<PAGE> 1
QUESTIONS?
Call 800-272-3442 or your
investment representative.
Summit Investment Trust
MANAGED BY
FIRST SUMMIT CAPITAL MANAGEMENT
------------------------------------------------------
SUMMIT HIGH YIELD FUND
SUMMIT EMERGING MARKETS BOND FUND
PROSPECTUS AS OF SEPTEMBER 30, 1999
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.
<PAGE> 2
SUMMIT INVESTMENT TRUST PROSPECTUS TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
[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
[LOGO]
Review this section for 11 Summit High Yield Fund
important additional 13 Summit Emerging Markets Bond Fund
information, including each
Fund's investment policies
and risks.
SHAREHOLDER INFORMATION
[LOGO]
Turn to this section for 16 Pricing of Fund Shares
information on how to open 17 Purchasing and Selling Your Shares
and maintain your account, 22 Distribution Arrangements/Sale Charges
including how to buy, sell 28 Services for Fund Investors
and exchange Fund shares. 30 Dividends, Distributions and Taxes
MANAGEMENT OF THE FUNDS
[LOGO]
Look here for details on the 31 Investment Adviser
management of the Funds, 31 Advisory Agreement
including the portfolio 32 Advisory Fee
manager. 33 Sub-Adviser
OTHER INFORMATION ABOUT THE FUND
[LOGO]
34 Shareholder Inquiries
35 Financial Highlights
</TABLE>
2
<PAGE> 3
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 condition 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 reducing
OF INVESTING IN THE HIGH 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, sensitivity to 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> 4
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.
HIGH YIELD FUND
PERFORMANCE BAR
CHART AND TABLE*
YEAR-BY-YEAR TOTAL RETURNS FOR
CLASS A SHARES AS OF 12/31
<TABLE>
<CAPTION>
'CALENDAR YEAR 1995' 'CALENDAR YEAR 1996' 'CALENDAR YEAR 1997' 'CALENDAR YEAR 1998'
- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
19.42 22.54 17.62 -6.06
</TABLE>
The Fund's performance for calendar
year 1999 through June 30, 1999 was
2.18%.
<TABLE>
<S> <C> <C>
Best quarter: Q2 1997 6.71%
Worst quarter: Q3 1998 -10.80%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS* (FOR THE PERIODS ENDING DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
PAST INCEPTION
YEAR (JUNE 27, 1994)
<S> <C> <C>
----------------------------
SUMMIT HIGH YIELD FUND CLASS A** -10.27% 10.23%
----------------------------
SALOMON HIGH YIELD INDEX*** 3.60% 10.74%
- -------------------------------------------------------------------------------------------
</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 on page 5 details the sales charges, if any,
that apply to each class of shares of the High Yield Fund.
** Returns are for Class A shares only. Class B shares had not yet been offered
for a full calendar year prior to the date of this prospectus.
*** 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.
4
<PAGE> 5
RISK/RETURN SUMMARY AND FUND EXPENSES
[LOGO]
HIGH YIELD FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(FEES PAID
DIRECTLY FROM
YOUR INVESTMENT) A SHARES B SHARES
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)(4) A SHARES B SHARES
Management fees(5) 0.72% 0.72%
Distribution and service (12b-1)
fees(6) 0.25% 1.00%(7)
Other expenses 0.63% 0.63%
Total fund operating expenses 1.60% 2.35%
</TABLE>
As an investor in the High
Yield Fund, you may 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
(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) The expense information in the table has been restated to reflect current
fees based on a contractual commitment by the Adviser to waive its advisory
fee and/or to assume as its own expense certain expenses otherwise payable by
the Fund, if necessary, if the advisory fee and expenses would cause the
Total Annual Fund Operating Expenses to exceed 1.60% for the Class A shares
and 2.35% for the Class B shares.
(5) This fee may vary between 0.35% and 1.15% depending on the Fund's
investment performance subject to the contractual fee cap described in
footnote 4.
(6) 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.
(7) Includes a fee of 0.75% for distribution related expenses and 0.25% for
shareholder services expenses.
Charge ("CDSC").
5
<PAGE> 6
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.
HIGH YIELD FUND
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $605 $ 932 $1,282 $2,265
CLASS B SHARES
Assuming redemption $738 $1,033 $1,455 $2,499
Assuming no
redemption $238 $ 733 $1,255 $2,499
</TABLE>
6
<PAGE> 7
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 ARE THE EMERGING The Fund invests primarily in government and corporate bonds
MARKETS FUND'S PRINCIPAL of emerging markets nations. For its investments, the Fund
INVESTMENT 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> 8
RISK/RETURN SUMMARY AND FUND EXPENSES
[LOGO]
The bar chart and table
below help show the returns
and risks of investing in
the Emerging Markets Fund.
They show the Fund's
performance returns for the
past one year in comparison
to those of the J.P. Morgan
Emerging Markets Bond
Index*** ("EMBI+"). You
should keep in mind that
the Fund's past performance
is not necessarily an
indication of the Fund's
future performance.
EMERGING MARKETS FUND
PERFORMANCE BAR
CHART AND TABLE*
YEAR-BY-YEAR TOTAL RETURNS FOR
CLASS A SHARES AS OF 12/31
<TABLE>
<CAPTION>
'CALENDARYEAR1998' -22.48
- ------------------ ------
<S> <C>
</TABLE>
The Fund's performance for calendar
year 1999 through June 30, 1999 was
13.84%.
<TABLE>
<S> <C> <C>
Best quarter: Q4 1998 12.65%
Worst quarter: Q3 1998 -30.67%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS* (FOR THE PERIODS ENDING DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
(JANUARY 1, 1998)
<S> <C>
---------------------------
SUMMIT EMERGING MARKETS BOND FUND CLASS A** -25.96%
---------------------------
J.P. MORGAN EMERGING MARKETS BOND INDEX*** -14.35%
- -------------------------------------------------------------------------------------------
</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 on page 9 details the sales charges, if any,
that apply to each class of shares of the Emerging Markets Fund.
** Returns are for Class A shares only. Class B shares had not yet been offered
for a full calendar year prior to the date of this prospectus.
*** The J.P. Morgan Emerging Markets Bond Index is a widely recognized,
unmanaged index of emerging market bond prices. The Index assumes
reinvestment of all dividends/distributions and does not reflect any
asset-based charges for investment management or other expenses.
8
<PAGE> 9
RISK/RETURN SUMMARY AND FUND EXPENSES
[LOGO]
EMERGING MARKETS FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
A SHARES B SHARES
SHAREHOLDER FEES
(FEES PAID
DIRECTLY FROM
YOUR 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)(4) A SHARES B SHARES
Management fee(5) 0.55% 0.55%
Distribution and service (12b-1)
fees(6) 0.25% 1.00%(7)
Other expenses 1.20% 1.20%
Total fund operating expenses 2.00% 2.75%
</TABLE>
As an investor in the
Emerging Markets Fund, you
may 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
(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) The expense information in the table has been restated to reflect current
fees based on a contractual commitment by the Adviser to waive its advisory
fee and/or to assume as its own expense certain expenses otherwise payable by
the Fund, if necessary, if the advisory fee and expenses would cause the
Total Annual Fund Operating Expenses to exceed 2.00% for the Class A shares
and 2.75% for the Class B shares.
(5) The Adviser has made a contractual commitment to waive a portion or all
of its advisory fee of 0.75%, as necessary to meet the expense cap described
in footnote 4 above.
(6) 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.
(7) Includes a fee of 0.75% for distribution related expenses and 0.25% for
shareholder services expenses.
Charge ("CDSC").
9
<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.
EMERGING MARKETS FUND
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $644 $1,049 $1,479 $2,672
CLASS B SHARES
Assuming redemption $778 $1,153 $1,654 $2,900
Assuming no redemption $278 $ 853 $1,454 $2,900
</TABLE>
10
<PAGE> 11
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 condition 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.
11
<PAGE> 12
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 objective 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 15.
12
<PAGE> 13
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.
13
<PAGE> 14
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 OR DEFENSIVE INVESTMENTS -- 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.
14
<PAGE> 15
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 established a common European currency for
participating countries. This currency is commonly known as the "Euro."
Each such participating country replaced its existing currency with the
Euro on January 1, 1999. Other European countries may participate after
that date. This conversion presented unique uncertainties, including
whether the payment and operational systems of banks and other financial
institutions were 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
adversely affect the value of securities held by the Fund. The conversion
has not had a material impact on the Fund to date, however, because the
Fund invests predominantly, normally over 90% of its assets, in U.S.
dollar denominated securities.
15
<PAGE> 16
SHAREHOLDER INFORMATION
[LOGO]
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 as of the end of the Fund's tax
quarter. 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.
PRICING OF FUND SHARES
- 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.
16
<PAGE> 17
SHAREHOLDER INFORMATION
[LOGO]
PURCHASING AND SELLING YOUR SHARES
Shares are sold on a continuous basis by the Fund's Distributor, BISYS Fund
Services L.P., 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>
17
<PAGE> 18
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>
18
<PAGE> 19
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.
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<PAGE> 20
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.
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. Redemptions in kind are
taxable transactions.
20
<PAGE> 21
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.
21
<PAGE> 22
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 of .25% shareholder servicing fees of
of the average daily net assets of 1.00% of the average daily net
the Fund's Class A Shares.** assets of the Fund's Class B
Shares.**
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.
() * For purchases made in connection with 401(k) plans, 403(b) plans and
other employer-sponsored qualified retirement plans, "wrap" type
programs, non-transactional fee fund programs, and programs offered by
fee-based financial planners and other types of financial institutions
(including omnibus service providers), the applicable sales charge may
be waived. Transactions made through these programs may be subject to
limitations or conditions and transaction fees or certain other fees
imposed by the planner, broker or other financial institutions offering
the program.
()** See "Distribution and Service (12b-1) Fees" on page 27.
22
<PAGE> 23
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; (ii) a trustee or other
fiduciary of a single trust estate or single fiduciary account; and (iii) a
single omnibus account held of record by a broker-dealer maintaining a
supermarket plan is deemed a single account for purposes of the sales charge
breakpoints. 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.
23
<PAGE> 24
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 (typically 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 federal income 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.
24
<PAGE> 25
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 may 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.
25
<PAGE> 26
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 organizations 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.
- For purchases made in connection with 401(k) plans, 403(b) plans and
other employer-sponsored qualified retirement plans, "wrap" type
programs, non-transactional fee fund programs, and programs offered by
fee-based financial planners and other types of financial institutions
(including omnibus service providers), the applicable sales charge may be
waived. Transactions made through these programs may be subject to
limitations or conditions and transaction fees or certain other fees
imposed by the planner, broker or other financial institutions offering
the program.
(*) Affiliated Providers are affiliates and subsidiaries of the Adviser, and
any organization that provides services to the Fund.
26
<PAGE> 27
SHAREHOLDER INFORMATION
[LOGO]
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
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."
A single omnibus account held of record by a broker-dealer maintaining a
supermarket plan is deemed a single account for purposes of the sales charge
breakpoint amounts stated in the table at the top of page 23 and may qualify
for reduced sales charges. As a result, shares purchased through such a plan
may pay no sales charges.
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; 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 provision 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 Class A shares of the Fund.
- Class B shares pay a 12b-1 fee of 1.00% of the average daily net assets
of the Class B shares 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.
27
<PAGE> 28
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 Mercantile Mutual Funds (formerly known as The
ARCH Fund, Inc.), namely, the Mercantile Money Market Portfolio and the
Mercantile Treasury Money Market Portfolio (the "Money Market Funds"), and
for Class A shares of the other Fund of the Trust. The Mercantile Mutual
Funds 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.
28
<PAGE> 29
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.
29
<PAGE> 30
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
In general, Fund distributions are taxable to you as either ordinary income
or capital gains. This is true whether you reinvest your distributions in
additional Fund shares or receive them in cash. Any capital gains a Fund
distributes are taxable to you as long-term capital gains no matter how long
you have owned your shares.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a Fund, you may have a capital gain or loss. For
tax purposes, an exchange of your Fund shares for shares of a different Fund
within the Trust is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares and your marginal tax rate.
By law, a Fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the Fund to do so.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in a Fund.
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
30
<PAGE> 31
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"), an Ohio corporation, and Freeman Holding
Company, Inc. ("Freeman"), a Delaware corporation.
Portfolio Manager -- Since the inception of the Funds, May 21, 1996, for the
High Yield Fund, and December 31, 1997, 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, has
been a Vice President and Director of the Fixed Income Group of Carillon
since September, 1990, and has also been a Managing Partner of Summit
Investment Partners, LLC, the Funds' investment sub-adviser, since November
16, 1998. In these capacities, Mr. Sutermeister oversees the management of
over $4 billion in fixed income assets as of August 31, 1999, and is
personally responsible for the investment of nearly $800 million in high
yield assets as of August 31, 1999, 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.
31
<PAGE> 32
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, 1999, the Adviser received an investment
advisory fee of $266,304 (0.49%), following certain waivers. Absent the
waivers undertaken by the Adviser, the Adviser would have been entitled to
receive an advisory fee of $303,469 (0.56%), based on the Fund's performance
for the fiscal year ended May 31, 1999, pursuant to the performance schedule
above. Under the provisions of the Advisory Agreement, the Adviser is
entitled to receive each month one-twelfth of the performance fee computed
for the preceding twelve-month period. The Adviser has made a contractual
commitment as of March 31, 1999 to waive all or a portion of its advisory fee
or to assume as its own expense certain expenses otherwise payable by the
Fund so as to limit the Fund's total annual fund operating 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>
32
<PAGE> 33
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 contractual
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 the Fund's average daily net assets. The advisory fee is paid monthly.
However, the Adviser has made a contractual commitment as of March 31, 1999
to waive all or a portion of its advisory fee, or to assume as its own
expense certain expenses otherwise payable by the Fund so as to limit the
Fund's total annual fund operating expenses to 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, 1999, the Adviser received an investment advisory fee of $129,500
(0.61%), following certain waivers. Absent the waivers undertaken by the
Adviser, the Adviser would have been entitled to receive an advisory fee of
$157,444 (0.75%).
SUB-ADVISER
Summit Investment Partners, LLC (the "Sub-Adviser"), organized as an Ohio
limited liability company with offices at 312 Elm Street, Suite 2525,
Cincinnati, Ohio 45202, is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. The Sub-Adviser is a
wholly-owned subsidiary of Union Central Life. Carillon was the investment
sub-adviser to the Trust until November, 1998. Under a restructuring of
Carillon which occurred in October 1998, Carillon assigned its advisory
business to the Sub-Adviser. The ownership of the Sub-Adviser is the same as
that of Carillon. Consequently, there was no change in control of the
investment sub-adviser of the Trust, and Union Central Life remains in
control of both Carillon and the Sub-Adviser. All the personnel of Carillon
who were providing investment advisory services to the Trust prior to the
restructuring continued to provide such services to the Trust as personnel of
the Sub-Adviser.
SUB-ADVISORY AGREEMENT
The Sub-Adviser serves pursuant to an Investment Sub-Advisory Agreement with
the Adviser dated September 18, 1996, as amended (the "Sub-Advisory
Agreement"). Under the Sub-Advisory Agreement, the Sub-Adviser 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 Trustees of the
Trust 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.
33
<PAGE> 34
OTHER INFORMATION ABOUT THE FUNDS
[LOGO]
YEAR 2000
Like other funds and business organizations around the world, the Funds could
be adversely affected if the computer systems used by the Adviser, the
Sub-Adviser and the Fund's other service providers do not properly process
and calculate date-related information for the year 2000 and beyond. The
Funds have been informed that the Adviser, the Sub-Adviser and the Funds'
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 Funds are dependent may result
in errors and account maintenance failures. The Funds have no reason to
believe that (1) the Year 2000 plans of the Adviser, the Sub-Adviser and the
Funds' 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 Funds or their service providers.
Since the ultimate costs or consequences of incomplete or untimely resolution
of the Year 2000 problem by the Funds' service providers are unknown to the
Funds at this time, no assurance can be made that such costs or consequences
will not have a material adverse impact on the Funds or their service
providers. The Fund, the Adviser and the Sub-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.
In addition, the Year 2000 problem may adversely affect the companies in
which the Funds invest. For example, these companies may incur substantial
costs to correct the problem and may suffer losses caused by data processing
errors.
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.
34
<PAGE> 35
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 cover page of this Prospectus.
The following information should be read in conjunction with the financial
statements and notes thereto.
SUMMIT HIGH YIELD FUND
For a unit of beneficial interest
outstanding for each period
A SHARES
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
MAY 31, 1999 MAY 31, 1998 MAY 31, 1997 MAY 31, 1996 MAY 31, 1995(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.99 $ 11.32 $ 11.05 $ 10.11 $ 10.00
----------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.95 1.01 0.99 1.01 0.83
Net realized and unrealized gains
(losses) on investments (1.89) 0.70 0.90 0.95 0.11
----------------------------------------------------------------------------------------------------------------
Total from Investment
Activities (0.94) 1.71 1.89 1.96 0.94
----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net investment income (0.97) (1.01) (0.99) (1.01) (0.83)
In excess of net investment
income -- -- (0.13) -- --
Net realized gains (0.29) (1.03) (0.50) (0.01) --
----------------------------------------------------------------------------------------------------------------
Total Distributions (1.26) (2.04) (1.62) (1.02) (0.83)
----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 8.79 $ 10.99 $ 11.32 $ 11.05 $ 10.11
----------------------------------------------------------------------------------------------------------------
Total Return (excludes
sales charges) (8.45%) 16.17% 18.15% 20.34% 9.97%(b)
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $47,325 $55,643 $34,707 $28,628 $27,676
Expenses before waivers 1.71% 2.03% 2.32% 2.24% 1.61%(c)
Net investment income before
waivers 9.86% 8.38% 8.01% 8.78% 9.08%(c)
Expenses net of waivers 1.60% 1.60% 1.60% 1.60% 1.56%(c)
Net investment income net of
waivers 9.97% 8.81% 8.73% 9.42% 9.13%(c)
Portfolio turnover (d) 176.06% 518.74% 271.68% 187.61% 158.36%
</TABLE>
(a) Period from commencement of operations (June 27, 1994).
(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 the shares issued.
35
<PAGE> 36
OTHER INFORMATION ABOUT THE FUNDS
[LOGO]
FINANCIAL HIGHLIGHTS
CONTINUED
SUMMIT HIGH YIELD FUND
For a unit of beneficial interest outstanding for each period
B SHARES
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
MAY 31, 1999(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.10
INVESTMENT ACTIVITIES:
Net investment income 0.53
Net realized and unrealized gains (losses) on
investments 0.02
Total from Investment Activities 0.55
DISTRIBUTIONS:
Net investment income (0.58)
In excess of net investment income --
Net realized gains (0.29)
Total Distributions (0.87)
NET ASSET VALUE, END OF PERIOD $ 8.78
Total Return (excludes sales charges) 6.20%(b)
RATIOS TO AVERAGE NET ASSETS / SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 372
Expenses before waivers 2.31%(c)
Net investment income before waivers 9.02%(c)
Expenses net of waivers 2.22%(c)
Net investment income net of waivers 9.11%(c)
Portfolio turnover (d) 176.06%
</TABLE>
(a) Period from commencement of operations (October 8, 1998).
(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 the shares issued.
36
<PAGE> 37
OTHER INFORMATION ABOUT THE FUNDS
[LOGO]
FINANCIAL HIGHLIGHTS
CONTINUED
SUMMIT EMERGING MARKETS BOND FUND
For a unit of beneficial interest outstanding for each period
<TABLE>
<CAPTION>
A SHARES B SHARES
------------------------------ ---------------
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED PERIOD ENDED
MAY 31, 1999 MAY 31, 1998(a) MAY 31, 1999(b)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.87 $ 10.00 $ 5.94
INVESTMENT ACTIVITIES:
Net investment income 0.99 0.35 0.62
Net realized and unrealized gains (losses) on
investments (2.54) (0.15) 1.39
Total from Investment Activities (1.55) 0.20 2.01
DISTRIBUTIONS:
Net investment income (1.00) (0.33) (0.63)
Net realized gains (0.04) -- (0.04)
Total Distributions (1.04) (0.33) (0.67)
NET ASSET VALUE, END OF PERIOD $ 7.28 $ 9.87 $ 7.28
Total Return (excludes sales charges) (14.86)% 2.01%(c) 35.12%(c)
RATIOS TO AVERAGE NET ASSETS / SUPPLEMENTAL DATA:
Net Assets at end of period (000) $22,237 $25,879 $ 1
Expenses before waivers 2.18% 2.20%(d) 2.94%(d)
Net investment income before waivers 13.13% 8.47%(d) 13.26%(d)
Expenses net of waivers 2.00% 2.00%(d) 2.75%(d)
Net investment income net of waivers 13.31% 8.67%(d) 13.43%(d)
Portfolio turnover (e) 37.83% 85.69% 37.83%
</TABLE>
(a) Period from commencement of operations (December 31, 1997).
(b) Period from commencement of operations (October 8, 1998).
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of the shares issued.
QUESTIONS?
Call 800-272-3442 or
your
investment
representative.
37
<PAGE> 38
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<PAGE> 39
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<PAGE> 40
For investors who want more information about the Funds, the following
documents are available upon request:
ANNUAL & SEMI-ANNUAL REPORTS:
Additional information about the Funds' investments is available in the
Funds' annual and semi-annual 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, dated
September 30, 1999, for the Summit High Yield Fund and the Summit Emerging
Markets Bond Fund, dated September 30, 1999. The prospectus may be obtained
without charge 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, 1999.
<PAGE> 42
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION ........................................ 1
INVESTMENT OBJECTIVES AND POLICIES ......................... 1
RISK FACTORS ............................................... 2
INVESTMENT PROGRAMS ........................................ 5
INVESTMENT IN DEBT SECURITIES ............................ 5
CORPORATE DEBT SECURITIES ................................ 5
U.S. GOVERNMENT OBLIGATIONS .............................. 5
U.S. GOVERNMENT AGENCY SECURITIES ........................ 5
BANK OBLIGATIONS ......................................... 6
ASSET-BACKED SECURITIES, INCLUDING
MORTGAGE-BACKED SECURITIES .......................... 6
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") ............. 9
STRIPPED MORTGAGE-BACKED SECURITIES ...................... 10
ZERO-COUPON AND PAY-IN-KIND BONDS ........................ 10
CONVERTIBLE BONDS ........................................ 11
DEPOSITARY RECEIPTS ...................................... 11
REPURCHASE AGREEMENTS .................................... 12
PRIVATE PLACEMENTS (RESTRICTED SECURITIES) ............... 12
FOREIGN SOVEREIGN DEBT SECURITIES ........................ 13
FOREIGN SECURITIES ....................................... 15
FOREIGN CURRENCY TRANSACTIONS ............................ 15
WARRANTS ................................................. 17
LENDING OF PORTFOLIO SECURITIES .......................... 18
LOAN PARTICIPATIONS AND ASSIGNMENTS ...................... 18
SHORT SALES .............................................. 19
FUTURES CONTRACTS ........................................ 20
INTEREST RATE AND STOCK INDEX FUTURES .................... 21
SPECIAL RISKS OF FUTURES CONTRACTS ....................... 22
OPTIONS .................................................. 25
HYBRID INSTRUMENTS ....................................... 31
INVESTMENT RESTRICTIONS .................................... 31
HIGH YIELD FUND .......................................... 31
EMERGING MARKETS FUND .................................... 34
MANAGEMENT OF THE TRUST .................................... 36
</TABLE>
-i-
<PAGE> 43
<TABLE>
<S> <C>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES ........ 39
INVESTMENT ADVISORY SERVICES ............................... 40
MANAGEMENT-RELATED SERVICES ................................ 45
BISYS SERVICE AGREEMENTS ................................. 45
ADMINISTRATOR ............................................ 45
FUND ACCOUNTANT .......................................... 46
TRANSFER AGENT ........................................... 47
DISTRIBUTION PLAN .......................................... 48
THE DISTRIBUTOR .......................................... 50
PORTFOLIO TRANSACTIONS ..................................... 51
PORTFOLIO TURNOVER ......................................... 54
CAPITAL STOCK .............................................. 54
PRICING OF SECURITIES ...................................... 55
DIVIDENDS .................................................. 56
TAX STATUS ................................................. 56
INVESTMENT PERFORMANCE ..................................... 58
YIELD INFORMATION ........................................ 58
TOTAL RETURN PERFORMANCE ................................. 59
GENERAL .................................................... 62
REPURCHASE OF SHARES ..................................... 62
PAYMENT FOR SHARES PRESENTED ............................. 62
UNDELIVERABLE REDEMPTION CHECKS .......................... 62
SALES CHARGE REDUCTION AND WAIVERS FOR CLASS A SHARES .... 63
EXCHANGE PRIVILEGE ....................................... 63
CUSTODIAN ................................................ 64
INDEPENDENT ACCOUNTANTS .................................. 64
FINANCIAL INFORMATION ...................................... 65
</TABLE>
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<PAGE> 44
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.
<PAGE> 45
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. 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.
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. 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.
Both 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). Both 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.
2
<PAGE> 46
RISK FACTORS
Because of their investment policies, the Funds may not be suitable or
appropriate for all investors. The Funds are designed for intermediate to
long-term investors who can accept the risks entailed in seeking a high level of
current income available from investments in intermediate to long-term, high
yield, high risk, medium- and lower-quality, fixed-income securities (in the
case of both Funds) and in emerging market securities (in the case of the
Emerging Markets Fund). Consistent with an intermediate to long-term investment
approach, investors in the Funds should not rely on the Funds for their
short-term financial needs. The principal value of the lower-quality securities
in which the Funds invest will be affected by interest rate levels, general
economic conditions, specific industry conditions (in the case of the High Yield
Fund) and the creditworthiness of the individual issuer. In addition, the
principal value of the lower-quality securities in which the Emerging Markets
Fund invests will be affected by social, economic and political conditions of
emerging market nations in which the Fund invests. Although the Funds seek to
reduce risk by portfolio diversification, extensive credit analysis and
attention to trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no assurance that
the Funds will achieve these results.
SPECIAL RISKS OF INVESTING IN HIGH YIELD, HIGH RISK BONDS AND IN EMERGING MARKET
SECURITIES
The Funds' prospectuses, in the sections entitled "Risk Factors -
Special Summary" (for the High Yield Fund), "Summary of Risks" (for the Emerging
Markets Fund) and "Fund and Market Characteristics/Risk Factors," describe the
special considerations and additional risk factors associated with each Fund's
investments in lower-rated debt securities commonly referred to as "junk bonds,"
and investing abroad in emerging market nations (in the case of the Emerging
Markets Fund).
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.
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<PAGE> 47
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 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.
Each of the Funds may purchase securities on a "when-issued" basis.
When-issued securities are purchased for delivery beyond the normal settlement
date at a stated price and yield, and thereby involve risk that the yield
obtained in the transaction will be less than those available in the market when
delivery takes place. The Funds will generally not pay for such securities or
start earning interest on them until they are received. During the period when a
Fund has purchased securities on a when-issued basis, the Trust's custodian will
segregate in a segregated account or status, cash or liquid securities equal on
a daily basis each business day to the amount of the commitment for the
securities. Securities purchased on a when-issued basis are recorded as an asset
and are subject to changes in value based upon changes in the general level of
interest rates. Each of the Funds expects that commitments to purchase
when-issued securities will not exceed 25%
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<PAGE> 48
of the value of its total assets under normal market conditions, and that a
commitment to purchase when-issued securities will not exceed 60 days. The Funds
do not intend to purchase when-issued securities for speculative purposes, but
only for the purpose of acquiring portfolio securities.
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%.
With the same income return of 10%, a price increase of 5% would have
given you a total 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.
INVESTMENT PROGRAMS
INVESTMENT IN DEBT SECURITIES
In seeking to meet its investment objective, each 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
The Funds invest in outstanding convertible and non-convertible
corporate debt securities (e.g., bonds and debentures) that generally are
intermediate to long-term, having 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
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<PAGE> 49
U.S. Government obligations include 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
U.S. Government agency securities include 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
Bank obligations include certificates of deposit, bankers' acceptances,
and other debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Emerging Markets Fund may invest in obligations of foreign banks and bank
holding companies.
The Funds may also invest in the securities of certain supranational
entities, such as the International Development Bank.
ASSET-BACKED SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES
ASSET-BACKED SECURITIES. 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. 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.
Asset-backed 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.
Each Fund may invest up to 10% of its total assets in 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.
In addition, for asset-backed securities purchased at a premium, the premium may
be lost in the event of early pre-payment which may result in a loss to the
Fund.
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.
Collateralized obligations 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. 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. Each Fund may invest up to 10% of its total assets in mortgage-backed
securities. The actual prepayment experience of a pool of mortgage loans or
other obligations may cause the yield realized by the Fund to differ from the
yield calculated on the basis of the average life of the pool. (When a mortgage
in the underlying mortgage pool is prepaid, an unscheduled principal prepayment
is passed through to the Fund. This principal is returned to the Fund at par.
As a result, if a mortgage security were trading at a premium, its total return
would be lowered by prepayments, and if a mortgage security were trading at a
discount, its total return would be increased by prepayments.) The value of
these securities also may change because of changes in the market's perception
of the creditworthiness of the federal agency that issued them. In addition,
the mortgage securities market in general may be adversely affected by changes
in governmental regulation or tax policies. In addition, for mortgage-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.
6
<PAGE> 50
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
7
<PAGE> 51
floating interest rates (i.e., interest rates which adjust as a specified
benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. A Fund may invest in such asset-backed securities if such
investment is otherwise consistent with its investment objective and policies
and with the investment restrictions of the Fund.
TYPES OF CREDIT SUPPORT. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initiating payments on the underlying
assets, are held in reserve against future losses) or that have been
"over-collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security.
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,
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<PAGE> 52
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on the securities. In addition,
various state and federal laws give the motor vehicle owner the right to assert
against the holder of the owner's Automobile Contract certain defenses such
owner would have against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the Automobile Receivable Securities.
CREDIT CARD RECEIVABLE SECURITIES. The Funds may invest in asset-backed
securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities"). Credit balances on revolving credit card
agreements ("Accounts") are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued publicly to date
have been pass-through certificates. In order to lengthen the maturity of Credit
Card Receivable Securities, most such securities provide for a fixed period
during which only interest payments on the underlying Accounts are passed
through to the security holder and principal payments received on such Accounts
are used to fund the transfer to the pool of assets supporting the related
Credit Card Receivable Securities of additional credit card charges made on an
Account. The initial fixed period usually may be shortened upon the occurrence
of specified events which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest rates.
The ability of the issuer to extend the life of an issue of Credit Card
Receivable Securities thus depends upon the continued generation of additional
principal amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
OTHER ASSETS. FSCM anticipates that asset-backed securities backed by
assets other than those described above will be issued in the future. Each of
the Funds may invest in such securities in the future if such investment is
otherwise consistent with its investment objective, policies and restrictions.
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") 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
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payments. When that tranche of bonds is retired, the next tranche, or tranches,
in the sequence, as specified in the prospectus, receive all of the principal
payments until they are retired. The sequential retirement of bond groups
continues until the last tranche, or group of bonds, is retired. Accordingly,
the CMO structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate and long
final maturities and expected average lives.
The primary risk of any mortgage security is the uncertainty of the
timing of cash flows. For CMOs, the primary risks result from the rate of
prepayments on the underlying mortgages serving as collateral. An increase or
decrease in prepayment rates (resulting from a decrease or increase in mortgage
interest rates) will affect the yield, average life and price of CMOs. CMOs can
be quite sensitive to interest rate changes and the rate of principal
prepayments on the underlying mortgages serving as collateral. As an
illustration, declining interest rates may result in prepayments and thus,
termination of interest payments. In addition, the proceeds of prepayments may
have to be reinvested at the lower interest rates. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
STRIPPED MORTGAGE-BACKED SECURITIES
These are securities representing interests in a pool of mortgages, the
cash flow of which has been separated into its interest and principal
components. Interest-only securities ("IOs") receive the interest portion of the
cash flow while principal-only securities ("POs") receive the principal portion.
Each Fund may invest up to 5% of its total assets in IOs and POs. The Emerging
Markets Fund has no present intention of investing 5% or more of its total
assets in IOs and POs. Stripped mortgage-backed securities may be issued by U.S.
Government agencies or by private issuers. The value of IOs tends to move in the
same direction as interest rates. The value of the other mortgage-backed
securities described herein, like other debt instruments, will tend to move in
the opposite direction compared to interest rates.
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. 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. 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;
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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.
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 securities paid in cash.
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 issuing 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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DEPOSITARY 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 would comprise, together with
all other illiquid securities, more than 15% of the value of each Fund's net
assets.
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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 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
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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 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.
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The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
FOREIGN SECURITIES
Subject to the Funds' quality and maturity standards, the Funds may
invest without limitation in the securities (payable in U.S. dollars) of foreign
issuers and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). The High Yield Fund may invest
up to 20% of its net assets in non-U.S. dollar-denominated fixed-income
securities principally traded in financial markets outside the United States,
and the Emerging Markets Fund may invest up to 100% of its net assets in
non-U.S. dollar-denominated fixed-income securities principally traded in
financial markets outside the United States. Because the Funds may invest in
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
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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 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
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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 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
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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.
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
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For the purpose of realizing additional income, each Fund may make
secured loans of portfolio securities amounting to not more than one-third of
its total assets. This policy is a fundamental policy. Securities loans are made
to broker-dealers or institutional investors pursuant to agreements requiring
that the loans be continuously secured by collateral at least equal at all times
to the value of the securities lent marked to market on a daily basis. The
collateral received will consist of cash, U.S. Government securities, letters of
credit or such other collateral as may be permitted under its investment
program. While the securities are being lent, a Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Funds have a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Funds will not have the right to vote securities while
they are being lent, but they will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
delay or default in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed by the Adviser to be of good standing, and will not be made unless,
in the judgment of the Adviser, the consideration to be earned from such loans
would justify the risk.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Funds may invest in loan participations and assignments
(collectively "participations"). Such participations will typically be
participating interests in loans made by a syndicate of banks, represented by an
agent bank, which has negotiated and structured the loan to corporate borrowers
to finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may also have been made to
governmental borrowers, especially governments of emerging market nations.
Emerging market nations debt securities or obligations will involve the risk
that the governmental entity responsible for the repayment of the debt may be
unable or unwilling to do so when due. (For a discussion of risks associated
with investing in securities in emerging market nations, see "Foreign Sovereign
Debt Securities" above.) The loans underlying such participations may be secured
or unsecured, and the Funds may invest in loans collateralized by mortgages on
real property or which have no collateral. The loan participations themselves
may extend for the entire term of the loan or may extend only for short "strips"
that correspond to a quarterly or monthly floating rate interest period on the
underlying loan. Thus, a 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.
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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.
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.
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A Fund will incur a loss as a result of the short sale if the price of
the security sold short increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will realize a
gain if the security sold short declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the amount
of any loss increased, by the amount of any premium, dividends or interest the
Fund may be required to pay in connection with a short sale. Any gain or loss on
the security sold short would be separate from a gain or loss on the Fund
security being hedged by the short sale.
FUTURES CONTRACTS
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a debt security) at a specified price, date, time and
place designated at the time the contract is made. Brokerage fees are incurred
when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when the Funds purchase or sell a security, no price will be
paid or received by the Funds upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open positions
in futures contracts, a Fund will be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash, U.S.
Government securities, suitable money market instruments, or other liquid
securities, known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Funds.
These subsequent payments, called "variation margin," to and from the
futures broker are made on a daily basis as the price of the underlying assets
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." Each Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing out
an open futures contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If the
offsetting purchase price is less than the original sale price, a Fund realizes
a gain; if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund realizes a gain;
if it is less, the Fund realizes a loss. The transaction costs must also
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be included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
As an example of an offsetting transaction in which the underlying
instrument is not delivered, the contractual obligations arising from the sale
of one contract of September Treasury Bills on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one contract of September
Treasury Bills on the same exchange. In such instance, the difference between
the price at which the futures contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs, represents the
profit or loss to the Funds.
INTEREST RATE AND STOCK INDEX FUTURES
The Funds may enter into financial futures contracts, including stock
index and interest rate futures. Stock index futures contracts may be used to
provide a hedge for a portion of a Fund's portfolio, as a cash management tool,
or as an efficient way for the Adviser to implement either an increase or
decrease in portfolio market exposure in response to changing market conditions.
Stock index futures contracts are currently traded with respect to the S&P 500
Index and other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Funds may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge a Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or sub-indices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate futures contracts may be used as a hedge against changes
in prevailing levels of interest rates in order to establish more definitely the
effective return on securities held or intended to be acquired by a Fund. In
this regard, the Funds could sell interest rate futures as an offset against the
effect of expected increases in interest rates and purchase such futures as an
offset against the effect of expected declines in interest rates.
The Funds will enter into futures contracts which are traded on
national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Funds' objectives in these
areas.
REGULATORY LIMITATIONS. The Funds will engage in transactions in
futures contracts and options thereon only for bona fide hedging, risk
management and other permissible purposes, in each case in accordance with the
rules and regulations of the CFTC, and not for speculation.
The Funds may not enter into futures contracts or options thereon for
other than bona-fide hedging purposes if immediately thereafter the sum of the
amounts of initial margin deposits on a Fund's existing futures and premiums
paid for options on futures would exceed 5% of the market value of the Fund's
total
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assets; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
In instances involving the purchase of futures contracts or call
options thereon or the writing of put options thereon by the Funds, an amount of
cash, U.S. Government securities or other liquid securities, equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be deposited in a segregated account with the Funds' custodian
to cover the position, or alternative cover will be employed thereby insuring
that the use of such futures contracts and options is unleveraged.
In addition, CFTC regulations may impose limitations on the Funds'
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Funds would comply with such new
restrictions.
SPECIAL RISKS OF FUTURES CONTRACTS
VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the minimum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, a Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying instrument and sold it after the decline. Furthermore, in the
case of a futures contract purchase, in order to be certain that a Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
earmarks to the futures contract money market instruments equal in value to the
current value of the underlying instrument less the margin deposit.
LIQUIDITY. Each Fund may elect to close some or all of its futures
positions at any time prior to their expiration. A Fund would do so to reduce
exposure represented by long futures positions or increase exposure represented
by short futures positions. A Fund may close its positions by taking opposite
positions
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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 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,
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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 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
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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; (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.
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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 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
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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.
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.
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The operation of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Funds would write put options only on a covered basis, which means
that a Fund would maintain in a segregated account cash, U.S. Government
securities or other liquid securities in an amount not less than the exercise
price or the Fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) A Fund
would generally write covered put options in circumstances where the Adviser
wishes to purchase the underlying security or currency for the Fund's portfolio
at a price lower than the current market price of the security or currency. In
such event the Fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
such a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to a Fund. In
addition, a Fund, because it does not own the specific securities or currencies
which it may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
PURCHASING PUT OPTIONS. The Funds may purchase American or European
style put options. As the holder of a put option, each Fund has the right to
sell the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Funds may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. Each Fund may
purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided below.
A Fund may purchase a put option on an underlying security or currency
(a "protective put") owned by the Fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or currency.
Such hedge protection is provided only during the life of the put option when
the Fund, as the holder of the put option, is able to sell the underlying
security or currency at the 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.
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The premium paid by a Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of New
York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
PURCHASING CALL OPTIONS. The Funds may purchase American or European
style call options. As the holder of a call option, a Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Funds may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. Each Fund may
purchase call options for the purpose of increasing its current return or
avoiding tax consequences which could reduce its current return. Each Fund may
also purchase call options in order to acquire the underlying securities or
currencies. Examples of such uses of call options are provided below.
Call options may be purchased by a Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables a Fund to acquire the securities
or currencies at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or currencies directly. This
technique may also be useful to the Funds in purchasing a large block of
securities or currencies that would be more difficult to acquire by direct
market purchases. So long as it holds such a call option rather than the
underlying security or currency itself, a Fund is partially protected from any
unexpected decline in the market price of the underlying security or currency
and in such event could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.
Each Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
DEALER OPTIONS. The Funds may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While each Fund would
look to a clearing corporation to exercise exchange-traded options, if the Fund
were to purchase a dealer option, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction. Thus, the Adviser must
assess the creditworthiness of each such dealer or any guarantor 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
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insolvency of the contra party, the Funds may be unable to liquidate a dealer
option. With respect to options written by the Funds, the inability to enter
into a closing transaction may result in material losses to the Funds. For
example, since a Fund must maintain a secured position with respect to any call
option on a security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the option. This
requirement may impair the Funds' ability to sell portfolio securities or
currencies at a time when such sale might be advantageous.
The staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. Each Fund may treat the cover used for written OTC options as liquid
if the dealer agrees that the Fund may repurchase the OTC option it has written
for a maximum price to be calculated by a predetermined formula. In such cases,
the OTC option would be considered illiquid only to the extent the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Accordingly, each Fund will treat dealer options as subject to the Fund's
limitation prohibiting investment of more than 15% of its net assets in illiquid
securities. If the SEC changes its position on the liquidity of dealer options,
each Fund will change its treatment of such instruments accordingly.
SPREAD OPTION TRANSACTIONS. The Funds may purchase from and sell to
securities dealers covered spread options. Such covered spread options are not
presently exchange listed or traded. The purchase of a spread option gives a
Fund the right to put, or sell, a security that it owns at a fixed dollar spread
or fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Funds in purchasing
covered spread options is the cost of the premium paid for the spread option and
any transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect the Funds against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high-quality and lower quality securities. Such
protection is only provided during the life of the spread option. The security
covering the spread option will be maintained in a segregated account by the
Funds' custodian. The Funds do not consider a security covered by a spread
option to be "pledged" as that term is used in each Fund's policy limiting the
pledging or mortgaging of its assets.
OPTIONS ON SECURITIES AND OTHER FINANCIAL INDICES. The Funds may
purchase and sell call and put options on securities indices and other financial
indices. In so doing, each Fund can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula 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
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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.
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HYBRID INSTRUMENTS
These instruments (a type of potentially high-risk derivative) can
combine the characteristics of securities, futures, and options. For example,
the principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging,
duration management, and increased total return. Hybrids may not bear interest
or pay dividends. The value of a hybrid or its interest rate may be a multiple
of a benchmark and, as a result, may be leveraged and move (up or down) more
steeply and rapidly than the benchmark. These benchmarks may be sensitive to
economic and political events, such as commodity shortages and currency
devaluations, which cannot be readily foreseen by the purchaser of a hybrid.
Under certain conditions, the redemption value of a hybrid could be zero. Thus,
an investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated
debt security that has a fixed principal amount and pays a fixed rate or
floating rate of interest. The purchase of hybrids also exposes the Fund to the
credit risk of the issuer of the hybrid. These risks may cause significant
fluctuations in the net asset value of the Fund. Hybrids can have volatile
prices and limited liquidity and their use by the Fund may not be successful.
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
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assets valued at market. The Fund will not borrow in order to
increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely
disposition of portfolio securities. The Fund will not
purchase additional securities when money borrowed exceeds 5%
of total assets. For purposes of this restriction, entering
into futures contracts or reverse repurchase agreements will
not be deemed a borrowing;
(2) Commodities. Purchase or sell commodities or commodity
contracts, except that it may enter into futures contracts and
options thereon;
(3) Percent Limit on Assets Invested in any one Issuer.
Purchase the securities of any issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value
of the Fund's total assets would be invested in the securities
of a single issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to these
restrictions;
(4) Percent Limit on Share Ownership of any one Issuer.
Purchase the securities of any issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund, except that up to 25% of the value of the Fund's
total assets may be invested without regard to these
restrictions;
(5) Industry Concentration. Purchase the securities of any
issuer (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a
result, 25% or more of the value of the Fund's total assets
would be invested in the securities of issuers having their
principal business activities in the same industry;
(6) Real Estate. Purchase or sell real estate or real estate
limited partnerships (although it may purchase securities
secured by real estate or interests therein, or issued by
companies which invest in real estate or interests therein);
(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.
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NON-FUNDAMENTAL POLICIES OR RESTRICTIONS OF THE HIGH YIELD FUND:
As a matter of non-fundamental policy, the High Yield Fund
will not:
(11) Control of Portfolio Companies. Invest in companies for
the purpose of exercising management or control;
(12) Equity Securities. Invest more than 10% of the Fund's
total assets in common stocks (including up to 5% in
warrants);
(13) Futures Contracts. Enter into futures contracts or
options thereon if, as a result thereof, more than 5% of the
Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to initial
margin and premiums on such contracts or options thereon,
provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount,
as defined in certain CFTC regulations, may be excluded in
computing such 5%;
(14) Investment Companies. Purchase securities of other
investment companies if the purchase would cause more than 10%
of the value of the Fund's total assets to be invested in
investment company securities, provided that: (i) no
investment will be made in the securities of any one
investment company if immediately after such investment more
than 3% of the outstanding voting securities of such company
would be owned by the Fund or more than 5% of the value of the
Fund's total assets would be invested in such company; and
(ii) no restrictions shall apply to a purchase of investment
company securities in connection with a merger, consolidation
or reorganization. For purposes of this restriction, privately
issued collateralized mortgage obligations will not be treated
as investment company securities if issued by "Exemptive
Issuers." Exemptive Issuers are defined as unmanaged,
fixed-asset issuers that: (i) invest primarily in
mortgage-backed securities; (ii) do not issue redeemable
securities as defined in section 2(a)(32) of the Investment
Company Act of 1940, as amended (the "1940 Act"); (iii)
operate under general exemptive orders exempting them from
"all provisions of" the 1940 Act; and (iv) are not registered
or regulated under the 1940 Act as investment companies;
(15) 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;
(16) 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;
(17) 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%
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of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities;
(18) 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;
(19) Illiquid Securities. Invest more than 15% of the
value of its net assets in illiquid securities;
(20) 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
(21) 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 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) Industry Concentration. Purchase the securities of any
issuer (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a
result, 25% or more of the value of the Fund's total assets
would be invested in the securities of issuers having their
principal business activities in the same industry;
(4) Real Estate. Purchase or sell real estate or real estate
limited partnerships (although it may purchase securities
secured by real estate or interests therein, or issued by
companies which invest in real estate or interests therein);
(5) Loans. Make loans, although the Fund may: (i) purchase
obligations in which it is authorized to invest and enter into
repurchase agreements; and (ii) lend portfolio securities
provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed one-third of the value of
the Fund's total assets. For purposes of this restriction,
collateral arrangements with respect to options and futures
transactions shall not be deemed to be a loan;
(6) Senior Securities. Issue any class of securities senior to
any other class of securities, except to the extent that the
borrowing of money in accordance with restriction 1. or the
entering into reverse repurchase agreements as described in
restriction 8. may constitute the issuance of a senior
security. For purposes of this restriction, purchasing forward
commitments and engaging in options or futures transactions
will not be deemed to constitute the issuance of a senior
security;
(7) Underwriting. Underwrite securities issued by other
persons, except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the 1933 Act in
connection with the purchase of securities directly from the
issuer in accordance with the Fund's investment objective,
policies, and restrictions; and (ii) the later disposition of
restricted securities; or
(8) Reverse Repurchase Agreements. Enter into reverse
repurchase agreements if the total of such investments would
exceed 5% of the total assets of the Fund.
NON-FUNDAMENTAL POLICIES OR RESTRICTIONS OF THE EMERGING MARKETS FUND:
As a matter of non-fundamental policy, the Emerging Markets Fund will
not:
(9) Control of Portfolio Companies. Invest in companies for
the purpose of exercising management or control;
(10) Equity Securities. Invest more than 10% of the Fund's
total assets in common stocks (including up to 5% in
warrants);
(11) Futures Contracts. Enter into futures contracts or
options thereon if, as a result thereof, more than 5% of the
Fund's net assets (taken at market value at the time of
entering into the contract) would be committed to initial
margin and premiums on such contracts or options thereon,
provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount,
as defined in CFTC regulations, may be excluded in computing
such 5%;
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(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) 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;
(14) 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
(15) Illiquid Securities. Invest more than 15% of the
value of its net assets in illiquid securities.
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 Summit Investment Partners, LLC, 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 (*).
38
<PAGE> 82
<TABLE>
<CAPTION>
- ---------------------------------------- --------------------------------------- ---------------------------------------
<S> <C> <C>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH REGISTRANT PRINCIPAL OCCUPATION(S) DURING THE
PAST 5 YEARS
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Theodore H. Emmerich Trustee Consultant; Director of Carillon
1201 Edgecliff Place Fund, Inc. and Trustee of Carillon
Cincinnati, OH 45206 Investment Trust (investment
73 years old companies); formerly partner Ernst &
Whinney (Certified Public Accountants)
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
T. Ashley Cooper Trustee Financial Adviser - Seaconn (ferry
70 Oak Ridge Avenue operation company) and President -
Summit, NJ 07901 Custom Home Builder (residential home
38 years old development company) (August 1998 -
present); Senior Managing Director -
NationsBank Montgomery Securities
(broker-dealer) (1997 to August
1998); Senior Vice President - Lehman
Brothers Inc. (broker-dealer)
(1995-1996); and Vice President -
Salomon Brothers Inc. (broker-dealer)
(1982-1994).
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Dr. Bruce H. Olson Trustee Professor of Finance, Miami
120 Upham Hall University (Oxford, OH).
Miami University
Oxford, OH 45056
64 years old
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
James F. Smith* Trustee and President Director, President and Chief
30 Montgomery Street Financial Officer of Freeman
Jersey City, NJ 07302 Securities Company, Inc.
55 years old (broker-dealer)
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Steven R. Sutermeister* Trustee and Chairman Representative of the Adviser
1876 Waycross Road (January, 1994-present); Vice
Cincinnati, OH 45240 President of The Union Central Life
45 years old Insurance Company (August,
1991-present), Vice President of the
Sub-Adviser.
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Gregory A. Sullivan Vice President Senior Vice President, Freeman
30 Montgomery Street Securities Company, Inc.
Jersey City, NJ 07302 (broker-dealer).
50 years old
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Nimish Bhatt Treasurer Vice President of BISYS Fund
3435 Stelzer Road Services, Limited Partnership
Columbus, OH 43219 (since July, 1996);
36 years old officer of other investment companies
administered by BISYS Fund
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
</TABLE>
39
<PAGE> 83
<TABLE>
<CAPTION>
- ---------------------------------------- --------------------------------------- ---------------------------------------
NAME, ADDRESS AND AGE POSITION(S) HELD WITH REGISTRANT PRINCIPAL OCCUPATION(S) DURING THE
PAST 5 YEARS
<S> <C> <C>
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
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.
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
John J. Quillin Secretary Vice President of Client Services and
3435 Stelzer Road employee, BISYS Fund Services,
Columbus, OH 43219 Limited Partnership (since February
40 years old 1996); formerly, employee of Bay Bank
(June 1987 through February 1996).
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
James L. Smith Assistant Secretary Officer, BISYS Fund Services, Limited
3435 Stelzer Road Partnership (since October, 1996);
Columbus, OH 43219 employee of Alps Mutual Fund
39 years old Services, Inc. prior thereto.
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Alaina Metz Assistant Secretary Employee, BISYS Fund Services,
3435 Stelzer Road Limited Partnership (since June
Columbus, OH 43219 1995); Supervisor, Alliance Capital
32 years old Management prior thereto.
- ---------------------------------------- --------------------------------------- ---------------------------------------
- ---------------------------------------- --------------------------------------- ---------------------------------------
Bob Tuch Assistant Secretary Vice President, BISYS Fund Services,
3435 Stelzer Road Limited Partnership
Columbus, OH 43219
48 years old
- ---------------------------------------- --------------------------------------- ---------------------------------------
</TABLE>
40
<PAGE> 84
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, 1999, the Trustees received the
following compensation from the Trust:
<TABLE>
<CAPTION>
- ------------------------------------------------------------ -----------------------------------------------------------
AGGREGATE COMPENSATION
NAME AND POSITION WITH THE TRUST FROM THE TRUST+
<S> <C>
- ------------------------------------------------------------ -----------------------------------------------------------
- ------------------------------------------------------------ -----------------------------------------------------------
Theodore H. Emmerich, Trustee $8,500
- ------------------------------------------------------------ -----------------------------------------------------------
- ------------------------------------------------------------ -----------------------------------------------------------
Frederick Moss, Trustee $6,500
- ------------------------------------------------------------ -----------------------------------------------------------
- ------------------------------------------------------------ -----------------------------------------------------------
T. Ashley Cooper, Trustee $2,000
- ------------------------------------------------------------ -----------------------------------------------------------
- ------------------------------------------------------------ -----------------------------------------------------------
Dr. Bruce H. Olsen, Trustee $8,500
- ------------------------------------------------------------ -----------------------------------------------------------
- ------------------------------------------------------------ -----------------------------------------------------------
James F. Smith, Trustee and President $0
- ------------------------------------------------------------ -----------------------------------------------------------
- ------------------------------------------------------------ -----------------------------------------------------------
Steven R. Sutermeister, Trustee and Chairman $0
- ------------------------------------------------------------ -----------------------------------------------------------
</TABLE>
- --------------------------
+ As of May 31, 1999, the "Fund Complex" consisted of one investment
company, the Trust, and two portfolios, the High Yield Fund and the
Emerging Markets Fund.
The officers listed above are furnished to the Trust by the Adviser or
the Administrator (see "Management-Related Services -- Administrator") and
receive no compensation from the Trust. These officers spend only a portion of
their time on the affairs of the Trust. As of September 23, 1999, the
officers and Trustees, individually and as a group, owned beneficially less than
1% of the outstanding shares of each class of 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, as well as for other investors as described in the
Prospectus:
- A Trustee or officer of the Trust, or the immediate families
(i.e., the spouse or any children) of such persons.
- Directors, trustees, employees, and family members of the o
Adviser or "Affiliated Providers;"(1) or trade organizations
to which the Adviser or the Administrator belong.
- --------------------------
(1) Affiliated Providers are affiliates of the Adviser and any organization
that provides services to the Fund.
41
<PAGE> 85
- 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.
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 10, 1999, 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
3,035,722.284 outstanding Class A shares or 70.686% of such shares of the High
Yield Fund and 3,103,300.166 outstanding Class A shares or 98.655% of such
shares of the Emerging Markets Fund.
As of September 10, 1999, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94101-4122 owned of record 478,985.726 outstanding
Class A shares or 9.335% of such shares of the High Yield Fund.
As of September 10, 1999, the following individuals owned 5% or more of
the High Yield Fund Class B shares:
Name and Address Share Balance Percentage
McDonald Investments Inc. C FBO 3,352 7.646%
Edwin H. Sypolt IRA
6785 Thicket Hill Court
Florence, KY 41042-1188
Helen C. Hinckley 5,096 11.624%
The Regency No 1912
2444 Madison Road
Cincinnati, OH 45208-1256
Gladys K. Patterson 11,148.272 25.429%
6925 Clymer Drive
Reynoldsburg, OH 43068-2408
K. Louise Etter 11,148.272 25.429%
12310 Raintree Avenue
Pickerington, OH 43147-8470
42
<PAGE> 86
Sara E. Doepke TTEE 5,682 12.961%
Sara E. Doepke Living Trust
3856 Homewood Road
Cincinnati, OH 45227
As of September 10, 1999, BISYS Fund Services Ohio Inc., 3435 Stelzer
Road, Columbus, Ohio 43219, owned of record and beneficially 189.485 outstanding
Class B shares or 100% of such shares of the Emerging Markets Fund.
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"), 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
43
<PAGE> 87
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, 1999. Freeman has its principal offices at 30 Montgomery Street,
Jersey City, NJ 07302. Freeman is, in turn, majority-owned by the Freeman
Securities' Savings and Investment Plan and Employee Stock Ownership Plan. The
trustees of both such plans are Malcolm B. Sheldrick, Jr. and James F. Smith.
Mr. Smith is also a Trustee and President of the Trust.
Under the terms of the Joint Venture Agreement, Freeman initially
agreed to make an aggregate capital contribution to the Joint Venture not
exceeding $500,000, and Carillon agreed to arrange for the investment by its
parent, Union Central Life, of $25 million in shares of the High Yield Fund.
Carillon and Freeman will share in the profits and losses of the Joint Venture
in the ratio of 51% to 49%, except that Freeman alone will bear the initial
$500,000 in losses. The Joint Venture may be terminated and dissolved: (i) at
any time upon the agreement of the parties; (ii) 90 days after receipt by one
party of written notice from the other confirming the parties' failure to agree
on a matter requiring their agreement; (iii) on the occurrence of an event of
dissolution under Ohio laws; (iv) on the imposition on either party of any
sanction resulting in the suspension or revocation of its authorization to do
business by any state or Federal securities regulatory authority or on the
conviction of either for any criminal conduct constituting a felony; (v) on the
filing by or with respect to either party of any petition under applicable
Federal or state law regarding their bankruptcy, insolvency or other relief for
debtors, the adjudication of either as bankrupt or insolvent, or the appointment
for either of a trustee or liquidator of any substantial portion of its
property; or (vi) on December 1, 2003, unless the Parties extend such date for
periods not exceeding five years. In the event of termination and dissolution of
the Joint Venture, Carillon, or any affiliate thereof, would have the first
right to purchase all of the interest of Freeman in the Joint Venture. If such
right were not exercised, Freeman, or any affiliate thereof, would have the
right to purchase all of the interest of Carillon in the Joint Venture. In 1996,
each general partner contributed $150,000 in additional capital to the Joint
Venture. The general partners also 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
44
<PAGE> 88
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 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
45
<PAGE> 89
becomes an inappropriate measure of the High Yield Fund's performance, the
Trustees will meet to approve another appropriate index or will negotiate a
fixed advisory fee with the Adviser. The Advisor has made a contractual
commitment as of March 31, 1999 to waive all or a portion of its advisory fee or
to assume as its own expense certain expenses otherwise payable by the High
Yield Fund so as to limit the Fund's total annual fund operating expenses to
1.60% for the Class A shares and 2.35% for the Class B shares of the High Yield
Fund.
The High Yield Fund paid the Adviser for investment advisory services,
$139,821 for the fiscal year ended 1997, $262,141 for the fiscal year ended May
31, 1998 and $266, 304 for the fiscal year ended May 31, 1999. The Adviser
waived investment advisory fees in the amounts of $227,432 for the fiscal year
ended May 31, 1997, $171,891 for the fiscal year ended May 31, 1998 and
$37,165 for the fiscal year ended May 31, 1999.
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 the Emerging Markets Fund's
average daily net assets. The Adviser has made a contractual commitment as of
March 31, 1999 to waive all or a portion of its advisory fee or to assume as its
expense certain expenses otherwise payable by the Emerging Markets Fund so as to
limit the Fund's total operating expenses to 2.00% for the Class A shares and
2.75% for the Class B shares of the Emerging Markets Fund. The Emerging Markets
Fund commenced operations on December 31, 1997 and paid the adviser for
investment advisory services, $61,669 for the period from December 31, 1997 to
May 31, 1998 and $129,500 for the fiscal year ended May 31, 1999. The Adviser
waived investment advisory fees in the amount of $15,511 for the period that
began on December 31, 1997 and ended on May 31, 1998 and $27,944 for the fiscal
year ended May 31, 1999.
THE SUB-ADVISER
Summit Investment Partners, LLC (the "Sub-Adviser"), an Ohio
limited liability company with offices at 312 Elm Street, Suite 2525,
Cincinnati, Ohio 45202, is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. The Sub-Adviser is a wholly-owned
subsidiary of Union Central Life. Carillon was the investment sub-adviser to the
Trust until October 1998. Under a restructuring of Carillon that occurred in
October 1998, Carillon assigned its advisory business to Sub-Adviser. The
ownership of Sub-Adviser is the same as that of Carillon. Consequently, there
was no change in control of the investment sub-adviser of the Trust, and Union
Central Life remains in control of both Carillon and
<PAGE> 90
the Sub-Adviser. All the personnel of Carillon who were providing investment
advisory services to the Trust prior to the restructuring continued to provide
such services to the Trust as personnel of the Sub-Adviser.
THE SUB-ADVISORY AGREEMENT
The Sub-Adviser serves as sub-adviser of the Trust pursuant to an
Investment Sub-Advisory Agreement with the Adviser dated September 18, 1996, as
amended (the "Sub-Advisory Agreement"). Under the Sub-Advisory Agreement, the
Sub-Adviser 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. 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 as
described above. Aside from the change in name and organization of the
investment sub-adviser, the Sub-Advisory Agreement remained 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.
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 the Sub-Adviser, and by the Adviser or the Sub-Adviser, 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.
47
<PAGE> 91
Effective as of January 1, 1999, under the Sub-Advisory Agreement, the
Sub-Adviser receives from FSCM a fee at an annual rate of 0.50% of the average
daily net assets of each Fund, provided that the total fee for each year shall
not exceed $125,000 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 for a Fund, the Sub-Adviser is entitled to a
pro-rata portion of such fee for such Fund, 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 for such Fund. 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 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' principal offices are
located at 3435 Stelzer Road, Columbus, OH 43219.
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"). BISYS has its principal
offices at 3435 Stelzer Road, Columbus, OH 43219.
ADMINISTRATOR
Pursuant to a Management and Administration Agreement with the Trust
dated June 17, 1998, (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 year ended May 31,
1997, the Administrator received fees of $50,954 and voluntarily waived fees of
$17,134; for the fiscal year ended May 31, 1998, the Administrator received fees
of $71,895 and voluntarily waived fees of $24,056; and for the fiscal year ended
May 31, 1999, the Administrator received fees of
48
<PAGE> 92
$81,515 and voluntarily waived fees of $24,759. 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; and for the fiscal year ended May
31, 1999, the Administrator received fees of $31,489 and voluntarily waived fees
of $10,497.
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 effective for an initial three-year
term, 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 for "cause," in either such case by written notice of
non-renewal given to the other party at least 60 days prior to expiration of the
then-current term. Such annual continuance is subject to annual review (as to
"cause") and approval (a) by vote of a majority of the Trustees or of a majority
of each Fund's outstanding voting securities and (b) by vote of a majority of
the Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Trust or the Administrator. "Cause" for purposes of the foregoing means,
with respect to a party: (i) willful misfeasance, bad faith, gross negligence or
reckless disregard of duty; (ii) a final judgment or administrative order
finding guilt of criminal or unethical business conduct; (iii) financial
difficulties evidenced by bankruptcy, liquidation or reorganization proceedings;
or (iv) circumstances of substantial impairment of ability to perform the
Administration Agreement. Termination or replacement of the Administrator other
than for such "cause" would entitle the Administrator to receive from the Trust
as liquidated damages the balance of the fees 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 June 27, 1994, as amended and restated on June 17, 1998 (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 $44,994 for the fiscal year ended May 31, 1997, $40,780 for the
fiscal year ended May 31, 1998 and $41,637 for the fiscal year ended May 31,
1999. 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 and $53,852 for the fiscal year ended May 31, 1999.
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The 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.
TRANSFER AGENT
Pursuant to an Amended and Restated Transfer Agency Agreement with the
Trust dated June 27, 1994, as amended and restated on June 17, 1998 (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 $58,479 for the fiscal year ended May
31, 1997, $78,430 for the fiscal year ended May 31, 1998, and $84,633 for the
fiscal year ended May 31, 1999. 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 and $42,114 for the fiscal year
ended May 31, 1999.
The Transfer Agency Agreement is effective until June 17, 2001 and
thereafter 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 but not less than 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. BISYS has agreed to indemnify
the Trust, its employees, agents, trustees, officers and nominees against
claims, damages and liabilities arising out of its performance of the Transfer
Agency Agreement if its actions or non-actions are due to BISYS' bad faith,
willful misfeasance, negligence or reckless disregard of its obligations under
the agreement. 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, any fund accountant or another
custodian of Trust or Fund records.
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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.
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 Class A shares of the Fund;
(2) Class B shares pay a 12b-1 fee of 1.00% of the average daily net
assets of the Class B shares of the Fund. This will cause expenses to be higher
and dividends to be lower for Class B shares 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
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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 16, 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.
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.
The following is a breakdown of the expenses paid by the shares of the
High Yield Fund and Emerging Markets Fund out of distribution fees for the
fiscal year ended May 31, 1999:
HIGH YIELD FUND EMERGING MARKETS FUND
Advertising $0 $0
Printing and Mailing to
Prospectuses to Other
Shareholders $0 $0
Compensation to BISYS Fund
Services/Underwriter $13,540.15 $164.03
Compensation to Broker/Dealers $112,497.74 $52,293.45
Compensation to Sales Personnel $0 $0
Other $0 $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
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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 $26,909 for the fiscal
year ended May 31, 1997, $16,205.07 for the fiscal year ended May 31, 1998, and
$9,522.87 for the fiscal year ended May 31, 1999, all of which
commissions 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, and $16.01 for the fiscal year
ended May 31, 1999, 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. The
Distributor received no underwriting commissions on sales of the Class B shares
of the Funds for the fiscal year ended May 31, 1999.
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 years ended May 31, 1997 and 1998, the Funds paid
no brokerage commissions on brokerage transactions. For the fiscal year ended
May 31, 1999 BISYS received $106,216 and $178 from commissions earned on sales
of the High Yield Fund and Emerging Markets Fund, respectively, of which $7,386
was reallowed to BISYS and Carilla Investments (affiliated broker-dealers).
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.
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In purchasing and selling the Funds' portfolio securities, it is the
Adviser's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency transactions
(in which a Fund does not generally engage), at competitive commission rates.
However, under certain conditions, a Fund may pay higher brokerage commissions
in return for brokerage and research services. In selecting broker-dealers to
execute a Fund's portfolio transactions, consideration is given to such factors
as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition and
general execution and operational capabilities of competing brokers and dealers,
and brokerage and research services provided by them. It is not the policy of
the Adviser to seek the lowest available commission rate where it is believed
that a broker or dealer charging a higher commission rate would offer greater
reliability or provide better price or execution.
HOW EVALUATIONS ARE MADE OF THE OVERALL REASONABLENESS OF BROKERAGE COMMISSIONS
PAID
On a continuing basis, the Adviser seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed on
behalf of the Funds. In evaluating the reasonableness of commission rates, the
Adviser considers: (i) historical commission rates; (ii) rates which other
institutional investors are paying based on available public information; (iii)
rates quoted by brokers and dealers; (iv) the size of a particular transaction
in terms of the number of shares, dollar amount, and number of clients involved;
(v) the complexity of a particular transaction in terms of both execution and
settlement; (vi) the level and type of business done with a particular firm over
a period of time; and (vii) the extent to which the broker or dealer has capital
at risk in the transaction.
DESCRIPTION OF RESEARCH SERVICES RECEIVED FROM BROKERS AND DEALERS
The Adviser receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries, groups
of securities, individual companies, statistical information, accounting and tax
law interpretations, political developments, legal developments affecting
portfolio securities, technical market action, pricing and appraisal services,
credit analysis, risk measurement analysis, performance analysis and analysis of
corporate responsibility issues. These services provide both domestic and
international perspective. Research services are received primarily in the form
of written reports, computer-generated services, telephone contacts and personal
meetings with security analysts. In addition, such services may be provided in
the form of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some cases, research
services are generated by third parties but are provided to the Adviser by or
through broker-dealers.
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
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functions. In such event, the Adviser makes a good faith determination of the
anticipated research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
COMMISSIONS TO BROKERS WHO FURNISH RESEARCH SERVICES
With regard to the payment of brokerage commissions, the Adviser has
adopted a brokerage allocation policy embodying the concepts of Section 28(e) of
the 1934 Act which permits an investment adviser to cause an account to pay
commission rates in excess of those another broker or dealer would have charged
for effecting the same transaction, if the Adviser determines in good faith that
the commission paid is reasonable in relation to the value of the brokerage and
research services provided. The determination may be viewed in terms of either
the particular transaction involved or the overall responsibilities of the
Adviser with respect to the accounts over which it exercises investment
discretion. Accordingly, while the Adviser cannot readily determine the extent
to which commission rates charged by broker-dealers reflect the value of their
research services, the Adviser would expect to assess the reasonableness of
commissions in light of the total brokerage and research services provided by
each particular broker.
INTERNAL ALLOCATION PROCEDURES
The Adviser will follow a policy of not 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 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.
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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, 1999, the portfolio turnover rate for
the High Yield Fund was 176.06%, while for the fiscal year ended May 31, 1998,
the portfolio turnover rate for the High Yield Fund was 518.74%. The lower
portfolio turnover rate for the fiscal year ended May 31, 1999 was due to less
volatile market conditions in the high yield markets.
For the fiscal year ended May 31, 1999, the portfolio turnover rate for
the Emerging Markets Fund was 37.83%, while for the fiscal period from January
1, 1998 to May 31, 1998, the portfolio turnover rate for the Emerging Markets
Fund was 85.69%.
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 23, 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. Class B shares of the Funds were
created on September 23, 1998.
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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 ("NAV") 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. 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. 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. 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.
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.
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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
The Funds receive income generally in the form of dividends and
interest on their investments. This income, less expenses incurred in the
operation of a Fund, constitutes a Fund's net investment income from which
dividends may be paid to you. Any distributions by a Fund from such income
will be taxable to you as ordinary income, whether you take them in cash or
in additional shares.
The Funds may derive capital gains and losses in connection with
sales or other dispositions of their portfolio securities. Distributions
from net short-term capital gains will be taxable to you as ordinary income.
Distributions from net long-term capital gains will be taxable to you as
long-term capital gain, regardless of how long you have held your shares
in a Fund. Any net capital gains realized by a Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the
Fund.
Most foreign exchange gains realized on the sale of debt securities
are treated as ordinary income by a Fund. Similarly, foreign exchange losses
realized by a Fund on the sale of debt securities are generally treated as
ordinary losses by the Fund. These gains when distributed will be taxable to
you as ordinary dividends, and any losses will reduce a Fund's ordinary
income otherwise available for distribution to you. This treatment could
increase or reduce a Fund's ordinary income distributions to you, and may
cause some or all of a Fund's previously distributed income to be classified
as a return of capital.
A Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of a Fund's total assets
at the end of the fiscal year are invested in securities of foreign
corporations, the Fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the Fund. If this election is made, the year-end
statement you receive from the Fund will show more taxable income than was
actually distributed to you. However, you will be entitled to either deduct
your share of such taxes in computing your taxable income or (Subject to
limitations) claim a foreign tax credit for such taxes against your U.S.
federal income tax. A Fund will provide you with the information necessary
to complete your individual income tax return if it makes this election.
The Funds will inform you of the amount of your ordinary income
dividends and capital gains distributions at the time they are paid, and will
advise you of their tax status for federal income tax purposes shortly after
the close of each calendar year. If you have not held Fund shares for a full
year, a Fund may designate and distribute to you, as ordinary income or
capital gain, a percentage of income that is not equal to the actual amount
of such income earned during the period of your investment in the Fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each Fund
has elected to be treated as a regulated investment company under Subchapter
M of the Internal Revenue Code, has qualified as such for its most recent
fiscal year, and intends to so qualify during the current fiscal year. As
regulated investment companies, the Funds generally pay no federal income
tax on the income and gains they distribute to you. The board reserves
the right not to maintain the qualification of a Fund as a regulated
investment company if it determines such course of action to be beneficial
to shareholders. In such case, a Fund will be subject to federal, and
possibility state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the
extent of such Fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes,
the Internal Revenue Code requires a Fund to distribute to you by December
31 of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain
net income earned during the twelve month period ending October 31; and 100%
of any undistributed amounts from the prior year. Each Fund intends to
declare and pay these amounts in December (or in January that are treated
by you as received in December) to avoid these excise taxes, but can give no
assurances that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of Fund shares
are taxable transactions for federal and state income tax purposes. If you
redeem your Fund shares, or exchange your Fund shares for shares of a
different Fund within the Trust, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long
you hold your shares. Any loss incurred on the redemption or exchange of
shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gains distributed to you by
the Fund on those shares.
All or a portion of any loss that you realize upon the redemption
of your Fund shares will be disallowed to the extent that you buy other
shares in such Fund (through reinvestment of dividends or otherwise) within
30 days before or after your share redemption. Any loss disallowed under
these rules will be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a
Fund, and then reinvest the sales proceeds in such Fund or in another Fund
within the Trust within 90 days of buying the original shares, the sales
charge that would otherwise apply to your reinvestment may be reduced or
eliminated. The IRS will require you to report gain or loss on the redemption
of your original shares in a Fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in a Fund will be excluded from
your tax basis in the shares sold (for the purpose of determining gain or
loss upon the sale of such shares). The portion of the sales charge excluded
will equal the amount that the sales charge is reduced on your reinvestment.
Any portion of the sales charge excluded from your tax basis in the shares
sold will be added to the tax basis of the shares you acquire from your
reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to
dividends paid to you from interest earned on direct obligations of the
U.S. government, subject in some states to minimum requirements that must
be met by a Fund. Investments in Government National Mortgage Association
or Federal National Mortgage Association securities, bankers' acceptances,
commercial paper and repurchase agreements collateralized by U.S. government
securities do not generally qualify for tax-free treatment. The rules on
exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because each Fund's
income consists of interest rather than dividends, no portion of its
distributions will generally be eligible for the dividends-received
deduction. None of the dividends paid by the Funds for the most recent
calendar year qualified for such deduction, and it is anticipated that none
of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The Funds may invest in complex
securities. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by
a Fund are treated as ordinary income or capital gain, accelerate the
recognition of income to a Fund and/or defer a Fund's ability to recognize
losses, and, in limited cases, subject a Fund to U.S. federal income
tax on income from certain of its foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you
by a Fund.
58
<PAGE> 102
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.
59
<PAGE> 103
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of a Fund to that
of other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return and yield.
Both "total return" and "yield" figures are based on the historical performance
of a Fund, show the performance of a hypothetical investment and are not
intended to indicate future performance.
YIELD INFORMATION
From time to time, a Fund may advertise a yield figure. A portfolio's
yield is a way of showing the rate of income the portfolio earns on its
investments as a percentage of the portfolio's share price. Under the rules of
the SEC, yield must be calculated according to the following formula:
a-b
YIELD = 2 [ ( ------- + 1 ) to the 6th power - 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.
60
<PAGE> 104
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, 1999,
the yield for the High Yield Fund Class A shares was -6.01% and for the Class B
shares was -6.56%. The Emerging Markets Fund's yield for Class A shares was
- -7.65% and for Class B shares was -8.13%.
TOTAL RETURN PERFORMANCE
Under the rules of the Commission, funds advertising performance must
include total return quotes, "T" below, calculated according to the following
formula:
P(1 + T)n (exponent) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods (or fractional
portion thereof).
The average annual total return will be calculated under the foregoing
formula and the time periods used in advertising will be based on rolling
calendar quarters, updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover prescribed
periods. When the period since inception is less than one year, the total return
quoted will be the aggregate return for the period. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by a Fund are assumed to have been
reinvested at net asset value as described in the prospectuses on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the
prescribed periods (or fractional portions thereof) that would equate the
initial amount invested to the ending
61
<PAGE> 105
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.
The average annual total returns for each Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1999 SINCE INCEPTION (6/27/94)
----------------------- -------------------------
<S> <C> <C>
HIGH YIELD FUND
Class A -8.45% 10.87%
Class B* -8.97% 10.74%
<CAPTION>
YEAR ENDED MAY 31, 1999 SINCE INCEPTION (12/31/97)
----------------------- --------------------------
<S> <C> <C>
EMERGING MARKETS FUND
Class A -14.86% -9.49%
Class B* -15.26% -9.79%
</TABLE>
- -----------------------
* Performance for B Shares which commenced operations on October 8, 1998, is
based on historical performance of the A Shares (without sales charge) prior to
that date. A Shares performance does not reflect the higher 12b-1 fees
associated with the B Shares. Had the higher 12b-1 fees been incorporated, total
returns would have been different.
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 each Fund were as follows:
Year Ended May 31, 1999 Since Inception to May 31, 1999
----------------------- -------------------------------
High Yield Fund
Class A -12.58% 9.84%(1)
Emerging Markets Fund
Class A -18.73% -12.38%(2)
____________________________
(1) June 27, 1994
(2) December 31, 1997
Each Fund may also from time to time include in such advertising an
aggregate total return figure or an average annual total return figure that is
not calculated according to the formula set forth above in order to compare more
accurately the Fund's performance with other measures of investment return. Each
Fund may quote an aggregate total return figure in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Value Line
Composite Index, the Lehman Brothers Bond, Government Corporate, Corporate and
Aggregate Indices, Merrill Lynch Government & Agency Index, Merrill Lynch
Intermediate Agency Index, Morgan Stanley Capital International Europe,
Australia, Far East Index or the Morgan Stanley Capital International World
Index. For such purposes, each Fund calculates its aggregate total return for
the specified periods of time by assuming the investment of $1,000 in Fund
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. Each Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. Each Fund would, however, disclose the maximum sales charge and would
also disclose that the performance data does not reflect sales charges and that
the inclusion of sales charges would reduce the performance quoted, if a sales
charge is in effect. To calculate its average annual total return, the aggregate
return is then annualized according to the Commission's formula for total return
quotes, outlined above. When the period since inception is less than one year,
the total return quoted will be the aggregate return for the period.
Each Fund may also advertise the performance rankings assigned by
various publications and statistical services, including but not limited to SEI,
Lipper Mutual Performance Analysis, Intersec Research Survey of Non-U.S. Equity
Fund Returns, Frank Russell International Universe, and any other data which may
be presented from time to time by such analyses as Dow Jones, Morningstar, Inc.,
Chase Investment Performance, Wilson Associates, Stanger, CDA Investment
Technologies, Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor
National Index, IBC/Donaghue's Average/U.S. Government and Agency, or as they
appear in various publications including but not limited to The Wall Street
Journal, Forbes, Barron's, Fortune, Money Magazine, The New York Times,
Financial World, Financial Services Week, USA Today and other regional
publications.
62
<PAGE> 106
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 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.
63
<PAGE> 107
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 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 transaction fees are charged 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 Mercantile Mutual Funds (formerly known as The
ARCH Fund, Inc.), namely, the Mercantile Money Market Portfolio and the
Mercantile Treasury Money Market Portfolio (the "Money Market Funds"), and for
Class A shares of the other Fund. The Mercantile Mutual Funds 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
64
<PAGE> 108
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 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.
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.
65
<PAGE> 109
FINANCIAL INFORMATION
The Funds' Financial Statements for the fiscal year ended May 31, 1999,
including the Report of Independent Accountants, which are included in the
Fund's Annual Report to Shareholders for the fiscal year ended May 31, 1999 (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.
66
<PAGE> 110
<TABLE>
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
Schedule of Portfolio Investments May 31, 1999
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
------ ----------- -----
<S> <C> <C> <C>
COMMON STOCKS (0.8%):
Communications (0.8%):
International - Wholesale Telecom (0.8%):
8,083 Viatel, Inc. (b) $363,735
-----------
Paging/Telegraph (0.0%):
1,000 Paging Do Brazil Holding Co. LLC, Class B --
-----------
TOTAL COMMON STOCKS 363,735
-----------
CORPORATE BONDS (97.9%):
Communications (44.4%):
Data/Internet (5.3%):
$500,000 Covad Communications Group, Inc., 12.50%, 2/15/09 482,500
1,000,000 Psinet, Inc., 11.50%, 11/1/08 1,055,000
1,000,000 Teligent, Inc., 11.50%, 12/1/07 985,000
-----------
2,522,500
-----------
Domestic - Retail Telecom (6.6%):
1,000,000 E.Spire Communication, Inc., 0.00%, 4/1/06 (c) 580,000
2,625,000 Focal Communications Corp., 0.00%, 2/15/08 (d) 1,496,250
1,000,000 ITC Deltacom, Inc., 9.75%, 11/15/08 1,050,000
-----------
3,126,250
-----------
Domestic - Wholesale Telecom (1.6%):
650,000 Qwest Communications International, 10.88%,
4/1/07 744,250
-----------
Equipment Providers (1.9%):
1,500,000 SBA Communications Corp., 0.00%, 3/1/08 (e) 930,000
-----------
International - Retail Telecom (7.9%):
1,000,000 ESAT Telecom Group plc, Senior Notes, 11.88%,
12/1/08 1,050,000
1,000,000 Metronet Communications Corp., 12.00%, 8/15/07 1,165,000
1,500,000 Versatel Telecom, 13.25%, 5/15/08 1,567,500
-----------
3,782,500
-----------
International - Wholesale Telecom (12.7%):
1,725,000 Esprit Telecom Group plc, 11.50%, 12/15/07 1,871,625
2,000,000 Facilicom International, Inc., 10.50%, 1/15/08 1,560,000
100,000 Global Crossing Holding Co., Ltd., 10.50%,
12/1/08 1,110,000
1,500,000 Viatel, Inc., 11.25%, 4/15/08 1,515,000
-----------
6,056,625
-----------
Paging/Telegraph (5.3%):
2,500,000 Arch Communications Group, 6.75%, 12/1/03 1,425,000
1,000,000 Paging Network Do Brazil SA, 13.50%, 6/6/05 450,000
1,000,000 Paging Network, Inc., 10.13%, 8/1/07 655,000
-----------
2,530,000
-----------
Pay Phone Operators (3.1%):
1,500,000 Phonetel Technologies, Inc., 12.00%, 12/15/06** 510,000
1,000,000 Talton Holdings, Inc., 11.00%, 6/30/07 945,000
-----------
1,455,000
-----------
21,147,125
-----------
Energy/Mining (4.2%):
Distribution (0.9%):
1,000,000 Empire Gas Corp., 7.00%, 7/15/04 (f) 450,000
-----------
Oil/Gas Extraction (1.3%):
1,000,000 Abraxas Petroleum Corp., 11.50%, 11/1/04 613,750
-----------
</TABLE>
<PAGE> 111
<TABLE>
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
Schedule of Portfolio Investments May 31, 1999
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
------ ----------- -----
<S> <C> <C> <C>
Services (2.0%):
1,500,000 Eagle Geophysica, Inc., 10.75%, 7/15/08 $930,000
-----------
1,993,750
-----------
Financial (2.1%):
Banking/Insurance (2.1%):
1,000,000 AmeriCredit Corp., 9.88%, 4/15/06* 1,025,000
-----------
Manufacturing/Consumer Goods (9.9%):
Consumer Products (2.1%):
1,000,000 Werner Holdings Co., Inc., 10.00%, 11/15/07 1,007,500
-----------
Electric/HVAC (2.3%):
1,000,000 International Wire Group, 11.75%, 6/1/05 1,040,000
-----------
Furniture & Fixtures (1.6%):
1,000,000 Macsaver Financial Services, 7.60%, 8/1/07 770,000
-----------
Professional & Commercial Equipment (1.9%):
1,000,000 Anchor Lamina, Inc., 9.88%, 2/1/08 930,000
-----------
Textile/Apparel (2.0%):
1,500,000 Anvil Knitwear, 10.88%, 3/15/07 960,000
-----------
4,707,500
-----------
Manufacturing/Trade (12.2%):
Metals (3.1%):
1,500,000 Kaiser Aluminum & Chemicals, 12.75%, 2/1/03 1,500,000
-----------
Miscellaneous (7.8%):
1,500,000 Derby Cycle Corp., 10.00%, 5/15/08 1,290,000
500,000 IMO Industries, Inc., 11.75%, 5/1/06 515,000
1,000,000 International Knife & Saw Corp., 11.38%, 11/15/06 977,500
1,000,000 Numatics, Inc., 9.63%, 4/1/08 890,000
-----------
3,672,500
-----------
Paper & Pulp (1.3%):
1,000,000 Indah Kiat Fin Mauritius, 10.00%, 7/1/07 630,000
-----------
5,802,500
-----------
Media (7.5%):
Cable TV/Programming (1.1%):
500,000 Avalon Cable of Michigan, 9.38%, 12/1/08 510,000
-----------
Outdoor Advertising (3.2%):
1,500,000 Tri-State Outdoor Media, 11.00%, 5/15/08 1,533,750
-----------
Radio Broadcasting (3.2%):
500,000 Emmis Communications Corp., 8.13%, 3/15/09 485,625
1,000,000 Spanish Broadcasting System, 11.00%, 3/15/04 1,070,000
-----------
1,555,625
-----------
3,599,375
-----------
Miscellaneous Services (16.7%):
Healthcare (4.8%):
1,000,000 Genesis Health Ventures, Inc., 9.88%, 1/15/09 860,000
1,500,000 Insight Health Services Corp., 9.63%, 6/15/08 1,440,000
-----------
2,300,000
-----------
Hotel/Gaming (9.8%):
1,000,000 Argosy Gaming, 13.25%, 6/1/04 1,137,160
500,000 Casino Magic - Louisiana, Inc., 13.00%, 8/15/03 575,000
1,000,000 Mohegan Tribal Gaming, 8.75%, 1/1/09 997,500
1,000,000 Station Casinos, 8.88%, 12/1/08 985,000
1,000,000 Vail Resorts, Inc., 8.75%, 5/15/09* 980,000
-----------
4,674,660
-----------
Other (2.1%):
1,000,000 Affinity Group Holdings, Inc., 11.00%, 4/1/07 1,010,000
-----------
$7,984,660
-----------
</TABLE>
<PAGE> 112
<TABLE>
SUMMIT INVESTMENT TRUST
SUMMIT HIGH YIELD FUND
Schedule of Portfolio Investments May 31, 1999
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
------ ----------- -----
<S> <C> <C> <C>
Transportation (0.9%):
Shipping (0.6%):
750,000 Navigator Gas Transport, 12.00%, 6/30/07* 292,500
-----------
Trucking/Warehousing (0.3%):
500,000 Trism, Inc., 10.75%, 12/15/00** 150,000
-----------
442,500
-----------
TOTAL CORPORATE BONDS 46,702,410
-----------
RIGHTS/WARRANTS (0.3%):
Communications (0.3%):
International - Retail Telecom (0.1%):
1,500 Versatel Telecom, Warrants, expire 5/15/08 75,000
-----------
Network-Domestic (0.2%):
1,000 Metronet Communication Corp., Warrants, expire
12/31/99 78,540
-----------
153,540
-----------
Manufacturing/Consumer Goods (0.0%):
Consumer Products (0.0%):
2,000 Renaissance Cosmetics, Inc., Warrants, expire
8/15/01 2
-----------
Media (0.0%):
200 American Telecasting, Inc., Warrants, expire
8/10/00 --
TOTAL RIGHTS/WARRANTS 153,542
-----------
TOTAL INVESTMENTS (COST $53,005,895) (a) - 99.0% 47,219,687
OTHER ASSETS IN EXCESS OF LIABILITIES - 1.0% 478,194
-----------
TOTAL NET ASSETS - 100.0% $47,697,881
===========
</TABLE>
- ------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by amount of losses recognized for financial
reporting purposes in excess of federal income tax reporting of $112,500. Cost
for federal income tax purposes differs from value by net unrealized
depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation...................... $ 1,230,136
Unrealized depreciation...................... (7,128,844)
-----------
Net unrealized depreciation.................. $(5,898,708)
-----------
</TABLE>
(b) Non income producing.
(c) Interest rate increases to 12.75% on April 1, 2001.
(d) Interest rate increases to 12.13% on February 15, 2003.
(e) Interest rate increases to 12.00% on March 1, 2003.
(f) Interest rate increases to 12.88% on July 15, 1999.
* Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At May 31, 1999,
the market value of Rule 144A securities amounted to $2,297,500 or 5% of net
assets.
** Bond is in default as of 5/31/99
<PAGE> 113
<TABLE>
SUMMIT INVESTMENT TRUST
SUMMIT EMERGING MARKETS BOND FUND
Schedule of Portfolio Investments May 31, 1999
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
------ ----------- -----
<S> <C> <C>
CORPORATE BONDS (93.9%):
Asia (9.1%):
Indonesia (9.1%):
$1,000,000 APP International Finance, 11.75%, 10/1/05 $35,000
1,000,000 DGS International Finance Co. BV, 10.00%,
6/1/07** 660,000
1,000,000 Tjiwi Kimia Finance Mauritius, 10.00%, 8/1/04 630,000
-----------
2,025,000
-----------
2,025,000
-----------
Caribbean (3.9%):
Dominican Republic (3.9%):
1,000,000 Tricom SA, 11.38%, 9/1/04 870,000
-----------
Eastern Europe (12.1%):
Israel (2.6%):
1,000,000 Barak I.T.C., 0.00%, 11/15/07 (b) 570,000
-----------
Poland (4.0%):
1,000,000 Netia Holdings BV, 10.25%, 11/1/07 900,000
-----------
Russia (1.0%):
2,498,794 Russia-Ian, Floating Rate Note, currently 5.97%,
12/15/15** 224,891
-----------
Turkey (4.5%):
1,000,000 Cellco Finance NV, 15.00%, 8/1/05** 995,000
-----------
2,689,891
-----------
Latin America (57.2%):
Argentina (22.5%):
1,000,000 Acindar Ind., 11.25%, 2/15/04 770,000
1,000,000 Autopistas Del Sol SA, 10.25%, 8/1/09** 815,000
500,000 Cablevision Sa, 13.75%, 5/1/09 472,500
1,000,000 Cia International Telecom Cointel, 10.38%,
8/1/04 740,000
1,000,000 CTI Holdings SA, 0.00%, 4/15/08 (c) 530,000
1,000,000 Mastellone Hermanos SA, 11.75%, 4/1/08 770,000
1,000,000 Supercanal Holdings, 11.50%, 5/15/05** 470,000
500,000 Supermercados Norte, 10.88%, 2/9/04** 445,000
-----------
5,012,500
-----------
Brazil (17.3%):
1,000,000 Banco Nacional Desenvolvimento, Floating Rate
Note, currently 15.22%, 6/16/08 825,000
1,000,000 Comtel Brasileira Ltd., 10.75%, 9/26/04** 880,000
1,000,000 Espirito Santo Centrais Electrias, 10.00%,
7/15/07 735,000
1,000,000 MRS Logistica SA, 10.63%, 8/15/05** 640,000
1,000,000 Paging Network Do Brazil SA, 13.50%, 6/6/05 450,000
500,000 Tevecap SA, 12.63%, 11/26/04 325,000
-----------
3,855,000
-----------
Mexico (13.7%):
500,000 Alestra SA de RL de CV, 12.63%, 5/15/09** 475,000
1,000,000 Consorcio Grupo Dina, 8.00%, 8/8/04,
Convertible Bond 478,750
500,000 Gruma, SA de CV, 7.63%, 10/15/07 439,510
500,000 Grupo Industrial Durango, 12.63%, 8/1/03 477,500
1,000,000 Innova SA de RL, 12.88%, 4/1/07 810,000
500,000 TV Azteca SA, 10.50%, 2/15/07 365,000
-----------
3,045,760
-----------
Venezuela (3.7%):
1,000,000 Cantv Finance Ltd., 9.25%, 2/1/04 812,500
-----------
12,725,760
-----------
</TABLE>
<PAGE> 114
<TABLE>
SUMMIT INVESTMENT TRUST
SUMMIT EMERGING MARKETS BOND FUND
Schedule of Portfolio Investments May 31, 1999
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
------ ----------- -----
<S> <C> <C>
North America (2.0%):
Canada (2.0%):
$1,000,000 Microcell Telecommunications, 0.00%,
10/15/07 (d) 434,807
-----------
Western Europe (9.6%):
Greece (4.1%):
1,000,000 Fage Dairy Industries SA, 9.00%, 2/1/07 900,000
-----------
Ireland (3.2%):
1,000,000 ESAT Telecom Group plc, 0.00%, 2/1/07 (e) 710,000
-----------
Netherlands (2.3%):
500,000 Versatel Telecom BV, 13.25%, 5/15/08 522,500
-----------
2,132,500
-----------
TOTAL CORPORATE BONDS 20,877,958
-----------
RIGHTS/WARRANTS (0.1%):
Western Europe (0.1%):
Netherlands (0.1%):
500 Versatel Telecom BV, Warrants 25,000
-----------
TOTAL RIGHTS/WARRANTS 25,000
-----------
INVESTMENT COMPANIES (2.5%):
North America (2.5%):
United States (2.5%):
560,371 Fifth Third Commercial Paper Fund 560,371
-----------
TOTAL INVESTMENT COMPANIES 560,371
-----------
TOTAL INVESTMENTS (COST $27,272,520) (a) - 96.5% 21,463,329
OTHER ASSETS IN EXCESS OF LIABILITIES - 3.5% 774,920
-----------
TOTAL NET ASSETS - 100.0% $22,238,249
===========
</TABLE>
- ------------
(a) Cost for federal income tax purposes differs from value by net unrealized
depreciation as follows:
<TABLE>
<S> <C>
Unrealized appreciation...................... $ 182,225
Unrealized depreciation...................... (5,991,416)
-----------
Net unrealized depreciation.................. $(5,809,191)
-----------
</TABLE>
(b) Interest rate increases to 12.50% on November 15, 2002.
(c) Interest rate increases to 11.50% on April 15, 2003.
(d) Interest rate increases to 11.13% on October 15, 2002.
(e) Interest rate increases to 12.50% on February 1, 2002.
** Security exempt from registration under Rule 144A of the Securities Act of
1933, as amended. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At May 31, 1999,
the market value of Rule 144A securities amounted to $5,604,891 or 25% of net
assets.
<PAGE> 115
<TABLE>
SUMMIT INVESTMENT TRUST
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 1999
<CAPTION>
HIGH YIELD EMERGING MARKETS
ASSETS: FUND BOND FUND
----------- ----------------
<S> <C> <C>
Investments, at value (cost $53,005,895 and $27,272,520, respectively) $47,219,687 $21,463,329
Interest receivable 1,445,786 795,523
Receivable for capital shares issued 50,002 --
Deferred organizational expenses -- 8,326
----------- -----------
Total Assets 48,715,475 22,267,178
----------- -----------
LIABILITIES:
Payable for capital shares redeemed 50,000 --
Payable to Custodian 895,587 --
Accrued expenses and other payables:
Investment advisory fees 5,582 3,821
Administration fees 985 455
12b-1 fees (A shares) 9,632 4,862
12b-1 fees (B shares) 245 3
Shareholder Service fees 13 --
Other 55,550 19,788
----------- -----------
Total Liabilities 1,017,594 28,929
----------- -----------
NET ASSETS:
Capital 57,524,961 29,134,406
Undistributed net investment income 62,531 26,368
Accumulated undistributed net realized losses from investments and
foreign currency transactions (4,103,403) (1,113,334)
Net unrealized depreciation on investments and assets and
liabilities denominated in foreign currencies (5,786,208) (5,809,191)
----------- -----------
Net Assets $47,697,881 $22,238,249
=========== ===========
Net Assets:
A Shares $47,325,481 $22,236,911
B Shares 372,400 1,338
Outstanding units of beneficial interest (shares):
A Shares 5,382,321 3,053,293
B Shares 42,424 184
Net Asset Value
A Shares Redemption price per share $ 8.79 $ 7.28
=========== ===========
Maximum sales charge 4.50% 4.50%
=========== ===========
Maximum offering price (100%/100% - maximum sales charge)
of net asset value per share (adjusted to the nearest cent) $ 9.20 $ 7.62
=========== ===========
B Shares Offering price per share (a) $ 8.78 $ 7.28
=========== ===========
</TABLE>
- ----------
(a) Redemption price for B Shares varies based on length of time shares are
held.
See notes to financial statements.
<PAGE> 116
<TABLE>
SUMMIT INVESTMENT TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
<CAPTION>
EMERGING MARKETS
HIGH YIELD FUND BOND FUND
--------------- ----------------
<S> <C> <C>
INVESTMENT INCOME:
- ------------------
Interest Income $ 6,261,945 $ 3,191,569
Dividend income 26,304 23,524
------------ -----------
Total Income 6,288,249 3,215,093
------------ -----------
EXPENSES:
- ---------
Investment advisory fees 303,469 157,444
Administration fees 106,274 41,986
12b-1 fees (A Shares) 123,297 52,475
12b-1 fees (B Shares) 602 6
Shareholder service fees (B shares) 204 2
Audit fees 15,847 7,588
Custodian fees 33,389 3,749
Fund accounting fees 41,637 53,852
Legal fees 94,807 31,997
Organization expenses -- 16,735
Transfer agent fees 84,633 42,114
Trustees' fees 23,044 9,133
Miscellaneous expenses 104,614 40,710
------------ -----------
Total expenses before voluntary reductions 931,817 457,791
Expenses voluntarily reduced (61,924) (38,441)
------------ -----------
Net Expenses 869,893 419,350
------------ -----------
Net Investment Income 5,418,356 2,795,743
------------ -----------
REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
- --------------------------------------------------
Net realized losses on investments and foreign currency transactions (3,965,380) (1,113,310)
Net change in unrealized depreciation on investments and assets
and liabilities denominated in foreign currencies (6,212,023) (5,487,784)
------------ -----------
Net realized/unrealized losses on investments (10,177,403) (6,601,094)
------------ -----------
Change in net assets resulting from operations $ (4,759,047) $(3,805,351)
------------ -----------
</TABLE>
See notes to financial statements.
<PAGE> 117
<TABLE>
SUMMIT INVESTMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
HIGH YIELD FUND EMERGING MARKETS BOND FUND
------------------------------ -------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
MAY 31, 1999 MAY 31, 1998 MAY 31, 1999 MAY 31, 1998(c)
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 5,418,356 $ 4,222,185 $ 2,795,743 $ 892,066
Net realized gains (losses) on investments
and foreign currency transactions (3,965,380) 3,821,677 (1,113,310) 105,690
Net change in unrealized (depreciation) on
investments and assets and liabilities denominated
in foreign currencies (6,212,023) (1,467,951) (5,487,784) (321,407)
------------ ------------ ----------- -----------
Change in net assets resulting from operations (4,759,047) 6,575,911 (3,805,351) 676,349
------------ ------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
A Shares (5,502,063) (4,184,950) (2,805,873) (857,402)
B Shares (a) (9,484) -- (110) --
Institutional Shares (b) -- (75,986) -- --
------------ ------------ ----------- -----------
(5,511,547) (4,260,936) (2,805,983) (857,402)
------------ ------------ ----------- -----------
In excess of net investment income
Institutional Shares (b) -- (3,718) -- --
------------ ------------ ----------- -----------
-- (3,718) -- --
------------ ------------ ----------- -----------
Net realized gains
A Shares (1,598,270) (3,955,064) (113,762) --
B Shares (a) (873) -- (7) --
------------ ------------ ----------- -----------
(1,599,143) (3,955,064) (113,769) --
------------ ------------ ----------- -----------
Change in net assets from shareholder distributions (7,110,690) (8,219,718) (2,919,752) (857,402)
------------ ------------ ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 29,367,573 45,870,906 864,623 25,207,058
Dividends reinvested 6,754,211 7,543,747 2,917,885 857,402
Cost of shares redeemed (32,197,576) (35,071,165) (698,624) (3,939)
------------ ------------ ----------- -----------
Change in net assets from capital transactions 3,924,208 18,343,488 3,083,884 26,060,521
------------ ------------ ----------- -----------
Change in net assets (7,945,529) 16,699,681 (3,641,219) 25,879,468
NET ASSETS:
Beginning of period 55,643,410 38,943,729 25,879,468 --
------------ ------------ ----------- -----------
End of period $ 47,697,881 $ 55,643,410 $22,238,249 $25,879,468
============ ============ =========== ===========
</TABLE>
(a) Period from commencement of operations (October 8, 1998)
(b) On July 31, 1997, Institutional Shares ceased operations and were
transferred to High Yield Shares.
(c) Emerging Market Bond Fund commenced operations on December 31, 1997.
See notes to financial statements.
<PAGE> 118
SUMMIT INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
1. ORGANIZATION:
Summit Investment Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company established as a Massachusetts business
trust under an Agreement and Declaration of Trust dated March 8, 1994, as
amended. The Trust is comprised of two managed investment portfolios, the
Summit High Yield Fund (the "High Yield Fund") and the Summit Emerging
Markets Bond Fund (the "Emerging Markets Fund"), collectively (the
"Funds"), or individually (the "Fund"). On July 31, 1997, the
Institutional Service Shares of the Summit High Yield Fund ceased
operations and all outstanding shares were converted to High Yield Shares.
Effective October 8, 1998, the Funds added Class B Shares, which impose a
back end sales charge (load) if you sell your shares before the sixth
year.
The High Yield Fund's investment objective is high current income with
capital appreciation as a secondary goal. The Fund invests primarily in
lower-quality, intermediate to long-term corporate bonds.
The Emerging Market Fund's investment objective is to provide high income
and capital appreciation. The Fund will invest primarily in government and
corporate debt securities of emerging market nations.
The Funds are authorized to issue an unlimited number of shares, which are
units of beneficial interest without par value.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Funds in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts and disclosures. Actual
results could differ from those estimates.
SECURITIES VALUATION:
Securities which are traded on stock exchanges are valued at the last
sales price as of the close of the New York Stock Exchange (the
"Exchange"), or lacking any sales, at the closing bid price. Securities
traded in the "over-the-counter" market valued at the last bid price
quoted by brokers that make markets in the securities at the close of
trading on the Exchange. Fixed income securities are generally traded in
the over-the-counter market. Securities and assets for which market
quotations are not readily available or not obtained from a pricing
service are valued at fair value as determined in good faith by the Board
of Trustees, although the actual calculations may be made by persons
acting pursuant to the direction of the Trustees. As approved by the Board
of Trustees, the Fund uses a pricing service or services in determining
the net asset value of shares of the Funds. Fixed income securities with a
remaining maturity of 60 days or less are valued on an amortized cost
basis, which the Trustees have determined reflects fair value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Trust are maintained in U.S. dollars.
Investment securities and other assets and liabilities of the Emerging
Markets Fund denominated in a foreign currency are translated into U.S.
dollars at the exchange rate on the date of valuation. Purchases and sales
of securities, income receipts and expense payments are translated into
U.S. dollars at the exchange rate on the dates of transactions. The Fund
does not isolate that portion of the results of operations resulting from
changes in foreign exchanges on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gains or losses from
investments.
FOREIGN CURRENCY CONTRACTS
A forward currency contract ("forward") is an agreement between two
parties to buy and sell a currency at a set price on a future date. The
market value of the forward fluctuates with changes in currency exchange
rates. The forward is marked-to-market daily and the change in market
value is recorded by a Fund as appreciation or depreciation. When the
forward is closed, the Fund records a realized gain or loss equal to the
fluctuations in value during the period the forward was open. A Fund could
be exposed to risk if a
<PAGE> 119
SUMMIT INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1999
counterparty is unable to meet the terms of a forward or if the value of
the currency changes unfavorably.
Forward foreign exchange contracts may involve market or credit risk in
excess of the amounts reflected on the Fund's statement of assets and
liabilities. The gain or loss from the difference between the original
contracts and the amount realized upon the closing of such contracts is
included in net realized gains/losses from investment and foreign currency
transactions. No forward foreign exchange contracts were held as of May
31, 1999.
SECURITIES TRANSACTIONS AND RELATED INCOME:
Securities transactions are accounted for on the trade date. Interest
income is recognized on the accrual basis and includes, where applicable,
the amortization of premiums or accretion of discounts. Dividend income is
recorded on the ex-dividend date. Net realized gains and losses on
investments sold and on foreign currency transactions are recorded on the
basis of identified cost.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared and paid monthly. Net
realized capital gains, if any, are declared and paid at least annually.
Dividends from net investment income and from net realized capital gains
are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These "book/tax"
differences are primarily due to differing treatments for organization
costs, market discount, and foreign currency transactions.
These "book/tax" differences are either considered temporary or permanent
in nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the composition of net assets based on
their federal tax-basis treatment; temporary differences do not require
reclassifications. Dividends and distributions to shareholders which
exceed net investment income and net realized gains for financial
reporting purposes but not for tax purposes are reported as dividends in
excess of net investment income or distribution in excess of net realized
gains. To the extent they exceed net investment income and net realized
gains for tax purposes, they are reported as distribution of capital. As
of May 31, 1999, the following reclassifications were made to
increase(decrease) such accounts with offsetting adjustments made to
paid-in-capital:
<TABLE>
<CAPTION>
Accumulated Accumulated Net
Undistributed Net Realized Gain/(Loss)
Investment Income on Investments
----------------- --------------
<S> <C> <C>
High Yield Fund $25,523 $(25,523)
Emerging Markets Fund $ 24 $ (24)
</TABLE>
FEDERAL INCOME TAXES:
It is the policy of each Fund to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially
all, federal income taxes.
OTHER:
Expenses directly attributable to a Fund are charged to that Fund, while
expenses which are attributable to both Funds are allocated among each
Fund based upon relative net assets or another appropriate method. Costs
incurred in connection with the organization and initial registration of
the Emerging Markets Fund have been deferred and are being amortized over
a twenty four month period, beginning with each Fund's commencement of
operations.
<PAGE> 120
SUMMIT INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1999
3. PURCHASES AND SALES OF PORTFOLIO SECURITIES:
Purchases and sales of securities (excluding short-term securities) for
the fiscal year ended May 31, 1999 are as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
High Yield Fund $95,581,432 $93,249,828
Emerging Markets Fund $ 8,387,922 $ 7,297,616
</TABLE>
4. RELATED PARTY TRANSACTIONS:
First Summit Capital Management ("FSCM" or the "Adviser"), a joint venture
having its principal offices at 312 Elm Street, Suite 2525, Cincinnati,
Ohio 45202, 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 Summit
Investment Partners, LLC, ("SIP") and Freeman Holding Company, Inc.
("Freeman"), a Delaware corporation. Under the Joint Venture Agreement,
SIP 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. SIP is a division of Union
Central Life, an Ohio mutual insurance company, which owns approximately
55% of the High Yield Fund and, 98% of the Emerging Markets Fund as of May
31, 1999. 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% 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 fiscal year ended
May 31, 1999, FSCM received $ 266,304 and $ 129,500 of advisory fees after
voluntarily waiving $ 37,165 and $ 27,944 of advisory fees for the High
Yield Fund and Emerging Markets Fund, respectively.
Summit Investment Partners, LLC, with offices at 312 Elm Street, Suite
2525, Cincinnati, Ohio 45202, 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, Summit Investment Partners,
LLC 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 and $ 150,000 per year from the High Yield Fund and
Emerging Markets Fund, respectively. If the Sub-Adviser renders services
to the Adviser under the Sub-Advisory Agreement for a period of less than
twelve months, the Sub-Adviser is entitled to a pro-rata portion of such
fee, or such other fees as shall be agreed to by the Adviser and the
Sub-Adviser, not to exceed the equivalent of the pro-rata portion of such
fee. In the event that the amount payable as the Sub-Adviser's fees
exceeds the amount of advisory fees paid to the Adviser pursuant to the
Advisory Agreement, the difference will be shared equally by the Adviser's
general partners, Freeman and SIP, or paid by FSCM.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS") serves as the administrator,
manager, and distributor to the Trust.
Certain officers of the Trust are affiliated with BISYS or with FSCM. Such
officers are not paid any fees
<PAGE> 121
SUMMIT INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1999
directly by the Funds or the Trust for serving as officers of the Trust.
BISYS Fund Services, LP ("BISYS" or "Administrator"), a wholly-owned
subsidiary of The BISYS Group, Inc., serves as the Trust's administrator
and assists the Trust in all aspects of its administration and operation.
The administrator is entitled to a fee under the terms of the Management
and Administration Agreement between the Trust and, BISYS' fees are
computed daily and paid monthly as a percentage of the average daily net
assets of the Funds at an annual rate of 0.20%. For the fiscal year ended
May 31, 1999, BISYS received $ 81,515 and $ 31,489 of administration fees
after voluntarily waiving $ 24,759 and $ 10,497 of administration fees for
the High Yield Fund and Emerging Markets Fund, respectively.
The Trust has adopted a Distribution Plan and Distribution and Shareholder
Service Plan BISYS receives fees for providing distribution and
shareholder services under the Distribution Agreement between the Trust
and BISYS and the Trust's (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. Under the Plan, Class A shares are subject to an annual
distribution fee of up to 0.25% of the average daily net assets. Class B
shares are subject to an annual distribution fee of up to 1.00% of the
average daily net assets. The Distributor may use up to 0.25% of the fees
for shareholder servicing and up to 0.75% for distribution activities. For
the fiscal year ended May 31, 1999, BISYS has received $ 78,760 and $
52,408 for the High Yield Fund and the Emerging Markets Fund for
distribution fees, respectively. These fees may be used by BISYS to pay
financial institutions, including the Summit Investment Partners, LLC,
broker dealers and other institutions, or to reimburse BISYS or its
affiliates for distribution or shareholder service assistance. In
addition, BISYS has the right, as principal underwriter, to purchase Fund
shares at their net asset value and to sell such shares to the public, or
to dealers who have entered into selected dealer agreements with the
Distributor, in both cases against orders for such shares. BISYS may sell
such shares at the public offering price, which is net asset value plus a
maximum sales charge of 4.50% or, in the case of sales to dealers, at the
public offering price less a concession determined by BISYS which may not
exceed the amount of the sales charge or the underwriting discount. For
the fiscal year ended May 31, 1999, BISYS received $ 106,216 and $ 178
from commissions earned on sales of the High Yield Fund and Emerging
Markets Fund, respectively, of which $ 99,008 was re-allowed to
unaffiliated broker/dealers for the High Yield Fund.
BISYS serves as the Trust's transfer agent and is entitled to receive fees
based upon a contractually specified amount per shareholder with specified
minimum per portfolio amounts and surcharges. In addition, the transfer
agent is reimbursed for certain out-of-pocket expenses incurred in
providing transfer agency services. BISYS also serves the Trust as fund
accountant. Under the terms of the Fund Accounting Agreement, BISYS is
entitled to receive an minimum annual fee of $ 30,000 and $ 45,000 or
0.03% and 0.05% of the average daily net assets of the High Yield Fund and
Emerging Markets Fund, respectively. In addition, BISYS is entitled to be
reimbursed for certain out-of-pocket expenses incurred in providing such
fund accounting services. Transfer agent and fund accounting fees for the
fiscal year ended May 31, 1999 were $ 126,270 and $ 95,966, for the High
Yield Fund and the Emerging Markets Fund, respectively.
5. CAPITAL SHARE TRANSACTIONS (Insert schedule)
6. FEDERAL TAX INFORMATION (UNAUDITED)
CAPITAL LOSS CARRYOVER
As of May 31,1999, the following Funds had net capital loss carryover
which will be available through stated years to offset any future net
capital gains, if any, to the extent provided by the Treasury regulations.
To the extent that this carryover is used to offset future capital gains,
it is probable that the gains so offset will not be distributed to
shareholders:
<TABLE>
<CAPTION>
Amount Year Expired
<S> <C> <C>
High Yield Fund $(853,764) 2007
Emerging Markets Bond Fund $ (80,585) 2007
</TABLE>
<PAGE> 122
SUMMIT INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MAY 31, 1999
CAPITAL GAIN DISTRIBUTIONS
During the period ended May 31, 1999 the High Yield Fund declared long
term capital gain distributions of $173,165.
POST OCTOBER LOSS DEFERRAL:
Foreign currency losses incurred after October 31, within the Funds'
fiscal year are deemed to arise on the first business day of the following
fiscal year for tax purposes. The High Yield and Emerging Markets Funds
have incurred and will elect to defer such foreign currency losses of
$3,137,139 and $1,032,749, respectively.
7. CONCENTRATION OF CREDIT RISK
The Funds may invest its assets in intermediate to long-term, high yield,
medium and lower quality, fixed income securities. Because the market for
lower-rated securities may be thinner and less active than for
higher-rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. If market
quotations are not readily available for the Fund's lower-rated or
non-rated securities, these securities will be valued by a method that the
Trustees believe accurately reflects fair value. Judgment plays a greater
role in valuing lower-rated securities than with respect to securities for
which external sources of quotations and last sale information are more
available.
The Emerging Markets Bond Fund has a relatively large concentration of
securities invested in companies domiciled in the emerging markets. The
Fund may be more susceptible to the political, social and economic events
adversely affecting the emerging market companies than funds not so
concentrated.
<PAGE> 123
<TABLE>
SUMMIT HIGH YIELD FUND
FINANCIAL HIGHLIGHTS
For a unit of beneficial interest outstanding for each period
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
A SHARES MAY 31, 1999 MAY 31, 1998 MAY 31, 1997 MAY 31, 1996 MAY 31, 1995(a)
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.99 $ 11.32 $ 11.05 $ 10.11 $ 10.00
------- ------- ------- ------- -------
INVESTMENT ACTIVITIES:
Net investment income 0.95 1.01 0.99 1.01 0.83
Net realized and unrealized gains (losses)
on investments (1.89) 0.70 0.90 0.95 0.11
------- ------- ------- ------- -------
Total from Investment Activities (0.94) 1.71 1.89 1.96 0.94
------- ------- ------- ------- -------
DISTRIBUTIONS:
Net investment income (0.97) (1.01) (0.99) (1.01) (0.83)
In excess of net investment income -- -- (0.13) -- --
Net realized gains (0.29) (1.03) (0.50) (0.01) --
------- ------- ------- ------- -------
Total Distributions (1.26) (2.04) (1.62) (1.02) (0.83)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.79 $ 10.99 $ 11.32 $ 11.05 $ 10.11
======= ======= ======= ======= =======
Total Return (excludes sales charges) (8.45%) 16.17% 18.15% 20.34% 9.97%(b)
RATIOS TO AVERAGE NET ASSETS / SUPPLEMENTAL DATA:
Net Assets at end of period (000) $47,325 $55,643 $34,707 $28,628 $27,676
Expenses before waivers 1.71% 2.03% 2.32% 2.24% 1.61%(c)
Net investment income before waivers 9.86% 8.38% 8.01% 8.78% 9.08%(c)
Expenses net of waivers 1.60% 1.60% 1.60% 1.60% 1.56%(c)
Net investment income net of waivers 9.97% 8.81% 8.73% 9.42% 9.13%(c)
Portfolio turnover (d) 176.06% 518.74% 271.68% 187.61% 158.36%
</TABLE>
- -------------
(a) Period from commencement of operations (June 27, 1994).
(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 the shares issued.
<TABLE>
SUMMIT HIGH YIELD FUND
FINANCIAL HIGHLIGHTS
For a unit of beneficial interest outstanding for each period
<CAPTION>
FOR THE
PERIOD ENDED
B SHARES MAY 31, 1999(a)
---------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.10
------
INVESTMENT ACTIVITIES:
Net investment income 0.53
Net realized and unrealized gains (losses) on investments 0.02
------
Total from Investment Activities 0.55
------
DISTRIBUTIONS:
Net investment income (0.58)
In excess of net investment income --
Net realized gains (0.29)
------
Total Distributions (0.87)
------
NET ASSET VALUE, END OF PERIOD $ 8.78
======
Total Return (excludes sales charges) 6.20%(b)
RATIOS TO AVERAGE NET ASSETS / SUPPLEMENTAL DATA:
Net Assets at end of period (000) $ 372
Expenses before waivers 2.31%(c)
Net investment income before waivers 9.02%(c)
Expenses net of waivers 2.23%(c)
Net investment income net of waivers 9.10%(c)
Portfolio turnover (d) 176.06%
</TABLE>
- -------------
(a) Period from commencement of operations (October 8, 1998).
(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 the shares issued.
See notes to financial statements.
<PAGE> 124
<TABLE>
SUMMIT EMERGING MARKETS BOND FUND
FINANCIAL HIGHLIGHTS
For a unit of beneficial interest outstanding for each period
<CAPTION>
A SHARES B SHARES
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED PERIOD ENDED
MAY 31, 1999 MAY 31, 1998(a) MAY 31, 1999(b)
------------ --------------- ---------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.87 $ 10.00 $ 5.94
------- ------- ------
INVESTMENT ACTIVITIES:
Net investment income 0.99 0.35 0.62
Net realized and unrealized gains (losses) on investments (2.54) (0.15) 1.39
------- ------- ------
Total from Investment Activities (1.55) 0.20 2.01
------- ------- ------
DISTRIBUTIONS:
Net investment income (1.00) (0.33) (0.63)
Net realized gains (0.04) -- (0.04)
------- ------- ------
Total Distributions (1.04) (0.33) (0.67)
------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 7.28 $ 9.87 $ 7.28
======= ======= ======
Total Return (excludes sales charges) (14.86%) 2.01%(c) 35.12%(c)
RATIOS TO AVERAGE NET ASSETS / SUPPLEMENTAL DATA:
Net Assets at end of period (000) $22,237 $25,879 $ 1
Expenses before waivers 2.18% 2.20%(d) 2.94%(d)
Net investment income before waivers 13.13% 8.47%(d) 13.26%(d)
Expenses net of waivers 2.00% 2.00%(d) 2.75%(d)
Net investment income net of waivers 13.31% 8.67%(d) 13.42%(d)
Portfolio turnover (e) 37.83% 85.69% 37.83%
</TABLE>
- -------------
(a) Period from commencement of operations (December 31, 1997).
(b) Period from commencement of operations (October 8, 1998).
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of the shares issued.
See notes to a financial statements.
<PAGE> 125
To the Shareholders and Trustees
Summit Investment Trust
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Summit High Yield Fund and the
Summit Emerging Markets Bond Fund (separate portfolios constituting the Summit
Investment Trust, hereafter referred to as the "Funds") at May 31, 1999, the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the periods presented, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which include correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
July 23, 1999
