currently named the Class A shares) was 8.52% and the Emerging Markets Fund's
yield for its single class of shares (currently named the Class A shares) was
8.97%.
TOTAL RETURN PERFORMANCE
Under the rules of the Commission, funds advertising performance must
include total return quotes, "T" below, calculated according to the following
formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
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<PAGE> 105
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $10,000
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 $10,000
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, 1998 and for the period from June 27, 1994 to
May 31, 1998 for the Summit High Yield Shares class (currently, the Class A
shares) of the High Yield Fund were 16.17% and 16.41%, respectively. The total
returns for the fiscal period from December 31, 1997 to May 31, 1998 for the
single class of shares of the Emerging Markets Fund (currently, the Class A
shares) was 2.01%. 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 High Yield Fund Class A shares and the Emerging Markets Fund Class A
shares. The average annual total returns, after the deduction of the front-end
sales charge for the same periods, for the High Yield Fund Class A shares were
10.97% and 15.06%, respectively, and for the fiscal period from December 31,
1997 to May 31, 1998 for the Emerging Markets Fund Class A shares was -2.57%.
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,
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<PAGE> 106
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
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<PAGE> 107
Fund fairly to determine the value of its net assets; or (iii) for such other
periods as the SEC may by order permit for the protection of shareholders,
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions described in (i) and (ii) exist. Payment of proceeds may
also be delayed if the shares to be redeemed or repurchased were purchased by
check and that check has not cleared (which may be up to 15 days or more).
UNDELIVERABLE REDEMPTION CHECKS
If you elect to receive distributions in cash and checks from the Funds
(1) are returned marked as "undeliverable" or (2) remain uncashed for six
months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the Funds at the
per share NAV determined as of the date of payment of the distributions. In
addition. any undeliverable check or checks that remain uncashed for six months
will be canceled and will be reinvested in the Funds at the NAV determined as of
the date of the cancellation.
SALES CHARGE REDUCTION AND WAIVERS FOR CLASS A SHARES
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 determining sales charge reductions or waivers, to
permit confirmation of the qualification. An investor may qualify for reduced
sales charges in the following cases. First, an investor may purchase shares of
the Fund pursuant to a Letter of Intent. The Letter of Intent permits an
investor to purchase Class A shares of the Fund over a 13-month period and
receive the same sales charge as if all shares had been purchased at one time.
Each investment made during the period will be assessed 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 investment made during
this 30-day period, valued at the purchaser's cost, can be applied to the
fulfillment Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor
either Fund to sell, the indicated amount. In the event the stated goal is not
achieved within the 13-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 13-month period exceed the stated investment goal, an adjustment will be
made to reflect any further reduced sales
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<PAGE> 108
charges applicable to such purchases. All such adjustments will be made at the
conclusion of the 13-month period and in the form of additional shares at the
then current applicable public offering price.
EXCHANGE PRIVILEGE
The Exchange Privilege permits you to sell your shares for shares of
the same class of another Fund within the Trust generally without paying
additional sales charges. No transactions fees are charges for exchanges.
Exchanges are subject to the following conditions.
Class A shares of a 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 Class A shares of the other Fund. 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 for shares of the other 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. 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.
In addition, the following conditions exists: The shares of the Fund
selected for exchange must be available for sale in your state of residence; the
minimum investment requirements for the Fund must be met at the time of your
exchange; the registration and tax identification numbers of the two accounts
must be identical; your exchange request must be received by 4:00 p.m. Eastern
Time on a Business Day in order to receive the NAV determined for that same
Business Day; to prevent disruption in the management of the Funds, due to
market timing strategies, exchange activity may be limited; and the Exchange
Privilege may be changed or eliminated at any time upon 60 days notice to
shareholders.
An exchange between Funds involves two transactions - a sale of one
Fund and the purchase of another. That sale typically will produce a gain or
loss for tax purposes. Exchanges between classes of the same Fund are not
taxable. Exchanges may be made by sending the Trust's Exchange Request Form to
Summit Investment Trust, P.O. Box 182448, Columbus, Ohio, 43218-2448 or by
calling 1-800-272-3442.
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<PAGE> 109
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, PricewaterhouseCoopers LLP, 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 Funds' Financial Statements for the fiscal year ended May 31, 1998,
including the Report of Independent Accountants, which are included in the
Fund's Annual Report to Shareholders for the fiscal year ended May 31, 1998 (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 Class B shares of
the Funds did not have operations during the fiscal year ended May 31, 1998 and
are not covered in such Financial Statements or the Report.
The Fund's Financial Statements are incorporated herein by reference to
Post-Effective Amendment No. 8 to the Registrant's Registration Statement No.
33-76250 as filed on July 31, 1998.
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<PAGE> 110
SUMMIT INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS, CONTINUED
May 31, 1998
3. PURCHASES AND SALES OF PORTFOLIO SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended May 31, 1998 are as follows:
PURCHASES SALES
------------ ------------
High Yield Fund................. $252,632,269 $240,545,119
Emerging Markets Fund........... $ 41,930,292 $ 17,796,163
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 Funds. FSCM was organized principally for
purposes of sponsoring and managing the Trust pursuant to a joint venture
agreement (the "Joint Venture Agreement") between Carillon Advisers, Inc.
("Carillon"), 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 is a wholly-owned
subsidiary of Union Central Life, an Ohio mutual insurance company, which
owns as of May 31, 1998 approximately 53% of the High Yield Fund and 99% of
the Emerging Markets 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 daily net assets of the Funds. Effective July 1,
1995, the investment advisory fee is 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 for
the same period. The advisory fee is paid monthly at an annual rate which
varies between 0.35% and 1.15% of the High Yield Fund's average daily net
assets. For the Emerging Markets Fund the advisory fee is paid monthly at an
annual rate of 0.75% B.P. 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 total
annual expenses of the High Yield Fund to 1.60% and the Emerging Markets to
2.00%. For the period ended May 31, 1998, FSCM received $262,141 and $61,669
of advisory fees after voluntarily waiving $171,891 and $15,511 of advisory
fees for the High Yield Fund and Emerging Markets Fund, respectively.
Carillon, with offices at 1876 Waycross Road, Cincinnati, Ohio 45240, serves
as investment sub-adviser (the "Sub-Adviser") to the Funds 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 Funds. Under the Sub-Advisory Agreement,
the Sub-Adviser receives from the Adviser an annual fee in the amount of
$150,000 for each Fund. If the Sub-Adviser renders
Continued
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<PAGE> 111
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Agreement and Declaration of Trust of Registrant is
incorporated herein by reference to the Registrant's
Initial Registration Statement No. 33-76250, Exhibit
No. (1), as filed on April 7, 1994.
(1) Amendment to Agreement and Declaration of
Trust of Registrant is incorporated herein by
reference to Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement No.
33-76250, Exhibit No. (1)(a), as filed on
June 15, 1994.
(2) Amendment No. 2 to Agreement and Declaration
of Trust of Registrant is incorporated herein
by reference to Post-Effective Amendment No.
6 to the Registrant's Registration Statement
No. 33-76250, Exhibit No. (1)(b), filed on
September 30, 1997.
(b) By-laws of the Summit Investment Trust are
incorporated herein by reference to the Registrant's
Initial Registration Statement No. 33-76250, Exhibit
No. (2), as filed on April 7, 1994.
(c) Certificate No. 1 of Trustees relating to the
establishment of two additional classes for Summit
High Yield Fund: is filed herewith as Exhibit No.
23(c)(1).
Certificate No. 2 of Trustees relating to the
exchange of shares of the Summit High Yield
Institutional Service Shares into shares of the High
Yield Shares class: is filed herewith as Exhibit No.
23(c)(2).
Certificate No. 3 of Trustees relating to the
establishment of the Summit Emerging Markets Bond
Fund: is filed herewith as Exhibit No. 23(c)(3).
Certificate No. 4 of Trustees relating to the
designation of Class A shares and Class B shares is
filed herewith as Exhibit 23(c)(4).
<PAGE> 112
(d) (1) Investment Advisory Agreement between the
Summit Investment Trust and First Summit
Capital Management on behalf of the High
Yield Fund is incorporated herein by
reference to Pre-Effective Amendment No. 2
to the Registrant's Registration Statement
No. 33-76250, Exhibit No. (5), as filed on
June 15, 1994.
(2) Investment Advisory Agreement between the
Summit Investment Trust and First Summit
Capital Management, on behalf of the Summit
Emerging Markets Bond Fund is incorporated by
reference to Post-Effective Amendment No. 8
to the Registrant's Registration Statement
No. 33-76250, Exhibit No. 23(d)(2) as filed
on July 31, 1998.
(3) Investment Sub-Advisory Agreement between
First Summit Capital Management and Carillon
Advisers, Inc., on behalf of the Summit High
Yield Fund and Summit Emerging Markets Bond
Fund is incorporated by reference to
Post-Effective Amendment No. 8 to the
Registrant's Registration Statement
No. 33-76250, Exhibit No. 23(d)(3) as filed
on July 31, 1998.
(4) Form of Sub-Advisory Agreement between First
Summit Capital Management and Summit
Investment Partners, LLP, on behalf of the
Summit High Yield Fund and Summit Emerging
Markets Bond Fund is filed herewith as
Exhibit No. 23(d)(4).
(e) (1) Amended and Restated Distribution Agreement
between the Summit Investment Trust and BISYS
Fund Services Limited Partnership is
incorporated by reference to Post-Effective
Amendment No. 6 to the Registrant's
Registration Statement No. 33-76250, Exhibit
6(a)(2), as filed on September 30, 1997.
(2) "Form of" Dealer Agreement on behalf of the
Summit Investment Trust is incorporated
herein by reference to Pre-Effective
Amendment No. 2 to the Registrant's
Registration Statement No. 33-76250, Exhibit
No. (6)(b), as filed on June 15, 1994.
(3) "Form of" Selling Agreement between BISYS
Fund Services Limited Partnership and
McDonald & Co., on behalf of the Summit
Investment Trust incorporated herein by
reference to Post-Effective Amendment No. 3
to the Registrant's Registration Statement
No. 33-76250 Exhibit (6)(b)(2), as filed on
October 12, 1995.
(4) "Form of" Servicing Agreement on behalf of
the Summit Investment Trust is incorporated
herein by reference to the Registrant's
Initial Registration Statement No. 33-76250,
Exhibit No. (6)(c), as filed on April 7,
1994.
(5) Amended Schedules A, B, C-2 and D to the
Amended and Restated Distribution Agreement
(Exhibit 23(e)(1) above) as of September 23,
1998 are filed herewith as Exhibit
No. 23(e)(5).
(f) Not Applicable.
(g) Custodian Agreement between the Summit Investment
Trust and The Fifth Third Bank is incorporated herein
by reference to the Registrant's Initial Registration
Statement No. 33-76250, Exhibit No. (8), as filed on
April 7, 1994.
<PAGE> 113
(h) (1) Management and Administration Agreement
between Summit Investment Trust and BISYS
Fund Services Ohio, Inc. is incorporated by
reference to Post-Effective Amendment No. 8
to the Registrant's Registration Statement
No. 33-76250, Exhibit No. 23(h)(1) as filed
on July 31, 1998.
(2) Amended and Restated Transfer Agency
Agreement between the Summit Investment Trust
and BISYS Fund Services Ohio, Inc. is
incorporated by reference to Post-Effective
Amendment No. 8 to the Registrant's
Registration Statement No. 33-76250, Exhibit
No. 23(h)(2) as filed on July 31, 1998.
(3) Amended and Restated Fund Accounting
Agreement between the Summit Investment Trust
and BISYS Fund Services Ohio, Inc. is
incorporated by reference to Post-Effective
Amendment No. 8 to the Registrant's
Registration Statement No. 33-76250,
Exhibit 23(h)(3) as filed on July 31, 1998.
(4) Joint Venture Agreement between Carillon
Advisers, Inc., and Freeman Holding Company,
Inc. is incorporated herein by reference to
Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement No.
33-76250, Exhibit No. (9)(d), as filed on
June 15, 1994.
(i) Opinion and consent of Stradley, Ronon, Stevens &
Young, LLP is filed herewith as Exhibit No. 23(i).
(j) Consent of PricewaterhouseCoopers LLP is filed
herewith as Exhibit No. 23(j).
(k) Not Applicable.
(l) Letter Containing Investment Undertaking is
incorporated herein by reference to Pre-Effective
Amendment No. 2 to Registrant's Registration
Statement No. 33-76250, Exhibit No. (13), as filed on
June 15, 1994.
(m) Rule 12b-1 Plan for Class A Shares and Class B Shares
(Schedule C-1 to Amended and Restated Distribution
Agreement) is filed herewith as Exhibit No. 23(m).
(n) Financial Data Schedule of:
(1) Summit High Yield Shares class of the Summit
High Yield Fund is filed herewith as Exhibit
No. 23(n)(1).
(2) Summit High Yield Institutional shares class
of the Summit High Yield Fund is filed
herewith as Exhibit No. 23(n)(2).
(3) Summit Emerging Markets Bond Fund is filed
herewith as Exhibit No. 23(n)(3).
<PAGE> 114
(o) Rule 18f-3 Plan is filed herewith as Exhibit
No. 23(o).
(p) Powers-of-Attorney are incorporated by
reference to Post-Effective Amendment No. 8
to the Registrant's Registration Statement
No. 33-76250, Exhibit No. 23(p) as filed on
July 31, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT.
No person is directly or indirectly controlled by the
Registrant. With respect to the High Yield Fund, as of July
21, 1998, The Union Central Life Insurance Company ("Union
Central Life"), a mutual insurance company organized under the
laws of Ohio, owned 59.018% of the outstanding shares of the
Summit High Yield Shares class. Union Central Life also owned
99.235% of the outstanding shares of the Summit Emerging
Markets Bond Fund. While the Summit Investment Trust disclaims
any such control relationship, it may be deemed to be
controlled by its investment adviser by virtue of the advisory
relationship. The Registrant's investment adviser, First
Summit Capital Management ("FSCM"), is a joint venture of
Carillon Advisers, Inc. ("Carillon") and Freeman Holding
Company, Inc. ("Freeman"). Carillon is an Ohio corporation
which is a wholly-owned subsidiary of Union Central Life.
Freeman is a Delaware corporation which is majority-owned by
the employee benefit plans of its wholly-owned, broker-dealer
subsidiary, Freeman Securities Company, Inc., a New Jersey
corporation. Set forth below is a chart showing the entities
controlled by Union Central Life, the jurisdictions in which
such entities are organized, and the percentage of voting
securities owned by the person immediately controlling each
such entity.
THE UNION CENTRAL LIFE INSURANCE COMPANY,
ITS SUBSIDIARIES AND AFFILIATES
I. The Union Central Life Insurance Company (Ohio)
A. Carillon Life Insurance Company (Ohio) -
100% owned.
B. Carillon Investments, Inc. (Ohio) - 100%
owned.
C. Carillon Marketing Agency, Inc. (Delaware) -
100% owned.
a. Carillon Marketing Agency of
Alabama, Inc. (Alabama) - 100%
owned.
b. Carillon Marketing Agency of
Arkansas, Inc. (Arkansas) - 100%
owned.
c. Carillon Marketing Agency of Hawaii,
Inc. (Hawaii) - 100% owned.
d. Carillon Marketing Agency of Idaho,
Inc. (Idaho) - 100% owned.
e. Carillon Marketing Agency of
Kentucky, Inc. (Kentucky) - 100%
owned.
f. Carillon Marketing Agency of
Massachusetts, Inc. (Massachusetts)
- 100% owned.
<PAGE> 115
g. Carillon Marketing Agency of New
Mexico, Inc. (New Mexico) -
100% owned.
h. Carillon Marketing Agency of Ohio,
Inc. (Ohio) - 100% owned.
i. Carillon Marketing Agency of Texas,
Inc. (Texas) - 100% owned.
D. Carillon Advisers, Inc. (Ohio) - 100% owned.
E. The Manhattan Life Insurance Company (New
York) - 73% owned.
II. Mutual Funds of the Carillon Group.
A. Carillon Fund, Inc.* (Maryland).
B. Carillon Investment Trust** (Massachusetts).
III. Summit Investment Trust (Massachusetts).
A. Summit High Yield Fund Shares Class
- 62.669% owned.
B. Summit Emerging Markets Bond Fund
- 99.396% owned.
------
* At September 23, 1998, Union Central owned 100% of
the outstanding shares of Carillon Fund, Inc.
** At September 23, 1998, Union Central owned 33% of
the outstanding shares of Carillon Investment Trust.
ITEM 25. INDEMNIFICATION.
Sections 6.4 and 6.5 of the Agreement and Declaration of
Trust, as amended, of the Registrant provide that the
Registrant shall indemnify each of its Trustees and officers
against all liabilities, including but not limited to amounts
paid in satisfaction of judgments, in compromise or as fines
and penalties, and against all expenses, including but not
limited to accountants and counsel fees, reasonably incurred
in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before
any court or administrative or legislative body, in which such
Trustee or officer may be or may have been involved as a party
or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being
or having been such a Trustee or officer, except that
indemnification shall not be provided if it shall have been
finally adjudicated in a decision on the merits by the court
or other body before which the proceeding was brought that
such Trustee or officer: (i) did not act in good faith in the
reasonable belief that his or her action was in the best
interests of the Registrant; or (ii) is liable to the
Registrant or its shareholders by reason of willful
<PAGE> 116
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office.
Indemnification of the Registrant's officers and Trustees,
persons who control the Registrant, or Registrant's
Distributor, Transfer Agent, Fund Accountant or Administrator
against certain stated liabilities is provided for in the
following documents:
(a) Sections 1.11 and 1.12 of the Amended and Restated
Distribution Agreement between the Summit Investment
Trust and BISYS Fund Services, Limited Partnership,
incorporated herein by reference to Post-Effective
Amendment No. 3 to the Registrant's Registration
Statement No. 33-76250, as Exhibit (6)(a)(2);
(b) Section 4 of the Management and Administration
Agreement between the Summit Investment Trust and
BISYS Fund Services Ohio, Inc., filed herewith as
Exhibit No. 23(h)(1).
(c) Section 9 of the Amended and Restated Transfer Agency
Agreement between the Summit Investment Trust and
BISYS Fund Services Ohio, Inc., filed herewith as
Exhibit No. 23(h)(2).
(d) Section 7 of the Amended and Restated Fund Accounting
Agreement between the Summit Investment Trust and
BISYS Fund Services Ohio, Inc., filed herewith as
Exhibit No. 23(h)(3).
(e) Sections 8.1 and 8.2 of the Custodian Agreement
between the Summit Investment Trust and The Fifth
Third Bank, incorporated herein by reference to the
Registrant's Initial Registration Statement No.
33-76250, Exhibit No. (8), as filed on April 7,
1994.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended, (the "1933 Act"), may be
permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the Registrant in
the successful defense of any action suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the 1933 Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Summit Capital Management ("FSCM") is a joint venture of
Carillon Advisers, Inc. ("Carillon"), an Ohio corporation, and
Freeman Holding Company, Inc. ("Freeman"), a Delaware
corporation. Information regarding the Representatives of FSCM
and their business, profession or employment of a substantial
nature during the last two years is set forth below. For
information as to the business, profession, vocation or
employment of a substantial nature of Carillon and Freeman,
reference is made to the respective Forms ADV of Carillon
and Freeman's wholly-owned subsidiary, Freeman Securities
Company, Inc. ("Freeman Securities") as amended, filed under
the Investment Advisers Act of 1940, as amended, which are
herein incorporated by reference.
<PAGE> 117
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE ADVISER DURING PAST TWO YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
James F. Smith Representative President and Chief Financial Officer, Freeman Securities.
30 Montgomery Street
Jersey City, NJ 07302
Gregory A. Sullivan Representative Senior Vice President, Freeman Securities.
30 Montgomery Street
Jersey City, NJ 07302
Steven R. Sutermeister Representative Vice President of Union Central Life and Carillon.
1876 Waycross Road
Cincinnati, OH 45240
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) BISYS Fund Services, Limited Partnership ("BISYS"),
the Distributor of shares of the Registrant, also
distributes the securities of the following open-end
management investment companies:
The Coventry Group;
The Riverfront Funds, Inc.;
The Victory Portfolios;
The Parkstone Group of Funds;
The B B & T Mutual Funds Group;
M S D & T Funds, Inc.;
The ARCH Fund, Inc.;
American Performance Funds;
The Sessions Group;
Pacific Capital Funds;
AmSouth Mutual Funds;
MarketWatch Funds;
M M A Praxis Mutual Funds;
Qualivest Funds;
Empire Builder Tax Free Bond Fund;
First Choice Funds Trust;
Fountain Square Funds;
Hirtle Callaghan Trust;
HSBC Family of Funds;
The Infinity Mutual Funds, Inc.;
Intrusts Funds;
Kent Funds;
Magna Funds;
Meyers Sheppard Investment Trust;
Minerva Funds;
The Parkstone Advantage Funds;
Pegasus Funds;
The Republic Funds Trust;
The Republic Advisors Funds Trust;
SBSF Funds, Inc. dba Key Mutual Funds; and
Sefton Funds.
(b) Officers and Directors of Principal Underwriter
Set forth below is information with respect to the
partners of BISYS as of September 30, 1998.
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND PRINCIPAL POSITION AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH UNDERWRITER REGISTRANT
------------------ -------------------- --------------
<S> <C> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Rd.
Columbus, OH 43219
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND PRINCIPAL POSITION AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH UNDERWRITER REGISTRANT
------------------ -------------------- --------------
<S> <C> <C> <C>
WC Subsidiary Corporation Sole Limited Partner None
3435 Stelzer Rd.
Columbus, OH 43219
</TABLE>
Each of these corporations is a subsidiary of The BISYS Group,
Inc., 150 Clove Road, Little Falls, NJ 07424.
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act
of 1940, as amended [15 U.S.C. 80a-30(a)], and the Rules
promulgated thereunder, [17 CFR 270.31a-1 to 31a-3] are
maintained by the Registrant's investment adviser,
First Summit Capital Management, 1876 Waycross Road,
Cincinnati, OH 45240, except for those maintained by the
Registrant's Custodian, The Fifth Third Bank, 38 Fountain
Square Plaza, Cincinnati, OH 45263, the Registrant's
Administrator and Distributor, BISYS Fund Services Limited
Partnership or the Registrant's Transfer Agent and Fund
Accountant, BISYS Fund Services Ohio, Inc. BISYS Fund
Services Limited Partnership and BISYS Fund Services Ohio
Inc. are located at 3435 Stelzer Road, Columbus, OH 43219.
ITEM 29. MANAGEMENT SERVICES.
All management-related service contracts are discussed in Part
A or B of this Registration Statement.
ITEM 30. UNDERTAKINGS
Not Applicable.
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Cincinnati, and State of Ohio on the 29th day of
September, 1998.
SUMMIT INVESTMENT TRUST
(The Registrant)
By: *
------------------------------------
Steven R. Sutermeister
Chairman of the Board and
Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
* Chairman of the September 29, 1998
- ------------------------ Board and Trustee -------------
Steven R. Sutermeister (Chief Executive Officer) (Date)
* Trustee September 29, 1998
- ------------------------ ------------------
Theodore H. Emmerich (Date)
* Trustee September 29, 1998
- ------------------------ ------------------
Frederick Moss (Date)
* Trustee September 29, 1998
- ------------------------ ------------------
Dr. Bruce H. Olson (Date)
* Trustee September 29, 1998
- ------------------------ ------------------
James F. Smith (Date)
/s/ Nimish Bhatt Treasurer (Principal September 29, 1998
- ------------------------ Financial and ------------------
Nimish Bhatt Accounting Officer) (Date)
* By /s/ Robert L. Tuch September 29, 1998
------------------------- ------------------
Robert L. Tuch, pursuant to (Date)
Power-of-Attorney
<PAGE> 120
EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
FORM N-1A EDGAR
EXHIBIT NO. DESCRIPTION EXHIBIT NO.
- ----------- ----------- -----------
<S> <C> <C>
23(c)(1) Certificate No. 1 of Trustees relating to the establishment Ex-99.c(1)
of two additional classes for Summit High Yield Fund: is
filed herewith as Exhibit No. 23(c)(1).
23(c)(2) Certificate No. 2 of Trustees relating to the exchange Ex-99.c(2)
of shares of the Summit High Yield Institutional Service
Shares into shares of the High Yield shares class: is
filed herewith as Exhibit No. 23(c)(2).
23(c)(3) Certificate No. 3 of Trustees relating to the establishment Ex-99.c(3)
of the Summit Emerging Markers Bond Fund: is filed
herewith as Exhibit No. 23(c)(3).
23(c)(4) Certificate No. 4 of Trustees relating to the designation Ex-99.c(4)
of Class A shares and Class B shares is filed herewith
as Exhibit 23(c)(4).
23(d)(4) Investment Sub-Advisory Agreement between First Summit Ex-99.d (4)
Capital Management and Summit Investment Partners, LLP, on
behalf of Summit High Yield Fund and Summit Emerging Markets
Bond Fund.
23(e)(5) Amended Schedules A, B, C-2, and D to the Amended and Restated Ex-99.e(5)
Distribution Agreement (Exhibit 23(e)(1) above) as of September
23, 1998
23(i) Opinion and consent of Stradley, Ronon, Stevens & Ex-99.i
Young, LLP
23(j) Consent of PricewaterhouseCoopers LLP Ex-99.j
23(m) Rule 12b-1 Plan for Class A Shares and Class B Shares (Schedule Ex-99.m
C-1 to Amended and Restated Distribution Agreement)
23(n)(1) Financial Data Schedule of Summit High Yield Shares class Ex-27.1
of the Summit High Yield Fund.
23(n)(2) Financial Data Schedule of Summit High Yield Institutional Ex-27.2
Shares class of the Summit High Yield Fund.
23(n)(3) Financial Data Schedule of Summit Emerging Markets Bond Ex-27.3
Fund.
23(o) Rule 18f-3 Plan for Class A Shares and Class B Shares Ex-99.o
</TABLE>
<PAGE> 1
Exhibit 23(c)(1)
CERTIFICATE
The undersigned, being all of the Trustees of Summit Investment Trust (the
"Trust"), hereby certify the following:
WHEREAS, by unanimous consent dated July 31, 1995 (the "Consent"), the Board
of Trustees approved, in principle, the establishment of two additional classes
(the "Classes") of shares of the Trust's sole Sub-Trust, Summit High Yield Fund
(the "Fund"), which Classes were initially designated as "Class B Shares" and
"Class C Shares," and were in addition to the class of shares originally
established for the Fund, which class had outstanding and issued shares, and was
thereinafter called "Class A Shares," and
WHEREAS, such Class A Shares, Class B Shares, and Class C Shares were
subsequently redesignated as Summit High Yield Shares, Summit High Yield
Institutional Shares and Summit High Yield Institutional Service Shares; and
WHEREAS, the Board of Trustees also approved, in the Consent, that the Summit
High Yield Institutional Shares and the Summit High Yield Institutional Service
Shares would have the same rights and limitations as those of Summit High Yield
Shares, as set forth in Article IV of the Trust's Agreement and Declaration of
Trust (the "Declaration of Trust"), except that dividends paid on Summit High
Yield Institutional Service Shares of the Fund, similar to Summit High Yield
Shares, shall reflect reductions for payments of fees under the Trust's
Distribution Plan relating to Summit High Yield Shares, and Summit High Yield
Institutional Service Shares, respectively, each of which has been adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended
(collectively, the "Plan"), and provided further, that only the Summit High
Yield Shares and the Summit High Yield Institutional Service Shares shall be
entitled to vote upon or with respect to any matter relating to or arising from
the Plan relating to such Class; and
WHEREAS, the Board of Trustees, at its meeting on September 27, 1995,
approved the public offering of the Summit High Yield Institutional Service
Shares Class (the "Service Class") for the Fund, and authorized certain actions
pertaining to the registration, issuance and maintenance of the Service Class;
NOW, THEREFORE, BE IT
RESOLVED, that this Certificate, upon its execution, shall
evidence the establishment and designation of the Classes by
the Trustees, pursuant to Section 4.1(b) of Article IV of the
Declaration of Trust, entitled `Classes of Shares.'
WITNESS the execution this 27th day of September, 1995.
/s/ Theodore H. Emmerich /s/ Dr. Bruce H. Olson
- ------------------------- ------------------------------
THEODORE H. EMMERICH DR. BRUCE H. OLSON
<PAGE> 2
/s/ Frederick Moss /s/ Steven R. Sutermeister
- ------------------------- ------------------------------
FREDERICK MOSS STEVEN R. SUTERMEISTER
/s/ James F. Smith
- -------------------------
JAMES F. SMITH
Filed with the minutes of the proceedings of the Trust,
this 27th day of September, 1995.
/s/ Robert L. Tuch
------------------------------
Assistant Secretary
<PAGE> 1
Exhibit 23(c)(2)
SUMMIT INVESTMENT TRUST
CERTIFICATE NO. 2 OF TRUSTEES
REGARDING DESIGNATION OF SERIES OR CLASSES
The undersigned, being all of the Trustees of Summit Investment Trust (the
"Trust"), hereby certify the following:
WHEREAS, the Board of Trustees, at its meeting on June 18, 1997, authorized
and directed the exchange of all shares of the Summit High Yield Institutional
Service Shares class (the "Service Class") of the Trust's sole Sub-Trust, Summit
High Yield Fund (the "Fund") into shares of the High Yield Shares class of the
Fund and authorized certain actions pertaining to the abolishment of the Service
Class;
NOW, THEREFORE, BE IT
RESOLVED, that this Certificate, upon its execution, shall
evidence, effective upon the completion of the exchange of all
shares of the Service Class into shares of the High Yield
Shares class of the Fund, the Trustees action, taken pursuant
to Section 4.1(b) of Article IV of the Agreement and
Declaration of Trust, as amended, entitled "Classes of
Shares," to abolish the Service Class, with its establishment
and designation; and
FURTHER RESOLVED, that this certificate may be executed in one
or more counterparts, each of which shall be deemed an
original, and when taken together shall constitute one and the
same instrument.
WITNESS the execution hereof this 17th day of September, 1997.
/s/ Theodore H. Emmerich /s/ Dr. Bruce H. Olson
- ------------------------- ------------------------------
THEODORE H. EMMERICH DR. BRUCE H. OLSON
/s/ Frederick Moss /s/ Steven R. Sutermeister
- ------------------------- ------------------------------
FREDERICK MOSS STEVEN R. SUTERMEISTER
/s/ James F. Smith
- -------------------------
JAMES F. SMITH
Filed with the minutes of the proceedings of the Trust,
this 17th day of September, 1997.
<PAGE> 2
/s/ Robert L. Tuch
------------------------------
Name: Robert L. Tuch
Title: Assistant Secretary
<PAGE> 1
Exhibit 23(c)(3)
SUMMIT INVESTMENT TRUST
CERTIFICATE NO. 3 OF TRUSTEES
REGARDING DESIGNATION OF SERIES OR CLASSES
The undersigned, being all of the Trustees of Summit Investment Trust
(the "Trust"), hereby certify the following:
WHEREAS, the Board of Trustees, at its meeting on December 16, 1997,
authorized and directed the establishment and designation of one additional
series of shares of the Trust as a new Sub-Trust of the Trust, named the Summit
Emerging Markets Bond Fund (the "Fund"), and the designation and classification
of an unlimited number of shares of the Trust to the Fund;
NOW, THEREFORE, BE IT
RESOLVED, that this Certificate, upon its execution, shall, in
accordance with Section 4.1 of Article IV of the Agreement and
Declaration of Trust, as amended, of the Trust (the
"Declaration"), evidence the action of the Trustees, taken
pursuant to Article IV of the Declaration, to establish and
designate the Fund as a separate series of shares of the Trust
and as a Sub-Trust of the Trust, to designate and classify an
unlimited number of shares of the Trust to the Fund and to
provide that the shares of the Fund shall have the relative
rights and preferences described in Article IV of the
Declaration; and it is
FURTHER RESOLVED, that this Certificate may be executed in one
or more counterparts, each of which shall be deemed an
original, and when taken together shall constitute one and the
same instrument.
WITNESS the execution hereof as of this 16th day of December, 1997.
/s/ Theodore H. Emmerich /s/ Dr. Bruce H. Olson
- ------------------------- ------------------------------
THEODORE H. EMMERICH DR. BRUCE H. OLSON
/s/ Frederick Moss /s/ Steven R. Sutermeister
- ------------------------- ------------------------------
FREDERICK MOSS STEVEN R. SUTERMEISTER
/s/ James F. Smith
- -------------------------
JAMES F. SMITH
Filed with the minutes of the proceedings of the Trust, as of
this 16th day of December, 1997.
/s/ Robert L. Tuch
------------------------------
Robert L. Tuch
Assistant Secretary
<PAGE> 1
Exhibit 23(c)(4)
SUMMIT INVESTMENT TRUST
CERTIFICATE NO. 4 OF TRUSTEES
REGARDING DESIGNATION OF SERIES OR CLASSES
The undersigned, being all of the Trustees of Summit Investment Trust
(the "Trust"), hereby certify the following:
WHEREAS, the Board of Trustees, at its meeting on September
23, 1998, authorized and directed the establishment and designation of
one additional class of shares of each of the Summit High Yield Fund
and the Summit Emerging Markets Bond Fund, the two Sub-Trusts of the
Trust (each, a "Fund," and together, the "Funds"), and the designation
and classification of an unlimited number of shares of the Trust to the
Class B Shares of the Funds;
NOW, THEREFORE, BE IT
RESOLVED, that this Certificate, upon its execution, shall, in
accordance with Section 4.1 of Article IV of the Agreement and
Declaration of Trust, as amended, of the Trust (the "Declaration"),
evidence the action of the Trustees, taken pursuant to Article IV of
the Declaration, to do the following:
1. To redesignate the current registered class of shares of
Summit High Yield Fund, which class currently has issued and
outstanding shares and was previously designated as the
"Summit High Yield Shares Class," as the "Class A Shares;"
2. To redesignate the current registered single class of
shares of the Summit Emerging Markets Bond Fund, which class
currently has issued and outstanding shares and was previously
not named, as the "Class A Shares;"
3. To establish and designate an additional class of shares
(the "Class B Shares") of each Fund of the Trust, which class
of shares shall be designated "Class B Shares" and shall be in
addition to the class or classes of shares previously
established for the Funds, and that an unlimited number of
shares of the Trust are hereby designated and classified to
the Class B Shares of the Funds;
4. To establish that the Class B Shares shall have the same
rights, privileges and limitations as those of Class A Shares
and as set forth in Article IV of the Declaration; provided
that dividends paid on Class B Shares shall reflect reductions
for payments of fees under the Trust's distribution plan
relating to the Class B Shares that is adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "Class B Plan"); and provided further, that only
the Class B Shares shall be entitled to vote upon or with
respect to any matter relating to or arising from the Class B
Plan relating to such class;
<PAGE> 2
5. To establish that the Class B Shares of the Trust shall
convert automatically to Class A shares of the Trust A,
subject to the following terms and conditions:
(a) Other than shares described in paragraph (b)
below, each Class B Share of a series of the Trust shall be
converted automatically, and without any action or choice on
the part of the holder thereof, into a Class A Share of the
same series on the Conversion Date. The term "Conversion Date"
when used herein shall mean a date set forth in the prospectus
relating to any Class B Share, as such prospectus may be
amended from time to time, that is no later than three months
after either (i) the date on which the eighth anniversary of
the date of issuance of the share occurs, or (ii) any such
other anniversary date as may be determined by the Board of
Trustees and set forth in the prospectus relating to the Class
B Share, as such prospectus may be amended from time to time;
provided that any such other anniversary date determined by
the Board of Trustees shall be a date that will occur prior to
the anniversary date set forth in clause (i) and any such
other date theretofore determined by the Board of Trustees
pursuant to this clause (ii); but further provided that,
subject to the provisions of the next sentence, for any Class
B Share acquired through an exchange, or through a series of
exchanges, as permitted by the Trust as provided in the
prospectus relating to the Class B Shares, as such prospectus
may be amended from time to time, from another investment
company or another series of the Trust (an "eligible
investment company"), the Conversion Date shall be the
conversion date applicable to the shares of stock of the
eligible investment company originally subscribed for in lieu
of the Conversion Date of any stock acquired through exchange
if such eligible investment company issuing the stock
originally subscribed for had a conversion feature, but not
later than the Conversion Date determined under (i) above. For
the purpose of calculating the holding period required for
conversion, the date of issuance of a Class B Share shall mean
(i) in the case of a Class B Share obtained by the holder
thereof through an original subscription to the Trust, the
date of the issuance of such Class B Share, or (ii) in the
case of a Class B Share obtained by the holder thereof through
an exchange, or through a series of exchanges, from an
eligible investment company, the date of issuance of the share
of the eligible investment company to which the holder
originally subscribed.
(b) Each Class B Share of a series (i) purchased
through the automatic reinvestment of a dividend or
distribution with respect to any Class B Share of the series
or the corresponding class of any other investment company or
of any other series of the Trust issuing Class B Shares or
(ii) issued pursuant to an exchange privilege granted by the
Trust in an exchange or series of exchanges for shares
originally purchased through the automatic reinvestment of a
dividend or distribution with respect to shares of capital
stock of an eligible investment company, shall be segregated
in a separate sub-account on the stock records of the Trust
for each of the holders of record thereof. On any Conversion
Date, a number of the Class B Shares of the series held in the
separate sub-account of the holder of record of the share or
shares being converted, calculated in accordance
2
<PAGE> 3
with the next following sentence, shall be converted
automatically, and without any action or choice on the part of
the holder, into Class A Shares of the same series. The number
of shares in the holder's separate sub-account so converted
shall (i) bear the same ratio to the total number of shares
maintained in the separate sub-account on the Conversion Date
(immediately prior to conversion) as the number of shares of
the holder converted on the Conversion Date pursuant to
paragraph (a) above bears to the total number of Class B
Shares of the holder on the Conversion Date (immediately prior
to conversion) after subtracting the shares then maintained in
the holder's separate sub-account, or (ii) be such other
number as may be calculated in such other manner as may be
determined by the Board of Trustees and set forth in the
prospectus relating to such Class B Shares, as such prospectus
may be amended from time to time.
(c) The number of Class A Shares into which a Class B
Share of the same series is converted pursuant to paragraphs
(a) and (b) above shall equal the number (including for this
purpose fractions of a share) obtained by dividing the net
asset value per share of the Class B Shares for purposes of
sales and redemption thereof on the Conversion Date by the net
asset value per share of the Class A Shares of the same series
for purposes of sales and redemption thereof on the Conversion
Date.
(d) On the Conversion Date, the Class B Shares
converted into Class A Shares of the same series will no
longer be deemed outstanding and the rights of the holders
thereof (except the right to receive (i) the number of Class A
Shares into which the Class B Shares have been converted and
(ii) declared but unpaid dividends to the Conversion Date or
such other date set forth in the prospectus of the Class B
Shares, as such prospectus may be amended from time to time
and (iii) the right to vote converting Class B Shares held as
of any record date occurring on or before the Conversion Date
and theretofore set with respect to any meeting held after the
Conversion Date) will cease. Certificates representing the
Class A Shares resulting from the conversion need not be
issued until certificates representing the Class B Shares
converted, if issued, have been received by the Trust or its
agent duly endorsed for transfer.
(e) The automatic conversion of Class B Shares into
Class A Shares, as set forth in paragraphs (a) and (b) above
shall be suspended at any time that the Board of Trustees
determines (i) that there is not available a reasonably
satisfactory opinion of counsel to the effect that (x) the
assessment of the higher fee under the distribution plan
adopted under Rule 12b-1 ("Distribution Plan") under the
Investment Company Act of 1940, as amended (the "1940 Act") ,
with respect to the Class B Shares does not result in the
Trust's dividends or distributions constituting a
"preferential dividend" under the Internal Revenue Code of
1986, as amended, and (y) the conversion of the Class B Shares
does not constitute a taxable event under federal income tax
law, or (ii) any other condition to conversion set forth in
the prospectus of the Class B Shares, as such prospectus may
be amended from time to time, is not satisfied.
3
<PAGE> 4
(f) The automatic conversion of Class B Shares into
Class A Shares, as set forth in paragraphs (a) and (b) above,
may also be suspended by action of the Board of Trustees at
any time that the Board of Trustees determines such suspension
to be appropriate in order to comply with, or satisfy the
requirements of the 1940 Act or any rule, regulation or order
issued thereunder relating to voting by the holders of the
Class B Shares on any Distribution Plan with respect to, as
relevant, the Class A Shares and in effect from time to time,
and in connection with, or in lieu of, any such suspension,
the Board of Trustees may provide holders of the Class B
Shares with alternative conversion or exchange rights into
other classes of shares of beneficial interest of the Trust in
a manner consistent with the law, rule, regulation or order
giving rise to the possible suspension of the conversion
right.
- and -
5. To establish that the Class B Shares of the Trust shall
have the right to vote separately with respect to the Rule
12b-1 Plan related to that class and on any increase in fees
or expenses that are to be allocated to the Class A Shares
upon approval by vote of the holders of Class A Shares and
that are (i) expenses or fees arising from any arrangement for
shareholder services or the distribution of securities or
both; or (ii) expenses or fees, not including advisory or
custodial fees or other expenses related to the management of
the Trust's assets, to the extent that these expenses or fees
are actually incurred in a different amount by the Class A
Shares or for services of a different kind or to a different
degree than other classes.
FURTHER RESOLVED, that this Certificate may be executed in one
or more counterparts, each of which shall be deemed an original, and
when taken together shall constitute one and the same instrument.
WITNESS the execution hereof this 23rd day of September, 1998.
/s/ Theodore H. Emmerich /s/ Dr. Bruce H. Olson
- ------------------------- ------------------------------
THEODORE H. EMMERICH DR. BRUCE H. OLSON
/s/ Frederick Moss /s/ Steven R. Sutermeister
- ------------------------- ------------------------------
FREDERICK MOSS STEVEN R. SUTERMEISTER
4
<PAGE> 5
/s/ James F. Smith
- -------------------------
JAMES F. SMITH
Filed with the minutes of the proceedings of the Trust, this 23rd day of
September, 1998.
/s/ John J. Quillin
------------------------------
John J. Quillin
Secretary
5
<PAGE> 1
Exhibit Ex-99.d(4)
Form of
-------
AMENDED INVESTMENT SUB-ADVISORY AGREEMENT
-----------------------------------------
THIS AGREEMENT, made as of the 18th day of September, 1996, as
amended September ___, 1998 between FIRST SUMMIT CAPITAL MANAGEMENT (the
"Adviser"), an Ohio general partnership, and ___________________. (the
"Sub-Adviser," formerly named Carillon Advisers, Inc.), an Ohio [____]
corporation;
WHEREAS, the Adviser has entered into an Investment Advisory
Agreement, dated June 27, 1994, with Summit Investment Trust (the "Fund"), an
open-end investment company registered under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, as the Adviser to the Fund, the Adviser furnishes the
Fund with certain advisory services and management services, and furnishes and
pays the expenses of the Fund for certain other services; and
WHEREAS, the Sub-Adviser is willing to make available to the
Adviser, on a part-time basis, certain employees of the Sub-Adviser for the
purpose of better enabling the Adviser to fulfill its obligations under the
Investment Advisory Agreement with the Fund, provided that the Adviser bears all
the costs allocable to the time spent by such employees on the affairs of the
Adviser, and the Adviser and the Fund believe that such an arrangement will be
to their mutual benefits;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
1
<PAGE> 2
1. The Adviser shall have the right to use on a part-time
basis and the Sub-Adviser shall make available on such basis employees of the
Sub-Adviser for such periods as may be agreed upon by the Adviser and the
Sub-Adviser as may be reasonably needed by the Adviser in the performance of its
advisory and management functions. It is anticipated that most such employees
will be persons employed in the investment or administrative operations of the
Sub-Adviser, in addition to such clerical, stenographic and administrative
services as the Adviser may reasonably request.
2. The employees of the Sub-Adviser in performing services for
the Adviser hereunder may, to the full extent that they deem appropriate, have
access to and utilize economic, statistical and investment research reports and
other material prepared for or contained in the files of the Sub-Adviser which
are relevant to the making of investment decisions within the investment
objectives of the Fund and make such material available to the Adviser; provided
that, any such material prepared or obtained in connection with a private
placement or other nonpublic transaction need not be made available to the
Adviser if the Sub-Adviser deems such material confidential.
3. The employees of the Sub-Adviser performing services for
the Adviser pursuant hereto shall report and be solely responsible to the
officers and representatives of the Adviser or persons designated by them. The
Sub-Adviser shall have no responsibility for investment recommendations or
decisions of the Adviser based upon information or advice given or obtained by
or through such employees of the Sub-Adviser.
4. The Sub-Adviser will, to the extent requested by the
Adviser, supply to officers and representatives of the Adviser and employees of
the Sub-Adviser serving the Adviser, such clerical, stenographic and
administrative services and such office supplies and
2
<PAGE> 3
equipment as may reasonably be required in order that they may properly perform
their respective functions on behalf of the Adviser in connection with the
performance of this Agreement.
5. The obligation of performance under the Investment Advisory
Agreement with the Fund is solely that of the Adviser, and the Sub-Adviser
undertakes no obligation in respect thereto except as otherwise expressly
provided herein.
6. In consideration of services to be rendered by the
Sub-Adviser and its employees pursuant to this Agreement, the Adviser agrees to
compensate the Sub-Adviser in the amount per year for each series of shares, or
Sub-Trust, of the Trust as set forth in Schedule A attached hereto. If the
Sub-Adviser renders services to the Adviser with respect to a series of shares,
or Sub-Trust, of the Trust under this Agreement for any period that is less than
twelve months in length, the Sub-Adviser shall be entitled to a pro-rata portion
of the fee identified in this paragraph, 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.
7. (a) This Agreement shall become effective as of the date
first above written, and shall continue in effect for two years from such
initial date and thereafter for successive periods of one year, subject to the
provisions for termination contained herein and all of the other terms and
conditions hereof, if: (i) such continuation shall be specifically approved at
least annually by the vote of the majority of the Trustees of the Fund,
including a majority of the Trustees who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval; and (ii) the Adviser shall not have notified
the Sub-Adviser in writing as provided in subsection (b) below that it does not
desire such continuation with respect to the Fund. This Agreement may also be
approved by the
3
<PAGE> 4
affirmative vote of a majority of the outstanding voting securities of the Fund,
provided, however, that if the continuance of this Agreement is submitted to the
shareholders of the Fund for their approval, and should shareholders fail to
approve such continuance of this Agreement as provided herein, the Sub-Adviser
may continue to serve hereunder as to the Fund in a manner consistent with the
1940 Act and the rules and regulations thereunder.
(b) The Fund may at any time terminate this Agreement,
without payment of any penalty, by sixty (60) days' written notice delivered or
mailed by registered mail, postage prepaid, to the Adviser and the Sub-Adviser.
Action of the Fund under this subsection may be taken either (i) by vote of its
Trustees or (ii) by the affirmative vote of a majority of the outstanding voting
securities of the Fund. The Adviser or the Sub-Adviser may at any time terminate
this Agreement by not less than ninety (90) days' written notice delivered or
mailed by registered mail, postage prepaid, to the other party and the Fund.
(c) Termination of this Agreement pursuant to this section
shall be without payment of any penalty.
8. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed postage prepaid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Fund,
the Adviser and the Sub-Adviser for this purpose shall be P. O. Box 40407,
Cincinnati, Ohio 45240.
9. This Agreement shall be governed by the laws of The
Commonwealth of Massachusetts. The names "Summit Investment Trust" and "Trustees
of Summit Investment Trust" refer respectively to the Massachusetts business
trust created by the Trustees, as trustees but not individually or personally
acting from time to time under the Agreement and Declaration
4
<PAGE> 5
of Trust, dated as of March 8, 1994, to which reference is hereby made and a
copy of which is on file at the office of the Secretary of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of "Summit Investment
Trust" entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, shareholders or representatives of the
Fund personally, but bind only the assets of the Fund, and all persons dealing
with any series of shares of the Fund must look solely to the assets of the Fund
belonging to such series for the enforcement of any claims against the Fund.
10. The parties to this Agreement hereby acknowledge that:
(a) The Union Central Life Insurance Company ("Union
Central") shall have no responsibility for investment recommendations or
decisions made by the Adviser or the Sub-Adviser for the Fund under this
Agreement;
(b) Employees of Union Central may, to the full extent
that they deem appropriate, have access to and utilize economic, statistical and
investment research reports and other material prepared pursuant to this
Agreement which are relevant to the making of investment decisions for the Fund;
provided however, that any such material prepared or obtained in connection with
a private placement or other non-public transaction shall not be made available
to Union Central if the Adviser or the Sub-Adviser deems such material
confidential; and
(c) Union Central shall have no responsibility for
investment recommendations or decisions of the Sub-Adviser that are based upon
information or advice given or obtained through Union Central employees.
5
<PAGE> 6
FIRST SUMMIT CAPITAL MANAGEMENT
By: ____________________________________
Name:_______________________________
Title:______________________________
[ ]
By: ____________________________________
Name:_______________________________
Title:______________________________
Union Central hereby acknowledges and agrees to the provisions
of paragraph 10 of this Agreement.
THE UNION CENTRAL LIFE
INSURANCE COMPANY
By: ____________________________________
Name:_______________________________
Title:______________________________
6
<PAGE> 7
SCHEDULE A
TO THE
INVESTMENT SUB-ADVISORY AGREEMENT
BETWEEN FIRST SUMMIT CAPITAL MANAGEMENT AND
[_____________]
SUB-ADVISORY FEE SCHEDULE PURSUANT TO PARAGRAPH 6
FUND FEE
- ---- ---
1. Summit High Yield Fund $150,000.00
2. Summit Emerging Markets Bond Fund $150,000.00
7
<PAGE> 1
Exhibit Ex-99.e(5)
Dated: June 27, 1994, as amended
and restated on September 23, 1998
SCHEDULE A
TO THE
AMENDED AND RESTATED DISTRIBUTION AGREEMENT
BETWEEN SUMMIT INVESTMENT TRUST
AND BISYS FUND SERVICES LIMITED PARTNERSHIP
Name of Fund
- ------------
Summit High Yield Fund Class A
Summit High Yield Fund Class B
Summit Emerging Markets Bond Fund Class A
Summit Emerging Markets Bond Fund Class B
SUMMIT INVESTMENT TRUST
__________________________________
By:_______________________________
Title:____________________________
Date:_____________________________
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc., General Partner
__________________________________
By:_______________________________
Title:____________________________
Date:_____________________________
1
<PAGE> 2
Dated: As of June 27, 1994, as
amended on December 16, 1997
and September 23, 1998
Schedule B
to the Amended and Restated Distribution Agreement
between Summit Investment Trust and
BISYS Fund Services Limited Partnership
Name of Distribution Plan Fund Name of Distribution Plan Class
- --------------------------------------------------------------------------------
Summit High Yield Fund Class A Shares
Class B Shares
Summit Emerging Markets Bond Fund Class A Shares
Class B Shares
SUMMIT INVESTMENT TRUST
By:_______________________________
Name:
Title:
BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By:_______________________________
Name:
Title:
2
<PAGE> 3
Dated: As of September 27, 1995
As amended September 23, 1998
Schedule C-2
to the Amended and Restated Distribution Agreement
between Summit Investment Trust and
BISYS Fund Services Limited Partnership
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
-----------------------------------------
This Schedule C-2 relating to the Summit High Yield Institutional Service Shares
Class is no longer used because such class of shares was terminated in 1997.
3
<PAGE> 4
Dated: As of July 27, 1994, as
amended on December 16, 1997 and
September 23, 1998
Schedule D
to the
Amended and Restated Distribution Agreement
between Summit Investment Trust and
BISYS Fund Services Limited Partnership
Name of Load Fund Name of Load Shares
- --------------------------------------------------------------------------------
Summit High Yield Fund Class A Shares
Summit Emerging Markets Bond Fund Class A Shares
SUMMIT INVESTMENT TRUST
By:_______________________________
Name:
Title:
BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By:_______________________________
Name:
Title:
4
<PAGE> 1
Exhibit 23(i)
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
September 24, 1998
Summit Investment Trust
3435 Stelzer Road
Columbus, Ohio 43219-3035
Re: LEGAL OPINION-SECURITIES ACT OF 1933
------------------------------------
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust (the
"Declaration of Trust") of the Summit Investment Trust (the "Trust"), a business
trust organized under the laws of the State of Massachusetts on March 8, 1994,
the By-Laws of the Trust, and the resolutions adopted by the Trust's Board of
Trustees organizing the business of the Trust, all as amended to date, and the
various pertinent proceedings we deem material. We have also examined the
Notification of Registration and the Registration Statements filed under the
Investment Company Act of 1940 (the "Investment Company Act") and the Securities
Act of 1933 (the "Securities Act"), all as amended to date, as well as other
items we deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue
an unlimited number of shares of beneficial interest without a par value. The
Trust issues shares of the Summit High Yield Fund and the Summit Emerging
Markets Bond Fund. The Declaration of Trust designates, or authorizes the
Trustees to designate, one or more series or classes of shares of the Trust, and
allocates, or authorizes the Trustees to allocate, shares of beneficial interest
to each such series or class. The Declaration of Trust also empowers the
Trustees to designate any additional series or classes and allocate shares to
such series or classes.
The Trust has filed with the U.S. Securities and Exchange
Commission (the "Commission"), a Registration Statement under the Securities
Act, which Registration Statement is deemed to register an indefinite number of
shares of the Trust pursuant to the provisions of Rule 24f-2 under the
Investment Company Act. You have further advised us that the Trust has filed,
and each year hereafter will timely file, a Notice pursuant to Rule 24f-2
perfecting the registration of the shares sold by the Trust during each fiscal
year during which such registration of an indefinite number of shares remains in
effect.
<PAGE> 2
You have also informed us that the shares of the Trust have
been, and will continue to be, sold in accordance with the Trust's usual method
of distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in accordance
with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long
as the Trust remains a valid and subsisting trust under the laws of the State of
Massachusetts, and the registration of an indefinite number of shares of the
Trust remains effective, the authorized shares of the Trust when issued for the
consideration set by the Board of Trustees pursuant to the Declaration of Trust,
and subject to compliance with Rule 24f-2, will be legally outstanding,
fully-paid, and non-assessable shares, and the holders of such shares will have
all the rights provided for with respect to such holding by the Declaration of
Trust and the laws of the State of Massachusetts.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement of the Trust, and any amendments thereto, covering
the registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments thereto,
filed in accordance with the securities laws of the several states in which
shares of the Trust are offered, and we further consent to reference in the
registration statement of the Trust to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: Bruce G. Leto
-------------
Bruce G. Leto
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A (File No. 33-76250) of the Summit
Investment Trust, of our report dated July 23, 1998 on our audits of the
financial statements and financial highlights of the Summit High Yield Fund and
the Summit Emerging Markets Bond Fund, constituting the Summit Investment Trust
which report is included in the Annual Report to Shareholders for the year
ended May 31, 1998 which is included in the Registration Statement.
/s/ PricewaterhouseCoopers, LLP
Columbus, Ohio
September 29, 1998
<PAGE> 1
Exhibit Ex-99.m
DATED: AS OF JUNE 27, 1994
AS AMENDED: DECEMBER 16, 1997
AND SEPTEMBER 23, 1998
SCHEDULE C-1 TO THE DISTRIBUTION AGREEMENT
between Summit Investment Trust and
BISYS Fund Services, Limited Partnership
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
-----------------------------------------
This Plan (the "Plan") constitutes the distribution and shareholder service plan
of Summit Investment Trust, a Massachusetts business trust (the "Trust"),
adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Plan relates to the shares of those investment
portfolios ("Funds") and those classes of shares of the Funds identified on
Schedule B of the Trust's Distribution Agreement, as amended from time to time
(each, a "Distribution Plan Fund" or "Distribution Plan Class," as applicable).
SECTION 1.
(a) Subject to the limitations on the payment of asset-based charges
set forth in Rule 2830 of the Conduct Rules of the National Association
of Securities Dealers, Inc., each Distribution Plan Fund or
Distribution Plan Class shall pay to BISYS Fund Services, Limited
Partnership, the distributor (the "Distributor") of the Trust's units
of beneficial interest (the "Shares"), a fee in an amount not to exceed
on an annual basis the percentage of the average daily net asset value
of such Distribution Plan Fund or Distribution Plan Class (the
"Distribution Fee") as set forth below for the following payments or
reimbursements on behalf of such Distribution Plan Fund or Distribution
Plan Class: (a) payments the Distributor makes to banks and other
institutions and broker/dealers (each, a "Participating Organization")
for distribution assistance and/or shareholder service pursuant to an
agreement between the Distributor and the Participating Organization;
or (b) reimbursement of expenses incurred by a Participating
Organization pursuant to an agreement in connection with distribution
assistance and/or shareholder service, including, but not limited to,
the reimbursement of expenses relating to printing and distributing
prospectuses to persons other than shareholders of a Distribution Plan
Fund or Distribution Plan Class, printing and distributing advertising
and sales literature and reports to shareholders used in connection
with the sale of Shares, and personnel and communication equipment used
in servicing shareholder accounts and prospective shareholder
inquiries:
1
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
Distribution Plan Fund/Class Percentage
---------------------------- ----------
Class A Shares of Each Fund 0.25%
Class B Shares of Each Fund 0.75%
</TABLE>
(b) In addition to the amounts described in paragraph 1(a) above, each
of the following Distribution Plan Funds or Distribution Plan Classes
shall pay (i) to the Distributor for payment to Participating
Organizations, or (ii) directly to Participating Organizations, an
amount not to exceed on an annual basis 0.25% of the average daily net
asset value of such Distribution Plan Fund or Distribution Plan Class
from time to time, as a service fee:
Distribution Plan Fund/Class
----------------------------
Class B Shares of Each Fund
The monies to be paid pursuant to this paragraph 1(b) by a Distribution
Plan Fund or Distribution Plan Class shall be used to make the
following payments on behalf of such Distribution Plan Fund or
Distribution Plan Class: payments to Participating Organizations for,
among other things, furnishing personal services and maintaining
shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for
bank wires; monitoring dividend payments from the Fund or class on
behalf of customers; forwarding certain shareholder communications from
the Fund or class to customers; receiving and answering correspondence;
and aiding in maintaining the investment of the customers of the Fund
or class. Any amounts paid under this paragraph 1(b) shall be paid
pursuant to a servicing or other agreement, which form of agreement has
been approved from time to time by the Trustees, including a majority
of the Independent Trustees.
(c) For purposes of the Plan, a Participating Organization may include
the Distributor or any of its affiliates or subsidiaries.
SECTION 2. The Distribution Fee shall be paid by a Distribution Plan Fund or
Distribution Plan Class to the Distributor only to compensate or to reimburse
the Distributor for payments or expenses incurred pursuant to Section 1(a) with
respect to such Distribution Plan Fund or Distribution Plan Class.
SECTION 3. If the Plan is adopted after any public offering of shares of a
Distribution Plan Fund or Distribution Plan Class to which the Plan relates, or
the sale of such shares to persons who are not affiliated persons of the Trust,
affiliated persons of such persons, promoters of the Trust, or affiliated
persons of such promoters, the Plan shall not take effect with respect to such
Distribution Plan Fund or Distribution Plan Class until the Plan has been
approved by a vote of at least a majority of the outstanding voting securities
of such Distribution Plan Fund or Distribution Plan Class.
2
<PAGE> 3
SECTION 4. The Plan shall not take effect until it has been approved, together
with any related agreements, by votes of the majority (or whatever greater
percentage may, from time to time, be required by Section 12(b) of the 1940 Act
or the rules and regulations hereunder) of both (a) the Trustees of the Trust,
and (b) the Independent Trustees of the Trust cast in person at a meeting called
for the purpose of voting on the Plan or such agreement.
SECTION 5. The Plan shall continue in effect for a Distribution Plan Fund or
Distribution Plan Class for a period of more than one year after the date of its
execution or adoption only so long as such continuance is specifically approved
for such Distribution Plan Fund or Distribution Plan Class at least annually in
the manner provided for approval of the Plan in Section 4.
SECTION 6. Any person authorized to direct the disposition of monies paid or
payable by the Distribution Plan Funds or Distribution Plan Classes pursuant to
the Plan or any related agreement shall provide to the Trustees of the Trust,
and the Trustees shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made.
SECTION 7. The Plan with respect to a Distribution Plan Fund or Distribution
Plan Class may be terminated at any time by vote of a majority of the
Independent Trustees, or by a vote of a majority of the outstanding voting
securities of such Distribution Plan Fund or Distribution Plan Class.
SECTION 8. All agreements with any person relating to implementation of the Plan
shall be in writing, and any agreement related to the Plan shall provide:
(a) That such agreement may be terminated at any time with respect to a
Distribution Plan Fund or Distribution Plan Class, without payment of
any penalty, by vote of a majority of the Independent Trustees or by
vote of a majority of the outstanding voting securities of such
Distribution Plan Fund or Distribution Plan Class, on not more than 60
days' written notice to any other party to the agreement; and
(b) That such agreement shall terminate automatically in the event of
its assignment.
SECTION 9. The Plan with respect to a Distribution Plan Fund or Distribution
Plan Class may not be amended to increase materially the amount of distribution
expenses permitted pursuant to Section 1 hereof without approval in the manner
provided in Section 3 hereof, and all material amendments to the Plan shall be
approved in the manner provided for approval of the Plan in Section 4.
SECTION 10. As used in the Plan, (a) the term "Independent Trustees" shall mean
those Trustees of the Trust who are not interested persons of the Trust, and
have no direct or indirect financial interest in the operation of the Plan or
any agreements related to it, and (b) the terms "assignment", "interested
person" and "majority of the outstanding voting securities" shall have the
respective meanings specified in the 1940 Act and the rules and regulations
thereunder, subject to such exemptions as may be granted by the Securities and
Exchange Commission.
3
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000919989
<NAME> SUMMIT HIGH YIELD FUND
<SERIES>
<NUMBER> 011
<NAME> SUMMIT HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 54045275
<INVESTMENTS-AT-VALUE> 54471090
<RECEIVABLES> 1414134
<ASSETS-OTHER> 4410
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55889634
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 246224
<TOTAL-LIABILITIES> 246224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53600753
<SHARES-COMMON-STOCK> 5061209<F1>
<SHARES-COMMON-PRIOR> 3064624<F1>
<ACCUMULATED-NII-CURRENT> 130199
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1486643
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 425815
<NET-ASSETS> 55643410
<DIVIDEND-INCOME> 45813
<INTEREST-INCOME> 4947735
<OTHER-INCOME> 0
<EXPENSES-NET> 771363
<NET-INVESTMENT-INCOME> 4222185
<REALIZED-GAINS-CURRENT> 3821677
<APPREC-INCREASE-CURRENT> (1467951)
<NET-CHANGE-FROM-OPS> 6575911
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4184950<F1>
<DISTRIBUTIONS-OF-GAINS> 3955064<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3964100<F1>
<NUMBER-OF-SHARES-REDEEMED> 2641732<F1>
<SHARES-REINVESTED> 674217<F1>
<NET-CHANGE-IN-ASSETS> 16699681
<ACCUMULATED-NII-PRIOR> 48225
<ACCUMULATED-GAINS-PRIOR> 1747243
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 434032
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 977544
<AVERAGE-NET-ASSETS> 47183736<F1>
<PER-SHARE-NAV-BEGIN> 11.32<F1>
<PER-SHARE-NII> 1.01<F1>
<PER-SHARE-GAIN-APPREC> 0.70<F1>
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<FN>
<F1>HIGH YIELD SHARES
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<NAME> SUMMIT HIGH YIELD FUND
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<NAME> SUMMIT HIGH YIELD FUND
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<PAGE> 1
Exhibit Ex-99.o
SUMMIT INVESTMENT TRUST
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
This Multiple Class Plan (the "Plan") has been adopted
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"Act") by a majority of the Board of Trustees (the "Board") of Summit Investment
Trust (the "Trust"), including a majority of the Trustees who are not interested
persons of the Trust (the "Independent Trustees") as defined in the Act. The
Board has determined that the Plan, including the expense allocation, is in the
best interests of each class of the Trust individually and the Trust as a whole.
The Plan sets forth the provisions relating to the establishment of multiple
classes of shares for each series of shares (each, a "Fund") of the Trust. To
the extent that a subject matter set forth in this Plan is covered by the
Trust's Agreement and Declaration of Trust, as amended from time to time (the
"Declaration"), or By-Laws, as amended from time to time (the "By-Laws"), the
Declaration and/or By-Laws will control in the event of any inconsistencies with
descriptions contained in this Plan.
CLASSES
1. The Trust may offer three classes of shares, known as the
Class A Shares, the Class B Shares and the Summit High Yield Institutional
Shares Class (the "Institutional Shares"). The Trust has two series of shares or
Sub-Trusts, the Summit High Yield Fund and the Summit Emerging Markets Bond Fund
(each, a "Fund," and together, the "Funds"). Currently, the former Fund may
offer all three classes and the latter Fund may offer only the Class A Shares
and Class B Shares.
FRONT-END SALES CHARGE
2. Class A Shares carry a front-end sales charge as described
in the Trust's relevant prospectus or statement of additional information
("SAI"). Class B Shares and Institutional Shares carry no front-end sales
charge.
CONTINGENT DEFERRED SALES CHARGE
3. Class A Shares are not subject to a contingent deferred
sales charge ("CDSC") except in the following limited circumstances. On
investments of $500,000 or more for which a dealer's commission is paid by the
Trust's principal underwriter (the "Distributor"), a CDSC of up to 1.00% of the
lesser of (i) the net asset value at the time of redemption or (ii) the purchase
price may apply to redemptions within the first year after purchase. The CDSC is
waived in certain circumstances, as described in the Fund's relevant prospectus.
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<PAGE> 2
4. Class B Shares redeemed within six years of their purchase
shall be assessed a CDSC at the following rate: (i) 5.00% if the shares are
redeemed during the first year following purchase; (ii) 4.00% if shares are
redeemed during the second year following purchase; (iii) 3.00% if shares are
redeemed during the third or fourth year following purchase; (iv) 2.00% if
shares are redeemed during the fifth year following purchase; (v) 1.00 % if
shares are redeemed during the sixth year following purchase; and (vi) 0%
thereafter. The CDSC is waived in certain circumstances as described in the
Fund's relevant prospectus.
5. Institutional Shares are not subject to a CDSC.
RULE 12b-1 PLANS
6. In accordance with the Trust's distribution plan adopted
under Rule 12b-1 under the Act ("Rule 12b-1 Plan") for the Class A Shares, each
Fund shall pay a monthly fee for distribution-related expenses not to exceed
0.25% per annum of the Fund's average daily net assets represented by Class A
Shares as may be determined by the Board from time to time.
7. In accordance with the Rule 12b-1 Plan for the Class B
Shares, each Fund shall pay a monthly fee for distribution-related expenses not
to exceed 0.75% per annum of the Fund's average daily net assets represented by
Class B Shares as may be determined by the Board from time to time. In addition,
under the Rule 12b-1 Plan for the Class B Shares, each Fund shall pay a monthly
service fee for shareholder services not to exceed 0.25% per annum of the Fund's
average daily net assets represented by Class B Shares as may be determined by
the Board from time to time. The Fund shall pay the monthly service fee to the
Distributor for payment to dealers or others or directly to dealers or others
pursuant to dealer or servicing agreements.
8. The Trust has not adopted a Rule 12b-1 Plan for the
Institutional Shares.
ALLOCATION OF EXPENSES
9. The Trust shall allocate to each class of shares any fees
and expenses incurred by the Trust in connection with the distribution or
servicing of such class of shares under a Rule 12b-1 Plan, if any, adopted for
such class. In addition, the Trust reserves the right, subject to approval by
the Board, to allocate fees and expenses of the following nature to a particular
class of shares (to the extent that such fees and expenses actually vary among
each class of shares or vary by the services provided to each class of shares):
(i) transfer agency and other recordkeeping costs;
(ii) Securities and Exchange Commission ("SEC") and blue
sky registration or qualification fees;
(iii) printing and postage expenses related to printing and
distributing class specific materials such as
shareholder reports, prospectuses and proxies to
2
<PAGE> 3
current shareholders of a particular class or to
regulatory authorities with respect to such class of
shares;
(iv) audit or accounting fees or expenses relating solely
to such class;
(v) the expenses of administrative personnel and services
as required to support the shareholders of such
class;
(vi) litigation or other legal expenses relating solely to
such class of shares;
(vii) Trustees' fees and expenses incurred as a result of
issues relating solely to such class of shares; and
(viii) other expenses subsequently identified and determined
to be properly allocated to such class of shares.
10. Except for any expenses that are allocated to a particular
class as described in paragraph 9 above, all expenses incurred by the Trust will
be allocated to each class of shares on the basis of the net asset value of each
such class in relation to the net asset value of the Trust. Fees or expenses
allocated to a particular class will be allocated to each Fund having such class
on the basis of the net asset value of each such Fund in relation to the net
asset value represented by such class (except to the extent that such class fees
or expenses actually vary among each Fund or vary by the services provided to
such class of shares of each Fund.)
ALLOCATION OF INCOME AND GAINS
11. Income and realized and unrealized capital gains and
losses of the Trust will be allocated to each class of shares on the basis of
the net asset value of each such class in relation to the net asset value of the
Trust.
CONVERSIONS
12. Except for shares acquired through a reinvestment of
dividends or distributions, Class B Shares held for eight years after purchase
will automatically convert into Class A Shares in accordance with the terms
described in the Funds' relevant prospectus. Class B Shares acquired through a
reinvestment of dividends or distributions will convert to Class A Shares pro
rata with the Class B Shares that were not acquired through the reinvestment of
dividends and distributions. Conversion periods are measured from the end of the
month in which the Class B Shares were purchased. If Class B Shares of one Fund
are exchanged for Class B Shares of another Fund, the time the shares are held
in each Fund will be added together for purposes of calculating the eight-year
time periods.
The automatic conversion feature of Class B Shares shall be
suspended at any time that the Board determines that there is not available a
reasonably satisfactory opinion of counsel to the effect that (i) the assessment
of the higher fee under the Rule 12b-1 Plan for Class B Shares
3
<PAGE> 4
does not result in the Fund's dividends or distributions constituting a
preferential dividend under the Internal Revenue Code of 1986, as amended, and
(ii) the conversion of Class B Shares into Class A Shares does not constitute a
taxable event under federal income tax law. In addition, the Board may suspend
the automatic conversion feature by determining that any other condition to
conversion set forth in the Fund's prospectus, as amended from time to time, is
not satisfied.
The Board may also suspend the automatic conversion of Class B
Shares if it determines that suspension is appropriate to comply with the
requirements of the Act, or any rule or regulation issued thereunder, relating
to voting by shareholders of Class B Shares regarding the Rule 12b-1 Plan for
Class A Shares or, in the alternative, the Board may provide shareholders of
Class B Shares with alternative conversion or exchange rights.
Class A Shares and Institutional Class Shares do not have a
conversion feature.
EXCHANGES
13. Exchanges are not currently permitted between the classes
of shares of the Funds.
GENERAL PROVISIONS
14. Each class will vote separately with respect to the Rule
12b-1 Plan related to that class; except as provided in the next sentence. The
holders of Class B Shares also shall have the right to vote on any increase in
fees or expenses that are to be allocated to the Class A Shares upon approval by
vote of the holders of Class A Shares and that are (i) expenses or fees arising
from any arrangement for shareholder services or the distribution of securities
or both; or (ii) expenses or fees, not including advisory or custodial fees or
other expenses related to the management of the Trust's assets, to the extent
that these expenses or fees are actually incurred in a different amount by the
Class A Shares or for services of a different kind or to a different degree than
other classes.
15. On an ongoing basis, the Trustees, pursuant to their
fiduciary responsibilities under the Act and otherwise, will monitor the Trust
for the existence of any material conflicts between the interests of the three
classes of shares. The Trustees, including a majority of the Independent
Trustees, shall take such action as is reasonably necessary to eliminate any
such conflict that may develop. The Trust's investment advisers and the
Distributor shall be responsible for alerting the Board to any material
conflicts that arise.
16. As described more fully in the Trust's prospectuses,
broker-dealers that sell Trust shares will be compensated differently depending
on which class of shares the investor selects.
17. The Trust may in the future alter the terms of existing
classes or create new classes in compliance with applicable rules and
regulations of the SEC and the National Association of Securities Dealers, Inc.
4
<PAGE> 5
18. All material amendments to this Plan must be approved by a
majority of the Trustees of the Trust, including a majority of the Independent
Trustees.
Effective as of September 23, 1998
5
